Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: RGA is an insurance holding company primarily engaged in life reinsurance, reinsuring policies often in force for the remaining lifetime of insured individuals. The company operates through five segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other. Effective January 1, 2009, discontinued accident and health operations were included in the Corporate & Other segment due to immateriality.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2009) | Amount (in thousands) |
|---|---|
| Total Revenues | $3,344,006 |
| Net Income | $176,469 |
| Income from Continuing Operations | $176,469 |
| Net Premiums | $2,721,228 |
| Investment Income (Net) | $507,832 |
| Total Investment Related Gains (Losses), Net | $5,926 |
| Net Cash Provided by Operating Activities | $539,217 |
| Total Assets | $22,649,349 |
| Total Liabilities | $19,550,176 |
| Stockholders' Equity | $3,099,173 |
| Long-Term Debt | $816,575 |
| Cash and Cash Equivalents | $416,947 |
Earnings Per Share (Diluted): $2.42 for the six months ended June 30, 2009 (compared to $2.22 in 2008).
Material Changes vs. Prior Period
- Profitability Increase: Income from continuing operations before income taxes increased by $22.0 million (9.7%) for the six months ended June 30, 2009, compared to the same period in 2008. This was driven by a $38.9 million pre-tax gain on the repurchase of long-term debt, increased net premiums in the U.S. and Canada, and higher investment income.
- Investment Impairments: The company recognized $71.3 million in other-than-temporary impairments (OTTI) on fixed maturity securities for the six months ended June 30, 2009, compared to $5.7 million in 2008. This increase is attributed to continued turmoil in U.S. and global financial markets.
- Embedded Derivatives: Favorable changes in the value of embedded derivatives related to modified coinsurance/funds withheld treaties (Issue B36) and equity-indexed annuities contributed significantly to investment-related gains, partially offset by unfavorable changes related to variable annuity guaranteed minimum living benefits.
- Foreign Currency Impact: Unfavorable foreign currency exchange fluctuations decreased income from continuing operations before income taxes by approximately $26.3 million for the first six months of 2009.
- Debt Reduction: The company repurchased $80.2 million face amount of its 6.75% junior subordinated debentures for $39.2 million, resulting in a significant gain and reducing outstanding debt.
Guidance, Outlook, Risks, and Unusual Items
- Market Environment: Management notes that while there has been some improvement in financial markets during the second quarter of 2009, the recovery is slow. The company continues to monitor capital needs and new business opportunities.
- Investment Strategy: RGA maintains a predominantly investment-grade, fixed maturity portfolio. Gross unrealized losses on fixed maturity and equity securities improved to $1.06 billion at June 30, 2009, from $1.42 billion at December 31, 2008, but remain significantly higher than levels in 2008.
- Liquidity: The company believes its sources of liquidity are sufficient to cover potential claims payments and operational needs. It does not rely on short-term funding or commercial paper.
- Unusual Items:
- Debt Repurchase Gain: A one-time pre-tax gain of $38.9 million was recognized in "Other revenues" due to the repurchase of long-term debt.
- Tax Benefit: A tax benefit of approximately $12.0 million was recognized in the second quarter related to the release of an uncertain tax position under FASB Interpretation No. 48.
- Risks: Key risks include adverse capital and credit market conditions, impairment of financial institutions, requirements to post collateral, adverse mortality/morbidity experience, and fluctuations in foreign currency exchange rates. The company also faces risks related to the valuation of embedded derivatives and the adequacy of reserves.
Important Facts for Investor Verification
- Debt Repurchase Impact: Verify the sustainability of earnings excluding the $38.9 million one-time gain from debt repurchase, which significantly boosted second-quarter results.
- Investment Portfolio Quality: Review the composition of the $1.06 billion in gross unrealized losses, specifically the concentration in commercial mortgage-backed securities (27% of losses) and asset-backed securities (13% of losses), and the company's intent to hold these securities to maturity.
- Embedded Derivative Volatility: Assess the sensitivity of earnings to changes in the fair value of embedded derivatives, particularly those related to variable annuity guaranteed minimum living benefits, which caused significant volatility in investment-related gains/losses.
- Foreign Currency Exposure: Monitor the impact of weakening foreign currencies (e.g., Canadian dollar, British pound, Euro) on reported premiums and income, which negatively affected results by approximately $26.3 million in the first half of 2009.
- Liquidity Position: Confirm the adequacy of the $417 million cash and cash equivalents balance relative to potential claims and collateral requirements, especially given the company's significant exposure to funds withheld at interest ($4.68 billion).