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| RGA > SEC Filings for RGA > Form 10-Q on 29-Oct-2009 | All Recent SEC Filings |
29-Oct-2009
Quarterly Report
Forward-Looking and Cautionary Statements
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including, among others,
statements relating to projections of the strategies, earnings, revenues, income
or loss, ratios, future financial performance, and growth potential of the
Company. The words "intend," "expect," "project," "estimate," "predict,"
"anticipate," "should," "believe," and other similar expressions also are
intended to identify forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, some of which cannot be predicted
or quantified. Future events and actual results, performance, and achievements
could differ materially from those set forth in, contemplated by, or underlying
the forward-looking statements.
Numerous important factors could cause actual results and events to differ
materially from those expressed or implied by forward-looking statements
including, without limitation, (1) adverse capital and credit market conditions
and their impact on the Company's liquidity, access to capital and cost of
capital, (2) the impairment of other financial institutions and its effect on
the Company's business, (3) requirements to post collateral or make payments due
to declines in market value of assets subject to the Company's collateral
arrangements, (4) the fact that the determination of allowances and impairments
taken on the Company's investments is highly subjective, (5) adverse changes in
mortality, morbidity, lapsation or claims experience, (6) changes in the
Company's financial strength and credit ratings and the effect of such changes
on the Company's future results of operations and financial condition,
(7) inadequate risk analysis and underwriting, (8) general economic conditions
or a prolonged economic downturn affecting the demand for insurance and
reinsurance in the Company's current and planned markets, (9) the availability
and cost of collateral necessary for regulatory reserves and capital,
(10) market or economic conditions that adversely affect the value of the
Company's investment securities or result in the impairment of all or a portion
of the value of certain of the Company's investment securities, that in turn
could affect regulatory capital, (11) market or economic conditions that
adversely affect the Company's ability to make timely sales of investment
securities, (12) risks inherent in the Company's risk management and investment
strategy, including changes in investment portfolio yields due to interest rate
or credit quality changes, (13) fluctuations in U.S. or foreign currency
exchange rates, interest rates, or securities and real estate markets, (14)
adverse litigation or arbitration results, (15) the adequacy of reserves,
resources and accurate information relating to settlements, awards and
terminated and discontinued lines of business, (16) the stability of and actions
by governments and economies in the markets in which the Company operates,
(17) competitive factors and competitors' responses to the Company's
initiatives, (18) the success of the Company's clients, (19) successful
execution of the Company's entry into new markets, (20) successful development
and introduction of new products and distribution opportunities, (21) the
Company's ability to successfully integrate and operate reinsurance business
that the Company acquires, (22) regulatory action that may be taken by state
Departments of Insurance with respect to the Company, (23) the Company's
dependence on third parties, including those insurance companies and reinsurers
to which the Company cedes some reinsurance, third-party investment managers and
others, (24) the threat of natural disasters, catastrophes, terrorist attacks,
epidemics or pandemics anywhere in the world where the Company or its clients do
business, (25) changes in laws, regulations, and accounting standards applicable
to the Company, its subsidiaries, or its business, (26) the effect of the
Company's status as an insurance holding company and regulatory restrictions on
its ability to pay principal of and interest on its debt obligations, and
(27) other risks and uncertainties described in this document and in the
Company's other filings with the Securities and Exchange Commission ("SEC").
Forward-looking statements should be evaluated together with the many risks and
uncertainties that affect the Company's business, including those mentioned in
this document and the cautionary statements described in the periodic reports
the Company files with the SEC. These forward-looking statements speak only as
of the date on which they are made. The Company does not undertake any
obligations to update these forward-looking statements, even though the
Company's situation may change in the future. The Company qualifies all of its
forward-looking statements by these cautionary statements. For a discussion of
these risks and uncertainties that could cause actual results to differ
materially from those contained in the forward-looking statements, you are
advised to see Item 1A - "Risk Factors" in the 2008 Annual Report.
Overview
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding
company that was formed on December 31, 1992. RGA and its subsidiaries
(collectively, the "Company") are primarily engaged in the life reinsurance
business, which involves reinsuring life insurance policies that are often in
force for the remaining lifetime of the underlying individuals insured, with
premiums earned typically over a period of 10 to 30 years. Each year, however, a
portion of the business under existing treaties terminates due to, among other
things, lapses or surrenders of underlying policies, deaths of policyholders,
and the exercise of recapture options by ceding companies.
The Company derives revenues primarily from renewal premiums from existing
reinsurance treaties, new business premiums from existing or new reinsurance
treaties, income earned on invested assets, and fees earned from financial
reinsurance transactions. The Company believes that industry trends have not
changed materially from those discussed in its 2008 Annual Report.
The Company's profitability primarily depends on the volume and amount of death
claims incurred and its ability to adequately price the risks it assumes. While
death claims are reasonably predictable over a period of years, claims become
less predictable over shorter periods and are subject to significant fluctuation
from quarter to quarter and year to year. The maximum amount of coverage the
Company retains per life is $8.0 million. Claims in excess of this retention
amount are retroceded to retrocessionaires; however, the Company remains fully
liable to the ceding company for the entire amount of risk it assumes. The
Company believes its sources of liquidity are sufficient to cover potential
claims payments on both a short-term and long-term basis.
The Company measures performance based on income or loss from continuing
operations before income taxes for each of its five segments. The Company's
U.S., Canada, Europe & South Africa and Asia Pacific operations provide
traditional life reinsurance to clients. The Company's U.S. operations also
provide asset-intensive and financial reinsurance products. The Company also
provides insurers with critical illness reinsurance in its Canada, Europe &
South Africa and Asia Pacific operations. Asia Pacific operations also provide
financial reinsurance. The Corporate and Other segment results include among
other things, the corporate investment activity, general corporate expenses,
interest expense of RGA, operations of RGA Technology Partners, Inc., a
wholly-owned subsidiary that develops and markets technology solutions for the
insurance industry, investment income and expense associated with the Company's
collateral finance facility and the provision for income taxes. Effective
January 1, 2009, due to immateriality, the discontinued accident and health
operations are included in the results of the Corporate and Other segment. Prior
to 2009, the results of the Company's discontinued accident and health
operations were reflected as discontinued operations.
The Company allocates capital to its segments based on an internally developed
economic capital model, the purpose of which is to measure the risk in the
business and to provide a basis upon which capital is deployed. The economic
capital model considers the unique and specific nature of the risks inherent in
RGA's businesses. As a result of the economic capital allocation process, a
portion of investment income and investment related gains and losses are
credited to the segments based on the level of allocated capital. In addition,
the segments are charged for excess capital utilized above the allocated
economic capital basis. This charge is included in policy acquisition costs and
other insurance expenses.
Results of Operations
Consolidated income from continuing operations before income taxes increased
$150.0 million, or 460.9%, and $172.0 million, or 66.1%, for the three and nine
months ended September 30, 2009, as compared to the same periods in 2008. These
increases were primarily due to a decrease in investment impairments and a
favorable change in the value of embedded derivatives within the U.S. segment
due to the impact of tightening credit spreads in the U.S. debt markets. Also
contributing to the favorable results were increased net premiums and investment
income. The increase in the first nine months also reflects the recognition in
other revenues of a gain on the repurchase of long-term debt of $38.9 million.
These increases were partially offset by unfavorable foreign currency
fluctuations. Foreign currency exchange fluctuations resulted in a decrease to
income from continuing operations before income taxes of approximately
$2.0 million and $28.3 million for the third quarter and first nine months of
2009, respectively.
The Company recognizes in consolidated income from continuing operations,
changes in the value of embedded derivatives on modified coinsurance or funds
withheld treaties, equity-indexed annuity treaties ("EIAs") and variable annuity
products. The change in the value of embedded derivatives related to reinsurance
treaties written on a modified coinsurance or funds withheld basis are subject
to the general accounting principles for Derivatives and Hedging related to
embedded derivatives. The unrealized gains and losses associated with these
embedded derivatives, after adjustment for deferred acquisition costs, had a
favorable effect on income before income taxes of $51.8 million and
$102.7 million for the third quarter and first nine months of 2009,
respectively, as compared to the same periods in 2008. Changes in risk free
rates used in the fair value estimates of embedded derivatives associated with
EIAs affect the amount of unrealized gains and losses the Company recognizes.
The unrealized gains and losses associated with EIAs, after adjustment for
deferred acquisition costs and retrocession, affected income before income taxes
unfavorably by $8.1 million in the third quarter and favorably by $9.7 million
in the first nine months of 2009, respectively, as compared to the same periods
in 2008. The change in the Company's liability for variable annuities associated
with guaranteed minimum living benefits affects the amount of unrealized gains
and losses the Company recognizes. The unrealized gains and losses associated
with guaranteed minimum living benefits, after adjustment for deferred
acquisition costs, affected income before income taxes favorably by $2.5 million
in the third quarter and unfavorably by $63.6 million in the first nine months
of 2009, respectively, as compared to the same periods in 2008.
The combined changes in these three types of embedded derivatives, after
adjustment for deferred acquisition costs and retrocession, resulted in
increases of approximately $46.2 million and approximately $48.8 million in
consolidated income from continuing operations before income taxes in the third
quarter and first nine months of 2009, respectively, as compared to the same
periods in 2008. These fluctuations do not affect current cash flows, crediting
rates or spread performance on the underlying treaties. Therefore, management
believes it is helpful to distinguish between the effects of changes in these
embedded derivatives and the primary factors that drive profitability of the
underlying treaties, namely investment income, fee income, and interest
credited.
Consolidated net premiums increased $101.6 million, or 7.8%, and $166.2 million,
or 4.2%, for the three and nine months ended September 30, 2009, as compared to
the same periods in 2008, due to growth in life reinsurance in force. Foreign
currency fluctuations unfavorably affected net premiums by approximately
$41.5 million and $289.4 million for the three and nine months ended
September 30, 2009, as compared to the same periods in 2008. Consolidated
assumed insurance in force increased to $2,274.6 billion as of September 30,
2009 from $2,176.5 billion as of September 30, 2008 due to new business
production. The Company added new business production, measured by face amount
of insurance in force, of $70.3 billion and $73.8 billion during the third
quarter of 2009 and 2008, respectively, and $216.9 billion and $221.8 billion
during the first nine months of 2009 and 2008, respectively. Management believes
industry consolidation, reduced capital levels in the life insurance industry
and the established practice of reinsuring mortality risks should continue to
provide opportunities for growth, albeit at rates less than historically
experienced.
Consolidated investment income, net of related expenses, increased
$79.2 million, or 36.0%, and $132.7 million, or 19.7%, for the three and nine
months ended September 30, 2009, as compared to the same periods in 2008,
primarily due to market value changes related to the Company's funds withheld at
interest investment associated with the reinsurance of certain equity-indexed
annuity products, which are substantially offset by a corresponding change in
interest credited to policyholder account balances resulting in a negligible
effect on net income. The third quarter and first nine months increases in
investment income also reflect a larger average invested asset base offset by a
lower effective investment portfolio yield. Average invested assets at amortized
cost at September 30, 2009 totaled $12.8 billion, a 10.2% increase over
September 30, 2008. The average yield earned on investments, excluding funds
withheld, decreased to 5.71%, for the third quarter of 2009 from 6.01% for the
third quarter of 2008. The average yield earned on investments, excluding funds
withheld, decreased to 5.71% for the first nine months of 2009 from 6.05% for
the first nine months of 2008. The average yield will vary from quarter to
quarter and year to year depending on a number of variables, including the
prevailing interest rate and credit spread environment, changes in the mix of
the underlying investments and cash balances, and the timing of dividends and
distributions on certain investments.
Total investment related gains (losses), net improved by $283.7 million and
$451.9 million, for the three and nine months ended September 30, 2009, as
compared to the same periods in 2008. The improvement for the third quarter is
primarily due to favorable changes in the embedded derivatives related to
reinsurance treaties written on a
modified coinsurance or funds withheld basis and guaranteed minimum living
benefits of $204.2 million and a decrease in investment impairments, net of
non-credit adjustments, of $71.4 million, partially offset by an increase in net
hedging losses related to the liabilities associated with guaranteed minimum
living benefits of $24.4 million. The improvement for the first nine months is
due to favorable changes in the value of embedded derivatives associated with
reinsurance treaties written on a modified coinsurance or funds withheld basis
and guaranteed minimum living benefits of $585.4 million, a decrease in
investment impairments, net of non-credit related adjustments, of $21.9 million
partially offset by an increase in net hedging losses related to the liabilities
associated with guaranteed minimum living benefits of $179.1 million. See Note 4
- "Investments" and Note 5 - "Derivatives" in the Notes to Condensed
Consolidated Financial Statements for additional information on the impairment
losses and derivatives. Investment income and investment related gains and
losses are allocated to the operating segments based upon average assets and
related capital levels deemed appropriate to support the segment business
volumes.
The effective tax rate on a consolidated basis was 35.3% and 22.4% for the third
quarter of 2009 and 2008, respectively, and 31.8% and 33.7% for the first nine
months of 2009 and 2008, respectively. The 2009 effective tax rates were
affected by the recognition of a previously uncertain tax position and by an
adverse tax adjustment related to an adjustment of prior period tax accruals.
This was offset by the earnings of non-U.S. subsidiaries in which the Company is
permanently reinvested whose statutory tax rates are less than the U.S.
statutory tax rate.
Critical Accounting Policies
The Company's accounting policies are described in the Summary of Significant
Accounting Policies in Note 2 of the consolidated financial statements
accompanying the 2008 Annual Report. The Company believes its most critical
accounting policies include the capitalization and amortization of deferred
acquisition costs ("DAC"); the establishment of liabilities for future policy
benefits, other policy claims and benefits, including incurred but not reported
claims; the valuation of fixed maturity investments, embedded derivatives and
investment impairments, if any; accounting for income taxes; and the
establishment of arbitration or litigation reserves. The balances of these
accounts require extensive use of assumptions and estimates, particularly
related to the future performance of the underlying business.
Additionally, for each of the Company's reinsurance contracts, it must determine
if the contract provides indemnification against loss or liability relating to
insurance risk, in accordance with applicable accounting standards. The Company
must review all contractual features, particularly those that may limit the
amount of insurance risk to which the Company is subject or features that delay
the timely reimbursement of claims. If the Company determines that the
possibility of a significant loss from insurance risk will occur only under
remote circumstances, it records the contract under a deposit method of
accounting with the net amount receivable or payable reflected in premiums
receivable and other reinsurance balances or other reinsurance liabilities on
the condensed consolidated balance sheets. Fees earned on the contracts are
reflected as other revenues, as opposed to net premiums, on the condensed
consolidated statements of income.
Differences in experience compared with the assumptions and estimates utilized
in the justification of the recoverability of DAC, in establishing reserves for
future policy benefits and claim liabilities, or in the determination of
other-than-temporary impairments to investment securities can have a material
effect on the Company's results of operations and financial condition.
Deferred Acquisition Costs ("DAC")
Costs of acquiring new business, which vary with and are primarily related to
the production of new business, have been deferred to the extent that such costs
are deemed recoverable from future premiums or gross profits. DAC amounts
reflect the Company's expectations about the future experience of the business
in force and include commissions and allowances as well as certain costs of
policy issuance and underwriting. Some of the factors that can affect the
carrying value of DAC include mortality assumptions, interest spreads and policy
lapse rates. For traditional life and related coverages, the Company performs
periodic tests to determine that DAC remains recoverable, and the cumulative
amortization is re-estimated and, if necessary, adjusted by a cumulative charge
or credit to current operations. For its asset-intensive business, the Company
updates the estimated gross profits with actual gross profits each reporting
period, resulting in an increase or decrease to DAC to reflect the difference in
the actual gross profits versus the previously estimated gross profits.
Liabilities for Future Policy Benefits and Other Policy Liabilities
Liabilities for future policy benefits under long-term life insurance policies
(policy reserves) are computed based upon expected investment yields, mortality
and withdrawal (lapse) rates, and other assumptions, including a provision for
adverse deviation from expected claim levels. The Company primarily relies on
its own valuation and administration systems to establish policy reserves. The
policy reserves the Company establishes may differ from those established by the
ceding companies due to the use of different mortality and other assumptions.
However, the Company relies upon its ceding company clients to provide accurate
data, including policy-level information, premiums and claims, which is the
primary information used to establish reserves. The Company's administration
departments work directly with its clients to help ensure information is
submitted by them in accordance with the reinsurance contracts. Additionally,
the Company performs periodic audits of the information provided by ceding
companies. The Company establishes reserves for processing backlogs with a goal
of clearing all backlogs within a ninety-day period. The backlogs are usually
due to data errors the Company discovers or computer file compatibility issues,
since much of the data reported to the Company is in electronic format and is
uploaded to its computer systems.
The Company periodically reviews actual historical experience and relative
anticipated experience compared to the assumptions used to establish aggregate
policy reserves. Further, the Company establishes premium deficiency reserves if
actual and anticipated experience indicates that existing aggregate policy
reserves, together with the present value of future gross premiums, are not
sufficient to cover the present value of future benefits, settlement and
maintenance costs and to recover unamortized acquisition costs. The premium
deficiency reserve is established through a charge to income, as well as a
reduction to unamortized acquisition costs and, to the extent there are no
unamortized acquisition costs, an increase to future policy benefits. Because of
the many assumptions and estimates used in establishing reserves and the
long-term nature of the Company's reinsurance contracts, the reserving process,
while based on actuarial science, is inherently uncertain. If the Company's
assumptions, particularly on mortality, are inaccurate, its reserves may be
inadequate to pay claims and there could be a material adverse effect on its
results of operations and financial condition.
Other policy claims and benefits include claims payable for incurred but not
reported losses, which are determined using case-basis estimates and lag studies
of past experience. These estimates are periodically reviewed and any
adjustments to such estimates, if necessary, are reflected in current
operations. The time lag from the date of the claim or death to the date when
the ceding company reports the claim to the Company can be several months and
can vary significantly by ceding company and business segment. The Company
updates its analysis of incurred but not reported claims, including lag studies,
on a periodic basis and adjusts its claim liabilities accordingly. The
adjustments in a given period are generally not significant relative to the
overall policy liabilities.
Valuation of Fixed Maturity Securities
The Company primarily invests in fixed maturity securities, including bonds and
redeemable preferred stocks. These securities are classified as
available-for-sale and accordingly are carried at fair value on the condensed
consolidated balance sheets. The difference between amortized cost and fair
value is reflected as an unrealized gain or loss, less applicable deferred taxes
as well as related adjustments to deferred acquisition costs, if applicable, in
accumulated other comprehensive income ("AOCI") in stockholders' equity. The
determinations of fair value may require extensive use of assumptions and
inputs. In addition, other-than-temporary impairment losses related to
non-credit factors are recognized in AOCI.
The Company performs regular analysis and review of the various techniques,
assumptions and inputs utilized in determining fair value to ensure that the
valuation approaches utilized are appropriate and consistently applied, and that
the various assumptions are reasonable. The Company also utilizes information
from third parties, such as pricing services and brokers, to assist in
determining fair values for certain assets and liabilities; however, management
is ultimately responsible for all fair values presented in the Company's
financial statements. The Company performs analysis and review of the
information and prices received from third parties to ensure that the prices
represent a reasonable estimate of the fair value. This process involves
quantitative and qualitative analysis and is overseen by the Company's
investment and accounting personnel. Examples of procedures performed include,
but are not limited to, initial and ongoing review of third party pricing
services and techniques, review of pricing trends and monitoring of recent trade
information. In addition, the Company utilizes both internal and
external cash flow models to analyze the reasonableness of fair values utilizing
credit spread and other market assumptions, where appropriate. As a result of
the analysis, if the Company determines there is a more appropriate fair value
based upon the available market data, the price received from the third party is
adjusted accordingly.
When available, fair values are based on quoted prices in active markets that
are regularly and readily obtainable. Generally, these are very liquid
investments and the valuation does not require management judgment. When quoted
prices in active markets are not available, fair value is based on market
standard valuation techniques, primarily a combination of a market approach,
including matrix pricing and an income approach. The assumptions and inputs used
by management in applying these techniques include, but are not limited to:
interest rates, credit standing of the issuer or counterparty, industry sector
of the issuer, coupon rate, call provisions, sinking fund requirements,
maturity, estimated duration and assumptions regarding liquidity and future cash
flows.
The significant inputs to the market standard valuation techniques for certain
types of securities with reasonable levels of price transparency are inputs that
are observable in the market or can be derived principally from or corroborated
by observable market data. Such observable inputs include benchmarking prices
for similar assets in active, liquid markets, quoted prices in markets that are
not active and observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation
techniques for determining the estimated fair value of certain types of
securities that trade infrequently, and therefore have little or no price
transparency, rely on inputs that are significant to the estimated fair value
that are not observable in the market or cannot be derived principally from or
. . .
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