Reinsurance Group of America, Inc. (NYSE:RGA) is the second-largest life insurance reinsurer in the United States. Reinsurance is an arrangement in which the reinsurer, agrees to take on risks another insurance company, the “ceding company,” for a percentage of the premiums paid on the original policy (for specifics, see Reinsurance). In addition to traditional life reinsurance, RGA also offers critical illness and financial reinsurance. The company's international exposure makes the company vulnerable to foreign currency exchange risk as the the dollar fluctuates in value relative to the Euro, the Canadian dollar, the British Pound, etc.
The subprime crisis and and the accompanying downturn in the U.S. economy, and falling interest rates combine to form a toxic cocktail for reinsurers like RGA. During times of economic hardship, individuals tend to redeem policies and investments in larger numbers. Meanwhile falling interest rates can mean that RGA's own investments produce lower returns. In such situations, insurers like RGA do not always have enough cash on hand, and have to resort selling their less liquid assets at loss to cover their obligations.
Often times, reinsurance firms are owned or controlled by much larger direct insurance firms. In this case, MetLife (MET) owns approximately 53% of RGA's controlling stock and effectively dictates the operations of the company. This relationship sometimes leads to bias decision-making within the board and skews the focus of RGA's development. This ownership structure, with a majority of the shares held in one entity's hands, also limits the liquidity of the company’s shares and prevents the price of RGA's shares to increase or decrease dramatically.
In 2009, RGA generated a net income of $407.1 million on $5.73 billion in net premiums. This represents a 130.3% increase in net income and a 7.0% increase in net premiums from 2008, when the company earned $176.8 million on net premiums of $5.35 billion.
RGA operates in three main sectors of four global markets: Traditional Reinsurance, Asset-Intensive Reinsurance, and Financial Reinsurance in the United States, Canada, Europe/South Africa, and Asia Pacific.
The aging of the population in North America is increasing demand for financial products among “baby boomers” who are concerned about protecting their peak income stream and are considering retirement and estate planning. This trend resulted in an increased demand for annuity products and life insurance policies, larger face amounts of life insurance policies and higher mortality risk taken by life insurers. However due to the ambiguity of the effect, statisticians can only estimate that 5-8% of the 20-25% increase of reinsurance in-force policies over the last 3 years can be attributed to the changing demographics of the insured populations.
Significant changes in interest rates expose reinsurance companies to the risk of reduced investment income or actual losses based on the difference between the interest rates earned on investments and the credited interest rates paid on outstanding reinsurance contracts. Both rising and declining interest rates, depending on the type of investment the company makes, can negatively affect its income and represent a highly volatile element of risk in the reinsurance company's performance. During periods of rising interest rates, RGA may be contractually obligated to increase the crediting rates on its reinsurance contracts that have cash values, but it may not have the ability to immediately acquire investments with interest rates sufficient to offset the increased crediting rates on its reinsurance contracts. During periods of falling interest rates, RGA's investment revenue will be lower because new investments in fixed maturity securities will likely bear lower interest rates. Moreover, lower interest rates result in lower demand for certain financial insurance and investment protection products.
Although the market is currently volatile due to decreasing business, RGA's primary competitors in its largest division, life reinsurance, are TransAmerica Occidental Life Insurance Company, a subsidiary of Aegon N.V., Swiss Re Life of America and Munich American Reinsurance Company.