Reinsurance Group of America, Incorporated — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011, with unaudited quarterly information for fourth quarter 2011. RGA is a global life and health reinsurer serving individual and group life, health, longevity, disability, annuity, critical illness and financial-reinsurance markets. North America generated approximately 65.8% of 2011 net premiums.
Financial performance and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net premiums | $7,335.7 million | $6,659.7 million | +10.2% |
| Total revenues | $8,829.5 million | $8,261.7 million | +6.9% |
| Income before income taxes | $834.4 million | $863.8 million | -3.4% |
| Net income | $599.6 million | $574.4 million | +4.4% |
| Diluted EPS | $8.09 | $7.69 | +5.2% |
| Net income margin | 6.8% | 6.9% | Down modestly |
| Net operating cash flow | $1,309.5 million | $1,842.7 million | -28.9% |
| Total assets | $32.1 billion | $29.1 billion | +10.4% |
| Stockholders’ equity | $6.14 billion | $5.04 billion | +21.8% |
Investment income increased 3.4% to $1,281.2 million, but the average investment yield declined to 5.29% from 5.62% because of the low-interest-rate environment. Net investment-related gains became a $36.1 million loss versus a $212.0 million gain in 2010, primarily reflecting unfavorable derivative and embedded-derivative valuation changes.
At December 31, 2011, cash and invested assets totaled $25.9 billion, including $16.2 billion of fixed-maturity securities and $5.4 billion of funds withheld at interest. Approximately 95.5% of fixed-maturity securities were investment grade. Gross unrealized gains were $2.31 billion compared with gross unrealized losses of $292.5 million.
Operating cash flow remained positive, while cash used in investing activities was $905.8 million and cash provided by financing activities was $102.0 million. Liquidity, including cash, cash equivalents and short-term investments, was $1.05 billion at year-end. Management stated that liquidity was sufficient for the next 12 months, including under scenarios involving early recapture and higher-than-expected claims.
Total debt was $1.41 billion at year-end, compared with $1.22 billion in 2010. The company issued $400 million of 5.00% senior notes due 2021 and repaid $200 million of senior notes due in 2011. RGA also maintained an $850 million four-year revolving credit facility with no cash borrowings outstanding and $183.5 million of issued, undrawn letters of credit. The company was in compliance with debt covenants.
Fourth-quarter 2011 information
| Metric | Q4 2011 | Q4 2010 |
|---|---|---|
| Total revenues | $2,348.2 million | $2,274.1 million |
| Income before income taxes | $220.6 million | $275.3 million |
| Net income | $158.5 million | $196.7 million |
| Diluted EPS | $2.15 | $2.62 |
Fourth-quarter results were lower year over year despite higher revenue, reflecting claims experience, market-sensitive derivative valuations and other operating factors.
Material changes versus the prior comparable period
- Premium growth was broad-based: total net premiums increased 10.2%; Europe and South Africa increased 30.0%, Asia Pacific 14.5%, Canada 4.8% and the U.S. 5.2%.
- Assumed life reinsurance in force increased to $2.664 trillion from $2.540 trillion, and new business production increased to $428.9 billion from $327.6 billion. Asia Pacific new group business in Australia contributed materially to growth.
- Income before tax declined in the U.S. segment to $436.7 million from $539.4 million, primarily because of unfavorable claims experience and adverse embedded-derivative valuation changes.
- Canada income before tax increased 36.1% to $166.6 million, while Europe and South Africa increased 16.6% to $100.0 million. Asia Pacific declined 24.4% to $67.1 million due to reserve increases, incurred-but-not-reported claims and adverse claims experience.
- Corporate and Other income before tax increased to $63.9 million from $27.5 million, primarily due to a $65.6 million gain on repurchases of collateral finance facility securities.
- Net income benefited from a $32.5 million cumulative tax benefit related to previously enacted Canadian tax-rate reductions and from the collateral-finance gain. These benefits were partly offset by approximately $68.5 million of unfavorable after-adjustment changes in three categories of embedded derivatives.
- Common dividends declared increased to $0.60 per share from $0.48 per share. RGA repurchased approximately $380.3 million of common stock during 2011.
Guidance, outlook, commentary and risks
- Management expected continued demand for life reinsurance from industry consolidation, capital management needs, demographic trends and increased international reinsurance penetration.
- Management expected the low U.S. interest-rate environment to continue pressuring investment yields. If rates remained at then-current levels for five years, management estimated investment yield could decline approximately 50 basis points over that period.
- The company stated that its capital base was adequate for current operations and that it did not expect to need additional capital or record DAC write-downs solely if rates remained at then-current levels for five years.
- The company expected adoption in 2012 of amended guidance on deferred policy acquisition costs to reduce stockholders’ equity by approximately $320.4 million and DAC by approximately $472.3 million at January 1, 2012. Management estimated 2011 income before taxes would have been approximately $60.1 million lower under the new guidance.
- Primary risks include mortality and morbidity volatility, lapse and recapture risk, interest-rate and equity-market exposure, valuation changes in embedded derivatives, foreign-currency movements, investment-credit losses, counterparty and retrocessionaire performance, collateral availability, regulatory capital requirements and ratings downgrades.
- Approximately $333.9 billion of gross assumed in-force business was subject to potential recapture if specified financial-condition or ratings triggers were not maintained. Treaty guarantees had $467.5 million of exposure net of assets held in trust.
- Timberlake Re’s risk-based-capital ratio was below 100%, requiring quarterly regulatory approval for certain payments supporting the collateral finance facility. The related notes are insured by a monoline insurer whose parent was in Chapter 11 bankruptcy.
- The filing reported no material litigation, no unresolved SEC staff comments and unqualified audit opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether premium growth and new-business production continue without deterioration in mortality, morbidity, lapse or disability experience.
- The recurring earnings contribution excluding the $65.6 million collateral-finance gain, tax benefit and volatile embedded-derivative valuations.
- The effect of the 2012 DAC accounting adoption on equity, earnings, book value per share and reported operating metrics.
- Investment yield trends, credit impairments, Level 3 valuations and the sensitivity of variable-annuity guarantees to equity markets, interest rates and volatility.
- Availability and cost of collateral, letters of credit and statutory reserve financing as Regulation XXX-related requirements grow.
- Liquidity implications of potential treaty recaptures, collateral calls, guarantees and the Timberlake Re regulatory situation.
- Future dividend capacity, considering subsidiary statutory surplus, regulatory dividend limits and holding-company debt service requirements.