Reinsurance Group of America, Incorporated — 2011 Q1 Form 10-Q Summary
Business context and reporting period
RGA is a global life reinsurance holding company providing traditional life, health, long-term care, annuity, financial, critical illness, and longevity reinsurance. The filing covers the three months ended March 31, 2011, with comparisons to the three months ended March 31, 2010 and the December 31, 2010 balance sheet. Results are unaudited and are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenues | $2.282 billion | $2.100 billion | +8.7% |
| Net premiums | $1.736 billion | $1.628 billion | +6.6% |
| Net investment income | $371.0 million | $304.3 million | +21.9% |
| Investment-related gains, net | $123.6 million | $131.2 million | −5.8% |
| Income before income taxes | $241.8 million | $193.3 million | +25.1% |
| Net income | $160.8 million | $122.4 million | +31.4% |
| Diluted EPS | $2.18 | $1.64 | +32.9% |
| Dividends declared per share | $0.12 | $0.12 | Unchanged |
Reported pretax margin increased to approximately 10.6% from 9.2%, and net margin increased to approximately 7.0% from 5.8%. The effective tax rate was 33.5%, compared with 36.7% in the prior-year quarter.
- Assumed life insurance in force increased to $2.588 trillion from $2.363 trillion at March 31, 2010.
- New business production increased to $88.2 billion of face amount from $78.8 billion.
- Average invested assets at amortized cost increased 11.3% to $16.8 billion, while the investment yield excluding funds withheld declined to 5.35% from 5.84%.
- Total cash and invested assets were $23.554 billion at March 31, 2011, compared with $23.130 billion at December 31, 2010. Total assets were $29.510 billion and stockholders’ equity was $5.023 billion.
- Liquidity, defined by the company as cash, cash equivalents, and short-term investments, was $542.6 million at March 31, 2011, compared with $582.0 million at December 31, 2010.
- Debt outstanding, including short- and long-term debt, was $1.272 billion, compared with $1.216 billion at year-end. The collateral finance facility was $839.4 million.
Cash flow and capital actions
| Cash flow | Q1 2011 | Q1 2010 |
|---|---|---|
| Operating activities | $375.6 million | $948.0 million |
| Investing activities | $(125.8) million | $(776.3) million |
| Financing activities | $(249.8) million | $(158.3) million |
| Ending cash and cash equivalents | $467.7 million | $525.4 million |
Operating cash flow declined primarily because claims, acquisition costs, taxes, and other operating outflows increased more than premium and investment-income inflows. Financing cash outflows included approximately $336.0 million of treasury-stock purchases, partly offset by $154.6 million related to retirement of preferred income equity redeemable securities and $56.0 million of net credit-facility borrowings.
Material changes versus the prior comparable period
- U.S. pretax income increased 14.7% to $150.9 million, Canada increased 61.7% to $30.7 million, and Europe & South Africa increased 147.0% to $26.3 million. Asia Pacific declined 4.2% to $25.3 million.
- Europe & South Africa benefited from premium growth and favorable claims experience. Asia Pacific results included an estimated $6.5 million of losses from the Japan and New Zealand earthquakes.
- Changes in embedded derivatives increased consolidated pretax income by approximately $14.5 million versus the prior-year quarter. Management states these changes are generally unrealized and do not affect current cash flows, crediting rates, or underlying treaty spread performance.
- Other-than-temporary impairment losses recognized in earnings declined to $1.6 million from $5.1 million. Gross unrealized losses on fixed maturity and equity securities declined to $267.7 million from $319.1 million at December 31, 2010.
- The company completed a remarketing of approximately $158.2 million of trust preferred securities. Approximately 5.5 million common shares were issued upon warrant exercises, while approximately 5.5 million shares were repurchased through the MetLife transaction and accelerated share repurchase program to offset dilution.
- The company recognized a $5.0 million pretax gain from repurchasing $12.7 million face amount of collateral finance facility notes for $7.6 million and a $4.4 million pretax loss from the PIERS redemption and remarketing.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or revenue guidance. Management states that industry trends have not changed materially from those described in the 2010 Annual Report and expects continued growth opportunities from industry consolidation and demand for mortality-risk reinsurance, although at rates below historical levels.
- Management believes liquidity is sufficient for at least the next 12 months, including under scenarios involving early treaty recaptures and higher-than-expected death claims. The company also reports compliance with debt covenants.
- Approximately $160.3 million of remaining trust preferred securities obligations, including interest, was payable on June 6, 2011. The company also had $56.0 million of outstanding FHLB traditional funding agreements.
- The company had $750.0 million of syndicated revolving-credit capacity, with no cash borrowings outstanding and $152.4 million of issued but undrawn letters of credit. A separate $200.0 million letter-of-credit facility was also fully issued but undrawn.
- Undrawn letters of credit supporting third parties totaled approximately $16.4 million, while undrawn letters supporting intercompany reinsurance totaled approximately $423.0 million.
- Reinsurance and retrocession counterparty risk remains material. Claims recoverable from retrocessionaires were $137.9 million, including $18.2 million past due, although the company had not recorded a valuation allowance.
- Principal risks include mortality, morbidity, lapsation, catastrophe, underwriting, reserve adequacy, investment impairment, interest-rate and currency movements, liquidity, collateral requirements, counterparty credit, regulatory restrictions, litigation, and changes in accounting standards.
- Variable-annuity guarantees and related derivatives can create substantial earnings volatility. The fair value of liabilities associated with living benefit riders was $19.9 million at March 31, 2011, compared with $52.5 million at December 31, 2010.
- The investment portfolio was predominantly investment grade, with approximately 94.7% of fixed maturity securities investment grade. However, the company held $151.8 million amortized cost of securities with subprime mortgage exposure, valued at $115.2 million fair value.
- The company reported no material litigation and no material changes to previously disclosed risk factors. Management concluded that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether earnings growth is sustainable after excluding volatile embedded-derivative gains, investment gains, the $5.0 million collateral-finance gain, and the $4.4 million PIERS-related loss.
- The effect of lower investment yields and rising interest rates on future investment income, asset valuations, and policyholder liabilities.
- The adequacy of reserves and claims experience, particularly after the Asia Pacific earthquake losses and given normal quarter-to-quarter mortality volatility.
- Liquidity and capital requirements associated with the June 2011 trust-preferred maturity, collateral obligations, letters of credit, and potential treaty recaptures.
- Credit quality, valuation assumptions, and impairment exposure in structured securities, subprime assets, Level 3 investments, and funds-withheld portfolios.
- The recoverability of retrocession claims and the financial strength of reinsurance counterparties.
- The impact of the share issuance and repurchases on diluted share count, capital, and future EPS.