Business Context and Reporting Period
Company: Reinsurance Group of America, Inc. (RGA)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: RGA is a leading life reinsurer primarily engaged in traditional life, asset-intensive, and financial reinsurance. As of December 31, 2003, Equity Intermediary Company, a wholly-owned subsidiary of MetLife, Inc., owned approximately 51.9% of RGA's outstanding common stock. The Company operates globally with significant presence in the U.S., Canada, Europe, South Africa, and Asia Pacific.
Key Financial Metrics
| Metric (in millions) | 2003 | 2002 |
|---|---|---|
| Net Premiums | $2,643.2 | $1,980.7 |
| Total Revenues | $3,174.3 | $2,382.0 |
| Net Income | $173.1 | $122.8 |
| Diluted EPS (Continuing Ops) | $3.46 | $2.59 |
| Total Assets | $12,113.4 | $8,892.6 |
| Total Stockholders' Equity | $1,947.7 | $1,222.5 |
| Long-Term Debt | $398.1 | $327.8 |
| Operating Cash Flow | $572.3 | $161.9 |
Reinsurance in Force: $1,252.2 billion (up from $758.9 billion in 2002).
New Business Volume: $544.4 billion (up from $230.0 billion in 2002).
Material Changes vs. Prior Period
- Revenue Growth: Net premiums increased 33.4% to $2,643.2 million, driven primarily by a large coinsurance agreement with Allianz Life Insurance Company of North America ("Allianz Life") effective July 1, 2003. This transaction contributed $246.1 million in net premiums and $287.2 billion in new business volume.
- Profitability: Net income rose 41.0% to $173.1 million. Income from continuing operations increased 38.8% to $178.3 million. This growth was supported by the Allianz transaction, favorable mortality experience, and a $12.9 million gain from the change in value of embedded derivatives (due to adoption of Issue B36).
- Balance Sheet Expansion: Total assets grew 36.2% to $12.1 billion, fueled by the Allianz transaction, a common stock offering raising $426.7 million, and strong operating cash flows.
- Segment Performance: The U.S. segment remained the largest contributor (68.2% of net premiums). International segments (Europe & South Africa, Asia Pacific) saw significant premium growth due to favorable currency exchange rates and new treaty business.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects the Allianz Life transaction to contribute $30 to $40 million to net income in 2004. The Company anticipates continued growth in core North American business and expansion in international markets.
- Unusual Items:
- Accounting Change: Adoption of SFAS 133 Implementation Issue B36 resulted in a net gain of approximately $9.0 million (after tax and DAC amortization) in 2003.
- Discontinued Operations: The accident and health division (in run-off since 1998) reported a net loss of $5.7 million in 2003.
- Risks and Contingencies:
- Argentine Pension Business: RGA is in dispute with the Argentine government regarding privatized pension reinsurance. The Company has notified Argentina of its intent to file for arbitration under the ICSID. Management believes current reserves are adequate, but outcomes remain uncertain.
- Discontinued Operations Litigation: Ceding companies have raised claims of $62.6 million in excess of RGA's reserves related to discontinued accident and health business. RGA contests these claims.
- Interest Rate Risk: A hypothetical 10% unfavorable change in interest rates could result in a projected loss in fair value of $159.1 million.
- Recapture Rights: Ceding companies may recapture business after 10 years, which would reduce future premiums.
Investor Verification Checklist
- Allianz Transaction Integration: Verify the actual contribution of the Allianz Life block to 2004 earnings against the $30-$40 million guidance.
- Argentine Exposure: Monitor developments in the dispute with the Argentine government and any potential impact on reserves or liquidity.
- Discontinued Operations Reserves: Track the resolution of litigation regarding the accident and health run-off business, specifically the $62.6 million in disputed claims.
- Embedded Derivatives Volatility: Assess the impact of credit spread movements on the "change in value of embedded derivatives" line item, which contributed significantly to 2003 income.
- Dividend Capacity: Review statutory dividend limitations for key subsidiaries (RGA Reinsurance, RGA Canada) to ensure sufficient liquidity for shareholder distributions.