RGA 2016 Q3 Form 10-Q Summary
Business context and reporting period
Reinsurance Group of America, Incorporated provides traditional and non-traditional life, health, disability, critical illness, longevity, asset-intensive and financial reinsurance through operations in the U.S. and Latin America, Canada, Europe/Middle East/Africa, and Asia Pacific. This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the same periods in 2015. The filing was signed November 2, 2016.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net premiums | $2.252 billion | $2.089 billion | $6.756 billion | $6.242 billion |
| Total revenues | $2.901 billion | $2.439 billion | $8.452 billion | $7.590 billion |
| Income before taxes | $287.6 million | $140.1 million | $748.4 million | $538.1 million |
| Net income | $198.7 million | $83.5 million | $511.3 million | $339.0 million |
| Diluted EPS | $3.07 | $1.25 | $7.87 | $5.01 |
| Dividends declared per share | $0.41 | $0.37 | $1.15 | $1.03 |
- Net income margin was approximately 6.9% in Q3 and 6.1% for the first nine months; pretax margins were approximately 9.9% and 8.9%, respectively.
- Net cash provided by operating activities was $1.020 billion for the first nine months, compared with $878.5 million in 2015. Investing activities used $2.247 billion, primarily for purchases of fixed maturity securities, equity securities and mortgage loans. Ending cash and cash equivalents were $1.380 billion.
- Total assets increased to $54.832 billion from $50.383 billion at December 31, 2015. Stockholders’ equity increased to $7.993 billion from $6.135 billion, including a $1.504 billion increase in other comprehensive income, largely from unrealized investment gains.
- Total cash and invested assets were $47.765 billion, including $33.536 billion of available-for-sale fixed maturity securities, $3.608 billion of mortgage loans and $5.923 billion of funds withheld at interest.
- Approximately 95.0% of fixed maturity securities were investment grade. Gross unrealized gains were $3.578 billion and gross unrealized losses were $137.3 million at September 30, 2016.
- Outstanding borrowings under debt agreements were $3.111 billion, compared with $2.313 billion at year-end 2015. The company reported compliance with all debt covenants.
Material changes versus the prior comparable period
- Q3 net income increased 137.9% and nine-month net income increased 50.8%. The principal drivers were higher investment-related gains, higher investment income and improved U.S. mortality experience.
- Investment-related gains were $86.6 million in Q3 and $84.0 million for nine months, compared with losses of $111.3 million and $119.9 million, respectively, in 2015. The improvement primarily reflected changes in the fair value of embedded derivatives on modified coinsurance and funds-withheld treaties and lower impairments.
- Fixed maturity impairments were zero in Q3 2016 versus $23.1 million in Q3 2015. Nine-month impairments were $34.7 million, primarily involving high-yield energy and emerging-market corporate securities.
- Net premiums increased 7.8% in Q3 and 8.2% for nine months, mainly from growth in life reinsurance in force and large in-force block transactions completed in late 2015. Assumed life insurance in force increased to $3.083 trillion from $2.849 trillion a year earlier.
- Net investment income increased 25.7% in Q3 and 11.7% for nine months. However, the average investment yield excluding spread-related business declined to 4.43% from 4.66% in Q3 and to 4.53% from 4.77% for nine months.
- U.S. and Latin America pretax income increased 95.6% in Q3 and 37.4% for nine months, supported by improved Traditional mortality experience and favorable embedded-derivative changes.
- Canada pretax income declined 5.1% in Q3 but increased 12.8% for nine months. EMEA pretax income increased 15.9% in Q3 but declined 4.3% for nine months, while Asia Pacific pretax income increased 64.0% and 35.3%, respectively.
- In June 2016, RGA issued $400 million of 3.95% senior notes due 2026 and $400 million of 5.75% fixed-to-floating subordinated debentures due 2056. Net proceeds were approximately $791 million, partly intended to repay $300 million of senior notes maturing in March 2017.
- During the first nine months, RGA repurchased 1.4 million shares for $116.5 million under a $400 million authorization. The October 2016 dividend declaration was $0.41 per share.
Guidance, outlook, commentary and risks
- 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.
- Liquidity included approximately $1.506 billion of cash and short-term investments, $752.6 million of availability under the revolving credit facility and $838.3 million available through collateralized Federal Home Loan Bank borrowings.
- Management expects sustained low interest rates to pressure investment yields but stated that reserves should remain sufficient and that no deferred acquisition cost write-down or capital augmentation would be expected if rates remained at current levels for five years, assuming other factors remain constant.
- Brexit-related currency volatility, particularly the weaker British pound, could adversely affect results and may create additional regulatory and operational complexity for U.K. reinsurance.
- Reported earnings were materially affected by unrealized changes in embedded derivatives. Management stated that these changes do not affect current cash flows, policyholder crediting rates or the underlying spread performance of the related treaties.
- Key risks include mortality, morbidity, longevity, lapses and recaptures; investment credit and impairment risk; interest-rate, equity, foreign-currency and real-estate risk; counterparty and retrocessionaire collectability; collateral requirements; regulatory changes; litigation; catastrophe events; operational and information-security failures; and credit-rating downgrades.
- Statutory reserve-support commitments had maximum potential obligations totaling approximately $7.2 billion across maturities from 2023 through 2036. Management considered funding requirements under the defined events remote.
- The filing reports no material changes to previously disclosed risk factors, no material market-risk changes, and effective disclosure controls and procedures.
Most important facts for investors to verify
- Determine how much of the earnings increase is attributable to recurring underwriting, investment income and fee income versus volatile embedded-derivative fair-value changes.
- Review mortality, morbidity, longevity, lapse and policyholder-behavior trends by segment, including the unfavorable Q3 experience in Canada and EMEA and Australian disability claims.
- Assess the effect of lower investment yields and prolonged low interest rates on future spread income, reserves, capital and deferred acquisition costs.
- Monitor debt refinancing, covenant compliance, rating-sensitive derivative provisions and liquidity available after collateral and letter-of-credit requirements.
- Evaluate concentration risks, including the $4.0 billion funds-withheld balance associated with one client, investment exposure to energy and emerging markets, and counterparty and retrocession recoverables.
- Reconcile reported cash flows with the significant investment purchases, debt issuance, share repurchases and policyholder deposits and withdrawals.