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WIKI ANALYSIS
Reinsurance Group of America, Inc. (NYSE:RGA) is the second-largest life insurance reinsurer in the U.S. with a 16% market share and a total of approximately $1.9 trillion of life reinsurance in-force as of December 31, 2007 [1]. 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. RGA generates approximately 80% of its earnings in North America (U.S. 70%; Canada 10%), with operations in the U.K., Australia, South Korea, and Japan accounting for most of the remaining balance. Due to RGA's international operations, approximately 39% of its revenues and 32% of its fixed maturity securities available-for-sale were denominated in currencies other than the U.S. dollar[2]. This 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.
Business Overview
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.
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.
- Traditional Reinsurance: Traditional Reinsurance primarily provides life reinsurance to domestic clients for a variety of products. This sub-segment is the largest contributor to the company’s consolidated earnings (61% of the expected 2006 total). RGA is the second-largest player in the highly consolidated U.S. life reinsurance market with a 16% share of in-force business, and was the leader in new business production in 2005 with a 22% market share.
- Asset-Intensive Reinsurance: Asset-Intensive Reinsurance insures the risk that results from investing money from the customer's annuities and corporate-owned life insurance policies. This sector generates gains from the difference between investment income and interest credited for underlying deposits. They represent about 6% of RGA’s 2006 estimated consolidated earnings.
- Financial Reinsurance: The Financial Reinsurance segment assumes regulatory insurance liabilities--if something bad happens, they pay for it--from a ceding company in exchange for a cut of future profits on the reinsured block. The majority of the financial reinsurance risks assumed by the company are then ceded to other insurance companies. The Financial Reinsurance sub-segment represents 3% of RGA’s 2006 estimated consolidated earnings.
From 2004 through 2007, RGA had a steady growth in revenue, premiums and profits and has achieved the highest growth of all firms in the market in terms of new business underwriting due to favorable market conditions, a strong "brand name" market share, and effective management. These elements resulted in a steady 5% perpetual growth over the last decade and in-force growth between 3%-10% annually.
Key Trends and Forces
Declining Cession Rates Hurt Volume of Business
As reinsurers lowered pricing in the 1990s, ceding companies (the customers of reinsurers) saw the incentive to have the reinsurers underwrite a greater proportion of the risk. Thus, cession rates (the proportion of the policies "ceded" to the reinsurers) increased from 20% in 1994 to the low 60% area from 2000 to 2003. This However, 2007 saw increases in prices due to the reinsurance market's consolidation and the declining financial markets have forced the direct writers or ceding companies to assume greater levels of mortality risk since it is more expensive to outsource it to reinsurers. This resulted in a decline of cession rates from 60% in 2003 to 40% area in 2006. As the declining volume of business overtakes the firms abilities to increase prices, the reinsurance market continues shrink. Although this effect is not as apparent in firms like RGA with large market shares, RGA's revenue growth has still decreased about 2% from 10.5% in 2006 to 8.7% in 2007 with an even lower outlook of 5-6% in 2008.[5] These results have forced further consolidations in the reinsurance market and have decreased the overall reinsurance business approximately 20-25%.[6]
Changing Demographics of Insured Populations (Aging Baby Boomers) Increase Sales
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.[7]
Interest Rates Fluctuations Directly Influence Earnings
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. In its 2007 annual report, RGA reported that its projected loss in fair value of financial instruments in the event of a 10% unfavorable change in market interest rates in 2007 is $361.6 million. That is to say that if the interest rates shift a magnitude of 10% either up or down will result in a loss around $360-410 million to the firm. [8]
Credit Crisis is Putting Strain on Insurance and Reinsurance Sector
Due to the subprime mortgage crisis and the developing credit crisis, Life insurance and reinsurance firms such as RGA have seen a strong surge in policy withdrawals (policyholders in need of money terminate their policies for immediate cash). Since reinsurance companies manage their liabilities and configure their investment portfolios only to provide sufficient liquidity for anticipated withdrawal demands, unanticipated withdrawal or surrender activity will require reinsurance firms to dispose of illiquid assets on unfavorable terms. Although this effect is still not clear, some insurance companies like RGA have estimated that losses will amount up to 25% of current illiquid assets.[9]
Market Share
RGA is the second largest Life Reinsurance firm in the U.S. with a 16.1% market share of the Life Reinsurance market in terms of premiums collected. The top ten U.S. life reinsurance firsm by market share are ranked below, where market share is measured in terms of current in-force market share.
| Rank | Company | Market Share |
|---|---|---|
| 1 | Swiss Re | 18.3% |
| 2 | Lincoln Re | 13.6% |
| 3 | Reinsurance Group of America (RGA) | 10.9% |
| 4 | Munich Re | 10.4% |
| 5 | Employers/ERC | 7.5% |
| 6 | ING Re | 7.2% |
| 7 | Transamerica Income Shares (TAI) | 6.8% |
| 8 | Allianz | 4.5% |
| 9 | AUL | 4.0% |
| 10 | Gerling Global | 3.1% |
| Other | 14.0% |
| Rank | Company | Market Share |
|---|---|---|
| 1 | Swiss Re | 26.5% |
| 2 | Reinsurance Group of America (RGA) | 16.1% |
| 3 | Scottish RE Group (SCT) | 15.0% |
| 4 | Transamerica Income Shares (TAI) | 10.1% |
| 5 | Munich Re | 9.7% |
| 6 | GE Insurance Solutions | 5.6% |
| 7 | Generali US Life Reinsurance | 3.9% |
| 8 | Canada Life | 2.7% |
| 9 | Revios Re | 2.1% |
| 10 | General Re Life | 2.0% |
| Other | 6.3% |
The life reinsurance market is highly competitive with larger firms holding a majority of the market share. Over the past few years, consolidation has been an important industry trend as growth often seeks those with higher initial market positions. the past decade, affecting both life reinsurance utilization and pricing.
Competition
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.
| Company (Foreign Currency Not Converted due to Volatile Rates) | 2007 Revenue (mil$) | Net Income (mil$) | In-Force Premiums Collected (mil$) |
|---|---|---|---|
| Reinsurance Group of America (RGA) | $5,718.40[12] | $293.83[13] | $4,909.00[14] |
| TransAmerica (AEGON N.V. (AEG)) | $45,811.70[15] | $3,489.50[16] | $30,741.30[17] |
| Swiss Re Life of America | 42,874.00 CHF[18] | 4,162.00 CHF[19] | 31,664.00 CHF[20] |
| Munich America Reinsurance Company | €5,932.00[21] | €321.00[22] | €2,739.00[23] |
TransAmerica (AEGON N.V. (AEG)): Based in the US, TransAm provides life and annuity reinsurance to more than 500 life insurance and financial services companies in the Asia Pacific region, Latin America, North America, and Europe. One of the largest reinsurance firms in the world, TransAm generated over $45B in revenue in 2007.
Swiss Re Life of America: is a Swiss company operating in property, life, and financial reinsurance with over $40B in revenue for 2007. The company operates heavily in Europe and North America.
Munich America Reinsurance Company: is a property and life reinsurance firm in the US and provides treaty insurance (reinsurance for groups or categories of risks) and facultative reinsurance (reinsurance for individually negotiated risks) to both large and small primary insurers. The company generate $9-10 in revenue in 2007.
References
- ↑ RGA 2007 10k, Pg 4
- ↑ RGA 2007 10k, Pg 21
- ↑ RGA 2007 10k, Pg 11
- ↑ RGA 2007 10k p 121
- ↑ RGA 2007 10k
- ↑ RGA 2007 10k
- ↑ RGA 2007 10k
- ↑ RGA 2007 10k, pg.65
- ↑ [Carunther, Silas. "Are Insurers the Next Victim?" Bloomberg News Terminal, December 2007]
- ↑ [Bear Stearns Analyst Report 10/12/2006 p.21]
- ↑ [Bear Stearns Analyst Report 10/12/2006 p.21]
- ↑ RGA 2007 10K
- ↑ RGA 2007 10K
- ↑ RGA 2007 10K
- ↑ AEG 2007 6K
- ↑ AEG 2007 6K
- ↑ AEG 2007 6K
- ↑ Swiss Re 2007 Annual Financial Statement
- ↑ Swiss Re 2007 Annual Financial Statement
- ↑ Swiss Re 2007 Annual Financial Statement
- ↑ Munich Reinsurance Fact Sheet
- ↑ Munich Reinsurance Fact Sheet
- ↑ Munich Reinsurance Fact Sheet
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