Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Overview: RGA is a leading global life reinsurer, primarily engaged in traditional individual life, asset-intensive, critical illness, and financial reinsurance. As of December 31, 2007, General American Life Insurance Company (a wholly-owned subsidiary of MetLife, Inc.) owned approximately 52.0% of RGA's outstanding common stock. The Company operates through five geographic segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate and Other.
Key Financial Metrics
| Metric (in millions) | 2007 | 2006 |
|---|---|---|
| Net Premiums | $4,909.0 | $4,346.0 |
| Total Revenues | $5,718.4 | $5,193.7 |
| Net Income | $293.8 | $288.2 |
| Income from Continuing Operations | $308.3 | $293.3 |
| Diluted EPS (Continuing Ops) | $4.80 | $4.65 |
| Total Assets | $21,598.0 | $19,036.8 |
| Total Stockholders' Equity | $3,189.8 | $2,815.4 |
| Long-term Debt | $896.1 | $676.2 |
| Cash Flow from Operating Activities | $957.4 | $846.2 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 10.1% to $5.72 billion, driven by a 13.0% increase in net premiums to $4.91 billion. Investment income rose 16.4% to $907.9 million due to asset base growth and higher yields.
- Investment Losses: Investment-related losses, net, increased significantly to a loss of $178.7 million (compared to a gain of $2.6 million in 2006). This was primarily due to a $150.9 million loss from changes in the fair value of embedded derivatives (Issue B36) and a $10.5 million foreign currency translation loss related to the decision to sell Argentine operations.
- Segment Performance:
- U.S.: Income before taxes increased 1.7% to $327.9 million, driven by improved mortality experience, partially offset by embedded derivative losses in the Asset-Intensive sub-segment.
- Canada: Income before taxes surged 78.2% to $81.5 million due to favorable mortality experience and a stronger Canadian dollar.
- Europe & South Africa: Income before taxes decreased 18.5% to $47.5 million due to adverse mortality and morbidity experience in the UK.
- Asia Pacific: Income before taxes increased 2.6% to $60.1 million, supported by strong premium growth in Australia, Japan, and Korea.
- Discontinued Operations: Loss from discontinued accident and health operations increased to $14.4 million (from $5.1 million in 2006) due to settlements on previously contested matters.
Guidance, Outlook, and Risks
- Financial Objectives: Management targets a return on stockholders' equity of 14%, annual earnings per share growth of 14%, and net premium growth of 10% to 13% over the next three to five years.
- Segment Growth Expectations: Expected net premium growth ranges from 7-9% in the U.S., 10-12% in Canada, 13-16% in Asia Pacific, and 12-15% in Europe & South Africa.
- Key Risks:
- Regulation XXX: Increasing statutory reserve requirements in the U.S. may require additional collateral, potentially straining liquidity or requiring capital raises.
- Embedded Derivatives: Volatility in credit spreads and interest rates significantly impacts earnings through embedded derivative accounting (Issue B36).
- Counterparty Risk: Reliance on ceding companies for accurate data and retrocessionaires for payment obligations.
- MetLife Ownership: MetLife's majority ownership (52%) allows it to significantly influence corporate decisions; potential future sales of shares could impact stock price.
- Legal Proceedings: The Company is involved in arbitrations regarding discontinued accident and health business and life reinsurance. As of February 1, 2008, claims raised exceeded reserves by $1.6 million (accident/health) and $4.9 million (life reinsurance), though management believes outcomes will not materially affect financial position.
Investor Verification Checklist
- Embedded Derivative Impact: Verify the sensitivity of earnings to changes in credit spreads and interest rates, specifically regarding the $150.9 million loss from Issue B36 embedded derivatives.
- Regulatory Capital & Collateral: Assess the sufficiency of collateral (letters of credit, assets in trust) to meet Regulation XXX requirements and the potential need for additional capital.
- MetLife Relationship: Monitor MetLife's public statements regarding its 52% stake and potential for future share sales or strategic shifts.
- Discontinued Operations Run-off: Review the status of the accident and health run-off and the adequacy of reserves given the recent settlement of a disputed claim ($5.8 million paid in excess of reserves in Feb 2008).
- International Exposure: Evaluate the impact of foreign currency fluctuations on the Europe & South Africa and Asia Pacific segments, which contributed significantly to revenue growth.