Business Context and Reporting Period
Company: Reinsurance Group of America, Inc. (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: RGA is an insurance holding company primarily engaged in life reinsurance. During the quarter, the company completed a significant recapitalization and distribution agreement with MetLife, Inc. On September 12, 2008, MetLife disposed of the majority of its interest in RGA, exchanging shares to MetLife shareholders. RGA now operates as an independent public company with Class A and Class B common stock.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Net Premiums | $1,303.6 million | $3,960.2 million | $3,561.0 million |
| Total Revenues | $1,310.3 million | $4,313.2 million | $4,221.8 million |
| Net Income | $25.2 million | $167.4 million | $230.2 million |
| Income from Continuing Ops (Pre-Tax) | $32.5 million | $260.2 million | $364.7 million |
| Investment Related Losses, Net | ($241.3 million) | ($403.6 million) | ($82.0 million) |
| Total Assets | $21,844.3 million | As of Sep 30, 2008 | |
| Total Liabilities | $19,237.5 million | As of Sep 30, 2008 | |
| Stockholders' Equity | $2,606.9 million | As of Sep 30, 2008 | |
| Cash and Cash Equivalents | $412.3 million | As of Sep 30, 2008 | |
| Debt (Short-term + Long-term) | $1,018.0 million | As of Sep 30, 2008 |
Material Changes vs. Prior Period
- Profitability Decline: Net income for the nine months ended September 30, 2008, decreased by $62.8 million (27.3%) compared to the same period in 2007. Income from continuing operations before taxes dropped $104.5 million (28.6%).
- Investment Losses: Investment-related losses, net, increased significantly to $403.6 million for the nine months of 2008, compared to $82.0 million in 2007. This was driven by $115.0 million in other-than-temporary impairments (including subprime/Alt-A securities, Lehman Brothers, and Washington Mutual) and $300.2 million in derivative losses.
- Embedded Derivatives: Unfavorable changes in the fair value of embedded derivatives (related to modified coinsurance and funds withheld treaties) contributed to a decrease in income. Widening credit spreads in U.S. debt markets negatively impacted the valuation of these derivatives.
- Premium Growth: Despite the losses, net premiums increased by $399.2 million (11.2%) for the nine months, driven by growth in life reinsurance in force, which reached $2.2 trillion.
- Segment Performance: The U.S. segment reported a loss before taxes of $11.3 million for the quarter, a sharp decline from a profit of $66.2 million in the prior year, primarily due to investment impairments and adverse mortality experience. Conversely, Canada, Europe & South Africa, and Asia Pacific segments reported increased income.
Guidance, Outlook, Risks, and Unusual Items
- Capital Markets Volatility: Management highlights extreme volatility and disruption in global capital markets as a primary risk. This has led to increased credit spreads, reduced liquidity, and higher costs of capital.
- Investment Portfolio: The company recorded $109.3 million in impairments for the quarter ended September 30, 2008. Gross unrealized losses on fixed maturity and equity securities totaled $960.6 million as of September 30, 2008. Management states it has the intent and ability to hold these securities until recovery, but acknowledges the risk of further impairments if market conditions deteriorate.
- Liquidity and Capital: On October 30, 2008 (subsequent to the period end), RGA priced a public offering of 8.9 million shares of Class A common stock at $33.89 per share, with an option for an additional 1.335 million shares. Net proceeds of approximately $331.6 million are expected to be used for reinsurance opportunities and general corporate purposes.
- Regulatory and Tax Risks: The company faces risks related to the preservation of Net Operating Losses (NOLs) following the MetLife split-off. Acquisition restrictions and a Section 382 shareholder rights plan are in place to prevent an "ownership change" that could limit the use of these tax attributes.
- Unusual Items: The adoption of SFAS 157 (Fair Value Measurements) resulted in a pre-tax gain of $3.9 million related to the decrease in the fair value of embedded derivative liabilities. The company also settled an arbitration claim in the third quarter with no net payment.
Investor Verification Checklist
- Investment Impairments: Verify the extent of other-than-temporary impairments in the subprime, Alt-A, and financial institution sectors (e.g., Lehman, Washington Mutual) and the company's intent to hold these assets.
- Embedded Derivatives: Assess the sensitivity of earnings to widening credit spreads and changes in risk-free rates affecting the valuation of embedded derivatives in modified coinsurance and funds withheld treaties.
- Liquidity Position: Confirm the status of the October 2008 equity offering and the company's ability to meet collateral requirements and debt obligations amidst tight credit markets.
- Mortality Experience: Review the impact of adverse mortality experience in the U.S. Traditional segment on future profitability and reserve adequacy.
- Regulatory Capital: Evaluate the impact of Regulation XXX on statutory reserves and the availability/cost of collateral (letters of credit) required to support these reserves.