Business Context and Reporting Period
Reinsurance Group of America, Incorporated (RGA) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. RGA primarily provides life, health, longevity, disability, annuity, critical illness, and financial reinsurance through geographic segments in the U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate and Other.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenues | $2.390 billion | $2.449 billion | $7.582 billion | $7.118 billion |
| Net premiums | $2.026 billion | $1.913 billion | $6.041 billion | $5.727 billion |
| Income before taxes | $201.7 million | $201.5 million | $405.8 million | $598.1 million |
| Net income | $138.0 million | $144.5 million | $273.9 million | $408.9 million |
| Diluted EPS | $1.93 | $1.95 | $3.76 | $5.52 |
| Operating cash flow | Not separately provided | Not separately provided | $1.251 billion | $1.529 billion |
- Q3 revenue declined 2.4%, while nine-month revenue increased 6.5%. Net premiums increased 5.9% in Q3 and 5.5% year to date, driven primarily by life reinsurance growth.
- Net income declined 4.5% in Q3 and 33.0% for the first nine months. Net margins were approximately 5.8% in Q3 2013 versus 5.9% in Q3 2012, and 3.6% for the first nine months versus 5.7% in the prior-year period.
- Investment income, net of related expenses, was $369.4 million in Q3 and $1.239 billion year to date. The Q3 decrease reflected lower funds-withheld market value changes; year-to-date investment income benefited from a larger invested asset base and a large fixed annuity transaction.
- Investment-related gains were a net loss of $76.5 million in Q3, compared with a $76.1 million gain in the prior-year quarter. Year-to-date investment-related gains were $66.1 million versus $143.4 million.
- Cash and cash equivalents were $1.423 billion at September 30, 2013, compared with $1.260 billion at December 31, 2012. Reported liquidity, including cash equivalents and short-term investments, was $1.467 billion.
- Total assets were $39.527 billion and stockholders’ equity was $5.896 billion at September 30, 2013. Equity declined from $6.910 billion at year-end, primarily reflecting a $1.009 billion reduction in accumulated other comprehensive income from unrealized investment losses and foreign currency changes.
- Long-term debt increased to $2.214 billion from $1.815 billion at year-end. The company also reported a $484.7 million collateral finance facility liability.
- Cash used in investing activities was $514.4 million and cash used in financing activities was $536.7 million for the first nine months. Financing uses included $269.2 million of treasury-stock purchases and $56.5 million of dividends.
Material Changes Versus the Prior Comparable Period
- Asia Pacific reported a $258.8 million pretax loss for the first nine months, compared with $39.4 million of pretax income in the prior-year period. The deterioration primarily reflected a $274.1 million increase in Australian group claims liabilities for total and permanent disability and disability income benefits, together with unfavorable individual claims experience.
- RGA suspended new quoting activity indefinitely in the Australian group total and permanent disability market while it worked with ceding companies to address rising claim incidence and reporting lags.
- U.S. pretax income decreased 32.4% in Q3 but increased 15.6% year to date. Q3 results were pressured by rising interest rates, lower fair values of embedded derivatives, and comparison with significant prior-year investment gains.
- Europe & South Africa pretax income increased 29.2% in Q3 and 28.1% year to date, supported by business growth and a $11.0 million fee-income transaction in Continental Europe.
- RGA issued $400.0 million of 4.70% senior notes due 2023, receiving approximately $395.1 million of net proceeds for general corporate purposes.
- RGA repurchased approximately $261.3 million of common stock during the first nine months and had $138.7 million remaining under its authorized $400.0 million repurchase program at September 30, 2013. The quarterly dividend increased to $0.30 per share from $0.24.
- RGA repurchased $160.0 million face amount of subsidiary collateral finance facility notes for $112.0 million, recording a $46.5 million pretax gain.
- Accumulated other comprehensive income declined to $1.100 billion from $2.109 billion at year-end, primarily because of a $938.2 million after-tax decline in unrealized investment gains and losses.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that liquidity was sufficient for at least the next 12 months under scenarios including early treaty recapture and higher-than-expected death claims. The company does not rely on short-term funding or commercial paper and reported no liquidity pressure.
- Management expects sustained low interest rates to pressure investment yields. The average investment yield, excluding funds-withheld and other spread-related business, declined to 4.78% for the first nine months from 5.03% in the prior-year period.
- Management stated that reserves were expected to remain sufficient and that no deferred acquisition cost write-down or capital augmentation was expected solely from interest rates remaining at current levels for five years, assuming other factors remain constant.
- Results remain sensitive to mortality, morbidity, disability, longevity, lapsation, policyholder behavior, treaty recapture, interest rates, credit spreads, equity markets, foreign exchange, and investment impairments.
- Changes in embedded derivative values reduced Q3 pretax income by approximately $13.6 million relative to the prior-year period but increased year-to-date pretax income by approximately $126.7 million relative to the prior-year period. Management characterized these changes as largely unrealized and not affecting current cash flows, crediting rates, or underlying treaty spread performance.
- Gross unrealized losses on fixed maturity and equity securities increased to $318.9 million from $133.6 million at year-end, while the company reported $1.688 billion of gross unrealized gains at September 30, 2013. Management stated it had the ability and intent to hold securities with unrealized losses until recovery.
- Debt agreements required minimum consolidated net worth of $2.8 billion and limited consolidated indebtedness to 35% of indebtedness plus adjusted consolidated net worth. RGA reported compliance with its covenants.
- Undrawn letters of credit totaled approximately $223.7 million for third parties and $916.5 million primarily supporting intercompany reinsurance. The company also had $241.9 million of limited-partnership investment commitments, $23.1 million of commercial mortgage loan commitments, and $58.2 million of bank-loan commitments.
- Potential statutory reserve-support obligations totaled up to $1.350 billion through 2033 and $560.0 million through 2035; management considered funding events remote at the reporting date.
- The filing reported no material litigation. The principal newly highlighted risk was the availability and cost of collateral, including letters of credit, trusts, and other credit facilities, particularly in connection with regulatory reserve requirements and affiliated captive reinsurance arrangements.
Important Facts for Investors to Verify
- Assess whether Australian group disability claims liabilities have stabilized and whether suspended quoting materially affects future Asia Pacific growth.
- Separate recurring underwriting and spread performance from volatile embedded-derivative and other investment valuation changes.
- Monitor investment yield compression, unrealized investment losses, credit quality, and future other-than-temporary impairments.
- Review debt maturities, covenant headroom, collateral requirements, rating-sensitive derivative provisions, and the collateral finance facility.
- Evaluate the availability and cost of letters of credit and other collateral supporting statutory reserves, including the effect of potential regulatory restrictions on affiliated captive reinsurers.
- Verify the sustainability of dividends and share repurchases against holding-company liquidity, subsidiary dividends, regulatory capital needs, and adverse claims scenarios.