Reinsurance Group of America, Incorporated — 2016 Form 10-K Summary
Business context and reporting period
RGA is a global provider of traditional life and health reinsurance and financial solutions, including longevity, asset-intensive and financial reinsurance. Operations span the U.S. and Latin America, Canada, Europe/Middle East/Africa, Asia Pacific, and Corporate and Other. The filing covers the fiscal year ended December 31, 2016; it is an annual filing rather than a quarter-only report, although fourth-quarter results are disclosed.
RGA reported 64.3 million common shares outstanding at January 31, 2017 and approximately 2,482 employees at December 31, 2016.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenues | $11.522 billion | $10.418 billion | +10.6% |
| Net premiums | $9.249 billion | $8.571 billion | +7.9% |
| Investment income, net | $1.912 billion | $1.734 billion | +10.2% |
| Investment-related gains, net | $94.2 million | $(164.8) million | Improved by $258.9 million |
| Income before taxes | $1.044 billion | $744.8 million | +40.2% |
| Net income | $701.4 million | $502.2 million | +39.7% |
| Diluted EPS | $10.79 | $7.46 | +44.6% |
| Operating cash flow | $1.466 billion | $2.089 billion | $(622.9) million |
Net income margin was approximately 6.1% of revenue and pretax margin was approximately 9.1%. The effective tax rate was 32.8%, compared with 32.6% in 2015. Management attributed the earnings improvement primarily to favorable U.S. mortality experience, higher investment income and substantially improved investment-related gains, including changes in fair values of embedded derivatives.
- Total assets were $53.098 billion, up from $50.383 billion.
- Total investments were $44.841 billion, up from $41.978 billion.
- Stockholders’ equity was $7.093 billion, up from $6.135 billion; book value per share was $110.31.
- Long-term debt was $3.089 billion, compared with $2.298 billion. The average interest rate was 5.16%, and the company was in compliance with debt covenants.
- Collateral finance and securitization notes were $840.7 million.
- Cash and cash equivalents were $1.201 billion; reported liquidity including cash, cash equivalents and short-term investments was $1.277 billion.
- Assumed life reinsurance in force was $3.063 trillion, up 2.3%; new business production was $404.8 billion, down from $491.0 billion.
- Common dividends declared were $1.56 per share, compared with $1.40 in 2015. RGA repurchased 1.36 million shares for approximately $116.5 million.
Material changes versus the prior comparable period
- U.S. and Latin America pretax income increased 47.5% to $654.5 million, driven by improved claims experience, higher investment income and favorable embedded-derivative movements.
- Canada pretax income increased 3.3% to $142.7 million, supported by higher creditor premiums and investment-related gains, partly offset by less favorable individual-life mortality and longevity experience.
- EMEA pretax income increased 7.1% to $168.1 million. Financial Solutions improved, while Traditional results declined because of unfavorable claims experience and currency effects.
- Asia Pacific pretax income decreased 5.8% to $118.0 million, primarily because of unfavorable Australian disability claims and lapse experience on a closed Japanese treaty.
- Corporate and Other pretax loss narrowed to $39.2 million from $119.1 million, mainly because of improved investment-related gains and lower interest expense.
- The company issued $400 million of 3.95% senior notes due 2026 and $400 million of 5.75% fixed-to-floating subordinated debentures due 2056. Proceeds were intended partly to refinance $300 million of senior notes maturing in March 2017.
- The name of the Non-Traditional segments was changed to Financial Solutions; management stated that the change did not affect previously reported results.
- Fourth-quarter 2016 net income was $190.1 million, or $2.92 diluted EPS, compared with $163.1 million, or $2.46 diluted EPS, in the fourth quarter of 2015.
Outlook, management commentary, risks and unusual items
Management stated that operating cash flows and available liquidity should be sufficient for at least the next 12 months, including under scenarios involving early treaty recapture, market events and higher-than-expected claims. Available alternatives include committed credit facilities, secured borrowings, new debt or equity issuance and sales of invested assets. No formal earnings or revenue guidance is provided.
- Low interest rates are pressuring investment yields. Average investment yield excluding spread-related business declined to 4.57% from 4.82%.
- RGA remains exposed to mortality, morbidity, longevity, lapse and policyholder behavior assumptions. Reserve adequacy and deferred acquisition cost recoverability depend on estimates that may change materially.
- Variable-annuity guarantees and other embedded derivatives can create significant earnings volatility from changes in equity markets, interest rates, volatility, credit spreads and policyholder behavior. The company’s hedging program may not fully offset these effects.
- Regulation XXX, collateral availability, captive-reinsurance restrictions and the transition toward principles-based reserves could increase capital, financing and collateral requirements. RGA expected to defer implementation of U.S. principles-based reserving until 2019.
- Regulatory restrictions may limit dividends from subsidiaries, which are a principal source of holding-company liquidity. RGA Reinsurance could pay approximately $152.2 million of dividends without prior approval as of January 1, 2017, subject to statutory conditions.
- At December 31, 2016, approximately $12.1 billion of securities were held in trust for third-party reinsurance collateral and approximately $2.4 billion for certain RGA subsidiaries. About $345.2 billion of gross assumed in-force business was subject to recapture provisions triggered by financial-condition or ratings events.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $7.2 billion through 2036, although management considered funding events remote.
- Brexit, foreign-currency movements, international regulation, counterparty failures, investment impairments, cyber incidents, catastrophes and competition remain material risks.
- No material litigation was reported. Deloitte & Touche issued an unqualified audit opinion and an unqualified opinion on internal control over financial reporting.
Most important facts an investor should verify
- Reconcile operating cash flow figures: the consolidated cash-flow statement reports $1.466 billion, while one liquidity summary table presents a different amount.
- Assess how much of the 2016 earnings increase came from recurring underwriting and investment spread performance versus non-cash embedded-derivative and investment-related gains.
- Review mortality, morbidity, lapse, longevity and disability experience by segment, particularly the U.S. older-issue-age block, Canadian longevity business, Australian disability business and Japanese closed treaty.
- Evaluate liquidity and capital sensitivity to recapture, collateral calls, ratings downgrades and restricted subsidiary dividends.
- Review debt maturities, refinancing of the 2017 senior notes, letter-of-credit capacity and collateral-finance obligations.
- Monitor the effect of low interest rates, credit spreads, equity volatility and policyholder behavior on reserves, DAC, investment yields and variable-annuity guarantees.
- Verify the expected timing and financial impact of principles-based reserving, CECL, lease, income-tax and stock-compensation accounting changes.