Business Context and Reporting Period
Company: Reinsurance Group of America, Inc. (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2005
Business Overview: RGA is a holding company primarily engaged in life reinsurance, reinsuring life insurance policies, annuities, and critical illness coverage globally. The company operates through five segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate & Other. It also maintains discontinued accident and health operations.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2005 |
Nine Months Ended Sep 30, 2005 |
Nine Months Ended Sep 30, 2004 |
|---|---|---|---|
| Net Premiums | $973,532 | $2,806,706 | $2,430,636 |
| Total Revenues | $1,158,417 | $3,345,965 | $2,915,101 |
| Net Income | $67,629 | $156,003 | $166,471 |
| Income from Continuing Ops | $73,519 | $165,943 | $189,383 |
| Diluted EPS (Net Income) | $1.06 | $2.45 | $2.65 |
| Invested Assets | $11,614,024 | $11,614,024 | $10,564,225 (Dec 31, 2004) |
| Cash & Cash Equivalents | $142,072 | $142,072 | $152,095 (Dec 31, 2004) |
| Total Debt (Short + Long Term) | $402,961 | $402,961 | $405,782 (Dec 31, 2004) |
| Stockholders' Equity | $2,526,275 | $2,526,275 | $2,279,025 (Dec 31, 2004) |
Operating Cash Flow (Nine Months): $360.9 million (2005) vs. $461.3 million (2004).
Investment Yield: 5.89% for the third quarter of 2005 (excluding funds withheld), down from 6.03% in the prior year quarter.
Material Changes vs. Prior Period
- Revenue Growth: Net premiums increased 18.8% in Q3 and 15.5% year-to-date (YTD) compared to 2004, driven by new business and renewal premiums.
- Profitability:
- Q3 2005: Income from continuing operations before taxes increased 27.4% to $113.6 million, driven by higher revenues and favorable mortality in the U.S.
- YTD 2005: Income from continuing operations before taxes decreased 14.7% to $246.7 million. This decline was primarily due to higher claims in the U.S. and UK, and a $24.0 million reserve increase for Argentine pension business.
- Segment Performance:
- U.S. Traditional: YTD income down 20.3% due to unfavorable mortality in the first six months, partially offset by favorable Q3 experience.
- Canada: Income up 25.7% YTD due to favorable mortality and a stronger Canadian dollar.
- Asia Pacific: Income up significantly YTD due to strong premium growth and favorable underwriting.
- Europe & South Africa: YTD income down 15.1% due to adverse mortality/morbidity in the UK.
- Discontinued Operations: Loss from discontinued accident and health operations improved to $5.9 million in Q3 2005 from $18.6 million in Q3 2004, following a large settlement charge in the prior year.
Outlook, Risks, and Contingencies
- Argentine Pension Business: RGA is in arbitration (ICSID) regarding government actions in Argentina that artificially inflated claim payments. The company increased reserves by $24.0 million in Q2 2005. Management believes current provisions are adequate, but adverse outcomes could materially affect net income in specific periods.
- Legal Proceedings: The company faces arbitrations regarding discontinued accident and health business. Claims raised by parties exceed reserves by approximately $20.8 million. Additionally, audits of ceding companies have identified potential claims exceeding reserves by $8.6 million.
- Debt and Liquidity: On September 29, 2005, RGA entered a new $600 million syndicated credit facility (up to $300 million cash borrowing). It immediately borrowed $50 million to prepay an expiring facility. Management believes liquidity is sufficient to meet obligations, including potential treaty recaptures or higher-than-expected claims.
- Investment Risks: The portfolio is predominantly investment-grade fixed maturities. The company monitors for other-than-temporary impairments; no such write-downs were recorded for fixed maturities in the first nine months of 2005. Unrealized losses on 499 securities totaled $33.2 million, primarily due to interest rate changes.
- Accounting Changes: Adoption of SFAS 123(r) in Q1 2006 is expected to increase compensation expense by approximately $1.1 million in 2006.
Investor Verification Checklist
- Mortality Volatility: Verify the sustainability of mortality experience, particularly the shift from unfavorable H1 2005 to favorable Q3 2005 in the U.S. segment.
- Argentine Exposure: Monitor the status of the ICSID arbitration and any further reserve adjustments related to the Argentine pension run-off.
- Discontinued Operations Reserves: Review the adequacy of reserves for the discontinued accident and health business, given that disputed claims exceed current reserves by ~$27.5 million.
- Investment Yield Trends: Assess the impact of the declining investment yield (5.89% vs 6.03%) on future profitability, especially for asset-intensive products.
- Debt Covenants: Confirm continued compliance with the new $600 million credit facility covenants, particularly regarding dividend restrictions.