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REINSURANCE GROUP OF AMERICA, INC. Reports Operating Results (10-Q)

November 03, 2010 | About:
10qk

10qk

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REINSURANCE GROUP OF AMERICA, INC. (RGA) filed Quarterly Report for the period ended 2010-09-30.

Reinsurance Group Of America, Inc. has a market cap of $3.75 billion; its shares were traded at around $50.88 with a P/E ratio of 8.4 and P/S ratio of 0.6. The dividend yield of Reinsurance Group Of America, Inc. stocks is 0.9%. Reinsurance Group Of America, Inc. had an annual average earning growth of 9.4% over the past 10 years. GuruFocus rated Reinsurance Group Of America, Inc. the business predictability rank of 2.5-star.RGA is in the portfolios of John Keeley of Keeley Fund Management, NWQ Managers of NWQ Investment Management Co, Chuck Royce of Royce& Associates, Steven Cohen of SAC Capital Advisors, Jeremy Grantham of GMO LLC.

Highlight of Business Operations:

Consolidated income before income taxes increased $14.6 million, or 8.0%, and $156.4 million, or 36.2%, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009. The increase in the third quarter is primarily due to a decrease in investment impairments and increased net premiums offset by an unfavorable change in the value of embedded derivatives within the U.S. segment. The increase for the first nine months is primarily due to a decrease in investment impairments, increased net premiums and investment income, partially offset by the recognition of a gain on the repurchase of long-term debt of $38.9 million, recorded in other revenues in 2009. Foreign currency fluctuations relative to the prior year favorably affected income before income taxes by approximately $2.4 million and $18.9 million for the third quarter and first nine months of 2010, respectively, as compared to the same periods in 2009.

The Company recognizes in consolidated income, 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, affected income before income taxes unfavorably by $32.6 million and $4.3 million in the third quarter and first nine months of 2010, respectively, as compared to the same periods in 2009. 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, adversely affected income before income taxes by $15.0 million and $19.3 million in the third quarter and first nine months of 2010, respectively, as compared to the same periods in 2009. The change in the Companys 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 unfavorably by $11.7 million in the third quarter and favorably by $30.8 million in the first nine months of 2010, respectively, as compared to the same periods in 2009.

The combined changes in these three types of embedded derivatives, after adjustment for deferred acquisition costs and retrocession, resulted in a decrease of approximately $59.3 million and an increase of approximately $7.2 million in consolidated income before income taxes in the third quarter and first nine months of 2010, respectively, as compared to the same periods in 2009. These fluctuations do not affect current cash flows, crediting rates or spread performance on the

Consolidated net premiums increased $242.1 million, or 17.2%, and $731.4 million, or 17.7%, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009, primarily due to growth in life reinsurance in force and the acquisition of Reliastar Life Insurance Companys group life and health reinsurance business, effective January 1, 2010. Foreign currency fluctuations favorably affected net premiums by approximately $15.4 million and $159.9 million for the three and nine months ended September 30, 2010, as compared to the same periods in 2009. Consolidated assumed insurance in force increased to $2,478.9 billion as of September 30, 2010 from $2,274.6 billion as of September 30, 2009 due to new business production. The Company added new business production, measured by face amount of insurance in force, of $77.4 billion and $70.3 billion during the third quarter of 2010 and 2009, respectively, and $246.5 billion and $216.9 billion during the first nine months of 2010 and 2009, respectively. Management believes industry consolidation and the established practice of reinsuring mortality risks should continue to provide opportunities for growth, albeit at rates less than historically experienced in some markets.

Consolidated investment income, net of related expenses, decreased $12.0 million, or 4.0%, and increased $76.1 million, or 9.4%, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009. The decrease in the third quarter was largely due to a $55.1 million decrease from market value changes related to the Companys funds withheld at interest investment associated with the reinsurance of certain EIAs, which are substantially offset by a corresponding change in interest credited to policyholder account balances resulting in an insignificant effect on net income. This decrease was largely offset by increased investment income from a larger average invested asset base. The increase in the first nine months was primarily due to a larger average invested asset base offset by a lower effective investment portfolio yield and a $47.2 million decrease from market value changes related to the Companys funds withheld at interest investment associated with the reinsurance of certain EIAs, which are substantially offset by a corresponding change in interest credited to policyholder account balances resulting in an insignificant effect on net income. Average invested assets at amortized cost at September 30, 2010 totaled $15.2 billion, an 18.6% increase over September 30, 2009. The average yield earned on investments, excluding funds withheld, decreased to 5.66%, for the third quarter of 2010 from 5.71% for the third quarter of 2009. The average yield earned on investments, excluding funds withheld, decreased to 5.67% for the first nine months of 2010 from 5.71% for the first nine months of 2009. 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. A continued low interest rate environment in the U.S. is expected to put downward pressure on this yield in future reporting periods.

Total investment related gains (losses), net reflect an unfavorable change of $59.1 million and a favorable change of $89.1 million, for the three and nine months ended September 30, 2010, as compared to the same periods in 2009. The unfavorable change for the third quarter was primarily due to unfavorable changes in the embedded derivatives related to guaranteed minimum living benefits of $26.4 million and reinsurance treaties written on a modified coinsurance or funds withheld basis of $90.1 million, largely offset by an increase in net hedging gains related to the liabilities associated with guaranteed minimum living benefits of $24.5 million and a decrease in investment impairments, net of non-credit related adjustments, of $16.1 million. The improvement for the first nine months is primarily due to an increase in net hedging gains related to the liabilities associated with guaranteed minimum living benefits of $302.1 million, favorable changes in the value of embedded derivatives associated with reinsurance treaties written on a modified coinsurance or funds withheld basis of $41.1 million, a decrease in investment impairments, net of non-credit related adjustments, of $62.6 million, largely offset by unfavorable changes in the embedded derivatives related to guaranteed minimum living benefits of $356.6 million. See Note 4 Investments and Note 5 Derivative Instruments 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 segment operations.

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