RGA

Business Context and Reporting Period

Company: Reinsurance Group of America, Inc. (RGA)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1999
Business Overview: RGA operates primarily in life reinsurance across five geographic segments: U.S., Canada, Latin America, Asia Pacific, and Other International. The company also engages in direct insurance in Latin America and non-traditional reinsurance (asset-intensive and financial) in the U.S. The accident and health division is reported as a discontinued operation.

Key Financial Metrics

Liquidity: Cash and cash equivalents increased to $30.6 million from $16.0 million at year-end 1998. The company has a line of credit with $15.0 million drawn as of March 31, 1999.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 41.4% year-over-year, driven by a 45.5% increase in net premiums and a 34.5% increase in investment income.
• Profitability: Net income rose 38.0% to $21.96 million. Income from continuing operations before taxes increased 43.9%.
• Segment Performance:
  • U.S. Operations: Income before taxes increased 52.7% to $37.3 million, led by strong traditional reinsurance growth (60.8% income increase) and asset-intensive products.
  • Canada: Income before taxes increased 43.6% to $5.2 million due to premium growth and higher investment income.
  • Latin America: Income before taxes more than doubled to $1.55 million, driven by privatized pension reinsurance in Argentina.
  • Asia Pacific: Reported a loss of $7.8 million (vs. break-even in 1998) due to adverse mortality claims in Japan and Hong Kong and the recapture of a financial reinsurance treaty.
  • Other International: Reported a loss of $0.6 million, though improved from a $1.2 million loss in 1998.
• Investment Portfolio: Fixed maturity securities held at fair value totaled $3.66 billion with net unrealized losses of $30.3 million before tax.

Outlook, Risks, and Management Commentary

• Management Commentary: Management attributes earnings growth to strong traditional reinsurance in the U.S. and Canada, and growth in non-traditional products. They expect sustained premium growth to offset start-up costs in developing markets.
• Market Risks:
  • Interest Rate Risk: A hypothetical 300 basis point rise in rates would decrease the fair value of fixed-rate instruments by approximately 18.9% ($550 million).
  • Foreign Currency Risk: The company is exposed to translation and transaction risks but generally does not hedge. A strengthening U.S. dollar could adversely affect results.
• Year 2000 Compliance: The company believes it is substantially compliant as of March 31, 1999. Remaining costs are estimated at $250,000 for the rest of 1999. Risks remain regarding external vendors and clients failing to comply.
• Discontinued Operations: The accident and health division is in run-off; results were break-even for the quarter.
• Accounting Changes: The company plans to adopt SFAS No. 133 (Derivatives) in 2000; the impact is currently undetermined.

Investor Verification Checklist

• Asia Pacific Losses: Verify the sustainability of the $7.8 million loss in the Asia Pacific segment and the adequacy of reserves for unreported claims in Japan and Australia.
• Investment Yield: Confirm the trend of declining average investment yields (6.69% in Q1 1999 vs. 7.06% in Q1 1998) and its impact on future profitability.
• Year 2000 Contingencies: Assess the potential financial impact if key external ceding companies or vendors fail to achieve Year 2000 compliance.
• Unrealized Losses: Review the $30.3 million net unrealized loss in the fixed maturity securities portfolio and its effect on comprehensive income.
• Discontinued Operations: Monitor the run-off status of the accident and health division to ensure reserves remain adequate for long-tail claims.