Reinsurance Group of America, Incorporated (RGA) — Q1 2015 Form 10-Q
Business context and reporting period
RGA is a global life and health reinsurance company providing traditional reinsurance and non-traditional reinsurance, including asset-intensive, longevity and financial reinsurance. This unaudited report covers the three months ended March 31, 2015, with comparison to March 31, 2014. Effective January 1, 2015, RGA separately presented traditional and non-traditional results in the Canada, EMEA and Asia Pacific segments; prior periods were conformed.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenues | $2.521 billion | $2.657 billion | Down 5.1% |
| Net premiums | $2.024 billion | $2.101 billion | Down 3.7% |
| Net investment income | $426.9 million | $404.4 million | Up 5.6% |
| Investment-related gains, net | $7.6 million | $84.6 million | Down 91.0% |
| Income before income taxes | $184.1 million | $199.4 million | Down 7.7% |
| Net income | $125.1 million | $136.7 million | Down 8.4% |
| Diluted EPS | $1.81 | $1.92 | Down 5.7% |
| Effective tax rate | Approximately 32.1% | 31.5% | Up approximately 60 bps |
| Net cash from operations | $316.2 million | $541.2 million | Down 41.6% |
Approximate pretax margin was 7.3% in Q1 2015 versus 7.5% in Q1 2014; approximate net margin was 5.0% versus 5.1%. Investment yield, excluding spread-related business, increased to 4.78% from 4.74%, while average invested assets increased 6.8% to $21.1 billion.
- Total assets were $44.69 billion at March 31, 2015, essentially unchanged from December 31, 2014.
- Stockholders’ equity increased to $7.15 billion from $7.02 billion, primarily reflecting comprehensive income, partly offset by share repurchases.
- Cash and cash equivalents were $1.08 billion, down from $1.65 billion at year-end. Liquidity, defined by management as cash and cash equivalents plus short-term investments, was $1.17 billion versus $1.74 billion.
- Long-term debt was $2.31 billion and collateral finance and securitization notes were $774.4 million. The company reported compliance with all debt covenants.
- Fixed maturity securities were $25.80 billion at fair value; approximately 94.3% were investment grade. Gross unrealized gains were $2.97 billion and gross unrealized losses were $99.5 million.
Material changes versus the prior comparable period
- Profit declined principally because of unfavorable mortality experience in the U.S. and Latin America Traditional and Canada Traditional segments, lower investment-related gains, and unfavorable foreign-currency movements.
- Net premiums declined $76.8 million. A large retrocession transaction completed in Q4 2014 reduced U.S. and Latin America Traditional premiums by approximately $112.0 million, while currency movements reduced consolidated premiums by approximately $96.6 million.
- Investment-related gains fell $77.0 million, primarily because the prior-year period benefited from a substantial increase in the fair value of embedded derivatives on modified coinsurance and funds-withheld treaties.
- Embedded derivative changes, after related deferred acquisition cost and retrocession adjustments, reduced pretax income by approximately $33.0 million compared with the prior year. These changes were substantially unrealized and did not affect current cash flows, credited rates or underlying treaty spread performance.
- U.S. and Latin America pretax income declined 46.0% to $72.3 million. Its Traditional loss ratio increased to 93.3% from 90.5%.
- Canada pretax income increased 33.9% to $26.9 million; EMEA increased 98.1% to $30.1 million; and Asia Pacific increased 138.7% to $62.8 million, supported largely by favorable claims or mortality experience.
- RGA repurchased 2.54 million shares for $230.1 million during the quarter. The January 2015 authorization was $300.0 million, with $69.9 million remaining at March 31.
- Cash declined $562.5 million, reflecting $503.7 million used in investing activities, $339.9 million used in financing activities, share repurchases and foreign-exchange effects.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects continued opportunities from industry consolidation and the established practice of reinsuring mortality risk, but notes that growth may be slower than historical levels. Management states that liquidity is sufficient for at least the next 12 months, including under scenarios involving early treaty recapture and higher-than-expected death claims.
- Persistently low interest rates are expected to pressure investment yields. Management believes reserves and capital are adequate even if rates remain at current levels for five years, assuming other factors remain constant.
- Principal risks include mortality, morbidity, longevity, lapsation, policy recapture, investment impairment, interest rates, credit spreads, foreign exchange, equity-market volatility, counterparty defaults, collateral requirements, regulatory changes and catastrophes.
- Variable-annuity and funds-withheld embedded derivatives can create significant earnings volatility. Hedging may not fully offset guarantee-related changes because of market volatility, timing differences, policyholder behavior and basis risk.
- Collateral and regulatory-reserve requirements, including Regulation XXX and potential changes to captive-reinsurance rules, could increase capital needs or reduce the company’s ability to write or retain business.
- RGA had no material litigation and reported no material changes to the risk factors in its 2014 Form 10-K. Disclosure controls were effective, with no material change in internal control over financial reporting.
- On April 1, 2015, RGA completed the acquisition of Aurora National Life Assurance Company for approximately $200 million. The acquired business represented approximately $3.7 billion of assets and $3.5 billion of liabilities, subject to customary adjustments, with no goodwill reported.
Important facts for investors to verify
- Whether elevated U.S. and Canada mortality experience normalizes and whether reported loss ratios improve.
- The recurring earnings contribution of investment income and the sensitivity of results to low interest rates, credit spreads and foreign exchange.
- The extent to which future earnings are affected by unrealized embedded-derivative valuation changes rather than underlying treaty economics.
- Liquidity after the substantial share repurchases, remaining repurchase authorization, collateral requirements and scheduled debt maturities.
- The impact of the Aurora acquisition on premiums, reserves, capital, earnings and integration costs.
- Future regulatory treatment of affiliated captives, collateral, certified reinsurers and statutory reserve-support commitments.