Business Context and Reporting Period
Company: Reinsurance Group of America, Incorporated (RGA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Overview: RGA is a leading global life reinsurer, primarily engaged in traditional individual life, asset-intensive, critical illness, and financial reinsurance. As of December 31, 2006, General American Life Insurance Company (a wholly-owned subsidiary of MetLife, Inc.) owned approximately 52.5% of RGA's outstanding common stock. The Company operates through five segments: U.S., Canada, Europe & South Africa, Asia Pacific, and Corporate and Other.
Key Financial Metrics
| Metric (in millions) | 2006 | 2005 |
|---|---|---|
| Net Premiums | $4,346.0 | $3,866.8 |
| Total Revenues | $5,193.7 | $4,584.7 |
| Net Income | $288.2 | $224.2 |
| Diluted EPS (Net Income) | $4.57 | $3.52 |
| Total Assets | $19,036.8 | $16,193.9 |
| Total Stockholders' Equity | $2,815.4 | $2,527.5 |
| Long-term Debt | $676.2 | $674.4 |
| Cash Flow from Operations | $846.2 | $599.4 |
Operating Data: Life reinsurance in force totaled $1,980.3 billion (up from $1,736.6 billion in 2005). New business production was $370.4 billion.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13.3% to $5.19 billion, driven by a 12.4% increase in net premiums and a 22.0% increase in investment income.
- Profitability: Net income rose 28.5% to $288.2 million. Income from continuing operations increased 24.5% to $293.3 million, primarily due to improved mortality experience in the U.S. and strong results in international segments.
- Segment Performance:
- U.S. Operations: Income before taxes increased 22.2% to $322.3 million, driven by improved mortality and higher investment income.
- Asia Pacific: Income before taxes surged 87.4% to $58.6 million, led by strong results in Australia, Japan, and Korea.
- Europe & South Africa: Income before taxes grew 64.0% to $58.2 million, benefiting from favorable mortality/morbidity experience in the UK.
- Canada: Income before taxes decreased 8.8% to $45.8 million due to unfavorable mortality experience, partially offset by a stronger Canadian dollar.
- Discontinued Operations: Loss from discontinued accident and health operations decreased to $5.1 million (from $11.4 million in 2005) following a negotiated settlement of disputed claims in the prior year.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Financial Objectives: Management targets a 12% return on stockholders' equity and 12% annual earnings per share growth over the intermediate term (3-5 years).
- Segment Growth: U.S. and Canada operations are expected to grow premiums and income by 8-10%. Newer international operations (Europe & South Africa, Asia Pacific) are targeted for 12-15% growth.
- Capital Strategy: The Company continues to expand internationally and manage capital requirements through retrocession and collateral facilities.
Key Risks & Contingencies:
- Regulation XXX: U.S. statutory reserve requirements (Regulation XXX) continue to increase, requiring significant collateral. In 2006, RGA issued $850 million of floating rate insured notes to fund these collateral requirements.
- Discontinued Operations Litigation: RGA is involved in arbitrations regarding its discontinued accident and health business. As of January 31, 2007, claims raised by parties were $23.4 million in excess of RGA's reserves. Management believes it has substantial defenses but acknowledges potential for future charges.
- Counterparty Risk: Reliance on ceding companies for accurate data and retrocessionaires for performance. The Company has not experienced material defaults but notes the risk remains.
- Interest Rate Risk: Fluctuations in interest rates impact investment income and the spread earned on asset-intensive products. A 10% unfavorable change in rates could reduce fair value of financial instruments by approximately $415.4 million.
Investor Verification Checklist
- MetLife Ownership: Verify the impact of MetLife's 52.5% ownership on strategic decisions and potential future divestitures or capital injections.
- Regulation XXX Collateral: Confirm the sufficiency of the $850 million collateral finance facility and the cost of funding statutory reserves under evolving regulations.
- Discontinued Operations Reserves: Monitor the status of the $23.4 million excess claims in the discontinued accident and health arbitrations and potential for reserve increases.
- Mortality Experience: Assess the sustainability of the improved mortality experience in the U.S. and international segments that drove 2006 profitability.
- Investment Portfolio: Review the composition of the $14.6 billion investment portfolio, specifically the exposure to non-investment grade securities (approx. 2.9% of fixed maturities) and funds withheld at interest ($4.1 billion).