Business Context and Reporting Period
Reinsurance Group of America, Incorporated filed its Form 10-K for the fiscal year ended December 31, 2010. The filing is an annual report, although the requested period is identified as 2010 Q4. RGA is a global life and health reinsurer serving individual and group life, annuity, critical illness, longevity, asset-intensive, and financial reinsurance markets across five segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate and Other.
- Approximately 69.0% of 2010 net premiums came from the U.S. and Canada.
- Life reinsurance in force was approximately $2.5 trillion, and consolidated assets were $29.1 billion at year-end.
- The Reliastar Life Insurance Company U.S. and Canadian group life, accident and health reinsurance business was acquired effective January 1, 2010.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net premiums | $6,659.7 million | $5,725.2 million | +16.3% |
| Total revenues | $8,261.7 million | $7,066.8 million | +16.9% |
| Investment income, net | $1,238.7 million | $1,122.5 million | +10.4% |
| Investment-related gains, net | $212.0 million | $34.1 million | Improved |
| Income before taxes | $863.8 million | $592.3 million | +45.8% |
| Net income | $574.4 million | $407.1 million | +41.1% |
| Diluted EPS from continuing operations | $7.69 | $5.55 | +38.5% |
| Operating cash flow | $1,842.7 million | $1,364.2 million | +35.1% |
| Total assets | $29,081.9 million | $25,249.5 million | +15.2% |
| Stockholders’ equity | $5,040.6 million | $3,867.9 million | +30.3% |
Approximate consolidated pretax margin was 10.5% and net income margin was 7.0%, based on total revenues. Investment yield on average invested assets, excluding funds withheld, declined to 5.62% from 5.75%.
- Cash and cash equivalents were $463.7 million; total cash and invested assets were $23.1 billion.
- Liquidity, defined as cash, cash equivalents, and short-term investments, was $582.0 million.
- Total debt was $1,216.4 million, including $200.0 million due in 2011; the collateral finance facility was $850.0 million.
- RGA had no cash borrowings under its revolving credit facilities and had approximately $601.3 million of credit availability, plus $997.1 million available through collateralized FHLB borrowings.
- Fixed maturity securities were $14.3 billion and approximately 95.0% were investment grade.
- Common dividends increased to $0.48 per share from $0.36 per share.
Material Changes Versus the Prior Comparable Period
- Net premiums increased $934.5 million, reflecting growth in reinsurance in force, favorable foreign exchange effects, and the Reliastar acquisition.
- Income growth was driven by higher premiums and investment income, substantially lower investment impairments, and improved investment-related results.
- Other-than-temporary impairments declined to $35.9 million from $132.3 million.
- Net cash provided by operating activities increased $478.5 million to $1,842.7 million.
- Net cash used in investing activities declined to $1,720.5 million from $1,939.1 million, while financing activities used $193.4 million compared with $195.0 million provided in 2009.
- U.S. segment pretax income increased to $539.4 million from $308.7 million, primarily due to lower investment impairments and the acquired group business.
- Canada pretax income increased 15.1% to $122.4 million; Europe & South Africa increased 64.0% to $85.8 million; Asia Pacific increased 6.2% to $88.8 million.
- Reinsurance in force increased to $2.540 trillion from $2.325 trillion, and new business production increased to $327.6 billion from $321.0 billion.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide specific numerical earnings guidance. It expected continued growth opportunities from industry consolidation, capital management needs, international expansion, longevity products, and established demand for mortality-risk reinsurance, while noting that growth rates could be lower than historical levels.
- 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.
- Low interest rates were expected to pressure future investment yields and asset-intensive spread income.
- Mortality, morbidity, lapse, claims, policyholder behavior, and reserve assumptions can cause significant earnings volatility.
- Variable-annuity guaranteed living benefit liabilities are sensitive to equity markets, interest rates, volatility, and policyholder behavior. Hedging may not fully offset adverse movements.
- Approximately $300.3 billion of gross assumed business was subject to potential recapture if specified financial condition or rating requirements were not maintained.
- Regulation XXX reserve requirements may increase collateral and capital needs. Failure of retrocessionaires to provide collateral could reduce statutory capital and constrain new business.
- Insurance subsidiary dividends are subject to regulatory restrictions. RCM and RGA Reinsurance had estimated 2011 dividends available without prior approval of $148.7 million and $152.9 million, respectively.
- RGA held securities in trust with amortized costs of $1,419.3 million for affiliates and $1,851.1 million for third-party treaty collateral. An additional $885.3 million was held for the collateral finance facility.
- Treaty guarantees had $352.0 million of net exposure after trust assets; guarantees related to trust preferred securities and credit facilities added $159.4 million of exposure.
- The company reported no material litigation and stated that it was in compliance with debt covenants.
- Subsequent to year-end, RGA announced redemption or remarketing of its PIERS warrants and preferred securities and repurchased 3.0 million common shares from MetLife at $61.14 per share. It also expected to repurchase up to 2.6 million additional shares.
Investor Verification Checklist
- Verify the sustainability of 2010 earnings after excluding favorable investment-related gains, derivative fair-value changes, lower impairments, foreign exchange effects, and acquisition-related contributions.
- Review statutory capital, risk-based capital ratios, collateral availability, and the impact of Regulation XXX on future reserve financing.
- Assess liquidity under adverse scenarios involving treaty recapture, policyholder withdrawals, collateral calls, and higher mortality or morbidity.
- Analyze exposure to variable annuity guarantees, funds-withheld assets, interest-rate spreads, and Level 3 valuation assumptions.
- Review the $200.0 million debt maturity in 2011 and the refinancing or repayment plan.
- Evaluate client, counterparty, and funds-withheld concentration, including the $3.8 billion of funds withheld associated with one client.
- Confirm the post-year-end PIERS warrant redemption, preferred-security remarketing, and share repurchase effects on dilution and capital.