Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) is a global life reinsurer providing traditional reinsurance and financial solutions, including asset-intensive, longevity, and financial reinsurance. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net premiums | $2.366 billion | $2.157 billion | +9.7% |
| Total revenues | $3.009 billion | $2.513 billion | +19.8% |
| Income before income taxes | $207.8 million | $107.6 million | +93.2% |
| Net income | $145.5 million | $76.5 million | +90.3% |
| Diluted EPS | $2.22 | $1.17 | +89.7% |
| Dividends declared per share | $0.41 | $0.37 | +10.8% |
| Net cash provided by operating activities | $417.4 million | $368.6 million | +13.2% |
Net income represented approximately 4.8% of revenue, and income before taxes represented approximately 6.9% of revenue. Investment income, net of related expenses, increased 23.3% to $514.4 million. The investment yield excluding spread-related business declined to 4.41% from 4.46%, despite average invested assets increasing 12.7% to $25.2 billion.
At March 31, 2017, total assets were $53.8 billion, total investments were $45.4 billion, cash and cash equivalents were $1.178 billion, and stockholders’ equity was $7.420 billion. Long-term debt was $2.789 billion, down from $3.089 billion at December 31, 2016. Collateral finance and securitization notes were $825.5 million.
Liquidity, defined by the company as cash and cash equivalents plus short-term investments, was $1.232 billion. The company had $724.6 million of revolving credit availability, $1.155 billion available through collateralized Federal Home Loan Bank borrowings, and no cash borrowings under its $850 million revolving credit facility. The facility had $125.4 million of issued but undrawn letters of credit.
Material Changes Versus the Prior Comparable Period
- Total investment-related gains improved to $60.5 million from a $120.9 million loss, primarily due to favorable fair value changes in embedded derivatives and lower investment impairments.
- Embedded derivative changes increased pretax income by approximately $189.8 million relative to Q1 2016. The effects were noncash and did not affect current cash flows, policyholder crediting rates, or underlying spread performance.
- Other-than-temporary impairments on fixed maturity securities declined to $17.2 million from $33.8 million.
- Claims and other policy benefits increased 11.6% to $2.106 billion, while policy acquisition costs and other insurance expenses increased 62.3% to $379.4 million.
- U.S. and Latin America pretax income increased to $133.5 million from $36.2 million, driven mainly by financial solutions and derivative-related results. U.S. Traditional pretax income declined to $30.0 million from $51.1 million because of unfavorable mortality experience; its loss ratio increased to 94.0% from 90.7%.
- Canada pretax income increased 10.8% to $22.9 million, EMEA pretax income increased 88.8% to $45.9 million, and Asia Pacific pretax income declined 4.3% to $47.6 million.
- Assumed life insurance in force increased to $3.137 trillion from $3.068 trillion. New business production declined to $91.6 billion from $107.8 billion.
- Operating cash flow increased, while investing cash use declined to $111.0 million from $709.6 million. Financing activities used $347.8 million, including a $300.6 million long-term debt principal repayment.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide specific earnings or revenue guidance. Management stated that available liquidity and expected cash flows should be sufficient for at least the next 12 months, including under scenarios involving early treaty recapture, market events, and higher-than-expected claims.
Management expects low interest rates to continue pressuring investment yields. It also stated that current capital is adequate for existing operating levels and that reserves are expected to remain sufficient even if interest rates remain at current levels for five years, assuming other factors remain constant.
- Results are exposed to volatility in mortality, morbidity, longevity, lapses, policyholder behavior, treaty recaptures, and claims experience. U.S. and Canadian mortality was unfavorable in the quarter, while EMEA claims experience improved.
- Fair value changes in embedded derivatives, interest rates, credit spreads, equity markets, volatility, and policyholder behavior can materially affect reported earnings without corresponding current-period cash flow effects.
- Investment risks include credit deterioration, impairments, interest-rate movements, unrealized losses, mortgage-backed security prepayments and extensions, real estate exposure, and concentration in corporate securities.
- Approximately 95.1% of fixed maturity securities were investment grade. Gross unrealized gains were $2.426 billion versus gross unrealized losses of $277.6 million at March 31, 2017.
- Funds withheld at interest totaled $5.943 billion, with approximately $4.1 billion associated with one client. The company would need to assert a claim on supporting assets if a ceding company became insolvent, although offset rights mitigate the risk.
- Statutory reserve support commitments had maximum potential obligations totaling approximately $8.946 billion across commitment periods ending from 2023 through 2037; management considered required funding remote.
- Treaty guarantees totaled $950.8 million, or $822.7 million net of assets in trust. The company reported no material litigation and no material changes to previously disclosed risk factors.
- RGA adopted new stock-compensation accounting guidance on January 1, 2017, recognizing a $17.7 million increase in retained earnings and a $1.9 million tax benefit in first-quarter income tax expense.
- The board authorized a new $400 million share repurchase program in January 2017. No shares were repurchased under the program during the quarter, although shares were withheld to satisfy equity-award tax obligations.
Most Important Facts for Investors to Verify
- Whether reported earnings growth persists after excluding favorable, noncash embedded-derivative fair value changes.
- Subsequent mortality and claims experience, especially in U.S. Traditional and Canadian individual life operations.
- Investment yield trends and sensitivity to prolonged low interest rates, credit spreads, and market volatility.
- Concentration and credit exposure related to funds withheld at interest, major clients, corporate bonds, and below-investment-grade securities.
- Compliance with debt covenants, including minimum consolidated net worth of $3.5 billion and the 35% maximum debt-to-capitalization ratio.
- Liquidity effects of collateral requirements, derivative rating triggers, treaty recaptures, policyholder withdrawals, and potential guarantee or reserve-support funding.
- Future adoption impacts of the pending financial instruments, current expected credit loss, lease, and income-tax accounting standards.