Back to GetFilings.com
1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 Commission file number 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact name of registrant as specified in its charter)
MISSOURI 43-1627032
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1370 TIMBERLAKE MANOR PARKWAY, CHESTERFIELD, MISSOURI 63017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (636) 736-7439
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- --------------------
Common Stock, par value $0.01 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 1,
2001, as reported on the New York Stock Exchange was approximately $786,050,442.
As of March 1, 2001, Registrant had outstanding 49,375,609 shares of common
stock.
2
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2001
Annual Meeting of Shareholders ("the Proxy Statement") which will be filed with
the Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year ended December 31, 2000, are incorporated by reference
in Part III of this Form 10-K.
2
3
REINSURANCE GROUP OF AMERICA, INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 2000
INDEX
ITEM PAGE
NUMBER OF THIS FORM
- ------ ------------
PART I
1. BUSINESS............................................................... 4
2. PROPERTIES............................................................. 21
3. LEGAL PROCEEDINGS...................................................... 22
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 22
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................. 22
6. SELECTED FINANCIAL DATA................................................ 22
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................. 24
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. 42
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................ 42
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 73
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................... 73
11. EXECUTIVE COMPENSATION................................................. 75
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......... 75
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 75
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........ 75
3
4
Item 1. BUSINESS
A. OVERVIEW
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company formed December 31, 1992. On December 31, 2000, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
49.0% of the outstanding shares of common stock of RGA. Equity Intermediary
Company is a wholly owned subsidiary of General American Life Insurance Company
("General American"), a Missouri life insurance company, which in turn is a
wholly owned subsidiary of GenAmerica Financial Corporation ("GenAmerica"), a
Missouri corporation. GenAmerica was acquired and became a wholly owned
subsidiary of Metropolitan Life Insurance Company ("MetLife"), a New York life
insurance company, on January 6, 2000. As a result of MetLife's ownership of
GenAmerica and its own direct investment in RGA, MetLife now beneficially owns
58.7% of the outstanding shares of common stock of RGA.
The consolidated financial statements include the assets, liabilities,
and results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"); RGA Australian Holdings PTY, Limited ("Australian Holdings"); RGA
Reinsurance Company (Barbados) Ltd. ("RGA Barbados"); RGA International, Ltd.
("RGA International"), a New Brunswick company that serves as a Canadian
marketing and insurance holding company for RGA's Canadian operations; RGA
Sudamerica, S.A., a Chilean holding company; RGA Holdings Limited ("RGA UK"), a
United Kingdom holding company; General American Argentina Seguros de Vida, S.A.
("GA Argentina"), an Argentine life insurance company; RGA South African
Holdings (Pty) Ltd. ("RGA South Africa"), a South African holding company;
Benefit Resource Life Insurance Company (Bermuda) Ltd. ("RGA Bermuda"); RGA
Americas Reinsurance Company, Ltd.; and Triad Re, Ltd. In addition, the
consolidated financial statements include the subsidiaries of RCM, Australian
Holdings, RGA International, RGA UK, RGA Sudamerica, S.A., and RGA South Africa
subject to an ownership position of fifty percent or more (collectively, the
"Company"). In 2000, the Company sold its interest in RGA Sudamerica, S.A. and
its subsidiaries, and RGA Bermuda.
During October 2000, the Company acquired the remaining 60 percent
interest in RGA/Swiss Financial Group, L.L.C. that it did not already own, and
has changed the name to RGA Financial Group, L.L.C.
The Company is primarily engaged in life reinsurance and international
life and disability insurance on a direct and reinsurance basis. In addition,
the Company provides reinsurance of non-traditional business including
asset-intensive products and financial reinsurance. RGA and its predecessor, the
Reinsurance Division of General American ("Reinsurance Division"), have been
engaged in the business of life reinsurance since 1973. As of December 31, 2000,
the Company had approximately $6.1 billion in consolidated assets.
Reinsurance is an arrangement under which an insurance company, the
"reinsurer," agrees to indemnify another insurance company, the "ceding
company," for all or a portion of the insurance risks underwritten by the ceding
company. Reinsurance is designed to (i) reduce the net liability on individual
risks, thereby enabling the ceding company to increase the volume of business it
can underwrite, as well as increase the maximum risk it can underwrite on a
single life or risk; (ii) stabilize operating results by leveling fluctuations
in the ceding company's loss experience; (iii) assist the ceding company to meet
applicable regulatory requirements; and (iv) enhance the ceding company's
financial strength and surplus position.
Life reinsurance primarily refers to reinsurance of individual term
life insurance policies, whole life insurance policies, universal life insurance
policies, and joint and survivor insurance policies. Ceding companies typically
contract with more than one company to reinsure their business. Reinsurance may
be written on an indemnity or an assumption basis. Indemnity reinsurance does
not discharge a ceding company from liability to the policyholder. A ceding
company is required to pay the full amount of its insurance obligations
regardless of whether it is entitled or able to receive payments from its
reinsurers. In the case of assumption reinsurance, the ceding company is
discharged from liability to the policyholder, with such liability passed to the
reinsurer. Reinsurers also may purchase reinsurance, known as retrocession
reinsurance, to cover their own risk exposure. Reinsurance companies enter into
retrocession agreements for reasons similar to those that cause primary insurers
to purchase reinsurance.
Reinsurance also may be written on a facultative basis or an automatic
treaty basis. Facultative reinsurance is individually underwritten by the
reinsurer for each policy to be reinsured, with the pricing and other terms
established at the time the policy is underwritten based upon rates negotiated
in advance. Facultative reinsurance normally is purchased by insurance companies
for medically impaired lives, unusual risks, or liabilities in excess of binding
limits on their automatic treaties.
4
5
An automatic reinsurance treaty provides that the ceding company will
cede risks to a reinsurer on specified blocks of business where the underlying
policies meet the ceding company's underwriting criteria. In contrast to
facultative reinsurance, the reinsurer does not approve each individual risk.
Automatic reinsurance treaties generally provide that the reinsurer will be
liable for a portion of the risk associated with the specified policies written
by the ceding company. Automatic reinsurance treaties specify the ceding
company's binding limit, which is the maximum amount of risk on a given life
that can be ceded automatically and that the reinsurer must accept. The binding
limit may be stated either as a multiple of the ceding company's retention or as
a stated dollar amount.
Facultative and automatic reinsurance may be written as yearly
renewable term, coinsurance, or modified coinsurance, which vary with the type
of risk assumed and the manner of pricing the reinsurance. Under a yearly
renewable term treaty, the reinsurer assumes only the mortality or morbidity
risk. Under a coinsurance arrangement, depending upon the terms of the contract,
the reinsurer may share in the risk of loss due to mortality or morbidity,
lapses, and the investment risk, if any, inherent in the underlying policy.
Modified coinsurance differs from coinsurance in that the assets supporting the
reserves are retained by the ceding company while the risk is transferred to the
reinsurer.
Generally, the amount of life reinsurance ceded under facultative and
automatic reinsurance agreements is stated on either an excess or a quota share
basis. Reinsurance on an excess basis covers amounts in excess of an agreed-upon
retention limit. Retention limits vary by ceding company and also vary by age
and underwriting classification of the insured, product, and other factors.
Under quota share reinsurance, the ceding company states its retention in terms
of a fixed percentage of the risk that will be retained, with the remainder up
to the maximum binding limit to be ceded to one or more reinsurers.
Reinsurance agreements, whether facultative or automatic, may provide
for recapture rights on the part of the ceding company. Recapture rights permit
the ceding company to reassume all or a portion of the risk formerly ceded to
the reinsurer after an agreed-upon period of time (generally 10 years), subject
to certain other conditions. Recapture of business previously ceded does not
affect premiums ceded prior to the recapture of such business.
The potential adverse effects of recapture rights are mitigated by the
following factors: (i) recapture rights vary by treaty and the risk of recapture
is a factor which is taken into account when pricing a reinsurance agreement;
(ii) ceding companies generally may exercise their recapture rights only to the
extent they have increased their retention limits for the reinsured policies;
and (iii) ceding companies generally must recapture all of the policies eligible
for recapture under the agreement in a particular year if any are recaptured,
which prevents a ceding company from recapturing only the most profitable
policies. In addition, when a ceding company increases its retention and
recaptures reinsured policies, the reinsurer releases the reserves it maintained
to support the recaptured portion of the policies. Also, some reinsurance
treaties provide provisions to allow the ceding companies to recapture if
certain ratings or other financial triggers are met.
B. CORPORATE STRUCTURE
RGA is a holding company, the principal assets of which consist of the
common stock of RCM, RGA Barbados, and RGA International, as well as investments
in several other subsidiaries or joint ventures. The primary source of funds for
RGA to make dividend distributions and to fund debt service is dividends paid to
RGA by its operating subsidiaries, securities maintained in its investment
portfolio, and proceeds from securities offerings. RCM's primary sources of
funds are dividend distributions paid by RGA Reinsurance Company ("RGA
Reinsurance") whose principal source of funds is derived from current
operations. RGA International's principal source of funds is dividends on its
equity interest in RGA Canada Management Company, Ltd. ("RGA Canada
Management"), whose principal source of funds is dividends paid by RGA Life
Reinsurance Company of Canada ("RGA Canada"). RGA Canada's principal source of
funds is derived from current operations.
As of December 31, 1998, the Company formally reported its accident and
health division as a discontinued operation. The accident and health operation
was placed into run-off and all treaties (contracts) were terminated at the
earliest possible date. RGA gave notice to all reinsureds and retrocessionaires
that all treaties were cancelled at the expiration of their term. If the treaty
was continuous, a written Preliminary Notice of Cancellation was given, followed
by a final notice within 90 days of the expiration date. The nature of the
underlying risks is such that the claims may take years to reach the reinsurers
involved. Thus, the Company expects to pay claims out of existing reserves over
a number of years as the level of business diminishes.
5
6
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and other
international operations. The U.S. operations provide traditional life
reinsurance and non-traditional reinsurance to domestic clients. Non-traditional
business includes asset-intensive and financial reinsurance. Asset-intensive
products primarily include reinsurance of corporate-owned life insurance and
annuities. The Canada operations provide insurers with traditional reinsurance
as well as assistance with capital management activity. The Latin America
operations include traditional reinsurance, reinsurance of privatized pension
products primarily in Argentina, and direct life insurance through a joint
venture and subsidiaries in Chile and Argentina. The Company sold its Chilean
interests during 2000. Asia Pacific operations provide primarily traditional
life reinsurance through RGA Reinsurance Company of Australia, Limited ("RGA
Australia") and RGA Reinsurance. Other international operations include
traditional business from Europe and South Africa, in addition to other markets
being developed by the Company. The operational segment results do not include
the corporate investment activity, general corporate expenses, interest expense
of RGA, and the provision for income tax expense (benefit). In addition, the
Company's discontinued accident and health operations are not reflected in the
continuing operations of the Company. The Company measures segment performance
based on profit or loss from operations before income taxes and minority
interest.
Prior to September 1999, the U.S. Operations reinsured approximately
25% of General American's funding agreement business, an asset intensive
product. Effective September 29, 1999, General American completed the recapture
of the entire block of funding agreement business it had reinsured with the
Company. The transaction resulted in the Company's transfer to General American
of all remaining liabilities related to the recaptured block and the underlying
assets supporting it. The Company transferred primarily investments in fixed
maturity securities and cash with a total market value of $1.8 billion in
satisfaction of all funding agreement liabilities. The associated liquidation of
investment securities and the transfer of assets to General American caused the
Company to incur an after tax net capital loss of approximately $33.2 million,
$26.0 million of which was associated with the recapture transaction alone.
Consolidated income from continuing operations before income taxes and
minority interest increased 88.4% in 2000 and decreased 32.6% in 1999. Diluted
earnings per share from continuing operations were $2.12 for 2000 compared to
$1.15 for 1999 and $2.08 for 1998. Earnings were attributed primarily to the
strong performance of traditional reinsurance in the U.S. and Canada. Earnings
during 1999 were affected by the investment losses incurred in connection with
the recapture of the funding agreement business. Further discussion and analysis
of the results for 2000 compared to 1999 and 1998 are presented by segment.
The U.S. operations represented 74.0% of the Company's business as
measured by 2000 net premiums. The U.S. operations market life reinsurance,
reinsurance of asset-intensive products, and financial reinsurance through RGA
Reinsurance, primarily to the largest U.S. life insurance companies. RGA
Reinsurance, a Missouri domiciled stock life insurance company, is wholly owned
by RCM, a wholly owned subsidiary of RGA. As of December 31, 2000, RGA
Reinsurance and RCM had regulatory capital and surplus of $499.1 million and
$493.0 million, respectively.
The Company's Canada operations, which represented 12.6% of the
Company's business as measured by 2000 net premiums, is conducted primarily
through RGA Canada, an indirect subsidiary of RGA International. RGA
International, a wholly owned subsidiary of RGA, is a federally incorporated,
marketing and insurance holding company which owns 100% of RGA Canada
Management, also a federally incorporated holding company, which in turn owns
100% of RGA Canada. The Canada operations provide insurers with traditional
reinsurance as well as assistance with capital management activity. As of
December 31, 2000, RGA Canada had regulatory capital and surplus of $167.7
million.
The Company's Latin America operations represented 4.6% of the
Company's business as measured by 2000 net premiums. The Company conducts
reinsurance business in the Latin America region through RGA Reinsurance.
Representative offices were opened in Mexico City and Buenos Aires in 1998 and
1999, respectively, to more directly assist clients in these markets.
Historically, the Latin America reinsurance operations have derived revenue
primarily from the reinsurance of privatized pension products in Argentina.
Since 1999, the Company has reduced its participation in these types of treaties
and is more actively marketing additional types of reinsurance in the region
such as traditional individual life, credit, and group life insurance as well as
non-traditional reinsurance transactions in Argentina and Mexico. It is
anticipated that the mix of business will continue to evolve in the upcoming
years. Latin America direct business primarily includes Chilean single premium
annuities and Argentine group life and individual universal life products. RGA
operates in Argentina through GA Argentina, a wholly owned subsidiary
6
7
that markets and sells individual, group, credit and universal life
and disability insurance. During 2000, the Company sold its Chilean interests.
The Company's Asia Pacific operations represented 6.7% of the Company's
business as measured by total net premiums in 2000. The Company conducts
reinsurance business in the Asia Pacific region through branch operations in
Hong Kong, an office in Japan and an office in Taiwan. In January 1996, RGA
formed Australian Holdings, a wholly owned holding company, and RGA Australia, a
wholly owned reinsurance company of Australian Holdings licensed to assume life
reinsurance in Australia. Business is also conducted through Malaysian Life
Reinsurance Group Berhad ("MLRe"), a joint venture in Malaysia. The principal
types of reinsurance provided in the region are life, critical care,
superannuation, and financial reinsurance. Superannuation funds accumulate
retirement funds for employees, and in addition, offer life and disability
insurance coverage.
The Company's other international operations represented 2.1% of the
Company's total net premiums for 2000. This segment provides life reinsurance to
international clients throughout Europe and South Africa. The principal type of
reinsurance being provided has been life reinsurance for a variety of life
products through yearly renewable term and coinsurance agreements. These
agreements may be either facultative or automatic agreements. In April 2000, the
Company's UK subsidiary, RGA Reinsurance UK Limited, obtained approval as a
licensed UK life reinsurer. The company also opened a representative office in
Spain during the second quarter of 2000. In addition, the Company conducts
reinsurance through its wholly owned subsidiary, RGA Reinsurance Company of
South Africa, Limited, with offices in Cape Town and Johannesburg, South Africa.
RGA Barbados and RGA Americas were formed and capitalized in 1995 and
1999, respectively, primarily providing reinsurance for a portion of certain
business assumed by RGA Reinsurance and other RGA insurance subsidiaries.
Intercorporate Relationships
As a result of various transactions with General American, including
capital contributions and transfer of the business of the Reinsurance Division
from General American to the Company on January 1, 1993, the Company has all the
economic benefits and risks of certain reinsurance agreements entered into by
General American, although General American currently remains the contracting
party with some of the underlying ceding companies.
RGA operates on a stand-alone basis; however, General American and its
affiliates continue to provide certain administrative and selected investment
management and advisory services to the Company pursuant to service agreements.
The transfer of the Reinsurance Division to RGA has had no material
effect on the existing reinsurance business of the Reinsurance Division. A small
percentage of RGA Reinsurance's business is written through General American
pursuant to a marketing agreement. The marketing agreement expired on January 1,
2000. Under the marketing agreement, General American agreed to amend and
terminate its existing assumed and retroceded reinsurance agreements pursuant to
the Retrocession Agreements only at the direction of RGA Reinsurance, thus
giving RGA Reinsurance the contractual right to direct future changes to
existing reinsurance agreements. Existing reinsurance agreements executed
pursuant to the marketing agreement will continue, but upon the expiration of
the marketing agreement, General American was no longer obligated to assume
reinsurance business on the Company's behalf or contractually precluded from
competing with the Company. The management of General American and MetLife,
however, has no current plans to compete with RGA Reinsurance. Moreover, given
MetLife's beneficial ownership of RGA's Shares, it would be contrary to
MetLife's economic interests for it to compete with RGA Reinsurance. Although
primary insurers must look to General American for payment in the first instance
with respect to existing reinsurance business written through General American,
the Company will be ultimately liable to General American with respect to such
reinsurance. General American charges RGA Reinsurance quarterly an amount equal
to, on an annual basis, 0.25% of specified policy-related liabilities that are
associated with existing reinsurance treaties written by General American for
the benefit of RGA Reinsurance.
The Company has reinsurance agreements with MetLife and certain of its
subsidiaries. As of December 31, 2000, the Company had assets and liabilities
related to these agreements totaling $103.3 million and $114.1 million,
respectively. Under these agreements, the Company reflected net premiums of
approximately $144.0 million, $130.3 million, and $111.5 million in 2000, 1999,
and 1998, respectively. The net premiums reflect the net of business assumed
from and ceded to MetLife and its subsidiaries, including GenAmerica. The
pre-tax gain (loss) on this business was approximately $17.8 million, ($31.0)
million, and $17.7 million in 2000, 1999, and 1998, respectively.
7
8
Ratings
The ability of RGA Reinsurance to write reinsurance partially depends
on its financial condition and its ratings. In December 2000, RGA Reinsurance's
and RGA Canada's ratings were upgraded to "A+" (Superior) from "A" (Excellent).
The rating actions reflect the Company's strong franchise in the North American
life reinsurance market, high level of expertise in assessing mortality risk
which has led to sustained earnings growth in its core businesses, high quality
balance sheet, and strong risk-adjusted capitalization. In addition, the ratings
reflect the implicit and explicit benefits the Company derives from its
affiliation with MetLife, the second largest life insurance company in the U.S.,
based on assets. A.M. Best's ratings are based upon an insurance company's
ability to pay policyholder obligations and are not directed toward the
protection of investors. A.M. Best's ratings for insurance companies currently
range from "A++" to "F", and some companies are not rated. Publications of A.M.
Best indicate that "A+" and "A" ratings are assigned to companies that have, on
balance, superior and excellent financial strength, operating performance and
market profile, respectively, when compared to the standards established by the
A.M. Best Company. Additionally, the publications indicate that companies with
"A+" and "A" ratings generally have a very strong or strong ability,
respectively, to meet their ongoing obligations to policyholders. In evaluating
a company's financial strength and operating performance, A.M. Best reviews the
company's profitability, leverage, and liquidity as well as its spread of risk,
the quality and appropriateness of its reinsurance program, the quality and
diversification of its assets, the adequacy of its policy or loss reserves, the
adequacy of its surplus, its capital structure, management's experience and
objectives, and its perception of policyholders' confidence.
RGA Reinsurance also maintains ratings from Standard & Poor's ("S & P")
and Moody's Investor Services ("Moody's"). S & P has assigned RGA Reinsurance a
financial strength rating of "AA". A rating of "AA" by S & P means that, in S &
P's opinion, the insurer has very strong financial security characteristics,
differing only slightly from those rated higher. Moody's has assigned RGA
Reinsurance a rating of "A1". A Moody's "A1" rating means that Moody's believes
that the insurance company offers good financial security; however, elements may
be present which suggest a susceptibility to impairment sometime in the future.
These ratings are based on an insurance company's ability to pay policyholder
obligations and are not directed toward the protection of investors.
Additionally, RGA has an "A" and "A3" long-term debt rating from S&P and
Moody's, respectively.
A security rating is not a recommendation to buy, sell or hold
securities. It is subject to revision or withdrawal at any time by the assigning
rating organization, and each rating should be evaluated independently of any
other rating.
Regulation
RGA Reinsurance and RCM; RGA Canada; GA Argentina; RGA Barbados, RGA
Americas, and Triad Re, Ltd.; RGA Australia; RGA South Africa; and RGA UK; are
regulated by authorities in Missouri, Canada, Argentina, Barbados, Australia,
South Africa, and the United Kingdom, respectively. RGA Reinsurance is subject
to regulations in the other jurisdictions in which it is licensed or authorized
to do business. Insurance laws and regulations, among other things, establish
minimum capital requirements and limit the amount of dividends, distributions,
and intercompany payments affiliates can make without prior regulatory approval.
Missouri law imposes restrictions on the amounts and type of investments
insurance companies like RGA Reinsurance may hold.
General
The insurance laws and regulations, as well as the level of supervisory
authority that may be exercised by the various insurance departments, vary by
jurisdiction, but generally grant broad powers to supervisory agencies or
regulators to examine and supervise insurance companies and insurance holding
companies with respect to every significant aspect of the conduct of the
insurance business, including approval or modification of contractual
arrangements. These laws and regulations generally require insurance companies
to meet certain solvency standards and asset tests, to maintain minimum
standards of business conduct, and to file certain reports with regulatory
authorities, including information concerning their capital structure,
ownership, and financial condition, and subject insurers to potential
assessments for amounts paid by guarantee funds.
RGA Reinsurance, RCM, and RGA Canada are required to file annual,
semi-annual, or quarterly statutory financial statements in each jurisdiction in
which they are licensed. Additionally, RGA Reinsurance, RCM, and RGA Canada are
subject to periodic examination by the insurance departments of the
jurisdictions in which each is licensed, authorized, or accredited. The most
recent examination of RGA Reinsurance by the Missouri Department of Insurance
was completed for the year ended
8
9
December 31, 1999. The result of this examination contained no material adverse
findings. RCM was licensed in April 2000 and has not subsequently been examined
by the Missouri Department of Insurance. RGA Canada, which was formed in 1992,
was last reviewed by the Canadian Superintendent of Financial Institutions for
the year ended December 31, 1999. The result of this examination contained no
material adverse findings.
RGA Australia is required to file a quarterly statistical return and
annual financial statement with the Australian Prudential Regulation Authority
("APRA"). RGA Australia is subject to additional reviews by the APRA on an as
required basis. In August 1997, RGA Australia was reviewed by the APRA's
predecessor, the Insurance and Superannuation Commission of Australia with no
material adverse findings.
RGA UK is required to file a quarterly statistical return and annual
financial statement with the Financial Services Authority ("FSA").
RGA South Africa is required to file a quarterly statistical return and
annual financials statement with the Financial Services Board ("FSB").
RGA Barbados, RGA Americas, and Triad Re, Ltd., are required to file an
annual financial statement with the Office of the Supervisor of Insurance of
Barbados.
GA Argentina as a direct life insurance company is required to file
annual and quarterly statutory financial statements in Argentina which are
reviewed by external auditors and filed with the Superintendencia de Seguros de
la Nacion ("Superintendencia-Argentina"). Additionally, GA Argentina is subject
to periodic examination by the Superintendencia-Argentina. The most recent
examination by the Superintendencia-Argentina was in May 2000. The results of
this examination were discussed with management and all adjustments, which were
not material to the Company's results of operations, were reflected during 2000.
Although some of the rates and policy terms of U.S. direct
insurance agreements are regulated by state insurance departments, the rates,
policy terms, and conditions of reinsurance agreements generally are not subject
to regulation by any regulatory authority. However, the NAIC Model Law on Credit
for Reinsurance, which has been adopted in most states, imposes certain
requirements for an insurer to take reserve credit for reinsurance ceded to a
reinsurer. Generally, the reinsurer is required to be licensed or accredited in
the insurer's state of domicile, or security must be posted for reserves
transferred to the reinsurer in the form of letter of credit or assets placed in
trust. The NAIC Life and Health Reinsurance Agreements Model Regulation, which
has been passed in most states, imposes additional requirements for insurers to
claim reserve credit for reinsurance ceded (excluding YRT reinsurance and
non-proportional reinsurance). These requirements include bona fide risk
transfer, an insolvency clause, written agreements, and filing of reinsurance
agreements involving in force business, among other things.
In recent years, the NAIC and insurance regulators increasingly have
been re-examining existing laws and regulations and their application to
insurance companies. In particular, this re-examination has focused on insurance
company investment and solvency issues, and, in some instances, has resulted in
new interpretation of existing law, the development of new laws, and the
implementations of non-statutory guidelines. The NAIC has formed committees and
appointed advisory groups to study and formulate regulatory proposals on such
diverse issues as the use of surplus debentures, accounting for reinsurance
transactions, and the adoption of risk-based capital rules. It is not possible
to predict the future impact of changing state and federal regulation on the
operations of RGA or its subsidiaries.
As a result of this review, the NAIC adopted the Valuation of Life
Insurance Policies Model Regulation (the "Model Regulation"). Several states
have subsequently enacted legislation based on the Model Regulation, and other
states are considering enacting similar legislation. Legislation based on the
Model Regulation primarily impacts level term life insurance products with
current premiums guaranteed for more than five years. Companies with these
products generally will have to increase reserves above the current levels or
limit the period of guaranteed premiums to five years. The Model Regulation also
affects the reserve requirements for other increasing premium products,
deficiency reserves and certain benefit guarantees in universal life products.
The Model Regulation does not affect the financial statements of the Company
prepared in accordance with GAAP; however, the Model Regulation may affect the
statutory financial statements of the subsidiaries.
9
10
In addition to the above regulatory changes being reexamined and
considered by the NAIC, the NAIC has completed its codification of statutory
accounting principles. The purpose of such codification is to establish a
uniform set of accounting rules and regulations ("SSAP") for use by insurance
companies in financial report preparation in connection with financial
reporting to regulatory authorities. The effective date of the uniform
statutory accounting principles is January 1, 2001. As of December 31, 2000,
the State of Missouri has not amended its laws and rules to closely mirror
SSAP, but the Missouri Department of Insurance has instructed its domestic
insurers to conform to the new codified SSAP in anticipation of changes to
applicable Missouri laws and rules during 2001. However, the Missouri
Department of Insurance cannot determine to what extent the amended Missouri
laws and rules will mirror SSAP. The Company has determined that the net effect
of codification in accordance with the NAIC's SSAP would not be material to the
Company's financial position or results of operations.
Capital Requirements
Guidelines on Minimum Continuing Capital and Surplus Requirements
("MCCSR") became effective for Canadian insurance companies in December 1992,
and Risk-Based Capital ("RBC") guidelines promulgated by the National
Association of Insurance Commissioners ("NAIC") became effective for U.S.
companies in 1993. The MCCSR risk-based capital guidelines, which are applicable
to RGA Canada, prescribe surplus requirements and consider both assets and
liabilities in establishing solvency margins. The RBC guidelines, applicable to
RGA Reinsurance and RCM, similarly identify minimum capital requirements based
upon business levels and asset mix. RGA Canada, RCM, and RGA Reinsurance
maintain capital levels in excess of the amounts required by the applicable
guidelines. Regulations in Argentina, Australia, Barbados, South Africa and
United Kingdom also require certain minimum capital levels, and subject the
companies operating there to oversight by the applicable regulatory bodies. The
Company's subsidiaries in Argentina, Australia, Barbados, South Africa and
United Kingdom meet the minimum capital requirements in their respective
jurisdiction. The Company cannot predict the effect that any proposed or future
legislation or rule making in the countries in which the Company operates may
have on the financial condition or operations of the Company or its
subsidiaries.
Insurance Holding Company Regulations
RGA is regulated in Missouri as an insurance holding company. The
Company is subject to regulation under the insurance and insurance holding
company statutes of Missouri. The Missouri insurance holding company laws and
regulations generally require insurance and reinsurance subsidiaries of
insurance holding companies to register with the Missouri Department of
Insurance and to file with the Missouri Department of Insurance certain reports
describing, among other information, their capital structure, ownership,
financial condition, certain intercompany transactions, and general business
operations. The Missouri insurance holding company statutes and regulations also
require prior approval of, or in certain circumstances, prior notice to the
Missouri Department of Insurance of certain material intercompany transfers of
assets, as well as certain transactions between insurance companies, their
parent companies and affiliates.
Under Missouri insurance laws and regulations, unless (i) certain
filings are made with the Missouri Department of Insurance, (ii) certain
requirements are met, including a public hearing, and (iii) approval or
exemption is granted by the Missouri Director of Insurance, no person may
acquire any voting security or security convertible into a voting security of an
insurance holding company, such as RGA, which controls a Missouri insurance
company, or merge with such a holding company, if as a result of such
transaction such person would "control" the insurance holding company. "Control"
is presumed to exist under Missouri law if a person directly or indirectly owns
or controls 10% or more or the voting securities of another person.
Certain state legislatures have considered or enacted laws that alter,
and in many cases increase, state regulation of insurance holding companies. In
recent years, the NAIC and state legislators have begun re-examining existing
laws and regulations, specifically focusing on insurance company investments and
solvency issues, risk-based capital guidelines, intercompany transactions in a
holding company system, and rules concerning extraordinary dividends. Canadian
federal insurance laws and regulations do not contain automatic registration and
reporting requirements applicable to insurance holding companies, although such
companies, together with all affiliates of a Canadian insurance company, may be
required to supply such information to the Canadian Superintendent of Financial
Institutions upon request.
Transactions whereby a person or entity would acquire control of or a
significant interest in, or increase (by more than an insignificant amount) its
existing interest in, a Canadian insurance company are subject to the prior
approval of the Canadian
10
11
Minister of Finance. "Significant interest" in an insurance company means the
beneficial ownership of shares representing 10% or more of a given class, while
"control" of an insurance company is presumed to exist when a person
beneficially owns shares representing more than 50% of the votes entitled to be
cast for the election of directors and such votes are sufficient to elect a
majority of the directors of the insurance company. Any transaction or
series of transactions with the same person involving the acquisition or
disposition by a Canadian insurance company of assets (other than the payment
of dividends) the aggregate value of which, over a twelve-month period, exceeds
10% of such company's total assets are also subject to the prior approval of
the Canadian Superintendent of Financial Institutions.
In addition, Canadian federal insurance laws and regulations generally
prohibit transactions between insurance companies and related parties, with
certain specified exceptions. Permitted related-party transactions must be on
terms that are at least as favorable to the insurance company as market terms
and conditions as defined in the Canadian federal insurance laws and
regulations. Reinsurance agreements pursuant to which an insurance company
causes itself to be reinsured with related parties are restricted unless (i) the
reinsurance is taken out in the ordinary course of business, and (ii) the
related party is either a Canadian insurance company or a foreign insurance
company duly registered in Canada or receives prior regulatory approval.
Reinsurance agreements pursuant to which an insurance company reinsures risks
undertaken by a related party are restricted unless the reinsurance is taken out
in the ordinary course of business.
Restrictions on Dividends and Distributions
Current Missouri law (applicable to Reinsurance Group of America,
Incorporated, RCM, and RGA Reinsurance) permits the payment of dividends or
distributions which, together with dividends or distributions paid during the
preceding twelve months, do not exceed the greater of (i) 10% of statutory
capital and surplus as of the preceding December 31, or (ii) statutory net gain
from operations for the preceding calendar year. Any proposed dividend in excess
of this amount is considered an "extraordinary dividend" and may not be paid
until it has been approved, or a 30-day waiting period has passed during which
it has not been disapproved, by the Missouri Director of Insurance. RCM's
allowable dividend without prior approval for 2001 is approximately $49.3
million pursuant to this calculation. RGA Reinsurance's allowable dividend
without prior approval for 2001 is approximately $80.6 million pursuant to this
calculation. Dividends may be paid only to the extent the insurer has unassigned
surplus (as opposed to contributed surplus). As of December 31, 2000, RCM and
RGA Reinsurance had unassigned surplus of approximately $38.9 million and $67.1
million, respectively. Any dividends paid by RGA Reinsurance would be paid to
RCM, who in turn has the ability to pay dividends to RGA.
In contrast to current Missouri law, the NAIC Model Insurance Holding
Company Act (the "Model Act") defines an extraordinary dividend as a dividend or
distribution which, together with dividends or distributions paid during the
preceding twelve months, exceeds the lesser of (i) 10% of statutory capital and
surplus as of the preceding December 31, or (ii) statutory net gain from
operations for the preceding calendar year. The Company is unable to predict
whether, when, or in what form Missouri will enact a new measure for
extraordinary dividends. The maximum amount available for payment on dividends
in 2001 by RGA Reinsurance under the Model Act without prior approval of the
Missouri Director of Insurance would have been $49.9 million at December 31,
2000. RCM would not be able to pay a dividend under this formula due to its loss
from operations during 2000.
In addition to the foregoing, Missouri insurance laws and regulations
require that the statutory surplus of RCM and RGA Reinsurance following any
dividend or distribution be reasonable in relation to its outstanding
liabilities and adequate to meet its financial needs. The Missouri Director of
Insurance may bring an action to enjoin or rescind the payment of a dividend or
distribution by RGA Reinsurance or RCM that would cause its statutory surplus to
be inadequate under the standards of Missouri.
Under the corporate law and regulations of New Brunswick applicable to
RGA International and RGA Canada Management, dividends may be declared and paid
unless there are reasonable grounds for believing either that the corporation
is, or would after the payment be, unable to pay its liabilities when due or
that the realizable value of its assets would be less than the aggregate of its
liabilities and stated capital of all classes. RGA Canada may not pay a dividend
if there are reasonable grounds for believing that RGA Canada is, or the payment
of the dividend would cause RGA Canada to be, in contravention of any regulation
made by the Governor in Council and the guidelines adopted by the Superintendent
of Financial Institutions respecting the maintenance by life companies of
adequate and appropriate forms of liquidity. The Canadian MCCSR guidelines
consider both assets and liabilities in establishing solvency margins, the
effect of which could limit the maximum amount of dividends that may be paid by
RGA Canada. RGA Canada's ability to declare and pay dividends in the future will
be affected by its continued ability to
11
12
comply with such guidelines. Moreover, RGA Canada must give notice to the
Superintendent of Financial Institutions of the declaration of any dividend at
least ten days prior to the day fixed for its payment. The maximum amount
available for payment of dividends by RGA Canada to RGA Canada Management under
the Canadian MCCSR guidelines was $28.7 million at December 31, 2000.
Default or Liquidation
In the event of a default on any debt that may be incurred by RGA or
the bankruptcy, liquidation, or other reorganization of RGA, the creditors and
stockholders of RGA will have no right to proceed against the assets of RCM, RGA
Reinsurance, RGA Canada, or other insurance or reinsurance company subsidiaries
of RGA. If RCM or RGA Reinsurance were to be liquidated, such liquidation would
be conducted by the Missouri Director of Insurance as the receiver with respect
to such insurance company's property and business. If RGA Canada were to be
liquidated, such liquidation would be conducted pursuant to the general laws
relating to the winding-up of Canadian federal companies. In both cases, all
creditors of such insurance company, including, without limitation, holders of
its reinsurance agreements and, if applicable, the various state guaranty
associations, would be entitled to payment in full from such assets before RGA,
as a direct or indirect stockholder, would be entitled to receive any
distributions made to it prior to commencement of the liquidation proceedings,
and, if the subsidiary was insolvent at the time of the distribution,
shareholders of RGA might likewise be required to refund dividends subsequently
paid to them.
In addition to RCM, RGA Reinsurance and RGA Canada, the Company has an
interest in licensed insurance subsidiaries in Australia, Argentina, Malaysia,
South Africa, and the United Kingdom. In the event of default or liquidation,
the rules and regulations of the appropriate governing body in the country of
incorporation would be followed.
Federal Regulation
Discussions continue in the Congress of the United States concerning
the future of the McCarran-Ferguson Act, which exempts the "business of
insurance" from most federal laws, including anti-trust laws, to the extent such
business is subject to state regulation. Judicial decisions narrowing the
definition of what constitutes the "business of insurance" and repeal or
modification of the McCarran-Ferguson Act may limit the ability of the Company,
and RGA Reinsurance in particular, to share information with respect to matters
such as rate-setting, underwriting, and claims management. It is not possible to
predict the effect of such decisions or change in the law on the operation of
the Company.
Risk Management
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of benefits paid
by ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company retains a maximum of $2.5
million of coverage per individual life. Effective January 1, 2001, the Company
increased its retention to $4.0 million of coverage per individual life. The
Company has a number of retrocession arrangements whereby certain business in
force is retroceded on an automatic or facultative basis.
Generally, RGA's insurance subsidiaries retrocede amounts in excess of
their retention to RGA Reinsurance or RGA Americas. Retrocessions are arranged
through the Company's retrocession pools for amounts in excess of its retention.
As of December 31, 2000, substantially all retrocession pool members in this
excess retention pool followed by the A.M. Best Company were rated "A-" or
better. The Company also retrocedes most of its financial reinsurance business
to other insurance companies to alleviate the strain on statutory surplus
created by this business. For a majority of the retrocessionaires that were not
rated, security in the form of letters of credit or trust assets has been given
as additional security in favor of RGA Reinsurance. In addition, the Company
performs annual financial and in force reviews of its retrocessionaires to
evaluate financial stability and performance.
The Company has never experienced a material default in connection with
retrocession arrangements, nor has it experienced any difficulty in collecting
claims recoverable from retrocessionaires; however, no assurance can be given as
to the future performance of such retrocessionaires or as to recoverability of
any such claims.
12
13
The Company has catastrophe insurance coverage issued by 6 insurers
rated "A" or higher by A.M. Best as of December 31, 2000, that provides benefits
of up to $100.0 million per occurrence for claims involving three or more deaths
in a single accident, with a deductible of $1.5 million per occurrence. This
coverage is terminable annually as of August 13 with 90 days prior notice. The
Company believes such catastrophe insurance coverage adequately protects it from
risks associated with multiple deaths in a single accident of reinsured lives.
Additionally, through December 31, 2000, the Company retained a maximum of $2.5
million of coverage per individual life. Effective January 1, 2001, the Company
increased its retention to $4.0 million of coverage per individual life.
RGA Canada's policy is normally to retain up to C$100,000 of individual
life and up to C$100,000 of Accidental Death and Dismemberment liability on any
one life. RGA Canada retrocedes amounts in excess of its retention mostly to RGA
Reinsurance directly or through General American. Retrocessions are arranged
through RGA Reinsurance's retrocession pool. RGA Canada has never experienced a
default in connection with its retrocession arrangements, nor has it experienced
any difficulty in collecting claims recoverable from its retrocessionaires.
However, no assurance can be given as to the future performance of such
retrocessionaires or as to the recoverability of any such claims.
For other international business, the Company retains up to $2.5
million for U.S., Canadian, Australian, and New Zealand currency-denominated
business. For other currencies and for countries with higher risk factors, the
Company systematically reduces its retention. The Argentine subsidiary cedes
business in excess of $40,000. RGA Australia has a retrocession arrangement with
RGA Reinsurance in which life risks above $100,000 Australian dollars are
retroceded to RGA Reinsurance. RGA UK has a retrocession arrangement such that
life risks above (pound)100,000 are retroceded to RGA Americas. RGA South Africa
has a retrocession arrangement such that life risks above R200,000 are
retroceded to RGA Americas. On an aggregate basis among all of its subsidiaries,
the Company does not retain more than $2.5 million on any one life.
Underwriting
Facultative. Senior management has developed underwriting guidelines,
policies, and procedures with the objective of controlling the quality of
business written as well as its pricing. The Company's underwriting process
emphasizes close collaboration among its underwriting, actuarial, and operations
departments. Management periodically updates these underwriting policies,
procedures, and standards to account for changing industry conditions, market
developments, and changes occurring in the field of medical technology; however,
no assurance can be given that all relevant information has been analyzed or
that additional risks will not materialize. These policies, procedures, and
standards are documented in an on-line underwriting manual.
The Company's management determines whether to accept facultative
reinsurance business on a prospective insured by reviewing the client company's
applications and medical requirements, and assessing financial information and
any medical impairments. Most facultative applications involve a prospective
insured with multiple impairments, such as heart disease, high blood pressure,
and diabetes, requiring a difficult underwriting assessment. To assist its
underwriters in making this assessment, the U.S. life operations employ two
full-time and one part-time medical directors, as well as a medical consultant.
Automatic. The Company's management determines whether to write
automatic reinsurance business by considering many factors, including the types
of risks to be covered; the ceding company's retention limit and binding
authority, product, and pricing assumptions; and the ceding company's
underwriting standards, financial strength and distribution systems. For
automatic business, the Company ensures that the underwriting standards and
procedures of its ceding companies are compatible with those of RGA. To this
end, the Company conducts periodic reviews of the ceding companies' underwriting
and claims personnel and procedures.
AIDS. Since 1987, the U.S. life insurance industry has implemented the
practice of antibody blood testing to detect the presence of the HIV virus
associated with Acquired Immune Deficiency Syndrome ("AIDS"). Prior to the onset
of routine antibody testing, it was possible for applicants with AIDS to
purchase significant amounts of life insurance. Since 1987, the Company has
adopted guidelines used by all operations regarding HIV testing for life
insurance risks.
The Company believes that the antibody test for AIDS is effective. No
assurance can be given, however, that additional AIDS-related death claims
involving insureds who test negative for AIDS at the time of underwriting will
not arise in the future.
13
14
The Company believes that its primary exposure to the AIDS risk is related to
business issued before the onset of AIDS antibody testing in 1987. Each
year, this business represents a smaller portion of RGA's reinsurance in force.
Competition
Reinsurers compete on the basis of many factors, including financial
strength, pricing and other terms and conditions of reinsurance agreements,
reputation, service, and experience in the types of business underwritten. The
U.S. and Canadian life reinsurance markets are served by numerous international
and domestic reinsurance companies. The Company believes that RGA Reinsurance's
primary competitors in the U.S. life reinsurance market are currently
Transamerica Occidental Life
Insurance Company, Swiss Re Life of America, ING Re, and Lincoln National
Corporation. However, within the reinsurance industry, this can change from year
to year. The Company believes that RGA Canada's major competitors in the
Canadian life reinsurance market are Employers Reassurance Corporation, Lincoln
National Life Insurance Company, Munich Reinsurance Company, and Swiss Re Life
and Health Canada.
The international life operations compete with subsidiaries of several
U.S. individual and group life insurers and reinsurers and other internationally
based insurers and reinsurers, some of which are larger and have access to
greater resources than the Company. Competition is primarily on the basis of
price, service, and financial strength.
Employees
As of December 31, 2000, the Company had 601 employees located in the
United States, Canada, Argentina, Mexico, Hong Kong, Australia, Japan, Taiwan,
South Africa, and the United Kingdom. None of these employees are represented by
a labor union. The Company believes that employee relations at all of its
subsidiaries are good.
C. SEGMENTS
The Company obtains substantially all of its revenues through
reinsurance agreements that cover a portfolio of life insurance products,
including term life, credit life, universal life, whole life, and joint and last
survivor insurance, as well as annuities, financial reinsurance, and direct
premiums which include single premium pension annuities, universal life, and
group life. Generally, the Company, through a subsidiary, has provided
reinsurance and, to a lesser extent, insurance for mortality and morbidity risks
associated with such products. With respect to asset-intensive products, the
Company has also provided reinsurance for investment-related risks. RGA
Reinsurance has written a small amount of primary insurance on General American
directors and officers, and a small amount of short-term life insurance.
The following table sets forth the Company's gross and net premiums
attributable to each of its segments for the periods indicated:
14
15
GROSS AND NET PREMIUMS BY SEGMENT
(dollars in millions)
Year Ended December 31,
------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
GROSS PREMIUMS:
U.S. operations $1,210.9 74.5 $1,158.2 73.1 $ 902.9 71.4
Canada operations 218.0 13.4 219.1 13.8 192.9 15.2
Latin America operations 64.2 4.0 105.5 6.7 108.3 8.6
Asia Pacific operations 100.7 6.2 76.6 4.8 56.9 4.5
Other international operations 30.5 1.9 25.4 1.6 3.7 0.3
-------- ----- -------- ----- -------- -----
Total $1,624.3 100.0 $1,584.8 100.0 $1,264.7 100.0
======== ===== ======== ===== ======== =====
NET PREMIUMS:
U.S. operations $1,038.9 74.0 $ 950.4 72.2 $ 716.2 70.5
Canada operations 176.3 12.6 162.5 12.4 144.8 14.2
Latin America operations 64.9 4.6 104.2 7.9 98.7 9.7
Asia Pacific operations 94.3 6.7 73.9 5.6 53.0 5.2
Other international operations 29.7 2.1 24.6 1.9 3.7 0.4
-------- ----- -------- ----- -------- -----
Total $1,404.1 100.0 $1,315.6 100.0 $1,016.4 100.0
======== ===== ======== ===== ======== =====
The following table sets forth selected information concerning assumed
reinsurance business in force for the Company's U.S., Canada, Latin America,
Asia Pacific, and other international segments for the indicated periods. (The
term "in force" refers to face amounts or net amounts at risk.)
REINSURANCE BUSINESS IN FORCE BY SEGMENT
(dollars in billions)
Year Ended December 31,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
U.S. operations $412.7 75.6 $345.7 77.4 $255.7 77.3
Canada operations 54.3 10.0 45.8 10.2 35.5 10.7
Latin America operations 44.6 8.2 31.9 7.1 35.1 10.7
Asia Pacific operations 31.9 5.8 22.1 5.0 3.8 1.1
Other international operations 2.4 0.4 1.4 0.3 0.5 0.2
------ ----- ------ ----- ------ -----
Total $545.9 100.0 $446.9 100.0 $330.6 100.0
====== ===== ====== ===== ====== =====
Reinsurance business in force reflects the addition or acquisition of
new reinsurance business, offset by terminations (e.g., voluntary surrenders of
underlying life insurance policies, lapses of underlying policies, deaths of
insureds, the exercise of recapture options, changes in foreign exchange, and
any other changes in the amount of insurance in force). As a result of
terminations, assumed in force amounts at risk of $59.3 billion, $48.6 billion,
and $21.6 billion were released in 2000, 1999, and 1998, respectively.
The following table sets forth selected information concerning assumed
new business volume for the Company's U.S., Canada, Latin America, Asia Pacific,
and other international operations for the indicated periods. (The term "volume"
refers to face amounts or net amounts at risk.)
15
16
NEW BUSINESS VOLUME BY SEGMENT
(dollars in billions)
Year Ended December 31,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
U.S. operations $115.7 71.8 $121.3 73.6 $102.7 82.2
Canada operations 13.8 8.6 9.4 5.7 12.8 10.2
Latin America operations 21.3 13.2 20.6 12.5 7.2 5.8
Asia Pacific operations 9.7 6.0 12.5 7.5 2.2 1.8
Other international operations 0.6 0.4 1.1 0.7 0.1 --
------ ----- ------ ----- ------ -----
Total $161.1 100.0 $164.9 100.0 $125.0 100.0
====== ===== ====== ===== ====== =====
Additional information regarding the operations of the Company's segments and
geographic operations is contained in Note 17 to the Consolidated Financial
Statements within Item 8 of Part II.
U.S. Operations
The U.S. operations represented 74.0%, 72.2%, and 70.5%, of the
Company's net premiums in 2000, 1999, and 1998, respectively. The U.S.
operations market life reinsurance, reinsurance of asset-intensive products and
financial reinsurance through RGA Reinsurance, primarily to the largest U.S.
life insurance companies.
Traditional
The U.S. traditional reinsurance subsegment provides life reinsurance
to domestic clients for a variety of life products through yearly renewable term
agreements, coinsurance, and modified coinsurance. This business has been
accepted under many different rate scales, with rates often tailored to suit the
underlying product and the needs of the ceding company. Premiums typically vary
for smokers and non-smokers, males and females, and may include a preferred
underwriting class discount. Reinsurance premiums are paid in accordance with
the treaty, regardless of the premium mode for the underlying primary insurance.
This business is made up of facultative and automatic treaty business.
In addition, several of the Company's U.S. clients have purchased life
insurance policies insuring the lives of their executives. These policies have
generally been issued to fund deferred compensation plans and have been
reinsured with the Company. As of December 31, 2000, reinsurance of such
policies was reflected in interest sensitive contract reserves of approximately
$1,217.5 million and policy loans of $706.9 million.
The U.S. facultative reinsurance operation involves the assessment of
the risks inherent in (i) multiple impairments, such as heart disease, high
blood pressure, and diabetes; (ii) cases involving large policy face amounts;
and (iii) financial risk cases, i.e., cases involving policies
disproportionately large in relation to the financial characteristics of the
proposed insured. The U.S. operation's marketing efforts have focused on
developing facultative relationships with client companies because management
believes facultative reinsurance represents a substantial segment of the
reinsurance activity of many large insurance companies and has been an effective
means of expanding the U.S. operation's automatic business. In 2000, 1999, and
1998, approximately 29.1%, 30.2%, and 35.5%, respectively, of the U.S. gross
premiums were written on a facultative basis. The U.S. operations have
emphasized personalized service and prompt response to requests for facultative
risk assessment. This percentage has decreased over the past several years due
to the increase in premiums from large automatic treaties on in force business.
16
17
Only a portion of approved facultative applications result in paid
reinsurance. This is because applicants for impaired risk policies often submit
applications to several primary insurers, which in turn seek facultative
reinsurance from several reinsurers. Ultimately, only one insurance company and
one reinsurer are likely to obtain the business. The Company tracks the
percentage of declined and placed facultative applications on a client-by-client
basis and generally works with clients to seek to maintain such percentages at
levels deemed acceptable.
Mortality studies performed by the Company have shown that its
facultative mortality experience is comparable to its automatic mortality
experience relative to expected mortality rates. Because the Company applies its
underwriting standards to each application submitted to it facultatively, it
generally does not require ceding companies to retain a portion of the
underlying risk when business is written on a facultative basis.
Automatic business, including financial reinsurance treaties, is
generated pursuant to treaties, which generally require that the underlying
policies meet the ceding company's underwriting criteria, although a number of
such policies may be rated substandard. In contrast to facultative reinsurance,
reinsurers do not engage in underwriting assessments of the risks assumed
through an automatic treaty.
Because the Company does not apply its underwriting standards to each
policy ceded to it under automatic treaties, the U.S. operations generally
require ceding companies to keep a portion of the business written on an
automatic basis, thereby increasing the ceding companies' incentives to
underwrite risks with due care and, when appropriate, to contest claims
diligently.
Non-traditional Business
The Company also provides non-traditional reinsurance of
asset-intensive products and financial reinsurance. Asset-intensive business
includes the reinsurance of corporate-owned life insurance and annuities. The
Company earns investment income on the deposits underlying the asset-intensive
products, which is largely offset by earnings credited and paid to the ceding
companies. Financial reinsurance assists ceding companies in meeting applicable
regulatory requirements and enhances ceding companies' financial strength and
regulatory surplus position.
Asset Intensive Business
Reinsurance business in which the investment risk is reinsured is
referred to as asset-intensive business. Asset-intensive business includes the
reinsurance of corporate-owned life insurance and annuities. Most of these
agreements are coinsurance or modified coinsurance of nonmortality risks such
that the Company recognizes profits or losses primarily from the spread between
the investment earnings and the interest credited on the underlying deposit
liabilities.
Asset-intensive business that does not produce mortality risk
(annuities) is normally limited by size of the deposit, from any one depositor.
Business which does produce mortality risks (corporate-owned and bank-owned)
normally involves a large number of insureds associated with each deposit.
Underwriting of these deposits also limits the size of any one deposit but the
individual policies associated with any one deposit are typically issued within
pre-set guaranteed issue parameters.
The Company looks for highly rated, financially secure companies as
clients for asset-intensive business. These companies may wish to limit their
own exposure to certain products. Ongoing asset/liability analysis is required
for the management of asset-intensive business. The Company performs this
analysis itself, in conjunction with asset/liability analysis performed by the
ceding companies.
Financial Reinsurance
The Company's financial reinsurance subsegment assists ceding companies
in meeting applicable regulatory requirements while enhancing the ceding
companies' financial strength and regulatory surplus position. The Company
commits cash or assumes insurance liabilities from the ceding companies.
Generally, such amounts are offset by receivables from ceding companies that are
repaid by the future profits from the reinsured block of business. The Company
structures its financial reinsurance transactions so that the projected future
profits of the underlying reinsured business significantly exceed the amount of
regulatory surplus provided to the ceding company.
17
18
The Company primarily targets highly rated insurance companies for
financial reinsurance. A careful analysis is performed before providing any
surplus enhancement to the ceding company. This analysis assures that the
Company understands the risks of the underlying insurance product and that the
surplus has a high likelihood of being repaid through the future profits of
the business. A staff of actuaries and accountants is required to track
experience on a quarterly basis in comparison to expected models. The Company
also retrocedes most of its financial reinsurance business to other insurance
companies to alleviate the strain on statutory surplus created by this business.
CUSTOMER BASE
The U.S. reinsurance operation markets life reinsurance primarily to
the largest U.S. life insurance companies and currently has treaties with most
of the top 100 companies. These treaties generally are terminable by either
party on 90 days written notice, but only with respect to future new business;
existing business generally is not terminable, unless the underlying policies
terminate or are recaptured. In 2000, 54 clients had annual gross premiums of $5
million or more and the aggregate gross premiums from these clients represented
approximately 91.2% of 2000 U.S. life gross premiums. For the purpose of this
disclosure, companies that are within the same holding company structure are
combined.
In 2000, no single non-affiliated U.S. client accounted for more than
10% of the Company's consolidated gross premiums; however, three non-affiliated
clients ceded more than 5% of U.S. life gross premiums. Together they ceded
$253.1 million, or 20.9%, of U.S. operations gross premiums in 2000.
MetLife and its affiliates generated approximately $174.9 million or
14.4% of U.S. operation's gross premium for 2000.
OPERATIONS
During 2000, substantially all gross U.S. life business was obtained
directly, rather than through brokers. The Company has an experienced marketing
staff that works to maintain existing relationships and to provide responsive
service.
The Company's auditing, valuation and accounting department is
responsible for treaty compliance auditing, financial analysis of results,
generation of internal management reports, and periodic audits of administrative
practices and records. A significant effort is focused on periodic audits of
administrative and underwriting practices, records, and treaty compliance of
reinsurance clients.
The Company's claims department (i) reviews and verifies reinsurance
claims, (ii) obtains the information necessary to evaluate claims, (iii)
determines the Company's liability with respect to claims, and (iv) arranges for
timely claims payments. Claims are subjected to a detailed review process to
ensure that the risk was properly ceded, the claim complies with the contract
provisions, and the ceding company is current in the payment of reinsurance
premiums to the Company's operations. The claims department also investigates
claims generally for evidence of misrepresentation in the policy application and
approval process. In addition, the claims department monitors both specific
claims and the overall claims handling procedure of ceding companies.
Claims personnel work closely with their counterparts at client
companies to attempt to uncover fraud, misrepresentation, suicide, and other
situations where the claim can be reduced or eliminated. By law, the ceding
company cannot contest claims made after two years of the issuance of the
underlying insurance policy. By developing good working relationships with the
claims departments of client companies, major claims or problem claims can be
addressed early in the investigation process. Claims personnel review material
claims presented to the Company in detail to find potential mistakes such as
claims ceded to the wrong reinsurer and claims submitted for improper amounts.
18
19
Canada Operations
The Canada operation represented 12.6%, 12.4%, and 14.2%, of the
Company's net premiums in 2000, 1999, and 1998, respectively. In 2000, the
Canadian life operations assumed $13.8 billion in new business. Of this amount,
$8.5 billion was recurring new business and $5.3 billion resulted from new
assumed in force blocks. Approximately 88% of the 2000 recurring new business
was written on an automatic basis.
The Company operates in Canada primarily through RGA Canada, a
wholly-owned company. RGA Canada is a leading life reinsurer in Canada and is
primarily engaged in traditional individual life reinsurance, including
preferred underwriting products, as well as creditor and critical illness
products. More than 90% of RGA Canada's premium income is derived from the life
reinsurance products.
Clients include virtually all of Canada's principal life insurers. In
2000, no Canadian client accounted for more than 10% of the Company's
consolidated gross premiums. However, one client accounted for more than 10% of
the Canada operation's gross premiums. This client ceded $66.7 million, or
30.6%, of the Canada operation's gross premiums in 2000. No other clients
represented more than 5% of Canada's gross premiums. The Canada operation
competes with a small number of individual and group life reinsurers. The Canada
operation competes primarily on the basis of price, service, and financial
strength.
RGA Canada maintains a staff of sixty-three people at the Montreal
office and fourteen people in an office in Toronto. RGA Canada employs its own
underwriting, actuarial, claims, pricing, accounting, systems, marketing and
administrative staff.
RGA's Canadian life reinsurance business was originally conducted by
General American. General American entered the Canadian life reinsurance market
in 1978 and was primarily engaged in the retrocession business, writing only a
small amount of business with primary Canadian insurers. In April 1992, General
American, through RGA Canada, purchased the life reinsurance assets and business
of National Reinsurance Company of Canada ("National Re"), including C$26.0
million of Canadian life reinsurance gross in force premiums. National Re had
been engaged in the life reinsurance business in Canada since 1972, writing
reinsurance on a direct basis with primary Canadian insurers.
Latin America Operations
The Latin American operations represented 4.6%, 7.9%, and 9.7%, of the
Company's net premiums in 2000, 1999, and 1998, respectively. The Company
conducts reinsurance business in the Latin American region through RGA
Reinsurance. During 1999, a representative office was opened in Buenos Aires and
during 1998 a representative office was opened in Mexico City to more directly
assist clients in these markets. Historically, the Latin American reinsurance
operations have derived revenue primarily from the reinsurance of privatized
pension products in Argentina. Since 1999, the Company has reduced its
participation in these types of treaties and is more actively marketing
additional types of reinsurance in the region such as traditional individual
life, credit, and group life insurance as well as non-traditional reinsurance
transactions in Argentina and Mexico. It is anticipated that the mix of business
will continue to evolve in the upcoming years.
Direct insurance has been generated primarily from subsidiaries in
Chile and Argentina. During April 2000, the Company sold its Chilean interests.
In 1994, to develop markets in Argentina, RGA formed GA Argentina. GA
Argentina writes direct life insurance primarily related to group life and
disability insurance for the Argentine privatized pension system as well as
traditional group life insurance. Effective July 1998, GA Argentina no longer
had new contracts related to the privatized pension system, but continues to
market group and individual life products.
The Latin American reinsurance operations are primarily supported by
the Latin American Division of RGA Reinsurance based in St. Louis with a staff
of ten people in St. Louis, four people in a representative office in Mexico and
three people in a representative office in Argentina. The division provides
bilingual underwriting, actuarial, claims, pricing, marketing, and
administrative support. Claims, accounting, and systems support are provided on
a corporate basis through the Company's operations in St. Louis. GA Argentina
maintains a staff of 70 people in Buenos Aires, Argentina, and employs its own
underwriting, actuarial, claims, pricing, accounting, systems, marketing and
administrative staff.
19
20
Asia Pacific Operations
The Asia Pacific operations represented 6.7%, 5.6%, and 5.2%, of the
Company's net premiums in 2000, 1999, and 1998, respectively. The Company has a
presence in the Asia Pacific region with a licensed branch office in Hong Kong
and representative offices in Tokyo and Taiwan. The Company also established a
reinsurance subsidiary in Australia in January 1996.
Within the Asia Pacific segment, seven people were on staff in the Hong
Kong office, nine people were on staff in the Tokyo office, six people were on
staff in the Taiwan office, and RGA Australia maintained a staff of twenty-two
people in Sydney. The Hong Kong, Tokyo and Taiwan offices primarily provide
marketing and underwriting service to the direct life insurance companies with
other service support provided directly by the Company's St. Louis operations.
RGA Australia directly maintains its own underwriting, actuarial, claims,
pricing, accounting, systems, marketing and administration service with
additional support provided by the Company's St. Louis operations.
Other International Operations
The other international operations represented 2.1%, 1.9%, and 0.4% of
the Company's net premiums in 2000, 1999, and 1998 respectively. This segment
provides life reinsurance to clients located in Europe (primarily in the United
Kingdom and Spain) and South Africa. The principal type of reinsurance being
provided has been life reinsurance for a variety of life products through yearly
renewable term and coinsurance agreements. These agreements may be either
facultative or automatic agreements.
During 2000, the Company's United Kingdom subsidiary, RGA Reinsurance
UK Limited ("RGA UK"), obtained approval as a licensed United Kingdom life
reinsurer, operating in the United Kingdom. The Company opened a representative
office in Spain during the second quarter of 2000. In 1998, the Company had
established RGA South Africa, with offices in Cape Town and Johannesburg to
promote life reinsurance in South Africa. The Company also participates as a
Corporate Name supporting life syndicate 429 at Lloyd's of London.
In the United Kingdom, an increasing number of insurers are ceding the
mortality and accelerated critical illness (pays on earlier of death or critical
illness) covers on a quota share basis creating reinsurance opportunities. The
reinsurers present in the market include the main global players with which RGA
competes in other markets as well.
In South Africa, the Company's subsidiary has managed to establish a
substantial position in the facultative market, through excellent service and
competitive pricing. The Company is concentrating on the life insurance market,
as opposed to competitors that are also in the health market.
The Company's subsidiaries in the United Kingdom and South Africa
employ their own underwriting, actuarial, claims pricing, accounting, marketing
and administration staff. Divisional management through RGA International based
in Toronto provides additional services for existing and future markets. RGA
International had a staff of thirteen people, operations in the United Kingdom
maintained a staff of twelve people, RGA South Africa maintained a staff of
twenty-one people, and two people were on staff in the Madrid office.
Discontinued Operations
As of December 31, 1998, the Company formally reported its accident and
health division as a discontinued operation. More information about the
Company's discontinued accident and health divisions may be found in Note 21 to
the Consolidated Financial Statements within Item 8 of Part II.
D. FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS
The Company's foreign operations are primarily in Canada, Latin
America, the Asia Pacific region, which includes Australia, and Europe. Revenue,
income (loss) which includes net realized gains (losses) before income tax and
minority interest, and identifiable assets attributable to these geographic
regions were identified in Note 17 to the Consolidated Financial Statements
within Item 8 of Part II.
20
21
E. EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding the executive officers of the Company, see
Part III, Item 10, entitled "Directors and Executive Officers of the
Registrant."
Item 2. PROPERTIES
RGA Reinsurance houses its employees and the majority of RGA's officers
in approximately 116,000 square feet of office space at 1370 Timberlake Manor
Parkway, Chesterfield, Missouri. These premises are leased through August 31,
2009, at annual rents ranging from approximately $2,000,000 to $2,400,000.
RGA Reinsurance also conducts business from approximately 1,400 square
feet in Norwalk, Connecticut, 2,979 square feet of office space located in Hong
Kong, approximately 2,900 square feet of office space located in Tokyo, Japan,
and 2,800 square feet of office space in Taipei, Taiwan. The rental expenses
paid by RGA Reinsurance under these leases during 2000 were approximately
$22,000, $166,000, $293,000, and $51,000 for Norwalk, Hong Kong, Tokyo, and
Taipei, respectively. RGA Australia conducts business from approximately 20,700
square feet of office space located in Sydney, Australia and paid approximately
$98,000 during 2000 for lease expense. The Norwalk, Hong Kong, Tokyo, and Taipei
leases expire in December 2002, October 2002, January 2002, and October, 2003,
respectively. The Sydney lease expires in October 2003.
RGA Reinsurance also conducts business from approximately 1,500 square
feet of office space in Mexico City, Mexico. The rental expenses paid by RGA
Reinsurance under the lease during 2000 were approximately $22,000. The lease
expires in December 2001.
General American Argentina conducts business from approximately 11,000
square feet of office space in Buenos Aires, Argentina, pursuant to several
leases. Rental expense paid for the office was approximately $179,000 during
2000. Two of the Buenos Aires leases expire in 2001, and three in 2002.
RGA Argentina conducts business from approximately 800 square feet of
office space in Buenos Aires, Argentina. The rental expenses paid by RGA
Argentina under the lease during 2000 were approximately $28,000. The lease
expires in December 2001.
RGA Canada's operations are conducted from approximately 12,480 square
feet of office space located in Montreal, Canada. The lease with respect to such
space expires in 2010. Rental expenses paid by RGA Canada under the lease during
2000 were approximately $289,000. RGA Canada also sub-leased approximately 800
square feet of space in Montreal, Canada. The sub-lease expired in 2000. The
rental expenses paid by RGA Canada under the sub-lease during 2000 were
approximately $10,000. RGA Canada also leases approximately 5,900 square feet of
space in Toronto, Canada. This lease expires in 2005. The rental expenses paid
by RGA Canada under the Toronto lease during 2000 were approximately $155,000.
RGA International conducts operations from approximately 9,800 square feet of
office space located in Toronto, Canada. The lease with respect to such space
expires in 2007. The rental expenses paid by RGA International under the lease
during 2000 were approximately $285,000.
RGA UK Reinsurance conducts business from approximately 3,000 square
feet of office space in London, England. The rental expenses paid by RGA UK
Reinsurance under the lease during 2000 were approximately $328,000. The lease
expires in 2009.
RGA South Africa conducts business from approximately 5,300 square feet
of office space in Cape Town and 3,600 square feet of office space located in
Johannesburg, South Africa. The rental expenses paid by RGA South Africa under
the leases during 2000 were approximately $20,000 and $24,000 for Cape Town and
Johannesburg respectively. The leases expire in September 2003 and May 2004 for
Cape Town and Johannesburg respectively.
The Company believes its facilities have been generally well maintained
and are in good operating condition. The Company believes the facilities are
sufficient for our current and projected future requirements.
21
22
Item 3. LEGAL PROCEEDINGS
The Company is currently a party in arbitrations that involve three
separate group medical reinsurance coverages as discussed in Note 21 to the
consolidated financial statements. From time to time, the Company is subject to
litigation and arbitration related to its reinsurance business and to
employment-related matters in the normal course of its business. While it is not
feasible to predict or determine the ultimate outcome of the pending arbitration
or legal proceedings or provide reasonable ranges of potential losses, it is the
opinion of Management that their outcomes after consideration of the provisions
made in the Company's consolidated financial statements would not have a
material adverse effect on its consolidated financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of security holders
during the fourth quarter of 2000.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On November 23, 1999, RGA completed a private placement of securities
in which it sold 4,784,689 shares of the Company's common stock, $0.01 par value
per share, to Metropolitan Life Insurance Company. The price per share was
$26.125, and the aggregate value of the transaction was approximately $125
million, paid in cash. These shares were not registered under the Securities Act
of 1933, as amended ("the Act"), and were sold on reliance on the exemption from
registration contained in Section 4(2) of the Act. Proceeds from the private
placement will be used for general corporate purposes, including the immediate
capital needs associated with the Company's primary businesses.
Information about the market price of the Company's common equity,
dividends and related stockholder matters is contained in Item 8 under the
caption "Quarterly Data (Unaudited)" and in Item 1 under caption "Restrictions
on Dividends and Distributions". Additionally, Insurance companies are subject
to statutory regulations that restrict the payment of dividends. See Item I
under the caption "Restrictions on Dividends and Distributions".
Item 6. SELECTED FINANCIAL DATA
The selected financial data presented for, and as of the end of, each
of the years in the five-year period ended December 31, 2000, have been prepared
in accordance with accounting principals generally accepted in the United States
of America for stock life insurance companies. All amounts shown are in
millions, except per share and operating data. The following data should be read
in conjunction with the Consolidate Financial Statements and the Notes to the
Consolidated Financial Statements appearing in Part II Item 8 and Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in Part II Item 7.
22
23
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in millions, except per share and operating data)
YEARS ENDING DECEMBER 31, 2000 1999 1998 1997 1996
Income Statement Data
Revenues:
Net premiums $ 1,404.1 $ 1,315.6 $ 1,016.4 $ 744.8 $ 617.7
Investment income, net of related expenses 326.5 340.3 301.8 187.1 135.8
Realized capital (losses) gains (28.7) (75.3) 3.1 0.3 0.9
Other income 23.8 26.5 23.2 46.0 16.8
---------- ---------- ---------- ---------- ----------
Total revenue 1,725.7 1,607.1 1,344.5 978.2 771.2
Benefits and expenses:
Claims and other policy benefits 1,103.6 1,067.1 797.9 569.1 463.5
Interest credited 104.8 153.1 153.2 92.3 54.7
Policy acquisition costs and other insurance expenses 243.5 218.3 188.5 148.1 118.1
Other expenses 80.9 64.5 58.0 47.5 37.5
Interest expense 17.6 11.0 8.8 7.8 6.2
---------- ---------- ---------- ---------- ----------
Total benefits and expenses 1,550.4 1,514.0 1,206.4 864.8 680.0
---------- ---------- ---------- ---------- ----------
Income from continuing operations before income
taxes and minority interest 175.3 93.1 138.1 113.4 91.2
Provision for Income taxes 69.2 39.1 49.1 40.4 33.1
---------- ---------- ---------- ---------- ----------
Income from continuing operations before minority interest 106.1 54.0 89.0 73.0 58.1
Minority interest in earnings (losses) of consolidated
subsidiaries 0.3 1.0 (0.7) 0.4 0.3
---------- ---------- ---------- ---------- ----------
Income from continuing operations 105.8 53.0 89.7 72.6 57.8
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (28.1) (12.1) (27.6) (18.0) (2.7)
---------- ---------- ---------- ---------- ----------
Net income $ 77.7 $ 40.9 $ 62.1 $ 54.6 $ 55.1
========== ========== ========== ========== ==========
BASIC EARNINGS PER SHARE
Continuing operations $ 2.14 $ 1.16 $ 2.11 $ 1.91 $ 1.53
Discontinued operations $ (0.57) $ (0.27) $ (0.61) $ (0.47) $ (0.08)
---------- ---------- ---------- ---------- ----------
Net income $ 1.57 $ 0.89 $ 1.50 $ 1.44 $ 1.45
DILUTED EARNINGS PER SHARE
Continuing operations $ 2.12 $ 1.15 $ 2.08 $ 1.89 $ 1.52
Discontinued operations $ (0.56) $ (0.27) $ (0.60) $ (0.47) $ (0.08)
---------- ---------- ---------- ---------- ----------
Net income $ 1.56 $ 0.88 $ 1.48 $ 1.42 $ 1.44
Weighted average diluted shares, in thousands 49,920 46,246 42,559 38,406 38,114
Dividends per share on common stock(1) $ 0.24 $ 0.22 $ 0.17 $ 0.15 $ 0.13
BALANCE SHEET DATA
Total investments $ 4,560.2 $ 3,811.9 $ 5,129.6 $ 3,634.0 $ 2,272.0
Total assets 6,061.9 5,123.7 6,318.6 4,673.6 2,893.7
Policy liabilities 4,617.7 3,998.1 5,053.1 3,558.7 2,068.6
Total long-term debt 272.3 184.0 108.0 106.8 106.5
Stockholders' equity 862.9 732.9 748.5 499.3 425.6
Stockholders' equity per share $ 17.51 $ 14.68 $ 16.52 $ 13.21 $ 11.14
OPERATING DATA (IN BILLIONS)
Assumed ordinary life reinsurance business in force $ 545.9 $ 446.9 $ 330.6 $ 227.3 $ 168.3
Assumed new business production 161.1 164.9 125.0 75.9 37.9
(1) Dividends are payable on voting and non-voting shares of common stock.
23
24
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The statements included in this Annual Report regarding the Company's business
which are not historical facts, including, without limitations, statements and
information relating to future financial performance, growth potential, the
effect of mortality rates and experience, claims levels, and other statements
related to the Company's business, are "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
"forward-looking" statements include, without limitation, certain statements in
the "Letter to Shareholders," "Divisional Highlights," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Such
statements also may include, but are not limited to, projections of earnings,
revenues, income or loss, or capital expenditures; estimated fair values of
fixed rate instruments; estimated cash flows of floating rate instruments; plans
for future operations and financing needs, growth prospects and targets;
industry trends; trends in or expectations regarding operations and capital
commitments; the sufficiency of claims reserves; and assumptions relating to the
foregoing. 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.
Important factors that could cause actual results and events to differ
materially from those expressed or implied by forward-looking statements
including, without limitation, (1) market conditions and the timing of sales of
investment securities, (2) regulatory action taken by the New York or Missouri
Departments of Insurance with respect to Metropolitan Life Insurance Company
("MetLife") or General American Life Insurance Company ("General American") or
the Company or its subsidiaries, (3) changes in the credit ratings of the
Company, MetLife or General American and the effect of such changes on the
Company's future results of operations and financial condition, (4) material
changes in mortality and claims experience, (5) competitive factors and
competitors' responses to the Company's initiatives, (6) general economic
conditions affecting the demand for insurance and reinsurance in the Company's
current and planned markets, (7) successful execution of the Company's entry
into new markets, (8) successful development and introduction of new products,
(9) the stability of governments and economies in foreign markets in which we
operate, (10) fluctuations in U.S. and foreign currency exchange rates, interest
rates, and securities and real estate markets, (11) the success of the Company's
clients, (12) changes in laws, regulations, and accounting standards applicable
to the Company and its subsidiaries, and (13) other risks and uncertainties
described in this Annual Report and in the Company's other filings with the
Securities and Exchange Commission.
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS ABOVE. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH STATEMENTS, WHICH SPEAK ONLY AS OF MARCH 1, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding
company formed December 31, 1992. On December 31, 2000, Equity Intermediary
Company, a Missouri holding company, directly owned approximately 49.0% of the
outstanding shares of common stock of RGA. Equity Intermediary Company is a
wholly owned subsidiary of General American, a Missouri life insurance company,
which in turn is a wholly owned subsidiary of GenAmerica Financial Corporation
("GenAmerica"), a Missouri corporation. GenAmerica was acquired and became a
wholly owned subsidiary of MetLife, a New York life insurance company, on
January 6, 2000. On April 7, 2000, MetLife completed a demutualization and
became a subsidiary of MetLife, Inc., a publicly traded company. As a result of
MetLife's ownership of GenAmerica and its own direct investment in RGA, MetLife
beneficially owns 58.7% of the outstanding shares of common stock of RGA at
December 31, 2000.
The consolidated financial statements include the assets, liabilities, and
results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"); RGA Australian Holdings PTY, Limited ("Australian Holdings"); RGA
Reinsurance Company (Barbados) Ltd. ("RGA Barbados"); RGA International, Ltd.
("RGA International"), a New Brunswick company that serves as a
24
25
Canadian marketing and insurance holding company for RGA's Canadian operations;
RGA Sudamerica, S.A., a Chilean holding company; RGA Holdings Limited
("RGA UK"), a United Kingdom holding company; General American Argentina
Seguros de Vida, S.A. ("GA Argentina"), an Argentine life insurance company;
RGA South African Holdings (Pty) Ltd. ("RGA South Africa"), a South African
holding company; Benefit Resource Life Insurance Company (Bermuda) Ltd. ("RGA
Bermuda"); RGA Americas Reinsurance Company, Ltd.; and Triad Re, Ltd. In
addition, the consolidated financial statements include the subsidiaries of
RCM, Australian Holdings, RGA International, RGA UK, RGA Sudamerica, S.A., and
RGA South Africa subject to an ownership position of fifty percent or more
(collectively, the "Company"). During 2000, the Company sold its interest in
RGA Sudamerica, S.A. and its subsidiaries, and RGA Bermuda.
RESULTS OF OPERATIONS
The Company derives revenues primarily from renewal premiums from existing
reinsurance treaties, new business premiums from existing or new reinsurance
treaties, and income earned on invested assets.
The Company's primary business is life reinsurance, which involves reinsuring
life insurance policies that are often in force for the remaining lifetime of
the underlying individual insureds, 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, voluntary surrenders of
underlying life insurance policies, lapses of underlying policies, deaths of
underlying insureds, and the exercise of recapture options by the ceding
companies.
Assumed insurance in force for the Company increased $99.0 billion to $545.9
billion at December 31, 2000. Assumed new business production for 2000 totaled
$161.1 billion compared to $164.9 billion in 1999 and $125.0 billion in 1998.
Significant growth in assumed new business in the U.S. and Canada operations of
$129.5 billion provided most of this increase in 2000.
As is customary in the reinsurance business, life insurance clients continually
update, refine, and revise reinsurance information provided to the Company. Such
revised information is used by the Company in the preparation of its financial
statements and the financial effects resulting from the incorporation of revised
data are reflected currently.
The Company's profitability primarily depends on the volume and amount of death
claims incurred. While death claims are reasonably predictable over a period of
many years, claims become less predictable over shorter periods and are subject
to fluctuation from quarter to quarter and year to year. A significant
fluctuation from period to period could adversely affect the results of
operations. The Company has catastrophe insurance coverage issued by 6 insurers
rated "A" or higher by A.M. Best as of December 31, 2000, that provides benefits
of up to $100.0 million per occurrence for claims involving three or more deaths
in a single accident, with a deductible of $1.5 million per occurrence. This
coverage is terminable annually as of August 13 with 90 days prior notice. The
Company believes such catastrophe insurance coverage adequately protects it from
risks associated with multiple deaths in a single accident of reinsured lives.
Additionally, through December 31, 2000, the Company retained a maximum of $2.5
million of coverage per individual life. Effective January 1, 2001, the Company
increased its retention to $4.0 million of coverage per individual life.
The Company has foreign currency risk on business conducted in foreign
currencies to the extent that the exchange rates of the foreign currencies are
subject to adverse change over time. The Company's operations in Canada transact
business in Canadian dollars. The exchange rate from Canadian to U.S. currency
was 0.6676, 0.6876, and 0.6535 at December 31, 2000, 1999, and 1998,
respectively. The Company's Latin America operations primarily conduct business
in Argentine pesos and, prior to the sale of RGA Sudamerica, S.A., Chilean
pesos. The exchange rate from these currencies to the U.S. currency remained
relatively stable during 2000, 1999, and 1998. The business generated from the
Asia Pacific region is primarily denominated in U.S. dollars, Australian
dollars, and Japanese yen. Additionally, the Company processes business in other
international currencies including the Great British Pound Sterling and South
African Rand. The Company was not materially affected by the decline in the
foreign exchange rates during 2000 and 1999.
Since December 31, 1998, the Company has formally reported its accident and
health division as a discontinued operation. The accident and health business
was placed into run-off, and all treaties were terminated at the earliest
possible date. Notice was given to all cedants and retrocessionaires that all
treaties were being cancelled at the expiration of their terms. If a treaty was
continuous, a written Preliminary Notice of Cancellation was given, followed by
a final notice within 90 days of the expiration date. The nature of the
underlying risks is such that the claims may take several years to reach the
reinsurers involved. Thus, the Company expects
25
26
to pay claims out of existing reserves over a number of years as the
level of business diminishes. During 2000, the accident and health division
lost $28.1 million, including a pre-tax charge of $25.0 million to strengthen
its reserves.
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and other
international operations. The U.S. operations provide traditional life
reinsurance and non-traditional reinsurance to domestic clients. Non-traditional
business includes asset-intensive and financial reinsurance. Asset-intensive
products primarily include reinsurance of corporate-owned life insurance and
annuities. The Canada operations provide insurers with traditional reinsurance
as well as assistance with capital management activity. The Latin America
operations include traditional reinsurance, reinsurance of privatized pension
products primarily in Argentina, and direct life insurance through a joint
venture and subsidiaries in Chile and Argentina. The Company sold its Chilean
interests during 2000. Asia Pacific operations provide primarily traditional
life reinsurance through RGA Reinsurance Company of Australia, Limited ("RGA
Australia") and RGA Reinsurance Company ("RGA Reinsurance"). Other international
operations include traditional business from Europe and South Africa, in
addition to other markets being developed by the Company. The operational
segment results do not include the corporate investment activity, general
corporate expenses, interest expense of RGA, and the provision for income tax
expense (benefit). In addition, the Company's discontinued accident and health
operations are not reflected in the continuing operations of the Company. The
Company measures segment performance based on profit or loss from operations
before income taxes and minority interest.
Prior to September 29, 1999, the U.S. Operations reinsured funding agreements,
an asset intensive product from General American. Effective September 29, 1999,
General American completed the recapture of the entire block of General
American's funding agreement business reinsured by the Company. Prior to the
recapture, the Company reinsured approximately 25% of General American's funding
agreement business. Pursuant to the recapture transaction, the Company
transferred all remaining liabilities related to the funding agreement business
and an equivalent amount of assets to General American. In the third quarter of
1999, the Company transferred to General American approximately $1.8 billion in
market value of assets. Those assets, consisting primarily of investments in
fixed maturity securities and cash, were transferred in satisfaction of $1.8
billion in funding agreement liabilities. The Company incurred an after tax net
capital loss of approximately $33.2 million associated with the liquidation of
investment securities and the transfer of assets to General American during the
third quarter of 1999.
Consolidated income from continuing operations increased 99.4% in 2000 to $105.8
million and decreased 40.9% in 1999 to $53.0 million. Diluted earnings per share
from continuing operations were $2.12 for 2000 compared to $1.15 for 1999 and
$2.08 for 1998. Earnings during these years were attributed primarily to the
strong performance of traditional reinsurance in the U.S. and Canada. Earnings
during 1999 were affected by the investment losses incurred in connection with
the recapture of the funding agreement business. Further discussion and analysis
of the results for 2000 compared to 1999 and 1998 are presented by segment.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
26
27
U.S. OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(Dollars in thousands)
--------------------------------------------------------
TRADITIONAL Non-traditional Total
ASSET- FINANCIAL
INTENSIVE REINSURANCE U.S.
----------- ----------- ----------- -----------
REVENUES:
Net premiums $ 1,036,656 $ 2,216 $ -- $ 1,038,872
Investment income, net of related expenses 139,688 89,001 (37) 228,652
Realized investment losses, net (12,206) (1,066) -- (13,272)
Other revenue 321 686 16,370 17,377
----------- ----------- ----------- -----------
Total revenues 1,164,459 90,837 16,333 1,271,629
BENEFITS AND EXPENSES:
Claims and other policy benefits 793,494 (95) -- 793,399
Interest credited 47,445 55,006 -- 102,451
Policy acquisition costs and other insurance expenses 150,347 23,446 5,457 179,250
Other operating expenses 25,244 802 3,274 29,320
----------- ----------- ----------- -----------
Total benefits and expenses 1,016,530 79,159 8,731 1,104,420
Income before income taxes and minority interest $ 147,929 $ 11,678 $ 7,602 $ 167,209
----------- ----------- ----------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands)
--------------------------------------------------------
TRADITIONAL Non-traditional Total
ASSET- FINANCIAL
INTENSIVE REINSURANCE U.S.
----------- ----------- ----------- -----------
REVENUES:
Net premiums $ 949,054 $ 1,380 $ -- $ 950,434
Investment income, net of related expenses 125,745 124,713 -- 250,458
Realized investment losses, net (17,043) (65,844) -- (82,887)
Other revenue (597) 12,655 13,180 25,238
----------- ----------- ----------- -----------
Total revenues 1,057,159 72,904 13,180 1,143,243
BENEFITS AND EXPENSES:
Claims and other policy benefits 740,339 1,009 -- 741,348
Interest credited 40,240 109,644 -- 149,884
Policy acquisition costs and other insurance expenses 145,529 2,850 9,370 157,749
Other operating expenses 23,002 623 100 23,725
----------- ----------- ----------- -----------
Total benefits and expenses 949,110 114,126 9,470 1,072,706
Income (loss) before income taxes and minority interest $ 108,049 $ (41,222) $ 3,710 $ 70,537
----------- ----------- ----------- -----------
27
28
FOR THE YEAR ENDED DECEMBER 31, 1998
(Dollars in thousands)
-----------------------------------------------
TRADITIONAL Non-traditional Total
ASSET- FINANCIAL
INTENSIVE REINSURANCE U.S.
----------- --------- ----------- --------
REVENUES:
Net premiums $714,876 $ 1,368 $ -- $716,244
Investment income, net of related expenses 106,664 124,808 -- 231,472
Realized investment gains, net 1,716 655 -- 2,371
Other revenue 644 4 17,800 18,448
-------- -------- -------- --------
Total revenues 823,900 126,835 17,800 968,535
BENEFITS AND EXPENSES:
Claims and other policy benefits 538,775 2,258 -- 541,033
Interest credited 44,053 107,948 -- 152,001
Policy acquisition costs and other insurance expenses 112,964 6,790 12,942 132,696
Other operating expenses 15,904 740 132 16,776
-------- -------- -------- --------
Total benefits and expenses 711,696 117,736 13,074 842,506
Income before income taxes and minority interest $112,204 $ 9,099 $ 4,726 $126,029
-------- -------- -------- --------
The U.S. operations segment continued to grow at a strong pace in 2000. Income
before income taxes and minority interest totaled $167.2 million, up from $70.5
million in 1999 and $126.0 million in 1998. Income was down in 1999 due to
realized losses primarily from liquidating securities in connection with the
recapture of the General American funding agreement business. Excluding the
realized gains (losses) from investments for the comparable years, income before
taxes and minority interest rose 17.6% and 24.1% in 2000 and 1999, respectively
. These increases are primarily the result of favorable mortality experience on
the core traditional block of business, emerging profits from reinsurance of the
large in-force blocks and growth in non-traditional reinsurance. Investment
income is allocated to the various operating segments on the basis of net
capital, and investment performance varies with the composition of investments.
Traditional Reinsurance
The U.S. traditional reinsurance subsegment is the oldest and largest subsegment
of the Company. This subsegment provides life reinsurance to domestic clients
for a variety of life products through yearly renewable term agreements,
coinsurance, and modified coinsurance arrangements. These reinsurance
arrangements may be either facultative or automatic agreements. During 2000,
production totaled $115.7 billion of new assumed in-force business, compared to
$121.3 billion in 1999 and $102.7 billion in 1998. The decrease in 2000 can be
attributed to more in-force blocks of business being reinsured in 1999 compared
to 2000. This decrease was somewhat offset by continued strong production on new
and existing treaties. Management believes industry consolidation,
demutualizations, and the trend toward reinsuring mortality risks should
continue to provide reinsurance opportunities.
Income before income taxes and minority interest for U.S. traditional
reinsurance increased 36.9% and decreased 3.7% in 2000 and 1999, respectively.
The increase in income for 2000 was primarily due to premium growth, improved
investment performance and favorable mortality experience. The decrease in
income for 1999 is attributable to realized investment losses of $17.0 million
on securities transactions. Excluding realized investment losses on securities
transactions, income before income taxes and minority interest increased 13.2%
in 1999.
Net premiums for U.S. traditional reinsurance rose 9.2% and 32.8% in 2000 and
1999, respectively. The 2000 increase in premiums of 9.2% is smaller because not
as many in-force blocks were reinsured in the current year. New premiums from
facultative and automatic treaties and renewal premium on existing blocks of
business all contributed to continued growth. Premium levels are significantly
influenced by large transactions and reporting practices of ceding companies and
therefore can fluctuate from period to period.
28
29
Net investment income increased 11.1% and 17.9% in 2000 and 1999, respectively.
This increase in both years was due to the continued growth of business in this
subsegment from facultative and automatic treaties, which resulted in an
increase in the underlying invested asset base.
Realized investment losses of approximately $12.2 million were reported for 2000
compared to $17.0 million in 1999. Included in the net realized losses for 2000
was the write-down of several fixed income securities along with capital losses
associated with the sale of some investments. The 1999 losses also included the
write-off of the Company's investment in a financial services consulting firm
specializing in the development of distribution systems.
The amount of claims and other policy benefits increased 7.2% and 37.4% in 2000
and 1999, respectively. The increases are primarily due to the increased size of
the business in force. Claims and other policy benefits, as a percentage of net
premiums, were 76.5%, 78.0%, and 75.4% in 2000, 1999, and 1998, respectively.
The lower percentage in 2000 compared to 1999 is the result of good mortality
experience. The slightly higher percentage in 1999 is partially the result of
large claims reported in the fourth quarter of 1999. Large claims are defined as
claims over one million dollars. Mortality is expected to fluctuate somewhat
from period to period, but remains fairly constant over the long term. Analysis
of the claims activity suggests no significant variances by cause of death,
client company, issue year, or automatic versus facultative which would indicate
any pricing or profitability problems.
Interest credited relates to amounts credited on the Company's cash value
products in this segment, which have a significant mortality component. This
amount fluctuates with the changes in cash surrender value and changes in
interest crediting rates.
The amount of policy acquisition costs and other insurance expenses rose 3.3%
and 28.8% in 2000 and 1999, respectively. As a percentage of net premiums,
policy acquisition costs and other insurance expenses were 14.5%, 15.3%, and
15.8% in 2000, 1999, and 1998, respectively. These percentages fluctuate
slightly due to variations in the mixture of business being written.
Other operating expenses increased 9.7% and 44.6% in 2000 and 1999,
respectively. As a percentage of net premiums, other operating expenses were
2.4%, 2.4%, and 2.2% in 2000, 1999, and 1998, respectively. The increase was
primarily due to increases in costs associated with the growth of the business.
Asset-Intensive Reinsurance
The U.S. asset-intensive reinsurance subsegment includes the reinsurance of
annuities and corporate-owned life insurance. Most of these agreements are
coinsurance or modified coinsurance of non-mortality risks such that the Company
recognizes profits or losses primarily from the spread between the investment
earnings and the interest credited on the underlying deposit liabilities.
Income before income taxes and minority interest increased significantly in 2000
as a result of funding agreement losses incurred in 1999. The funding agreement
business in 1999 had a net loss before income taxes and minority interest of
approximately $47.8 million, which included pre-tax investment losses of $52.9
million. Substantially all pre-tax investment losses in 1999 were incurred in
connection with liquidating securities and the recapture of the funding
agreement business by General American. Excluding the impact of the funding
agreements, income grew 77.3% in 2000, from $6.6 million to $11.7 million. The
income growth was primarily attributable to a new coinsurance agreement on a
block of single premium deferred annuities.
Net premiums reported in this subsegment primarily relate to a yearly renewable
term treaty that reinsures the mortality risk of a corporate-owned life
insurance product.
Policy acquisition costs and other insurance expenses relate primarily to the
commission payments and premium taxes (if applicable) on deposits received. The
increase in these expenses for 2000 primarily relates to the increase in net
acquisition costs of two annuity blocks.
Financial Reinsurance
The U.S. financial reinsurance subsegment includes net fees earned on financial
reinsurance agreements and the Company's investment in RGA/Swiss Financial
Group, L.L.C. ("RGA/Swiss"). Effective July 1, 2000, the Company increased its
ownership of RGA/Swiss from 40% to 80%. For 1998, 1999 and the first six months
of 2000, the Company included its equity in the earnings of RGA/Swiss in other
income due to the 40% ownership. For the third quarter 2000, results were
consolidated and minority interest
29
30
expense was recorded for the 20% not owned by the Company. Subsequent to the
end of the third quarter, the Company acquired the remaining 20% interest and
changed the name of RGA/Swiss to RGA Financial Group, L.L.C. ("RGA Financial
Group") Financial reinsurance agreements represent low mortality risk business
that the Company assumes and subsequently retrocedes with a net fee earned on
the transaction. The fees earned from the assumption of the financial
reinsurance contracts are reflected in other revenues and the fees paid to
retrocessionaires are reflected in policy acquisition costs and other insurance
expenses.
Income before income taxes and minority interest increased 104.9% and decreased
21.5% in 2000 and 1999, respectively. The results in 2000 can be primarily
attributed to the increased ownership interest in RGA Financial Group coupled
with higher amounts of financial reinsurance placed in 2000. The decrease in
1999 was primarily attributable to the decrease in earnings from RGA Financial
Group and the net fees earned on financial reinsurance agreements. A decrease in
outstanding statutory financial reinsurance contributed to the decrease in 1999.
At December 31, 2000, 1999, and 1998, the amount of outstanding statutory
financial reinsurance provided to client companies was $498.4 million, $310.0
million, and $512.9 million, respectively.
CANADA OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
(Dollars in thousands)
REVENUES:
Net premiums $ 176,326 $ 162,482 $ 144,784
Investment income, net of related expenses 61,950 52,767 38,857
Realized investment (losses) gains, net (1,291) 5,923 617
Other revenue 318 (38) 482
--------- --------- ---------
Total revenues 237,303 221,134 184,740
BENEFITS AND EXPENSES:
Claims and other policy benefits 171,417 154,194 127,821
Interest credited 763 1,799 1,059
Policy acquisition costs and other insurance expenses 16,563 19,970 26,163
Other operating expenses 8,702 7,292 6,943
--------- --------- ---------
Total benefits and expenses 197,445 183,255 161,986
Income before income taxes and minority interest $ 39,858 $ 37,879 $ 22,754
--------- --------- ---------
The Company conducts reinsurance business in Canada through RGA Life Reinsurance
Company of Canada ("RGA Canada"). RGA Canada is primarily engaged in traditional
individual life reinsurance, including preferred underwriting products. The
Canadian operation is one of the leading life reinsurers in Canada. Canadian
reinsurance in-force has more than tripled over a five-year period, to
approximately $54.3 billion in 2000 from approximately $17.3 billion in 1995. At
December 31, 2000, RGA Canada included most of the life insurance companies in
Canada as clients.
Income before income taxes and minority interest increased 5.2% in 2000 and
66.5% in 1999. Excluding net realized investment gains, income before taxes and
minority interest increased by 28.8% in 2000 and 44.4% in 1999. The increase in
2000 was driven by a growth in premiums of 8.5%, an increase in investment
income of 17.4% and favorable mortality experience. The increase during 1999 was
driven by a growth in premiums of 12.2%, an increase in investment income of
35.8%, and favorable mortality experience. The effects of changes in the foreign
exchange rates during 2000 and 1999 were not material.
Net premiums increased 8.5% to $176.3 million in 2000 and increased 12.2% to
$162.5 million in 1999. The premium growth in 2000 and 1999 resulted primarily
from increasing renewal premiums and new business premiums. Business premium
levels are significantly influenced by large transactions and reporting
practices of ceding companies and therefore can fluctuate from period to period.
Net investment income increased 17.4% and 35.8% during 2000 and 1999,
respectively. Investment income is allocated to the various operating segments
on the basis of net capital, and investment performance varies with the
composition of investments.
30
31
The increase in investment income was mainly the result of an increase in the
invested asset base. For 2000 and 1999, the invested asset base growth was due
to operating cash flows on traditional reinsurance, proceeds from capital
contributions and interest on an increasing amount of funds withheld at
interest related to an in-force block added in 1998. In 1999, the increase in
the invested asset base was partially offset by a decline in interest rates.
The average book yield on the Canadian investment portfolio increased slightly
to 7.02% for year ended December 31, 2000 from 6.97% for 1999 and 7.37% for
1998.
Claims and other policy benefits increased 11.2% and 20.6% during 2000 and 1999,
respectively. Claims and other policy benefits as a percentage of net premiums
were 97.2% of total 2000 net premiums compared to 94.9% in 1999 and 88.3% in
1998. The increased percentages experienced are primarily the result of several
large in-force blocks assumed in 1998 and 1997. These blocks are mature blocks
of level premium business in which mortality as a percentage of premiums is
expected to be higher than the historical ratios. The nature of level premium
policies requires that the Company invest the amounts received in excess of
mortality costs to fund claims in the later years. Claims and other policy
benefits as a percentage of net premiums and investment income were 71.9% of
total 2000 net premiums compared to 71.6% in 1999 and 69.6% in 1998. The Company
expects mortality to fluctuate somewhat from period to period but believes it is
fairly constant over longer periods of time. In addition, RGA Canada continues
to monitor mortality trends to determine the appropriateness of reserve levels.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums totaled 9.4% in 2000, 12.3% in 1999, and 18.1% in 1998. The decrease in
this ratio is primarily due to the changing mix of business to yearly renewable
term from coinsurance agreements. These yearly renewable term agreements tend to
have lower commission costs compared to coinsurance agreements.
Other operating expenses increased $1.4 million in 2000 and $0.3 million in
1999. The overall increase in operating expenses was attributed to planned
increases in costs associated with the ongoing growth of the business.
LATIN AMERICA OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
(Dollars in thousands)
REVENUES:
Net premiums $ 64,897 $ 104,167 $ 98,679
Investment income, net of related expenses 19,782 23,753 17,785
Realized investment (losses) gains, net (9,099) 95 4
Other revenue 364 (224) 243
--------- --------- ---------
Total revenues 75,944 127,791 116,711
BENEFITS AND EXPENSES:
Claims and other policy benefits 62,205 111,479 94,462
Interest credited 1,568 1,435 187
Policy acquisition costs and other insurance expenses 7,772 2,340 6,881
Other operating expenses 10,647 9,209 11,358
--------- --------- ---------
Total benefits and expenses 82,192 124,463 112,888
(Loss) income before income taxes and minority interest $ (6,248) $ 3,328 $ 3,823
--------- --------- ---------
During 2000, business was generated from reinsurance in the Latin America region
through RGA Reinsurance and also through direct operations in Argentina and
Chile. Historically, the Latin America reinsurance operations have derived
revenue primarily from the reinsurance of privatized pension products in
Argentina. Since 1999, the Company has reduced its participation in these types
of treaties and is more actively marketing additional types of reinsurance in
the region such as traditional individual life, credit, and group life insurance
as well as non-traditional reinsurance transactions in Argentina and Mexico. It
is anticipated that the mix of business will continue to evolve in the upcoming
years.
31
32
RGA formed General American Argentina Seguros de Vida S.A. ("GA Argentina") in
1994 to develop markets in Argentina. GA Argentina writes direct individual and
group life products, and life insurance primarily related to group life and
disability insurance for the Argentine privatized pension system. Effective
July 1998, GA Argentina no longer enters into new contracts related to the
privatized pension system, but continues to market individual universal life
and group life products.
In 1993, the Company entered into a joint venture in Chile to form BHIFAmerica
Seguros de Vida, S.A. ("BHIFAmerica"). This company was a direct life insurer
whose primary source of premium was generated from single premium immediate
annuities in addition to other lines including credit, individual, and group
life. During 1996, in an effort to support the growth of this business and
develop additional reinsurance opportunities in Chile, the Company formed RGA
Reinsurance Company Chile, S.A. ("RGA Chile"), a wholly-owned reinsurance
company licensed to assume life reinsurance in Chile. As of April 1, 2000, the
Company reached an agreement to sell its interest in all of its Chilean
subsidiaries: RGA Sudamerica, S.A., RGA Reinsurance Company Chile, S.A. and
BHIFAmerica. The transaction closed on April 27, 2000. The Company received
approximately $26.5 million in proceeds and recorded a loss on the sale of
approximately $8.6 million, primarily consisting of the realization of
accumulated foreign currency depreciation on the Company's net investment.
Income before income taxes and minority interest decreased to a loss of
approximately $6.2 million in 2000 from income of $3.3 million and $3.8 million
in 1999 and 1998, respectively. This was a result of the losses in the direct
operations, primarily from the sale of the Chilean companies during the second
quarter of 2000. These losses offset earnings in the reinsurance operations that
resulted from growth in the Mexican and Argentine traditional life reinsurance
business. The Company has limited its participation in the reinsurance of
privatized pensions in Argentina, and has focused its efforts on seeking
traditional reinsurance opportunities in other areas. More limited participation
in the Argentine privatized pension system, combined with continuing experience
refund payments to the ceding companies, contributed to the fluctuation in net
premiums compared to the prior year.
Net premiums decreased from prior years as a result of the sale of the Chilean
operations and reduced reinsurance of privatized pensions during 2000. Premiums
from other sources related primarily to the development of new business
opportunities in Mexico and Argentina. Net investment income decreased 16.7% and
increased 33.6% during 2000 and 1999, respectively. Investment income for direct
business declined with the sale of the Chilean companies, but increased for the
reinsurance business. Investment income is allocated to the various operating
segments on the basis of net capital, and investment performance varies with the
composition of investments. This increase was due to the continued growth of
business in this segment that resulted in an increase in the invested asset
base.
The claims and other policy benefits for the segment decreased $49.3 million
during 2000 and increased $17.0 million during 1999. Claims and other policy
benefits as a percentage of net premiums totaled 95.8%, 107.0%, and 95.7% for
2000, 1999, and 1998, respectively. The Company expects mortality to fluctuate
somewhat from period to period, but expects it to be fairly constant over longer
periods of time. The Company continues to monitor mortality trends to determine
the appropriateness of reserve levels. Interest credited represents amounts
credited on reinsurance of new and existing Mexican and Argentine universal life
products.
Policy acquisition costs and other insurance expenses increased $5.4 million and
decreased $4.5 million for 2000 and 1999, respectively. Policy acquisition costs
and other insurance expenses as a percentage of net premiums represented 12.0%,
2.2%, and 7.0% for 2000, 1999, and 1998, respectively. The percentages fluctuate
due to variations in the mixture of business being written in Argentina, Mexico,
and Chile with an increased amount of new business in 2000 with higher
allowances.
32
33
ASIA PACIFIC OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000 1999 1998
(Dollars in thousands)
REVENUES:
Net premiums $ 94,282 $ 73,887 $ 53,072
Investment income, net of related expenses 4,628 2,182 2,545
Realized investment (losses) gains, net (191) (3) 23
Other revenue 2,266 1,263 3,089
--------- --------- ---------
Total revenues 100,985 77,329 58,729
BENEFITS AND EXPENSES:
Claims and other policy benefits 56,377 46,785 31,900
Policy acquisition costs and other insurance expenses 32,484 29,860 21,775
Other operating expenses 9,939 6,983 7,660
Interest expense 980 491 454
--------- --------- ---------
Total benefits and expenses 99,780 84,119 61,789
Income (loss) before income taxes and minority interest $ 1,205 $ (6,790) $ (3,060)
--------- --------- ---------
The Company conducts reinsurance business in the Asia Pacific region through
branch operations in Hong Kong and Japan and a liaison office in Taiwan.
Business is also conducted through RGA Australia, a wholly owned subsidiary in
Australia, and Malaysian Life Reinsurance Group Berhad ("MLRe"), a joint venture
in Malaysia. The principal types of reinsurance provided in the region are life,
critical care, superannuation, and financial reinsurance. Superannuation is the
Australian government mandated compulsory retirement savings program.
Superannuation funds accumulate retirement funds for employees, and in addition,
offer life and disability insurance coverage.
The Asia Pacific income before income taxes and minority interest was an $8.0
million improvement over 1999. The improvement in profitability was caused by a
combination of better mortality and persistency, additional premium volume, and
a full year of experience from a large financial reinsurance transaction
executed at the end of 1999. The Asia Pacific loss before income taxes and
minority interest increased $3.7 million in 1999. The increase in the Asia
Pacific loss before income taxes in 1999 compared to 1998 was due to higher than
expected mortality experience, termination of a large financial reinsurance
contract, and higher than expected lapses.
Net premiums increased 27.6%, to $94.3 million in 2000 and increased 39.2%, to
$73.9 million, in 1999. Renewal premiums from the existing block of business,
new business premiums from facultative and automatic treaties, and premium flows
from larger blocks of business all contributed to the premium increase. Business
premium levels are significantly influenced by large transactions and reporting
practices of ceding companies and therefore can fluctuate from period to period.
Net investment income increased by 112.1% in 2000 and declined by 14.3% in 1999.
Investment income is allocated on the basis of average net capital, and the
investment performance varies with the composition of the assets. Other revenue
during 2000 and 1999 predominantly represented profit and risk fees associated
with financial reinsurance in Taiwan and Japan. The Taiwanese treaty was
commenced in late 1999, with a full year in 2000 versus a partial year in 1999.
A Japanese financial reinsurance treaty was discontinued in early 1999, reducing
the fees earned for 1999. Fees paid to retrocessionaires that were included in
policy acquisition costs and other insurance expenses partially offset these
fees earned for these years.
Claims and other policy benefits increased 20.5% in 2000 and 46.7% in 1999.
Claims and other policy benefits as a percentage of net premiums decreased to
59.8% in 2000 and increased to 63.3% in 1999 from 60.1% in 1998. The increase in
claims and other policy benefits as a percentage of premiums in 1999 was
primarily the result of adverse experience in the Japanese business. The Company
expects mortality to fluctuate somewhat from period to period, but believes it
is fairly constant over longer periods of time. The Company continues to monitor
mortality trends to determine the appropriateness of reserve levels.
33
34
Policy acquisition costs and other insurance expenses increased 8.8% in 2000 and
37.1% in 1999. Policy acquisition costs and other insurance expenses as a
percentage of net premiums was 34.5%, 40.4%, and 41.0% for 2000, 1999, and 1998,
respectively. These percentages fluctuate due to the timing of client company
reporting and variations in the mixture of business being written in Asia
Pacific. Other operating expenses increased 42.3% in 2000 and decreased 8.8% in
1999. As a percentage of premiums, other operating expenses increased to 10.5%
in 2000 and decreased to 9.5% in 1999 from 14.4% in 1998. The Company believes
that sustained growth in premiums should lessen the burden of start-up expenses
and expansion costs.
OTHER INTERNATIONAL OPERATIONS
For THE YEAR ENDED DECEMBER 31, 2000 1999 1998
(Dollars in thousands)
REVENUES:
Net premiums $ 29,690 $ 24,668 $ 3,641
Investment income, net of related expenses 2,056 775 479
Realized investment gains, net 365 101 81
Other revenue 3,177 105 938
-------- -------- --------
Total revenues 35,288 25,649 5,139
BENEFITS AND EXPENSES:
Claims and other policy benefits 20,151 13,305 2,685
Policy acquisition costs and other insurance expenses 7,473 8,388 923
Other operating expenses 9,542 7,810 6,540
Interest expense 502 -- --
-------- -------- --------
Total benefits and expenses 37,668 29,503 10,148
(Loss) before income taxes and minority interest $ (2,380) $ (3,854) $ (5,009)
-------- -------- --------
The other international segment is the newest segment of the Company. This
segment includes business received from reinsurance clients located in Europe
and South Africa in addition to business received as a Corporate Name supporting
a life reinsurance syndicate at Lloyd's of London. The principal type of
reinsurance provided through this segment has been life reinsurance for a
variety of life products through yearly renewable term and coinsurance
agreements. These agreements may be either facultative or automatic agreements.
During 2000, the Company's United Kingdom subsidiary obtained approval as a
licensed U.K. life reinsurer, and the Company opened a representative office in
Spain.
Net premiums increased to $29.7 million in 2000 compared to $24.7 million for
1999. While the majority of the net premium for 2000 was a result of business
generated from an automatic treaty with a United Kingdom client, the Company's
operation in South Africa also was a significant contributor mainly through the
facultative market. Investment income for the segment is allocated on the basis
of average net capital, and the investment performance varies with the
composition of the assets. Other revenue in 2000 represents fees associated with
asset management consulting services provided by RGA Financial Products and
other income from participation in the Lloyd's life syndicate.
Claims and other policy benefits increased as a percentage of premiums to 67.9%
in 2000 from 53.9% in 1999. Policy acquisition costs and other insurance
expenses decreased as a percent of premiums to 25.2% in 2000 from 34.0% in 1999.
These amounts will fluctuate based upon claim levels and the mix of business
being reinsured. Year to year comparisons of premiums and claims and other
policy benefits are not considered meaningful due to the start-up nature of this
segment. Other operating expenses increased $1.7 million during 2000 compared to
1999 and $1.3 million during 1999 compared to 1998. The overall increase in
operating expenses was attributed to increases in costs associated with the
expansion efforts within the segment. The interest expense in 2000 relates to a
debt facility within the United Kingdom.
34
35
CORPORATE AND OTHER
Corporate activity generally represents investment income on the undeployed
proceeds from the Company's capital raising efforts, corporate expenses that
include unallocated overhead and executive costs, as well as the interest
expense related to borrowings under the Company's $140 million credit agreement
entered into during 2000 (the "Credit Agreement"), a $75.0 million term loan
note with General American ("GA Note") issued during 1999 and the $100.0 million
7 1/4% Senior Notes ("Senior Notes") issued in 1996. In addition, the provision
for income taxes is generally calculated based on the overall operations of the
Company and allocated to the segments. Tax expense (benefit) is not used as a
basis of measuring segment profit/loss.
Consolidated investment income decreased 4.0% during 2000 and decreased 12.8%
during 1999. The decrease during 2000 was affected by the reduction in invested
assets related to the recapture of the funding agreement business by General
American on September 29, 1999. The cost basis of invested assets increased by
$0.6 billion, or 14.9% in 2000 and decreased $1.0 billion, or 20.2% in 1999. The
increase in invested assets during 2000 was primarily a result of positive
operating cash flows and new reinsurance transactions involving asset-intensive
products. The decrease in the invested assets during 1999 was primarily a result
of the funding agreement recapture. The 1999 decrease was offset, in part, by
positive operating cash flows, new reinsurance transactions involving
asset-intensive products, proceeds from the GA Note, and proceeds from a private
placement of 4,784,689 shares of the Company's common stock to MetLife. The
aggregate value of the private placement was approximately $125 million. The
average yield earned on investments was 7.30% in 2000 compared with 7.10% in
1999 and 6.84% in 1998. The average yield will vary from year to year depending
on a number of variables, including prevailing interest rate fluctuations,
changes in the mix of asset intensive products, and yields related to funds
withheld at interest. Investment income has been allocated to the operational
segments on the basis of average capital per segment.
Consolidated interest expense increased 59.7% during 2000 and 25.2% during 1999.
Interest expense relates primarily to borrowings outstanding under the Credit
Agreement, the GA Note, and Senior Notes. Interest expense for 2000, 1999, and
1998, was $17.6 million, $11.0 million, and $8.8 million, respectively.
Consolidated other expenses represent general corporate expenses.
The consolidated provision for income taxes for continuing operations increased
77.3% in 2000 and decreased 20.4% in 1999 as a result of fluctuations in pre-tax
income. Income tax expense from continuing operations represented approximately
39.5%, 42.0%, and 35.5% of pre-tax income for 2000, 1999, and 1998,
respectively. The effective tax rate for 2000 and 1999 was affected by realized
capital losses domestically and operating losses from foreign subsidiaries for
which deferred tax assets cannot be fully established. The Company calculated a
tax benefit of $15.1 million, $6.9 million, and $14.9 million related to the
discontinued operations in 2000, 1999, and 1998, respectively. The effective tax
rate on the discontinued operations was 35.0%, 36.0%, and 35.1% in 2000, 1999,
and 1998, respectively.
DISCONTINUED OPERATIONS
Since December 31, 1998, the Company has formally reported its accident and
health division as a discontinued operation. The accident and health business
was placed into run-off, and all treaties were terminated at the earliest
possible date. Notice was given to all cedants and retrocessionaires that all
treaties were being cancelled at the expiration of their terms. If a treaty was
continuous, a written Preliminary Notice of Cancellation was given, followed by
a final notice within 90 days of the expiration date. The nature of the
underlying risks is such that the claims may take several years to reach the
reinsurers involved. Thus, the Company expects to pay claims out of existing
reserves over a number of years as the level of business diminishes.
At the time it was accepting accident and health risks, the Company directly
underwrote certain business using its own staff of underwriters. Additionally,
it participated in pools of risks underwritten by outside managing general
underwriters, and offered high level common account and catastrophic protection
coverages to other reinsurers and retrocessionaires. Types of risks covered
included a variety of medical, disability, workers compensation carve-out,
personal accident, and similar coverages.
35
36
The reinsurance markets for several accident and health risks, most notably
involving workers' compensation carve-out and personal accident business, have
been quite volatile over the past several years. In particular, certain
programs are alleged to have been inappropriately underwritten by third
party managers, and some of the reinsurers and retrocessionaires involved have
alleged material misrepresentation and non-disclosures by the underwriting
managers. As a result, there have been a significant number of claims for
recission, arbitration, and litigation among a number of the parties involved.
This has had the effect of significantly slowing the reporting of claims
between parties, as the various outcomes of a series of arbitrations and
similar actions affects the extent to which higher level reinsurers and
retrocessionaires may ultimately have exposure to claims.
While RGA did not underwrite workers' compensation carve-out business directly,
it did offer certain high level common account coverages to other reinsurers and
retrocessionaires. The Company continues to investigate to determine if any
material indirect claims exposures arise from workers' compensation carve-out or
personal accident plans through pool participations or high level common account
retrocessional coverage. To date, no such material exposures have been
identified. If any material exposure is identified at some point in the future,
based upon the experience of others involved in these markets, any exposures
will potentially be subject to claims for recission, arbitration, or litigation.
Thus, resolution of any disputes will likely take several years. In any event,
it is management's opinion that future developments, if any, will not materially
adversely affect the Company's financial position, results of operations, or
cash flows.
The only arbitrations currently underway to which the Company is a party involve
three separate group medical reinsurance coverages. The Company expects those
arbitrations to be completed during 2001 and 2002. Reserves are established on
those treaties based upon estimates of the expected findings of the related
arbitration panels. There are no arbitrations underway currently relative to the
Company's portfolio of personal accident business, although such arbitrations
could commence at some point in the future.
The calculation of the claim reserve liability for the entire portfolio of
accident and health business requires management to make estimates and
assumptions that affect the reported claim reserve levels. The reserve balance
as of December 31, 2000 and 1999 was $89.1 million and $53.8 million,
respectively. The balance as of December 31, 2000 includes an additional $25.0
million charge taken by the Company during the fourth quarter of 2000 based upon
the most recent claims development to strengthen its reserves. Management must
make estimates and assumptions based on historical loss experience, changes in
the nature of the business, anticipated outcomes of claim disputes and claims
for recission, and projected future premium run-off, all of which may affect the
level of the claim reserve liability. Due to the significant uncertainty
associated with the run-off of this business, net income in future periods could
be affected positively or negatively. The consolidated statements of income for
all periods presented reflect this line of business as a discontinued operation.
Revenues associated with discontinued operations, which are not reported on a
gross basis in the Company's consolidated statements of income, totaled $23.7
million, $113.6 million, and $158.2 million for 2000, 1999, and 1998.
LIQUIDITY AND CAPITAL RESOURCES
RGA is a holding company that has as its principal asset interests in RGA
Reinsurance, RGA Canada, RGA Barbados, RGA Americas, Australian Holdings, RGA
UK, and GA Argentina.
As RGA continues its expansion efforts, management continually analyzes capital
adequacy issues. Funds generated through the Company's capital raising efforts
are used for general corporate purposes, including, but not limited to, the
immediate capital needs associated with the Company's primary businesses,
dividends paid by RGA to its shareholders, and interest payments. On May 24,
2000, the Company entered into the Credit Agreement with a bank syndicate, under
which it may borrow up to $140.0 million. Interest on borrowings is payable
quarterly at rates based either on the prime, federal funds or LIBOR rates plus
a base rate margin defined in the Credit Agreement. As of December 31, 2000, the
Company had approximately $80.0 million outstanding under the Credit Agreement.
The termination date of the Credit Agreement is May 24, 2003. On May 8, 2000,
RGA UK, entered into a revolving credit facility, whereby it may borrow up to
(pound)15.0 million (approximately $22.0 million). Interest on borrowings is
payable quarterly at LIBOR rates plus a base rate margin defined in the
agreement. As of December 31, 2000, the Company had borrowed (pound)6.0 million
(approximately $8.8 million) under the U.K. Credit Agreement. The termination
date of the U.K. Credit Agreement is May 8, 2003, extendable for two, one-year
terms. On November 23, 1999, RGA completed a private placement of securities in
which it sold 4,784,689 shares of the Company's common stock, $0.01 par value
per share, to MetLife. The price per share was $26.125, and the aggregate value
of the transaction was approximately $125 million. On June 1, 1999, the Company
36
37
entered into a term-loan agreement with General American, whereby it borrowed
$75.0 million. Interest on the term loan is payable quarterly at 100 basis
points over the British Bankers' Association three-month LIBOR rate. The term
loan matures on June 30, 2004. On March 19, 1996, RGA issued 7 1/4% Senior
Notes with a face value of $100.0 million in accordance with Rule 144A of the
Securities Act of 1933. Interest is payable semiannually on April 1 and October
1 with the principal amount due on April 1, 2006. Australian Holdings had a
line of credit with an outstanding balance at December 31, 2000 and 1999, of
$9.5 million, which was amended and restated in January 2001 and now expires
December 2005. The ability of RGA, Australian Holdings, and RGA UK to make
principal and interest payments is ultimately dependent on the earnings and
surplus of RGA's subsidiaries, the investment earnings on the undeployed funds
at RGA, and the Company's ability to raise additional capital.
At RGA's annual stockholders' meeting on May 27, 1998, a new class of non-voting
common stock was authorized. In June 1998, RGA completed a public offering in
which it sold 7,417,500 shares of non-voting common stock, after split, traded
on the New York Stock Exchange under the symbol RGA.A. The offering provided net
proceeds of approximately $221.8 million that have been utilized to finance the
continued growth of RGA's operations domestically and internationally. This
non-voting class of stock was subsequently converted into voting common shares
at a 0.97 conversion rate upon shareholder approval at a special meeting held
September 14, 1999.
Historically, RGA has paid quarterly dividends ranging from $0.027 per share in
1993 to $0.06 per share in 2000. All future payments of dividends are at the
discretion of the Company's Board of Directors and will depend on the Company's
earnings, capital requirements, insurance regulatory conditions, operating
conditions, and such other factors as the Board of Directors may deem relevant.
The amount of dividends that the Company can pay will depend in part on the
operations of its reinsurance subsidiaries. The transfer of funds from the
subsidiaries to RGA is subject to applicable insurance laws and regulations.
RGA has repurchased shares in the open market in the past primarily to satisfy
obligations under its stock option program. RGA purchased approximately 0.7
million shares of treasury stock in 2000 at an aggregate cost of $20.0 million.
No shares were repurchased in 1999 or 1998.
As of December 31, 2000, RGA Reinsurance had statutory capital and surplus of
$499.1 million. RGA Reinsurance is subject to statutory provisions that restrict
the payment of dividends. It may not pay dividends in any 12-month period in
excess of the greater of the prior year's statutory operating income or 10% of
capital and surplus at the preceding year-end, without regulatory approval.
Pursuant to this calculation, RGA Reinsurance's allowable dividend without prior
approval for 2001 would be $80.6 million. However, the applicable statutory
provisions only permit an insurer to pay a shareholder dividend from unassigned
surplus. As of December 31, 2000, RGA Reinsurance had unassigned surplus of
$67.1 million. Any dividends paid by RGA Reinsurance would be paid to RCM, who
in turn has restrictions related to its ability to pay dividends to RGA. As of
December 31, 2000, RCM could pay a maximum dividend to RGA equal to its
unassigned surplus, approximately $39.0 million. As of December 31, 2000, RGA
Canada's statutory capital was $167.7 million. The maximum amount available for
dividends by RGA Canada under the Canadian Minimum Continuing Capital and
Surplus Requirements ("MCCSR") is $28.7 million. Dividend payments from other
subsidiaries and joint ventures are subject to regulations in the country of
domicile.
The Company's net cash flows from consolidated operating activities for the
years ended December 31, 2000, 1999, and 1998 were $192.8 million, $277.7
million, and $349.1 million, respectively. The sources of funds of the operating
subsidiaries of RGA consist of direct investment by RGA, premiums and deposits
received from ceding insurers and direct insureds, investment income, and
proceeds from the sales and redemptions of investments. Premiums and deposits
are generally received in advance of related claim payments and withdrawals.
Funds are applied to policy claims and benefits, operating expenses, income
taxes, and investment purchases. The Company believes the short-term cash
requirements of its business operations will be sufficiently met by the positive
cash flows generated. The Company expects to address its longer-term liquidity
needs and capital required to support possible future growth and expansion of
the business through equity or debt financing. Any public offering would only be
made by means of a prospectus. Because its traditional life reinsurance business
generates positive cash flow, the Company's future policy benefit liabilities
generally are not subject to disintermediation risk, and because the reinsured
treaties offer no withdrawal options and require no return of premium if
canceled or allowed to lapse, the Company historically has had more than
sufficient funds to pay claims and expenses. The Company expects any future
increase in the need for liquidity due to relatively large policy loans or
unanticipated material claim levels would be met first by operating cash flows
and then by selling short-term investments or fixed maturity securities.
37
38
The Company's asset-intensive products are primarily supported by investments
in fixed maturity securities. Investment guidelines are established to
structure the investment portfolio based upon the type, duration and behavior
of products in the liability portfolio so as to achieve targeted levels of
profitability. The Company manages the asset-intensive business to provide a
targeted spread between the interest rate earned on investments and the
interest rate credited to the underlying interest sensitive contract
liabilities. The Company periodically reviews models projecting different
interest rate scenarios and their impact on profitability. One of the Company's
asset intensive agreements reinsures a market value adjusted annuity product on
a modified coinsurance basis. Pursuant to the terms of this reinsurance
agreement, the ceding company withholds the annuity liabilities and funds
supporting the liabilities. The underlying product reinsured provides the
contract holder with a minimum return guarantee over the life of the product.
The Company shares in this guarantee pursuant to the reinsurance agreement. The
ceding company manages the underlying investment portfolio. The risk to RGA is
that the return on the investment portfolio is not sufficient to satisfy the
minimum guarantee. This investment risk is mitigated through the Company's
participation in establishing investment guidelines and through management's
regular monitoring of the underlying investment performance.
Effective December 31, 1993, the National Association of Insurance Commissioners
("NAIC") adopted risk-based capital ("RBC") statutory requirements for
U.S.-based life insurance companies. These requirements measure statutory
capital and surplus needs based on the risks associated with a company's mix of
products and investment portfolio. At December 31, 2000, statutory capital and
surplus of RGA Reinsurance and RCM exceeded all RBC thresholds and RGA Canada's
capital levels exceeded any MCCSR requirements. All of the Company's insurance
operating subsidiaries exceed the minimum capital requirements in their
respective jurisdiction.
INVESTMENTS
All investments made by RGA and its subsidiaries conform to the qualitative and
quantitative limits prescribed by the applicable jurisdiction's insurance laws
and regulations. In addition, their respective Boards of Directors regularly
review the investment portfolios of the international subsidiaries. The RGA
Board of Directors also reviews all material investment portfolios. The
Company's investment strategy is to maintain a predominantly investment-grade,
fixed maturity portfolio, to provide adequate liquidity for expected reinsurance
obligations, and to maximize total return through prudent asset management. The
Company's asset/liability duration matching differs between the U.S. and Canada
operating segments. The target duration for U.S. portfolios, which are segmented
along product lines, range between four and seven years. Based on Canadian
reserve requirements, a portion of the Canadian liabilities is strictly matched
with long duration Canadian assets, with the remaining assets invested to
maximize the total rate of return, given the characteristics of the
corresponding liabilities and Company liquidity needs. The Company's earned
yield on fixed maturity securities was 7.30% in 2000, compared with 7.10% in
1999, and 6.84% in 1998.
The Company's fixed maturity securities are invested primarily in commercial and
industrial bonds, public utilities, Canadian government securities and, mortgage
and asset-backed securities. As of December 31, 2000, more than 96% of the
Company's consolidated investment portfolio of fixed maturity securities was
investment-grade. Important factors in the selection of investments include
diversification, quality, yield, total rate of return potential, and call
protection. The relative importance of these factors is determined by market
conditions and the underlying product or portfolio characteristics. Cash
equivalents are invested in high-grade money market instruments. The largest
asset class in which fixed maturities were invested was in commercial and
industrial bonds, which represented approximately 23.3% of total investments as
of December 31, 2000, an increase from 19.2% as of December 31, 1999. A majority
of these securities were classified as corporate securities, with an average
Standard and Poor's rating of A at December 31, 2000. The Company owns floating
rate securities that represent approximately 4.7% of total investments at
December 31, 2000. These investments may have a higher degree of income
variability than the other fixed income holdings in the portfolio due to the
floating rate nature of the interest payments.
For agreements written on a modified coinsurance basis and certain agreements
written on a coinsurance basis, assets equal to the net statutory reserves are
withheld and legally owned by the ceding company and are reflected as funds
withheld at interest on the balance sheet. Interest accrues to these assets at
rates defined by the treaty terms. Funds withheld at interest comprised
approximately 20.6% and 20.9% of the Company's investments as of December 31,
2000 and 1999, respectively.
Policy loans comprised approximately 15.5% and 17.3% of the Company's
investments as of December 31, 2000 and 1999, respectively. These policy loans
present no credit risk because the amount of the loan cannot exceed the
obligation due the ceding company upon the death of the insured or surrender of
the underlying policy. The provisions of the treaties in force and the
38
39
underlying policies determine the policy loan interest rates. Because policy
loans represent premature distributions of policy liabilities, they have the
effect of reducing future disintermediation risk. In addition, the Company earns
a spread between the interest rate earned on policy loans and the interest rate
credited to corresponding liabilities.
Mortgage loans represented approximately 2.8% and 5.6% of the Company's
investments as of December 31, 2000 and 1999, respectively. The decrease is due
to the sale of RGA Sudamerica, S.A. and its subsidiaries. As of December 31,
2000, all mortgages are U.S-based. The Company invests primarily in mortgages on
commercial offices and retail locations. The Company's mortgage loans generally
range in size from $0.3 million to $8.0 million, with the average mortgage loan
investment as of December 31, 2000, totaling approximately $3.1 million. The
mortgage loan portfolio was diversified by geographic region and property type
as discussed further in Note 6 of the notes to the consolidated financial
statements.
The Company utilizes derivative financial instruments on a very limited basis,
primarily to improve the management of the investment-related risks on a small
portfolio of equity-indexed annuities. The Company uses both exchange-traded and
customized, over-the-counter derivative financial instruments. RGA Reinsurance
has established minimum credit quality standards for counterparties and seeks to
obtain collateral or other credit supports. The Company limits its total
financial exposure to counterparties. The Company's use of derivative financial
instruments historically has not been significant to its financial position.
As of December 31, 2000, the invested assets of RGA, RCM, RGA Reinsurance, RGA
Barbados, Australian Holdings, and RGA Canada are primarily managed by a
third-party.
MARKET RISK
Market risk is the risk of loss that may occur when fluctuation in interest and
currency exchange rates and equity and commodity prices change the value of a
financial instrument. Both derivative and nonderivative financial instruments
have market risk so the Company's risk management extends beyond derivatives to
encompass all financial instruments held that are sensitive to market risk. RGA
is primarily exposed to interest rate risk and foreign currency risk.
INTEREST RATE RISK
This risk arises from many of the Company's primary activities, as the Company
invests substantial funds in interest-sensitive assets and also has certain
interest-sensitive contract liabilities. The Company manages interest rate risk
and credit risk to maximize the return on the Company's capital effectively and
to preserve the value created by its business operations. As such, certain
management monitoring processes are designed to minimize the impact of sudden
and sustained changes in interest rates on fair value, cash flows, and net
interest income.
The Company's exposure to interest rate price risk and interest rate cash flow
risk is reviewed on a quarterly basis. Interest rate price risk exposure is
measured using interest rate sensitivity analysis to determine the change in
fair value of the Company's financial instruments in the event of a hypothetical
change in interest rates. Interest rate cash flow risk exposure is measured
using interest rate sensitivity analysis to determine the Company's variability
in cash flows in the event of a hypothetical change in interest rates. If
estimated changes of fair value, net interest income, and cash flows are not
within the limits established by the Board, the Board may direct management to
adjust its asset and liability mix to bring interest rate risk within
Board-approved limits.
In order to reduce the exposure of changes in fair values from interest rate
fluctuations, RGA has developed strategies to manage its liquidity, and increase
the interest rate sensitivity of its asset base. From time to time, RGA has
utilized the swap market to manage the volatility of cash flows to interest rate
fluctuations.
Interest rate sensitivity analysis is used to measure the Company's interest
rate price risk by computing estimated changes in fair value of fixed rate
assets and off-balance sheet items in the event of a range of assumed changes in
market interest rates. Interest sensitive contract liabilities are generally
supported by related policy loans or funds withheld at interest. As these
amounts are affected similarly by interest rate changes, the net impact on
estimated fair values or cash flows is not considered material and is excluded
from the following sensitivity analysis. This analysis assesses the risk of loss
in market risk sensitive fixed rate instruments in the event of a sudden and
sustained 100 to 300 basis points increase or decrease in the market interest
rates. The
39
40
following table presents the Company's projected change in fair value
of financial instruments for the various rate shock levels at its fiscal year
ended December 31, 2000. All market risk sensitive instruments presented in this
table are available for sale. RGA has no trading securities.
The calculation of fair value is based on the net present value of estimated
discounted cash flows expected over the life of the market risk sensitive
instruments, using market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources as of
December 31, 2000, with adjustments made to reflect the shift in the Treasury
yield curve as appropriate.
DOLLARS IN THOUSANDS PERCENTAGE
PERCENT CHANGE IN ESTIMATED FAIR VALUE OF HYPOTHETICAL HYPOTHETICAL
INTEREST RATES FIXED RATE INSTRUMENTS CHANGE CHANGE
- ----------------- ----------------------- ------------ ------------
300 basis point rise $1,814,501 $(515,068) (22.11)%
200 basis point rise 1,958,935 (370,634) (15.91)%
100 basis point rise 2,129,226 (200,343) (8.60)%
Base Scenario 2,329,569 -- 0.00%
100 basis point decline 2,563,924 234,355 10.06%
200 basis point decline 2,843,006 513,437 22.04%
300 basis point decline 3,185,220 855,651 36.73%
At December 31, 2000, the Company's estimated changes in fair value were within
the targets outlined in the Company's investment policy.
Interest rate sensitivity analysis is also used to measure the Company's
interest rate cash flow risk by computing estimated changes in the cash flows
expected in the near term attributable to floating rate assets, liabilities, and
off-balance sheet items in the event of a range of assumed changes in market
interest rates. This analysis assesses the risk of loss in cash flows in the
near term in market risk sensitive floating rate instruments in the event of a
sudden and sustained 100 to 300 basis points increase or decrease in the market
interest rates. The following table presents the Company's projected change in
cash flows in the near term associated with floating-rate instruments for
various rate shock levels at December 31, 2000. All floating rate interest
sensitive instruments presented in this table are classified as available for
sale.
DOLLARS IN THOUSANDS PERCENTAGE
PERCENT CHANGE IN ESTIMATED CASH FLOWS OF HYPOTHETICAL HYPOTHETICAL
INTEREST RATES FLOATING RATE INSTRUMENTS CHANGE CHANGE
- ----------------- ------------------------- ------------ ------------
300 basis point rise $32,091 $ 8,699 37.19%
200 basis point rise 29,192 5,800 24.79%
100 basis point rise 26,292 2,900 12.40%
Base Scenario 23,392 -- 0.00%
100 basis point decline 20,492 (2,900) (12.40)%
200 basis point decline 17,592 (5,800) (24.79)%
300 basis point decline 14,693 (8,699) (37.19)%
The cash flows from coupon payments move in the same direction as interest rates
for the Company's floating rate instruments. The volatility in mortgage
prepayments partially offsets the cash flows from interest. At December 31,
2000, the Company's estimated changes in cash flows were within the targets
outlined in the Company's investment policy.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, and mortgage prepayments, and should not be relied on as indicative of
future results. Further, the computations do not contemplate any actions
management could undertake in response to changes in interest rates.
40
41
Certain shortcomings are inherent in the method of analysis presented in the
computation of the estimated fair value of fixed rate instruments and the
estimated cash flows of floating rate instruments, which estimates constitute
forward-looking statements. Actual values may differ materially from those
projections presented due to a number of factors, including, without limitation,
market conditions varying from assumptions used in the calculation of the fair
value. In the event of a change in interest rates, prepayments could deviate
significantly from those assumed in the calculation of fair value. Finally, the
desire of many borrowers to repay their fixed-rate mortgage loans may decrease
in the event of interest rate increases.
FOREIGN CURRENCY RISK
The Company is subject to foreign currency translation, transaction, and net
income exposure. The Company generally does not hedge the foreign currency
translation exposure related to its investment in foreign subsidiaries as it
views these investments to be long-term. Translation differences resulting from
translating foreign subsidiary balances to U.S. dollars are reflected in equity.
The Company generally does not hedge the foreign currency exposure of its
subsidiaries transacting business in currencies other than their functional
currency (transaction exposure). Currently, the Company believes its foreign
currency transaction exposure is not material to the consolidated results of
operations. Net income exposure that may result from the strengthening of the
U.S. dollar to foreign currencies will adversely affect results of operations
since the income earned in the foreign currencies is worth less in U.S. dollars.
When evaluating investments in foreign countries, the Company considers the
stability of the political and currency environment. Devaluation of the currency
after an investment decision has been made will affect the value of the
investment when translated to U.S. dollars for financial reporting purposes.
INFLATION
The primary, direct effect on the Company of inflation is the increase in
operating expenses. A large portion of the Company's operating expenses consists
of salaries, which are subject to wage increases at least partly affected by the
rate of inflation. The rate of inflation also has an indirect effect on the
Company. To the extent that a government's policies to control the level of
inflation result in changes in interest rates, the Company's investment income
is affected.
NEW ACCOUNTING STANDARDS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". SFAS No. 140 revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of the
provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. Adoption of the
provisions of SFAS No. 140 effective for the year ended December 31, 2000 did
not have a material effect on the Company's consolidated financial statements.
The Company is in the process of quantifying the impact, if any, of the
provisions of SFAS No. 140 effective for future periods.
In June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an Amendment to FASB
Statement No. 133". This Statement addresses a limited number of issues causing
implementation difficulties for numerous entities that apply Statement 133.
Statement 138 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS No. 133 requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. It also
requires that gains or losses resulting from changes in the values of those
derivatives be reported depending on the use of the derivative and whether it
qualifies for hedge accounting. Initial application for the Company will be
January 1, 2001. The Company has determined that initial application of the
accounting provisions of SFAS Nos. 138 and 133 will not have a material impact
on the Company's financial condition or results of operations.
In March 1998, the National Association of Insurance Commissioners ("NAIC")
adopted the Codification of Statutory Accounting Principles ("Codification").
The purpose of Codification is to establish a uniform set of accounting rules
and regulations ("SSAP") for use by insurance companies in financial report
preparation in connection with financial reporting to regulatory authorities.
The proposed effective date of the uniform statutory accounting principles is
January 1, 2001. As of December 31, 2000, the State of
41
42
Missouri has not amended its laws and rules to closely mirror SSAP, but
the Missouri Department of Insurance has instructed its domestic insurers to
conform to the new codified SSAP in anticipation of changes to applicable
Missouri laws and rules during 2001. The Company estimates that the adoption of
Codification as modified by the Missouri Department of Insurance, as currently
interpreted, will not decrease statutory capital and surplus as of January 1,
2001.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by Item 7A is contained in Item 7 under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Market Risk"
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
42
43
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2000 1999
----------- -----------
(Dollars in thousands)
ASSETS
Fixed maturity securities available for sale, at fair value $ 2,692,840 $ 1,876,166
Mortgage loans on real estate 128,111 213,187
Policy loans 706,877 660,062
Funds withheld at interest 938,362 797,949
Short-term investments 68,735 238,424
Other invested assets 25,233 26,069
----------- -----------
Total investments 4,560,158 3,811,857
Cash and cash equivalents 70,797 24,316
Accrued investment income 37,555 37,175
Premiums receivable 226,365 295,153
Reinsurance ceded receivables 296,368 295,460
Deferred policy acquisition costs 621,475 478,389
Other reinsurance balances 202,158 164,294
Other assets 46,984 17,099
----------- -----------
Total assets $ 6,061,860 $ 5,123,743
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 1,933,508 $ 1,870,099
Interest sensitive contract liabilities 2,128,743 1,545,893
Other policy claims and benefits 555,423 582,066
Other reinsurance balances 69,343 53,866
Deferred income taxes 170,905 67,914
Other liabilities 68,758 83,238
Long-term debt 272,257 183,954
----------- -----------
Total liabilities 5,198,937 4,387,030
Minority interest -- 3,765
Commitments and contingent liabilities (Note 15) Stockholders' equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) -- --
Common stock (par value $.01 per share; 75,000,000 shares authorized,
51,053,273 shares issued at December 31, 2000 and 1999) 511 511
Additional paid-in-capital 611,349 611,016
Retained earnings 348,158 282,389
Accumulated other comprehensive (loss):
Accumulated currency translation adjustment, net of income taxes (15,867) (9,909)
Unrealized depreciation of securities, net of income taxes (42,004) (131,341)
----------- -----------
Total stockholders' equity before treasury stock 902,147 752,666
Less treasury shares held of 1,759,715 and 1,112,820 at cost at
December 31, 2000 and 1999, respectively (39,224) (19,718)
----------- -----------
Total stockholders' equity 862,923 732,948
----------- -----------
Total liabilities and stockholders' equity $ 6,061,860 $ 5,123,743
=========== ===========
See accompanying notes to consolidated financial statements.
43
44
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in thousands, except per share data)
REVENUES:
Net premiums $ 1,404,066 $ 1,315,638 $ 1,016,420
Investment income, net of related expenses 326,505 340,280 301,780
Realized investment (losses) gains, net (28,651) (75,308) 3,092
Other revenue 23,815 26,472 23,200
----------- ----------- -----------
Total revenues 1,725,735 1,607,082 1,344,492
----------- ----------- -----------
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,103,548 1,067,111 797,901
Interest credited 104,782 153,118 153,247
Policy acquisition costs and other insurance expenses 243,542 218,314 188,471
Other operating expenses 80,922 64,447 58,021
Interest expense 17,596 11,020 8,805
----------- ----------- -----------
Total benefits and expenses 1,550,390 1,514,010 1,206,445
----------- ----------- -----------
Income from continuing operations
before income taxes and minority interest 175,345 93,072 138,047
Provision for income taxes 69,271 39,059 49,055
----------- ----------- -----------
Income from continuing operations
before minority interest 106,074 54,013 88,992
Minority interest in earnings (losses) of consolidated subsidiaries 287 968 (717)
----------- ----------- -----------
Income from continuing operations 105,787 53,045 89,709
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (28,118) (12,187) (27,628)
----------- ----------- -----------
Net income $ 77,669 $ 40,858 $ 62,081
=========== =========== ===========
Earnings per share from continuing operations:
Basic earnings per share $ 2.14 $ 1.16 $ 2.11
=========== =========== ===========
Diluted earnings per share $ 2.12 $ 1.15 $ 2.08
=========== =========== ===========
Earnings per share from net income:
Basic earnings per share $ 1.57 $ 0.89 $ 1.50
=========== =========== ===========
Diluted earnings per share $ 1.56 $ 0.88 $ 1.48
=========== =========== ===========
Weighted average number of diluted shares outstanding
(in thousands) 49,920 46,246 42,559
=========== =========== ===========
See accompanying notes to consolidated financial statements.
44
45
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 77,669 $ 40,858 $ 62,081
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (379) 25,288 (28,523)
Premiums receivable 68,407 (121,032) (55,687)
Deferred policy acquisition costs (154,229) (112,085) (65,393)
Reinsurance ceded balances (908) (35,914) 49,204
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 188,595 383,672 417,364
Deferred income taxes 57,210 48,013 26,785
Other assets and other liabilities (24,958) (2,490) (32,914)
Amortization of net investment discounts, goodwill and other (35,884) (26,692) (19,127)
Realized investment losses (gains), net 28,651 75,308 (3,091)
Other, net (11,375) 2,775 (1,552)
----------- ----------- -----------
Net cash provided by operating activities 192,799 277,701 349,147
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of subsidiaries 26,509 -- --
Purchase of business - net of cash received (21,850) -- --
Sales of investments:
Fixed maturity securities - available for sale 576,240 2,873,723 495,589
Mortgage loans on real estate -- 8,136 3,416
Maturities of fixed maturity securities - available for sale 20,153 6,204 109,577
Purchases of fixed maturity securities - available for sale (1,352,647) (1,369,576) (1,860,673)
Cash invested in:
Mortgage loans on real estate (21,951) (50,300) (75,281)
Policy loans (63,812) (146,177) (50,987)
Funds withheld at interest (64,394) (73,684) (194,373)
Principal payments on:
Mortgage loans on real estate 9,525 24,378 7,088
Policy loans 16,997 4,475 17,335
Change in short-term and other invested assets 162,746 64,644 (54,051)
----------- ----------- -----------
Net cash (used in) provided by investing activities (712,484) 1,341,823 (1,602,360)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (11,900) (9,981) (7,254)
Proceeds from stock offering -- 124,920 221,837
Debt issuance and borrowings under credit agreements 88,303 75,000 --
Purchase of treasury stock (20,000) -- --
Reissuance of treasury stock 827 886 987
Exchange of voting for non-voting shares -- (657) --
Excess deposits (withdrawals) on universal life and other
investment type policies and contracts 508,259 (1,801,601) 1,016,245
----------- ----------- -----------
Net cash provided by (used in) financing activities 565,489 (1,611,433) 1,231,815
Effect of exchange rate changes 677 259 (31)
----------- ----------- -----------
Change in cash and cash equivalents 46,481 8,350 (21,429)
Cash and cash equivalents, beginning of year 24,316 15,966 37,395
----------- ----------- -----------
Cash and cash equivalents, end of year $ 70,797 $ 24,316 $ 15,966
=========== =========== ===========
See accompanying notes to consolidated financial statements.
45
46
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Non-Voting Additional
Preferred Common Common Paid In Retained Comprehensive
Stock Stock Stock Capital Earnings Income (Loss)
--------- ------- ---------- ---------- -------- --------------
Balance, January 1, 1998 $ -- $ 261 $ -- $264,748 $196,685
Comprehensive income:
Net income 62,081 $ 62,081
Other comprehensive income, net of tax
Currency translation adjustments (6,767)
Unrealized investment losses, net of related
offsets and reclassification adjustment (22,017)
---------
Other comprehensive loss (28,784)
---------
Comprehensive income 33,297
---------
Dividends to stockholders 131 25 (156) (7,254)
Issuance of non-voting stock 49 221,788
Reissuance of treasury stock 289
----- ------- ----- -------- --------
Balance, December 31, 1998 -- 392 74 486,669 251,512
----- ------- ----- -------- --------
Comprehensive income:
Net income 40,858 $ 40,858
Other comprehensive income, net of tax
Currency translation adjustments 5,059
Unrealized investment losses, net of related
offsets and reclassification adjustment (176,614)
---------
Other comprehensive loss (171,555)
---------
Comprehensive loss (130,697)
---------
Dividends to stockholders (9,981)
Conversion of non-voting into voting stock 72 (74) (655)
MetLife private placement 47 124,873
Reissuance of treasury stock 129
----- ------- ----- -------- --------
Balance, December 31, 1999 -- 511 -- 611,016 282,389
----- ------- ----- -------- --------
Comprehensive income:
Net income 77,669 $ 77,669
Other comprehensive income, net of tax
Currency translation adjustments (5,958)
Unrealized investment gains, net of related
offsets and reclassification adjustment 89,337
---------
Other comprehensive income 83,379
---------
Comprehensive income 161,048
=========
Dividends to stockholders (11,900)
Purchase of treasury stock
Reissuance of treasury stock 333
----- ------- ----- -------- --------
Balance, December 31, 2000 $ -- $ 511 $ -- $611,349 $348,158
===== ======= ===== ======== ========
Accumulated
Other
Comprehensive Treasury
Income (Loss) Stock Total
------------- --------- --------
Balance, January 1, 1998 $ 59,089 $(21,462) $499,321
Comprehensive income:
Net income 62,081
Other comprehensive income, net of tax
Currency translation adjustments (6,767)
Unrealized investment losses, net of related
offsets and reclassification adjustment (22,017)
Other comprehensive loss (28,784)
Comprehensive income
Dividends to stockholders (7,254)
Issuance of non-voting stock 221,837
Reissuance of treasury stock 987 1,276
--------- --------- --------
Balance, December 31, 1998 30,305 (20,475) 748,477
--------- --------- --------
Comprehensive income:
Net income 40,858
Other comprehensive income, net of tax
Currency translation adjustments 5,059
Unrealized investment losses, net of related
offsets and reclassification adjustment (176,614)
Other comprehensive loss (171,555)
Comprehensive loss
Dividends to stockholders (9,981)
Conversion of non-voting into voting stock (657)
MetLife private placement 124,920
Reissuance of treasury stock 757 886
--------- --------- --------
Balance, December 31, 1999 (141,250) (19,718) 732,948
--------- --------- --------
Comprehensive income:
Net income 77,669
Other comprehensive income, net of tax
Currency translation adjustments (5,958)
Unrealized investment gains, net of related
offsets and reclassification adjustment 89,337
Other comprehensive income 83,379
Comprehensive income
Dividends to stockholders (11,900)
Purchase of treasury stock (20,000) (20,000)
Reissuance of treasury stock 494 827
--------- --------- --------
Balance, December 31, 2000 $ (57,871) $ (39,224) $862,923
========= ========= ========
See accompanying notes to consolidated financial statements.
46
47
Note 1 ORGANIZATION
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding
company formed December 31, 1992. On December 31, 2000, Equity Intermediary
Company, a Missouri holding company, directly owned approximately 49.0% of the
outstanding shares of common stock of RGA. Equity Intermediary Company is a
wholly owned subsidiary of General American Life Insurance Company ("General
American"), a Missouri life insurance company, which in turn is a wholly owned
subsidiary of GenAmerica Financial Corporation ("GenAmerica"), a Missouri
corporation. GenAmerica was acquired and became a wholly owned subsidiary of
Metropolitan Life Insurance Company ("MetLife"), a New York life insurance
company on January 6, 2000. As a result of MetLife's ownership of GenAmerica and
its own direct investment in RGA, MetLife beneficially owns 58.7% of the
outstanding shares of common stock of RGA at December 31, 2000 (See Note 3).
The consolidated financial statements include the assets, liabilities, and
results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"); RGA Australian Holdings PTY, Limited ("Australian Holdings"); RGA
Reinsurance Company (Barbados) Ltd. ("RGA Barbados"); RGA International, Ltd.
("RGA International"), a New Brunswick company that serves as a Canadian
marketing and insurance holding company for RGA's Canadian operations; RGA
Sudamerica, S.A., a Chilean holding company; RGA Holdings Limited ("RGA UK"), a
United Kingdom holding company; General American Argentina Seguros de Vida, S.A.
("GA Argentina"), an Argentine life insurance company; RGA South African
Holdings (Pty) Ltd. ("RGA South Africa"), a South African holding company;
Benefit Resource Life Insurance Company (Bermuda) Ltd. ("RGA Bermuda"); RGA
Americas Reinsurance Company, Ltd.; and Triad Re, Ltd. In addition, the
consolidated financial statements include the subsidiaries of RCM, Australian
Holdings, RGA International, RGA UK, RGA Sudamerica, S.A., and RGA South Africa
subject to an ownership position of fifty percent or more (collectively, the
"Company"). In 2000, the Company sold its interest in RGA Sudamerica, S.A. and
its subsidiaries, and RGA Bermuda.
The Company is primarily engaged in life reinsurance. Reinsurance is an
arrangement under which an insurance company, the reinsurer, agrees to indemnify
another insurance company, the ceding company, for all or a portion of the
insurance risks underwritten by the ceding company. Reinsurance is designed to
(i) reduce the net liability on individual risks, thereby enabling the ceding
company to increase the volume of business it can underwrite, as well as
increase the maximum risk it can underwrite on a single life or risk; (ii)
stabilize operating results by leveling fluctuations in the ceding company's
loss experience; (iii) assist the ceding company to meet applicable regulatory
requirements; and (iv) enhance the ceding company's financial strength and
surplus position.
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation. The consolidated financial statements
of the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America for stock life insurance
companies. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Significant accounts that the Company deems to be
sensitive to changes in estimates include deferred policy acquisition costs,
premiums receivable, future policy benefits, and other policy claims and
benefits. In all instances, actual results could differ materially from such
estimates and assumptions.
The accompanying financial statements consolidate the accounts of RGA and its
subsidiaries, both direct and indirect, subject to an ownership position greater
than fifty percent. Entities in which the Company has an ownership position of
twenty percent or more, but less than or equal to fifty percent are recorded on
the equity method of accounting. All significant intercompany balances and
transactions have been eliminated.
Investments. Fixed maturity securities available for sale are reported at fair
value and are so classified based upon the possibility that such securities
could be sold prior to maturity if that action enables the Company to execute
its investment philosophy and appropriately match investment results to
operating and liquidity needs.
Impairments in the value of securities held by the Company, considered to be
other than temporary, are recorded as a reduction of the carrying value of the
security, and a corresponding realized capital loss is recognized in the
consolidated statements of income. The Company's policy is to recognize such
impairment when the projected cash flows of these securities have been reduced
on other than a temporary basis so that the realizable value is reduced to an
amount less than the carrying value.
Mortgage loans on real estate are carried at unpaid principal balances, net of
any unamortized premium or discount and valuation allowances. Valuation
allowances on mortgage loans are being established based upon losses expected by
management to be realized in connection with future dispositions or settlement
of mortgage loans, including foreclosures. The valuation allowances
47
48
are being established after management considers, among other things, the value
of underlying collateral and payment capabilities of debtors.
Short-term investments are stated at amortized cost, which approximates fair
value.
Policy loans are reported at the unpaid principal balance.
Funds withheld represent amounts contractually withheld by ceding companies in
accordance with reinsurance agreements. For agreements written on a modified
coinsurance basis and certain agreements written on a coinsurance basis, assets
equal to the net statutory reserves are withheld and legally owned by the ceding
company and are reflected as funds withheld at interest on the balance sheet.
Interest accrues to these assets at rates defined by the treaty terms.
For reinsurance transactions executed prior to December 31, 1994, assets and
liabilities related to treaties written on a modified coinsurance basis with
funds withheld are reported on a gross basis. For reinsurance transactions
executed on or after December 31, 1994, assets and liabilities from reinsurance
agreements written on a modified coinsurance basis with funds withheld have
generally been reported on a net basis and included in other reinsurance
balances on the consolidated balance sheet because a right of offset exists.
Other invested assets, including derivative and equity securities, are carried
at fair value.
The Company has a variety of reasons to use derivative instruments, such as to
attempt to protect the Company against possible changes in the market value of
its investment portfolio as a result of interest rate changes and to manage the
portfolio's effective yield, maturity, and duration. The Company does not invest
in derivatives for speculative purposes. The Company uses both exchange-traded
and customized over-the-counter derivative financial instruments. The Company's
use of derivatives historically has not been significant to its financial
position. Income or expense on derivative financial instruments used to manage
interest-rate exposure is recorded on an accrual basis as an adjustment to the
yield of the related interest-earning assets or interest-bearing liabilities for
the periods covered by the contracts. Gains or losses from early terminations of
derivative contracts are deferred and amortized as an adjustment to the yield of
the designated assets or liabilities over the remaining period originally
contemplated by the derivative financial instrument. The Company is currently
holding exchange-traded derivatives with a notional amount of $25.6 million,
which are carried at fair value of $9.3 million.
The Company is exposed to credit-related risk in the event of nonperformance by
reinsurance counterparties to financial instruments but does not expect any
counterparties to fail to meet their obligations. Where appropriate, master
netting agreements are arranged and collateral is obtained in the form of rights
to securities to lower the Company's exposure to credit risk. It is the
Company's policy to deal primarily with highly rated companies. There are no
significant concentrations with counterparties. The Company has established
minimum credit quality standards for counterparties and seeks to obtain
collateral or other credit support where considered appropriate.
Investment income is recognized as it accrues or is legally due. Realized gains
and losses on sales of investments are included in net income, as are
write-downs of securities where declines in value are deemed to be other than
temporary in nature. The cost of investment securities sold is determined based
upon the specific identification method. Unrealized gains and losses on
marketable equity securities and fixed maturity securities, less applicable
deferred income taxes as well as related adjustments to deferred acquisition
costs, are reflected as a direct charge or credit to accumulated other
comprehensive income in stockholders' equity on the consolidated balance sheet.
Additional Information Regarding Statements of Cash Flows. Cash and cash
equivalents include cash on deposit and highly liquid debt instruments purchased
with an original maturity of three months or less. The consolidated statement of
cash flows includes the results of discontinued operations in net cash from
operations for all years presented, as the impact of the discontinued operations
on cash flows is not considered material.
Deferred Policy Acquisition Costs. 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. Such costs include commissions and allowances as well
as certain costs of policy issuance and underwriting. The Company performs
periodic tests to determine that the cost of business acquired remains
recoverable, and the cumulative amortization is re-estimated and adjusted by a
cumulative charge or credit to current operations.
Deferred costs related to traditional life insurance contracts, substantially
all of which relate to long-duration contracts, are amortized over the premium
paying period of the related policies in proportion to the ratio of individual
period premium revenues to total anticipated premium revenues over the life
of the policy. Such anticipated premium revenues are estimated using the same
48
49
assumptions used for computing liabilities for future policy benefits.
Deferred costs related to interest-sensitive life and investment-type policies
are amortized over the lives of the policies, in relation to the present value
of estimated gross profits from mortality, investment income, and expense
margins.
Other Reinsurance Balances. The Company assumes and retrocedes financial
reinsurance contracts which represent low mortality risk reinsurance treaties.
These contracts are reported as deposits and included in other reinsurance
assets/liabilities. The amount of revenue reported on these contracts represents
fees and the cost of insurance under the terms of the reinsurance agreement.
Balances resulting from the assumption and/or subsequent transfer of benefits
and obligations resulting from cash flows related to variable annuities have
also been classified as other reinsurance balance assets and/or liabilities.
Goodwill and Value of Business Acquired. Goodwill representing the excess of
purchase price over the fair value of net assets acquired is amortized on a
straight-line basis over ten to twenty years. The value of business acquired is
amortized in proportion to the ratio of annual premium revenues to total
anticipated premium revenues or in relation to the present value of estimated
profits. Anticipated premium revenues have been estimated using assumptions
consistent with those used in estimating reserves for future policy benefits.
The carrying value is reviewed periodically for indicators of impairment in
value. Goodwill and the value of business acquired were approximately $22.1
million and $2.8 million as of December 31, 2000 and 1999, respectively.
Accumulated amortization amounted to $5.2 million and $3.5 million at December
31, 2000 and 1999, respectively, and related amortization expense for the years
ended December 31, 2000, 1999 and 1998 was $2.2 million, $1.7 million, and $1.7
million, respectively. These amortized balances are included in other assets on
the consolidated balance sheet.
Future Policy Benefits and Interest-Sensitive Contract Liabilities. Liabilities
for future benefits on life policies are established in an amount adequate to
meet the estimated future obligations on policies in force. Liabilities for
future policy benefits under long-term life insurance policies have been
computed based upon expected investment yields, mortality and withdrawal rates,
and other assumptions. These assumptions include a margin for adverse deviation
and vary with the characteristics of the plan of insurance, year of issue, age
of insured, and other appropriate factors. Interest rates range from 6.0% to
8.0%. The mortality and withdrawal assumptions are based on the Company's
experience as well as industry experience and standards. Liabilities for future
benefits on interest-sensitive life and investment-type contract liabilities are
carried at the accumulated contract holder values without reduction for
potential surrender or withdrawal charges.
The Company periodically reviews actual and anticipated experience compared to
the assumptions used to establish policy benefits. The Company establishes
Premium deficiency reserves if actual and anticipated experience indicates that
existing policy liabilities together with the present value of future gross
premiums will not be 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 by a charge to income, as well as
a reduction in unamoritzed acquisition costs and, to the extent there are no
unamortized acquisition costs, an increase in future policy benefits.
In establishing reserves for future policy benefits, the Company assigns policy
liability assumptions to particular time frames (eras) in such a manner as to be
consistent with the underlying assumptions and economic conditions at the time
the risks are assumed. The Company generally maintains a consistent level of
provision for adverse deviation between eras.
The reserving process includes normal periodic reviews of assumptions used and
adjustments of reserves to incorporate the refinement of the assumptions. Any
such adjustments relate only to policies assumed in recent periods and the
adjustments are reflected by a cumulative charge or credit to current
operations. During the fourth quarter of 2000, the Company reflected a
cumulative pretax credit to current operations of approximately $6.9 million as
a result of its periodic review of reserves.
The Company reinsures asset-intensive products, including annuities,
corporate-owned life insurance and, prior to September 1999, funding agreement
products, on a coinsurance basis. The investment portfolios for these products
are segregated within the general account of RGA Reinsurance Company ("RGA
Reinsurance"). During 1999, the assets and liabilities of two major
asset-intensive blocks of business were recaptured by the ceding companies. The
results of these recaptures are included in the 1999 consolidated statement of
income. The liabilities for the remaining asset-intensive reinsurance contracts
are included in interest sensitive contract liabilities on the consolidated
balance sheet.
Other Policy Claims and Benefits. Claims payable for incurred but not reported
losses are determined using case basis estimates and lag studies of past
experience. These estimates are periodically reviewed and required adjustments
to such estimates are reflected in current operations. The Company has no
material policy claims liability balances that would require fair value
disclosure.
49
50
Other Liabilities. Liabilities primarily related to investments in transit,
separate accounts, employee benefits, and current federal income taxes payable
are included in other liabilities on the consolidated balance sheet.
Income Taxes. RGA and its eligible U.S. subsidiaries file a consolidated federal
income tax return. The U.S. consolidated tax return includes RGA, RGA
Reinsurance, RCM and Fairfield Management Group, Incorporated ("Fairfield"). Due
to rules which affect the ability of an entity to join in a consolidated tax
return, RGA Barbados, RGA Americas Reinsurance Company, Ltd., and
Triad Re Ltd. file separate tax returns even though these entities are
considered to be U.S. taxpayers. The Company's Argentine, Australian, Bermudan,
Canadian, Chilean, Malaysian, South African and United Kingdom subsidiaries are
taxed under applicable local statutes.
For all years presented the Company uses the asset and liability method to
record deferred income taxes. Accordingly, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, using enacted tax rates.
Foreign Currency Translation. The functional currency is the Argentine peso for
the Company's Argentine operations, the Australian dollar for the Company's
Australian operations, the Canadian dollar for the Company's Canada operations,
the South African Rand for the Company's South African operations and the
British Pound Sterling for the Company's United Kingdom operations. The
translation of the foreign currency into U.S. dollars is performed for balance
sheet accounts using current exchange rates in effect at the balance sheet date
and for revenue and expense accounts using a weighted average exchange rate
during each year. Gains or losses, net of deferred income taxes, resulting from
such translation are included in accumulated currency translation adjustments,
net of income taxes, in accumulated other comprehensive income (loss) on the
consolidated balance sheet.
Retrocession Arrangements and Reinsurance Ceded Receivables. The Company
generally reports retrocession activity on a gross basis. Amounts paid or deemed
to have been paid for reinsurance are reflected in reinsurance ceded
receivables. The cost of reinsurance related to long-duration contracts is
recognized over the terms of the reinsured policies on a basis consistent with
the reporting of those policies.
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
and coinsurance contracts. Through December 31, 2000, the Company retained a
maximum of $2.5 million of coverage per individual life. Effective January 1,
2001, the Company increased its retention to $4.0 million of coverage per
individual life. RGA Reinsurance has a number of retrocession arrangements
whereby certain business in force is retroceded on an automatic or facultative
basis. The Company also retrocedes most of its financial reinsurance business to
other insurance companies to alleviate capital requirements created by this
business.
Generally, RGA's insurance subsidiaries retrocede amounts in excess of their
retention to RGA Reinsurance. Retrocessions are arranged through RGA
Reinsurance's retrocession pools for amounts in excess of its retention. As of
December 31, 2000, substantially all retrocession pool participants followed by
the A.M. Best Company were rated A- or better. For a majority of the
retrocessionaires that were not rated, security in the form of letters of credit
or trust assets has been given as additional security in favor of RGA
Reinsurance. In addition, the Company performs annual financial reviews of its
retrocessionaires to evaluate financial stability and performance.
The Company has never experienced a material default in connection with
retrocession arrangements, nor has it experienced any difficulty in collecting
claims recoverable from retrocessionaires; however, no assurance can be given as
to the future performance of such retrocessionaires or as to recoverability of
any such claims.
Recognition of Revenues and Related Expenses. Revenues and expenses are reported
gross, except that initial reserve changes are netted against premiums when an
in force block of business is reinsured. Life and health premiums are recognized
as revenue over the premium paying periods of the policies. Benefits and
expenses are associated with earned premiums so that profits are recognized over
the life of the related contract. This association is accomplished through the
provision for future policy benefits and the amortization of deferred policy
acquisition costs. Other revenue includes items such as treaty recapture fees,
profit and risk fees associated with financial reinsurance as well as earnings
in unconsolidated subsidiaries. Any fees that are collected in advance of the
period benefited are deferred and recognized over the period benefited.
Revenues for interest-sensitive and investment-type products consist of
investment income, policy charges for the cost of insurance, policy
administration, and surrenders that have been assessed against policy account
balances during the period. Interest-sensitive contract liabilities for these
products represent policy account balances before applicable surrender charges.
Deferred policy
50
51
acquisition costs are recognized as expenses over the term of the
policies. Policy benefits and claims that are charged to expenses include
claims incurred in the period in excess of related policy account balances and
interest credited to policy account balances. The weighted average
interest-crediting rates for interest-sensitive products were 6.7%, 6.4%, and
6.2%, during 2000, 1999, and 1998, respectively. Interest crediting rates for
U.S. dollar-denominated investment-type contracts ranged from 5.3% to 7.2%
during 2000, 5.2% to 6.7% during 1999, and 5.4% to 6.5% during 1998. Interest
crediting rates for Mexican peso-denominated investment-type contracts ranged
from 9.3% to 19.4% during 2000.
Net Earnings Per Share. Basic earnings per share exclude any dilutive effects of
options. Diluted earnings per share include the dilutive effects assuming
outstanding stock options were exercised. All share and earnings per share
information has been adjusted to reflect the three-for-two stock split paid in
the form of a dividend on February 26, 1999.
New Accounting Standards. In September 2000, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which replaces SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 140 revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of the provisions of SFAS No. 125. SFAS No. 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001 and is effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Adoption of the provisions of SFAS No. 140 effective for the year ended December
31, 2000 did not have a material effect on the Company's consolidated financial
statements. The Company is in the process of quantifying the impact, if any, of
the provisions of SFAS No. 140 effective for future periods.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment to FASB Statement No.
133". This Statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133. SFAS 138 is effective
for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 133 requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. It also requires that gains or losses
resulting from changes in the values of those derivatives be reported depending
on the use of the derivative and whether it qualifies for hedge accounting.
Initial application for the Company will be January 1, 2001. The Company has
determined that initial application of the accounting provisions of SFAS Nos.
138 and 133 will not have a material impact on the Company's financial condition
or results of operations.
In March 1998, the National Association of Insurance Commissioners ("NAIC")
adopted the Codification of Statutory Accounting Principles ("Codification").
The purpose of Codification is to establish a uniform set of accounting rules
and regulations ("SSAP") for use by insurance companies in financial report
preparation in connection with financial reporting to regulatory authorities.
The proposed effective date of the uniform statutory accounting principles is
January 1, 2001. As of December 31, 2000, the State of Missouri has not amended
its laws and rules to closely mirror SSAP, but the Missouri Department of
Insurance has instructed its domestic insurers to conform to the new codified
SSAP in anticipation of changes to applicable Missouri laws and rules during
2001. The Company estimates that the adoption of Codification as modified by the
Missouri Department of Insurance, as currently interpreted, will not decrease
statutory capital and surplus as of January 1, 2001.
Reclassification. The Company has reclassified the presentation of certain prior
period information to conform to the 2000 presentation.
Note 3 STOCK TRANSACTIONS
During 2000, the Company purchased 689,953 shares of treasury stock at an
aggregate cost of $20.0 million. The Company plans to use the repurchased shares
to support the future exercise of options granted under its stock option plan.
On November 23, 1999, RGA completed a private placement of securities in which
it sold 4,784,689 shares of the Company's common stock, $0.01 par value per
share (the "Shares"), to MetLife. The price per share was $26.125, and the
aggregate value of the transaction was approximately $125 million.
In June 1998, RGA completed a public offering in which it sold 7,417,500 shares
of non-voting common stock traded on the New York Stock Exchange under the
symbol RGA.A. The offering was priced to the public at $31.33 per share and
provided net proceeds of approximately $221.8 million. On September 14, 1999,
the Company held a special shareholders' meeting at which an
51
52
amendment to the Company's restated articles of incorporation, as amended,
was approved which converted 7,417,500 shares of non-voting common stock into
7,194,971 shares of voting common stock, with cash paid in lieu of any
fractional shares. The conversion ratio of one share of non-voting common stock
to .97 share of voting common stock was determined after weighing the economic
interests of both securities then outstanding. The conversion price was subject
to a review of fairness by a third-party financial advisor.
Note 4 DIVIDENDS
RGA paid cash dividends on common shares of $0.24 per share in 2000, $0.22 per
share in 1999, and $0.17 per share in 1998.
Note 5 SIGNIFICANT TRANSACTIONS
1999 Reinsurance Agreement
During 1999, the Company entered into a new agreement reinsuring a market value
adjusted annuity product on a modified coinsurance basis. Pursuant to the terms
of the reinsurance agreement, the annuity liabilities and funds supporting the
liabilities are withheld by the ceding company. To reflect the Company's
obligations under the agreement, the amounts withheld have been reflected in
"Funds withheld at interest" and "Interest sensitive contract liabilities" on
the balance sheet. As of December 31, 2000, approximately $457.9 million and
$470.3 million related to this agreement were included in funds withheld at
interest and interest sensitive contract liabilities, respectively. As of
December 31, 1999, approximately $364.5 million and $395.7 million were included
in funds withheld at interest and interest sensitive contract liabilities,
respectively.
The Company subsequently retrocedes approximately 5/12ths of this business to a
GenAmerica subsidiary and 2/12ths to a subsidiary of MetLife. The Company
reports the effect of the retrocessions by reflecting a net receivable or
payable from/to the retrocessionaires in other reinsurance balances. The
underlying product reinsured by the Company provides the contract holder with a
minimum return guarantee over the life of the product. The Company shares in
this guarantee pursuant to the reinsurance agreement. The guarantee is mitigated
by applicable surrender charges over the first ten years of the contract. Also,
the Company mitigates the investment risk through participation in establishing
investment guidelines and through management's regular monitoring of the
underlying investment performance.
Recapture Transaction
Effective September 29, 1999, General American completed the recapture of the
entire block of General American's funding agreement business reinsured by the
Company. Prior to the recapture, the Company reinsured approximately 25% of
General American's funding agreement business. Pursuant to the recapture
transaction, the Company transferred all remaining liabilities related to the
funding agreement business and an equivalent amount of assets to General
American. Over the course of the third quarter of 1999, the Company transferred
to General American approximately $1.8 billion in market value of assets,
including $1.5 billion in connection with the recapture. Those assets,
consisting primarily of investments in fixed maturity securities and cash, were
transferred in satisfaction of $1.8 billion in funding agreement liabilities.
Associated with the liquidation of investment securities and the transfer of
assets to General American during the third quarter of 1999, the Company
incurred an after tax net capital loss of approximately $33.2 million, including
$26.0 million associated with the recapture transaction.
Note 6 INVESTMENTS
Major categories of net investment income consist of the following (in
thousands):
Years Ended December 31 2000 1999 1998
Fixed maturity securities $189,750 $252,399 $234,465
Mortgage loans on real estate 10,003 11,284 9,705
Policy loans 44,712 42,378 37,807
Short-term investments 11,129 10,901 9,033
Funds withheld at interest 69,715 23,490 13,373
Other 3,497 2,912 309
-------- -------- --------
Investment revenue 328,806 343,364 304,692
Investment expense 2,301 3,084 2,912
-------- -------- --------
Net investment income $326,505 $340,280 $301,780
======== ======== ========
52
53
The amortized cost, gross unrealized gains and losses, and estimated fair values
of investments in fixed maturity securities at December 31, 2000 and 1999 are as
follows (in thousands):
Amortized Unrealized Unrealized Fair
2000 Cost Gains Losses Value
---------- ---------- ---------- ----------
Available for sale:
Commercial and industrial $1,138,047 $ 21,837 $ 97,220 $1,062,664
Public utilities 366,767 39,285 20,273 385,779
Asset-backed securities 319,929 3,631 55,178 268,382
Canadian government 289,144 58,565 7,924 339,785
Mortgage backed securities 266,171 6,202 10,538 261,835
Finance 213,654 6,081 6,726 213,009
U.S Government and agencies 87,208 2,513 25 89,696
Other Foreign Government 18,373 177 -- 18,550
Australian government agencies 14,889 18 30 14,877
Argentine government and agencies 39,339 205 1,281 38,263
---------- ---------- ---------- ----------
$2,753,521 $ 138,514 $ 199,195 $2,692,840
========== ========== ========== ==========
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
---------- ---------- ---------- ----------
Available for sale:
Commercial and industrial $ 816,134 $ 1,106 $ 86,414 $ 730,826
Public utilities 341,881 24,619 35,612 330,888
Asset-backed securities 283,622 2 82,063 201,561
Canadian government 217,345 28,641 19,400 226,586
Mortgage backed securities 173,777 13 26,248 147,542
Finance 106,705 93 9,811 96,987
Chilean government and agencies 87,089 -- 3,055 84,034
U.S. Government and agencies 32,533 21 1,554 31,000
Other Foreign Government 13,123 33 1,486 11,670
Australian government agencies 10,938 39 267 10,710
Argentine government and agencies 4,393 -- 31 4,362
---------- ---------- ---------- ----------
$2,087,540 $ 54,567 $ 265,941 $1,876,166
========== ========== ========== ==========
There were no investments in any entity in excess of 10% of stockholders' equity
at December 31, 2000 or 1999, other than investments issued or guaranteed by the
U.S. government.
Equity investments and derivative financial instruments are included in other
invested assets in the Company's consolidated balance sheet. The cost basis of
equity investments at December 31, 2000 and 1999 was approximately $15.4 million
and $12.0 million, respectively. The cost basis of the derivative financial
instruments at December 31, 2000 and 1999 was approximately $4.4 million.
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 2000 are shown by contractual maturity for all securities except
U.S. Government agencies mortgage-backed securities, which are distributed to
maturity year based on the Company's estimate of the rate of future prepayments
of principal over the remaining lives of the securities. These estimates are
developed using prepayment rates provided in broker consensus data. Such
estimates are derived from prepayment rates experienced at the interest rate
levels projected for the applicable underlying collateral and can be expected to
vary from actual experience. Actual maturities can differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
53
54
At December 31, 2000, the contractual maturities of investments in fixed
maturity securities were as follows (in thousands):
Amortized Fair
Cost Value
Available for sale:
Due in one year or less $ 51,089 $ 48,746
Due after one year through five years 523,734 535,610
Due after five years through ten years 715,998 666,514
Due after ten years 1,196,529 1,180,135
Mortgage-backed securities 266,171 261,835
---------- ----------
$2,753,521 $2,692,840
========== ==========
Net realized investment gains or losses, consist of the following (in
thousands):
Years Ended December 3 2000 1999 1998
Fixed maturities and equity securities available for sale:
Realized gains $ 2,487 $ 19,683 $ 4,082
Realized losses (23,142) (81,936) (1,064)
Other, net (7,996) (13,055) 74
-------- -------- --------
Net (losses) gains $(28,651) $(75,308) $ 3,092
======== ======== ========
Included in net realized losses are permanent write-downs of fixed maturity
securities of approximately $10.1 million, $15.4 million, and $0.8 million in
2000, 1999, and 1998, respectively. Other losses during 2000 include $8.9
million in realized losses associated with the sale of subsidiaries.
Securities with an amortized cost of $3.1 million and $3.7 million were on
deposit with various state or governmental insurance departments to comply with
applicable insurance laws at December 31, 2000 and 1999, respectively.
Securities with an amortized cost of $411.6 million and $321.4 million were held
in trust in Canada at December 31, 2000 and 1999, respectively, to satisfy
collateral requirements for reinsurance business conducted in Canada.
Additionally, securities with an amortized cost of $821.5 million and $385.0
million at December 31, 2000 and 1999, respectively, were held in trust to
satisfy collateral requirements of certain treaties.
At December 31, 2000, fixed maturities held by the Company that were below
investment grade or not rated by an independent rating agency had an estimated
fair value of approximately $66.4 million. At December 31, 2000, the Company
owned non-income producing securites with an amortized cost of $7.2 million.
The Company makes mortgage loans on income producing properties, such as
apartments, retail and office buildings, light warehouses and light industrial
facilities. Loan to value ratios at the time of loan approval are 64 percent or
less for domestic mortgages. The distribution of mortgage loans by property type
is as follows (dollars in thousands):
2000 1999
Carrying Percentage Carrying Percentage
Value Of Total Value Of Total
Property Type
Apartment $ 1,028 .80% $ 78,375 36.65%
Retail 48,290 37.65% 50,088 23.42%
Office building 50,299 39.21% 52,136 24.38%
Industrial 26,423 20.60% 28,144 13.16%
Other commercial 2,227 1.74% 5,113 2.39%
--------- ------ --------- ------
128,267 100.00% 213,856 100.00%
====== ======
Less: Allowance (156) (669)
--------- ---------
Total $ 128,111 $ 213,187
======== =========
54
55
All the Company's mortgage loans are amortizing loans. As of December 31, 2000
and 1999, the Company's mortgage loans were distributed as follows (in
thousands):
2000 1999
Carrying Percentage Carrying Percentage
Value Of Total Value of Total
United States:
Arizona $ 13,606 10.61% $ 13,970 6.53%
California 20,538 16.01% 21,170 9.92%
Colorado 1,924 1.50% 1,955 .91%
Florida 5,787 4.51% 5,868 2.74%
Georgia 8,013 6.25% 8,344 3.90%
Illinois 12,606 9.83% 9,498 4.44%
Indiana 5,497 4.29% 5,634 2.63%
Kansas 7,663 5.97% 7,924 3.71%
Maryland 4,686 3.65% 4,898 2.29%
Missouri 7,475 5.83% 7,620 3.56%
Nevada 1,414 1.10% 1,482 .69%
North Carolina 16,688 13.01% 17,047 7.97%
Pennsylvania 5,759 4.49% 4,872 2.28%
Texas 2,233 1.74% 2,291 1.07%
Washington 14,378 11.21% 14,793 6.92%
Chile -- -- 86,490 40.44%
--------- ------ -------- ------
128,267 100.00% 213,856 100.00%
Less: Allowance (156) (669)
-------- --------
Total $128,111 $213,187
======== ========
There were no loans delinquent at December 31, 2000.
The maturities of the mortgage loans are as follows (in thousands):
2000 1999
Due within one year $ 311 $ --
Due one year through five years 1,160 1,501
Due after five years 45,446 46,453
Due after 10 years 81,350 165,902
--------- ---------
Subtotal 128,267 213,856
Less: Allowance (156) (669)
--------- ---------
Total $ 128,111 $ 213,187
========= =========
Note 7 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 2000 and 1999. SFAS No. 107,
"Disclosures about the Fair Value of Financial Instruments," defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties (in thousands):
55
56
2000 1999
Carrying Estimated Carrying Estimated
Assets: Value Fair Value Value Fair Value
Fixed maturities $2,692,840 $2,692,840 $1,876,166 $1,876,166
Mortgage loans on real estate 128,111 131,730 213,187 209,917
Policy loans 706,877 706,877 660,062 660,062
Funds withheld at interest 938,362 935,748 797,949 810,670
Short-term investments 68,735 68,735 238,424 238,424
Other invested assets 25,233 25,233 26,069 26,069
Liabilities:
Interest-sensitive contract $2,128,743 $2,074,491 $1,545,893 $1,500,510
liabilities
Long-term debt 272,257 274,420 183,954 177,057
Publicly traded fixed maturity securities are valued based upon quoted market
prices. Private placement securities are valued based on the credit quality and
duration of marketable securities deemed comparable by the Company's investment
advisor, which may be of another issuer. The fair value of mortgage loans on
real estate is estimated using discounted cash flows. Policy loans typically
carry an interest rate that is tied to the crediting rate applied to the related
policy and contract reserves. The carrying value of funds withheld at interest
generally equals fair value except were the funds withheld are specifically
identified in the agreement. The carrying value of short-term investments at
December 31, 2000 and 1999 approximates fair value. Equity investments and
derivative financial instruments included in other invested assets are reflected
at fair value on the consolidated balance sheet.
The fair value of the Company's interest sensitive contract liabilities is based
on the cash surrender value of the liabilities, adjusted for recapture fees. The
fair value of the Company's long-term debt is estimated based on quoted market
prices for corporations with similar credit quality.
Note 8 REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to direct
writing companies. Failure of retrocessionaires to honor their obligations could
result in losses to the Company; consequently, allowances would be established
for amounts deemed uncollectible. At December 31, 2000 and 1999, no allowances
were deemed necessary. The Company regularly evaluates the financial condition
of its reinsurers/retrocessionaires.
The effect of reinsurance on premiums and amounts earned is as follows (in
thousands):
Years Ended December 31 2000 1999 1998
Direct premiums and amounts assessed
against policyholders $ 26,077 $ 41,174 $ 50,961
Reinsurance assumed 1,598,197 1,543,634 1,213,780
Reinsurance ceded (220,208) (269,170) (248,321)
----------- ----------- -----------
Net premiums and amounts earned $ 1,404,066 $ 1,315,638 $ 1,016,420
=========== =========== ===========
The effect of reinsurance on policyholder claims and other policy benefits is
as follows (in thousands):
Years Ended December 31 2000 1999 1998
Direct $ 27,327 $ 53,358 $ 52,879
Reinsurance assumed 1,275,223 1,200,155 981,867
Reinsurance ceded (199,002) (186,402) (236,845)
----------- ----------- -----------
Net policyholder claims and benefits $ 1,103,548 $ 1,067,111 $ 797,901
=========== =========== ===========
At December 31, 2000, there were no reinsurance receivables associated with a
single reinsurer with a carrying value in excess of 5% of total assets.
56
57
The impact of reinsurance on life insurance in force is shown in the following
schedule (in millions):
Life Insurance In Force Direct Assumed Ceded Net Assumed/
Net %
December 31, 2000 $86 $545,950 $ 78,226 $467,810 116.70%
December 31, 1999 81 446,943 36,569 410,455 108.89%
December 31, 1998 83 330,615 16,171 314,527 105.11%
At December 31, 2000, RGA Reinsurance has provided approximately $498.4 million
of statutory financial reinsurance to other insurance companies under financial
reinsurance transactions to assist ceding companies in meeting applicable
regulatory requirements and to enhance ceding companies' financial strength.
Generally, such financial reinsurance is provided by the Company committing cash
or assuming insurance liabilities, which are collateralized by future profits on
the reinsured business. The Company retrocedes the majority of the assumed
financial reinsurance, including approximately $42.9 million to MetLife and its
subsidiaries. The Company earns a fee based on the amount of net outstanding
financial reinsurance.
Note 9 DEFERRED POLICY ACQUISITION COSTS
The following reflects the amounts of policy acquisition costs deferred and
amortized (in thousands):
Years Ended December 31 2000 1999 1998
Deferred acquisition cost
Assumed $ 715,318 $ 542,393 $ 359,946
Retroceded (93,843) (64,004) (8,904)
--------- --------- ---------
Net $ 621,475 $ 478,389 $ 351,042
========= ========= =========
Beginning of year $ 478,389 $ 351,042 $ 289,842
Capitalized
Assumed 382,772 333,020 234,066
Retroceded (43,452) (30,922) (2,480)
Amortized
Assumed (209,847) (177,440) (171,470)
Retroceded 13,613 2,689 1,084
--------- --------- ---------
End of year $ 621,475 $ 478,389 $ 351,042
========= ========= =========
Some reinsurance agreements involve reimbursing the ceding company for
allowances and commissions in excess of first-year premiums. These amounts
represent an investment in the reinsurance agreement, and are capitalized to the
extent deemed recoverable from the future premiums and amortized against future
profits of the business. This type of agreement presents a risk to the extent
that the business lapses faster than originally anticipated resulting in future
profits being insufficient to recover the Company's investment.
Note 10 INCOME TAX
Provision for income taxes attributable to income from operations consists of
the following (in thousands):
Years Ended December 31 2000 1999 1998
Current income tax $ 12,789 $(20,835) $ 16,807
Deferred income tax expense 46,494 40,430 23,662
Foreign current tax (728) 11,881 5,463
Foreign deferred tax 10,716 7,583 3,123
-------- -------- --------
Provision for income taxes $ 69,271 $ 39,059 $ 49,055
======== ======== ========
57
58
Provision for income taxes differed from the amounts computed by applying the
U.S. federal income tax statutory rate of 35% to pre-tax income as a result of
the following (in thousands):
Years Ended December 31 2000 1999 1998
Tax provision at U.S. statutory rate $ 61,371 $ 32,575 $ 48,316
Increase in income taxes resulting from:
Foreign tax rate in excess of U.S. tax rate 1,049 994 752
Foreign tax credit -- -- (1,194)
Travel and entertainment 134 136 97
Intangible amortization 215 284 394
Deferred tax valuation allowance 2,369 2,655 200
Basis differential on sale of Chilean subsidiaries 2,447 -- --
Other, net 1,686 2,415 490
--------- --------- ---------
Total provision for income taxes $ 69,271 $ 39,059 $ 49,055
========= ========= =========
Total income taxes were as follows (in thousands):
Years Ended December 31 2000 1999 1998
Income tax from continuing operations: $ 69,271 $ 39,059 $ 49,055
Tax benefit on discontinued operations (15,140) (6,855) (14,939)
Income tax from stockholders' equity
Unrealized holding gain or (loss) on debt and equity
securities recognized for financial 51,766 (104,174)
reporting purposes (11,090)
Exercise of stock options (344) (194) (583)
Foreign currency translation 3,208 2,702 (3,644)
--------- --------- ---------
Total income tax provided $ 108,761 $ (69,462) $ 18,799
========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at December 31, 2000 and 1999,
are presented in the following tables (in thousands):
Years Ended December 31 2000 1999
Deferred income tax assets:
Nondeductible accruals $ 12,271 $ 10,732
Differences in foreign currency translation 11,349 5,360
Deferred acquisition costs capitalized for tax 24,976 20,621
Net operating loss carryforward 94,781 47,157
Foreign tax & AMT credit carryforward 2,347 --
Capital loss carryforward 1,759 --
Differences in the tax basis of cash and invested assets -- 69,713
--------- ---------
Subtotal 147,483 153,583
Valuation allowance (6,204) (3,747)
--------- ---------
Total deferred income tax assets 141,279 149,836
--------- ---------
Deferred income tax liabilities:
Deferred acquisition costs capitalized for financial reporting 208,060 178,975
Differences between tax and financial reporting amounts concerning
certain reinsurance transactions and reserve for policies 95,400 38,606
Pension plan overfunding -- 169
Differences in the tax basis of cash and invested assets 8,724 --
--------- ---------
Total deferred income tax liabilities 312,184 217,750
--------- ---------
Net deferred income tax liabilities $ 170,905 $ 67,914
========= =========
58
59
As of December 31, 2000, and 1999, a valuation allowance for deferred tax assets
of approximately $6.2 million and $3.7 million respectively, was provided on the
net operating and capital losses of RGA, RGA Australia, GA Argentina, RGA South
Africa, and RGA UK. The Company utilizes valuation allowances when it
determines, based on the weight of available evidence, that it is more likely
than not that the deferred income tax assets will not be realized. The Company
has not recognized a deferred tax liability for the undistributed earnings of
its wholly owned domestic and foreign subsidiaries because the Company currently
does not expect those unremitted earnings to become taxable to the Company in
the foreseeable future. This is due to the fact that the unremitted earnings
will not be repatriated in the foreseeable future, or because those unremitted
earnings that may be repatriated will not be taxable through the application of
tax planning strategies that management would utilize.
The Company received federal income tax refunds of approximately $44.8 million
during 2000. The Company made federal income tax payments of approximately $6.5
million, $18.4 million, and $22.9 million during 2000, 1999 and 1998,
respectively. At December 31, 2000, the Company recognized deferred tax assets
associated with net operating losses of approximately $247.7 million. This net
operating loss is expected to be utilized in the normal course of business
during the period allowed for carry forwards and in any event, will not be lost
due to the application of tax planning strategies that management would utilize.
Note 11 EMPLOYEE BENEFIT PLANS
Most of the Company's U.S. employees participate in a non-contributory, defined
benefit pension plan sponsored by RGA Reinsurance. The benefits are based on
years of service and compensation levels. RGA Reinsurance's funding policy is to
contribute the maximum amount deductible for federal income tax purposes
annually.
Also, certain management individuals participate in several nonqualified defined
benefit and contribution plans sponsored by GenAmerica and RGA Reinsurance.
Those plans are unfunded and are deductible for federal income tax purposes when
the benefits are paid. Additionally, full-time salaried employees with at least
one year of service participate in a profit-sharing plan sponsored by RGA
Reinsurance. The Company's contributions are tied to RGA's operating results.
Contributions to that plan have been determined annually by the RGA Board of
Directors and are based upon the salaries of eligible employees. Full vesting
occurs after five years of continuous service.
The Company also provides certain health care and life insurance benefits for
retired employees through a self-insured, unfunded plan. Employees become
eligible for these benefits if they meet minimum age and service requirements.
The retiree's cost for health care benefits varies depending upon the credited
years of service.
The liabilities and periodic pension costs associated with the Company's
employee benefit plans are not material to the consolidated financial
statements.
Note 12 RELATED PARTY TRANSACTIONS
Prior to September 1, 2000, Conning Asset Management Company ("Conning"), a
majority-owned subsidiary of General American, provided investment management
and advisory services to RGA, RGA Reinsurance, RGA Barbados, Australian Holdings
and RGA Life Reinsurance Company of Canada ("RGA Canada"). These services were
provided pursuant to agreements at the rate of 0.09% of fixed maturity assets
managed and 0.22% of mortgage loans managed, payable quarterly, based on the
average book value of the portfolios managed during each calendar quarter. On
September 1, 2000, the Company contracted with a third party to provide the
majority of investment management and advisory services for these portfolios.
Conning, however, continues to provide accounting services for such portfolios,
and certain accounting, management, and advisory services related to the
Company's mortgage loan and collateralized mortgage back securitization
portfolios. The cost for Conning's services for the years ended December 31,
2000, 1999, and 1998, was approximately $1.7 million, $2.8 million, and $2.9
million, respectively. Management does not believe that the various amounts
charged by Conning to the Company would have been materially different if they
had been incurred from an unrelated third party.
Subject to written agreements with RGA and RGA Reinsurance, General American has
historically provided certain administrative services to RGA and RGA
Reinsurance. Such services include legal, treasury, employee benefit, payroll,
and personnel. The cost for the years ended December 31, 2000, 1999, and 1998,
was approximately $2.6 million, $2.2 million, and $2.7 million, respectively.
Management does not believe that the various amounts charged by General American
to the Company would be materially different if they had been incurred from an
unrelated third party.
Prior to moving its operations in August of 1999 to a leased facility owned by a
third-party, the Company conducted its business primarily from premises leased
by RGA Reinsurance from General American. RGA Reinsurance made rental payments
in 1999
59
60
and 1998 to General American, principally for office space, of approximately
$1.1 million and $1.6 million, respectively.
The Company also has direct policies and reinsurance agreements with MetLife
and certain of its subsidiaries. As of December 31, 2000, the Company had
assets and liabilities related to these agreements totaling $103.3 million and
$114.1 million, respectively. Additionally, the Company reflected net assumed
premiums of approximately $144.0 million, $130.3 million, and $111.5 million in
2000, 1999, and 1998, respectively. The premiums reflect the net of business
assumed from and ceded to MetLife and its subsidiaries. The pre-tax gain (loss)
on this business was approximately $17.8 million, $(31.0) million, and $17.7
million in 2000, 1999, and 1998, respectively. This includes realized gains
(losses) on the disposal of investment securities of ($70.4) million and $0.6
million for 1999 and 1998, respectively.
The loss in 1999 includes the impact of reinsuring the General American funding
agreements and an annuity coinsurance agreement with Cova Financial Services
Life Insurance Company ("Cova"), a subsidiary of General American, both of which
were recaptured during 1999. The funding agreement and annuity coinsurance
agreement contributed net pre-tax earnings (loss) of $(47.8) million and $2.6
million, respectively, during 1999, including pre-tax net capital losses on
disposal of investment securities of $52.9 million and $13.1 million,
respectively. Deposits related to funding agreements and the annuity coinsurance
at the time of recapture were $1.5 billion and $206.6 million, respectively.
Note 13 LEASE COMMITMENTS
The Company leases office space and furniture and equipment under non-cancelable
operating lease agreements, which expire at various dates. Future minimum office
space annual rentals under non-cancelable operating leases at December 31, 2000
are as follows:
2001 $ 3.9 million
2002 $ 3.4 million
2003 $ 3.3 million
2004 $ 3.2 million
2005 $ 3.3 million
Thereafter $11.4 million
Rent expenses amounted to approximately $4.7 million, $4.3 million, and $2.8
million for the years ended December 31, 2000, 1999, and 1998, respectively.
Note 14 FINANCIAL CONDITION AND NET INCOME ON A STATUTORY BASIS-SUBSIDIARIES
The statutory basis financial condition of RGA Reinsurance and RGA Canada, as of
December 31, 2000 and 1999 was as follows (in thousands):
RGA Reinsurance RGA Canada
2000 1999 2000 1999
Assets $4,876,745 $4,013,607 $ 826,841 $ 742,015
Liabilities 4,377,685 3,578,591 659,096 593,285
---------- ---------- ---------- ----------
Total capital and surplus $ 499,060 $ 435,016 $ 167,745 $ 148,730
========== ========== ========== ==========
The statutory basis net income of RGA Reinsurance and RGA Canada for the periods
indicated was as follows (in thousands):
RGA Reinsurance RGA Canada
2000 1999 1998 2000 1999 1998
Net income (loss) $ 80,575 $(51,283) $ 12,785 $ 6,646 $ 2,087 $ 6,855
The total capital and surplus positions of RGA Reinsurance and RGA Canada exceed
the risk based capital requirements of the applicable regulatory bodies. RGA
Reinsurance is subject to statutory provisions that restrict the payment of
dividends. It may not pay dividends in any 12-month period in excess of the
greater of the prior year's statutory operating income or 10% of capital and
60
61
surplus at the preceding year-end, without regulatory approval. Pursuant to this
calculation, RGA Reinsurance's allowable dividend without prior approval for
2001 would be $80.6 million. However, the applicable statutory provisions only
permit an insurer to pay a shareholder dividend from unassigned surplus. As of
December 31, 2000, RGA Reinsurance had unassigned surplus of $67.1 million. Any
dividends paid by RGA Reinsurance would be paid to RCM, its parent company,
which in turn has restrictions related to its ability to pay dividends to RGA.
The assets of RCM consist primarily of its investment in RGA Reinsurance. As of
December 31, 2000, RCM could pay a maximum dividend to RGA equal to its
unassigned surplus, approximately $38.9 million. The maximum amount available
for dividends by RGA Canada under the Canadian Minimum Continuing Capital and
Surplus Requirements ("MCCSR") is $28.7 million. Dividend payments from other
subsidiaries and joint ventures are subject to regulations in the country of
domicile.
Note 15 COMMITMENTS AND CONTINGENT LIABILITIES
The Company is currently a party in arbitrations that involve three separate
group medical reinsurance coverages as discussed in Note 21 to the consolidated
financial statements. From time to time, the Company is subject to litigation
and arbitration related to its reinsurance business and to employment-related
matters in the normal course of its business. While it is not feasible to
predict or determine the ultimate outcome of the pending arbitration or legal
proceedings or provide reasonable ranges of potential losses, it is the opinion
of Management that their outcomes after consideration of the provisions made in
the Company's consolidated financial statements would not have a material
adverse effect on its consolidated financial position.
The Company has obtained letters of credit in favor of various affiliated and
unaffiliated insurance companies from which the Company assumes business. This
allows the ceding company to take statutory reserve credit. The letters of
credit issued by banks represent a guarantee of performance under the
reinsurance agreements. At December 31, 2000, there were approximately $34.9
million of outstanding bank letters of credit in favor of unaffiliated entities
and $5.5 million in favor of General American.
Note 16 DEBT FINANCING ACTIVITIES
On May 24, 2000, the Company entered into a credit agreement (the "Credit
Agreement") with a bank syndicate, under which it may borrow up to $140.0
million to continue expansion of the Company's business. Interest on borrowings
is payable quarterly at rates based either on the prime, federal funds or LIBOR
rates plus a base rate margin (7.07% as of December 31, 2000) defined in the
Credit Agreement. As of December 31, 2000, the Company had approximately $80.0
million outstanding under the Credit Agreement. The termination date of the
Credit Agreement is May 24, 2003.
On May 8, 2000, RGA Holdings Limited, a wholly-owned subsidiary of the Company,
entered into a revolving credit facility (the "U.K. Credit Agreement"), whereby
it may borrow up to (pound)15.0 million (approximately $22.0 million) for
expansion of the Company's business in the United Kingdom. Interest on
borrowings is payable quarterly at LIBOR rates plus a base rate margin (6.67% as
of December 31, 2000) defined in the U.K. Credit Agreement. As of December 31,
2000, the Company had borrowed (pound)6.0 million (approximately $8.8 million)
under the U.K. Credit Agreement. The termination date of the U.K. Credit
Agreement is May 8, 2003, extendable for two, one-year terms.
On June 1, 1999, the Company entered into a term loan agreement with General
American, whereby it borrowed $75.0 million to continue expansion of the
Company's business. Interest on the term loan is payable quarterly at 100 basis
points over the British Bankers' Association three-month LIBOR rate (7.81% and
7.02% as of December 31, 2000 and 1999, respectively). The term loan matures on
June 30, 2004.
On March 19, 1996, RGA issued 7 1/4% Senior Notes with a face value of $100.0
million in accordance with Rule 144A of the Securities Act of 1933, as amended.
The net proceeds from the offering were approximately $98.9 million and interest
is payable semiannually on April 1 and October 1, with the principal amount due
April 1, 2006.
On January 8, 1996, Australian Holdings established a $15.9 million unsecured,
three month, revolving line of credit. The debt is guaranteed by the Company and
is utilized to provide operating capital to RGA Australia. The outstanding
balance as of December 31, 2000 and 1999 was approximately $9.5 million.
Interest is paid every three months at a variable rate with a rate of 6.54% and
5.80% as of December 31, 2000 and 1999, respectively. Subsequent to December 31,
2000, Australian Holdings amended and restated its credit agreement. With the
new agreement, Australian Holdings rolled over all outstanding borrowings into a
new AUS$35.0 million facility (approximately $19.6 million). The outstanding
balance as of December 31, 2000 is included in long-term debt on the face of the
consolidated balance sheet.
61
62
The ability of the Company to make debt principal and interest payments as well
as make dividend payments to shareholders is ultimately dependent on the
earnings and surplus of subsidiaries, investment earnings on the undeployed
debt proceeds, and the ability of the Company to raise additional funds. The
transfer of funds from the insurance subsidiaries to RGA is subject to
applicable insurance laws and regulations. In addition, the debt agreements
contain certain financial covenant restrictions related to, among others,
liens, the issuance and disposition of stock of restricted subsidiaries,
minimum requirements of net worth, and minimum rating requirements. The Company
must also comply with specific reporting requirements with notices given to
the respective fiscal agents at prescribed dates. As of December 31, 2000, the
Company was in compliance with all covenants under its debt agreements.
Interest paid on debt during 2000, 1999, and 1998 was $16.9 million, $9.6
million and $8.8 million, respectively.
Note 17 SEGMENT INFORMATION
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and other
international operations. The U.S. operations provide traditional life
reinsurance and non-traditional reinsurance to domestic clients. Non-traditional
business includes asset-intensive and financial reinsurance. Asset-intensive
products include reinsurance of corporate-owned life insurance, annuities and,
prior to September 30, 1999, funding agreement products. The Canada operations
provide insurers with traditional reinsurance as well as assistance with capital
management activity. The Latin America operations include direct life insurance
through a joint venture and subsidiaries in Chile and Argentina. The Company
sold its Chilean operations in April 2000. See Note 22. The Latin America
operations also include traditional reinsurance and reinsurance of privatized
pension products, primarily in Argentina. Asia Pacific operations provide
primarily traditional life reinsurance through RGA Australia and RGA
Reinsurance. Other international operations include traditional business from
Europe and South Africa, in addition to other markets being developed by the
Company. The operational segment results do not include the corporate investment
activity, general corporate expenses and interest expense of RGA. In addition,
the Company's discontinued accident and health operations are not reflected in
the continuing operations of the Company.
The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies in Note 2. The Company measures
segment performance based on profit or loss from operations before income taxes
and minority interest. There are no intersegment transactions and the Company
does not have any material long-lived assets. Investment income is allocated to
the segments based upon average assets and related capital levels deemed
appropriate to support the segment business volumes.
The Company's reportable segments are strategic business units that are
segregated by geographic region. Information related to revenues, income (loss)
before income taxes and minority interest, and assets of the Company's
continuing operations are summarized below.
For the Years ending December 31, 2000 1999 1998
(Dollars in thousands)
REVENUES
U.S. $1,271,629 $1,143,243 $ 968,535
Canada 237,303 221,134
184,740
Latin America 75,944
127,791 116,711
Asia Pacific 100,985
77,329 58,729
Other international 35,288 25,649 5,139
Corporate 4,586 11,936 10,638
---------- ---------- ----------
Total from continuing operations $1,725,735 $1,607,082 $1,344,492
========== ========== ==========
62
63
For the Years ending December 31, 2000 1999 1998
(Dollars in thousands)
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST
U.S. $ 167,209 $ 70,537 $ 126,029
Canada 39,858
37,879 22,754
Latin America (6,248)
3,328 3,823
Asia Pacific 1,205 (3,060)
(6,790)
Other international (2,380) (5,009)
(3,854)
Corporate (24,299) (8,028) (6,490)
--------- --------- ---------
Total from continuing operations $ 175,345 $ 93,072 $ 138,047
========= ========= =========
Unconsolidated subsidiaries with an ownership position less than fifty percent
are recorded on the equity basis of accounting. The equity in the net income of
unconsolidated subsidiaries is not material to the results of operations or
financial position of individual segments or the Company taken as a whole.
For the Years ending December 31, 2000 1999 1998
(Dollars in thousands)
INTEREST EXPENSE
Asia Pacific $ 980 $ 491 $ 455
Other International 502 -- --
Corporate 16,114 10,529 8,350
----------- ----------- -----------
Total from continuing operations $ 17,596 $ 11,020 $ 8,805
=========== =========== ===========
For the Years ending December 31, 2000 1999 1998
(Dollars in thousands)
DEPRECIATION AND AMORTIZATION
U.S $ 178,490 $ 158,135 $ 115,165
Canada 16,794 17,215 28,109
Latin America 5,204 (5,615) 6,599
Asia Pacific 20,170 31,930 20,324
Other international 4,001 8,819 125
----------- ----------- -----------
Total from continuing operations $ 224,659 $ 210,484 $ 170,322
=========== =========== ===========
For the Years ending December 31, 2000 1999 1998
(Dollars in thousands)
ASSETS
U.S $ 4,001,272 $ 2,987,710 $ 4,558,425
Canada 1,384,768 1,068,498
1,245,243
Latin America 140,610 248,536
340,502
Asia Pacific 236,031 160,785 123,508
Other international 33,214 5,791 (1,865)
Corporate and discontinued operations 265,965 383,712 321,451
----------- ----------- -----------
Total assets $ 6,061,860 $ 5,123,743 $ 6,318,553
=========== =========== ===========
Capital expenditures of each reporting segment were insignificant in the periods
noted.
63
64
Note 18 STOCK OPTIONS
The Company adopted the RGA Flexible Stock Plan (the "Plan") in February 1993
and the Flexible Stock Plan for Directors (the "Directors Plan") in January 1997
(collectively, the "Stock Plans"). The Stock Plans provide for the award of
benefits (collectively "Benefits") of various types, including stock options,
stock appreciation rights ("SARs"), restricted stock, performance shares, cash
awards, and other stock based awards, to key employees, officers, directors and
others performing significant services for the benefit of the Company or its
subsidiaries. In general, options granted under the Plan become exercisable over
vesting periods ranging from one to eight years while options granted under the
Directors Plan become exercisable after one year. As of December 31, 2000,
shares authorized for the granting of Benefits under the Plan and the Directors
Plan totaled 4,111,933 and 112,500, respectively. Options are granted with an
exercise price equal to the stock's fair value at the date of grant and expire
10 years after the date of grant. Information with respect to option grants
under the Stock Plans follow.
2000 1999 1998
Weighted- Weighted- Weighted-
Average Average Average
Options exercise price Options exercise price Options exercise price
---------- ---------------- --------- ---------------- --------- ----------------
BALANCE AT BEGINNING OF YEAR 1,653,137 $21.41 1,536,960 $19.07 1,280,740 $15.51
Granted 456,407 $23.38 220,124 $35.63 357,875 $30.06
Exercised (43,058) $12.37 (65,476) $12.10 (73,290) $11.81
Forfeited (755) $35.33 (27,600) $21.01 (28,365) $15.35
Impact of exchange of voting for
Non-voting grants -- -- (10,871) -- -- --
---------- ------ --------- ------ --------- ------
BALANCE AT END OF YEAR 2,065,731 $22.03 1,653,137 $21.41 1,536,960 $19.07
========== ====== ========= ====== ========= ======
Options Outstanding Options Exercisable
-------------------------------------------- --------------------------
Weighted- Weighted- Weighted-
Outstanding Average Average Exercisable Average
Range of as of Remaining Exercise as of exercise
Exercise Prices 12/31/2000 Contractual Life Price 12/31/2000 price
- --------------- ----------- ---------------- --------- ----------- ---------
$10.00 - $14.99 507,908 2.9 $12.04 291,719 $11.90
$15.00 - $19.99 32,522 5.0 $15.61 17,953 $15.61
$20.00 - $24.99 963,558 6.5 $21.67 417,151 $20.38
$25.00 - $29.99 216,887 6.9 $26.55 99,528 $26.81
$30.00 - $34.99 24,750 8.3 $32.12 13,500 $33.00
$35.00 - $39.99 320,106 7.7 $35.79 93,781 $35.67
--------- ---- ------ ------- ------
TOTALS 2,065,731 5.8 $22.03 933,632 $20.04
========= ==== ====== ======= ======
The per share weighted-average fair value of stock options granted during 2000,
1999, and 1998 was $9.40, $11.24, and $10.05 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 2000-expected dividend yield of 0.8%, risk-free interest rate of
6.12%, expected life of 5.8 years, and an expected rate of volatility of the
stock of 33% over the expected life of the options; 1999-expected dividend yield
of 0.8%, risk-free interest rate of 5.64%, expected life of 5.0 years, and an
expected rate of volatility of the stock of 26% over the expected life of the
options; 1998-expected dividend yield of 0.7%, risk-free interest rate of 5.50%,
expected life of 6.0 years, and an expected rate of volatility of the stock of
24% over the expected life of the options.
The Company applies APB Opinion No. 25 in accounting for its Stock Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under Statement of
Financial Accounting Standards No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below. The
effects of applying Statement of Financial Accounting Standards No. 123 may not
be representative of the effects on reported net income for future years.
64
65
2000 1999 1998
Net income (in thousands) As reported $77,669 $40,858 $62,081
Pro forma $75,105 $38,953 $60,675
Basic earnings per share As reported $ 1.57 $ 0.89 $ 1.50
Pro forma $ 1.52 $ 0.85 $ 1.47
Diluted earnings per share As reported $ 1.56 $ 0.88 $ 1.48
Pro forma $ 1.50 $ 0.84 $ 1.45
In January 1998 and 1999, the Board approved restricted stock awards of 15,000
voting shares and 13,500 non-voting shares, respectively, under the Company's
Flexible Stock Plan. During 1999, the 13,500 shares of non-voting restricted
stock were converted into 13,096 shares of voting restricted stock. Compensation
expense related to restricted stock awards is being amortized over the
individual agreements vesting periods. In January 2001, the Board approved an
additional 474,168 incentive stock options at $29.81 per share under the
Company's Flexible Stock Plan.
Note 19 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share information):
Earnings: 2000 1999 1998
Income from continuing operations (numerator for
basic and diluted calculations) $105,787 $ 53,045 $ 89,709
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 49,538 45,794 42,086
Equivalent shares from outstanding stock options 382 452 473
-------- -------- --------
Diluted shares (denominator for diluted calculation) 49,920 46,246 42,559
Earnings per share from continuing operations:
Basic $ 2.14 $ 1.16 $ 2.11
Diluted $ 2.12 $ 1.15 $ 2.08
-------- -------- --------
Note 20 COMPREHENSIVE INCOME
The following table presents the components of the Company's other comprehensive
income for the years ending December 31, 2000, 1999 and 1998 (in thousands):
FOR THE TWELVE MONTH PERIOD ENDING DECEMBER 31, 2000:
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- ------------- ----------
Foreign currency translation adjustments
Change arising during year $ (13,855) $ 4,849 $ (9,006)
Less: reclassification adjustment for losses
realized in net income (4,689) 1,641 (3,048)
Net currency translation adjustments (9,166) 3,208 (5,958)
--------- --------- ---------
Unrealized gains on securities:
Unrealized holding gains arising during the year 117,141 (46,359) 70,782
Less: reclassification adjustment for losses realized
in net income (23,962) 5,407 (18,555)
--------- --------- ---------
Net unrealized gains 141,103 (51,766) 89,337
--------- --------- ---------
Other comprehensive income $ 131,937 $ (48,558) $ 83,379
========= ========= =========
65
66
FOR THE TWELVE MONTH PERIOD ENDING DECEMBER 31, 1999:
BEFORE-TAX TAX (EXPENSE)
AMOUNT BENEFIT NET-OF-TAX AMOUNT
---------- ------------- -----------------
Foreign currency translation adjustments $ 7,761 $ (2,702) $ 5,059
Unrealized gains on securities:
Unrealized holding losses arising during the year (356,096) 130,117 (225,979)
Less: reclassification adjustment for losses realized
in net income (75,308) 25,943 (49,365)
--------- --------- ---------
Net unrealized losses (280,788) 104,174 (176,614)
--------- --------- ---------
Other comprehensive income loss $(273,027) $ 101,472 $(171,555)
========= ========= =========
FOR THE TWELVE MONTH PERIOD ENDING DECEMBER 31, 1998:
BEFORE-TAX TAX (EXPENSE)
AMOUNT BENEFIT NET-OF-TAX AMOUNT
---------- ------------- -----------------
Foreign currency translation adjustments $(10,411) $ 3,644 $ (6,767)
Unrealized gains on securities:
Unrealized holding losses arising during the year (30,015) 9,965 (20,050)
Less: reclassification adjustment for gains realized
in net income 3,092 (1,125) 1,967
-------- -------- --------
Net unrealized losses (33,107) 11,090 (22,017)
-------- -------- --------
Other comprehensive loss $(43,518) $ 14,734 $(28,784)
======== ======== ========
A summary of the components of net unrealized (depreciation) appreciation of
balances carried at fair value is as follows (in thousands):
Years Ended December 31 2000 1999 1998
Change in net unrealized appreciation (depreciation) on:
Fixed maturity securities available for sale $ 147,598 $(302,486) $ (23,967)
Other investments 1,592 7,514 (6,948)
Effect of unrealized (depreciation) on:
Deferred policy acquisition costs (8,716) 14,271 (3,794)
Other 629 (87) 1,602
--------- --------- ---------
Net unrealized appreciation (depreciation) $ 141,103 $(280,788) $ (33,107)
========= ========= =========
Note 21 DISCONTINUED OPERATIONS
Since December 31, 1998, the Company has formally reported its accident and
health division as a discontinued operation. The accident and health business
was placed into run-off, and all treaties were terminated at the earliest
possible date. Notice was given to all cedants and retrocessionaires that all
treaties were being cancelled at the expiration of their terms. If a treaty was
continuous, a written Preliminary Notice of Cancellation was given, followed by
a final notice within 90 days of the expiration date. The nature of the
underlying risks is such that the claims may take several years to reach the
reinsurers involved. Thus, the Company expects to pay claims out of existing
reserves over a number of years as the level of business diminishes.
At the time it was accepting accident and health risks, the Company directly
underwrote certain business using its own staff of underwriters. Additionally,
it participated in pools of risks underwritten by outside managing general
underwriters, and offered high level common account and catastrophic protection
coverages to other reinsurers and retrocessionaires. Types of risks covered
included a variety of medical, disability, workers compensation carve-out,
personal accident, and similar coverages.
66
67
The reinsurance markets for several accident and health risks, most notably
involving workers' compensation carve-out and personal accident business, have
been quite volatile over the past several years. In particular, certain programs
are alleged to have been inappropriately underwritten by third party managers,
and some of the reinsurers and retrocessionaires involved have alleged
material misrepresentation and non-disclosures by the underwriting managers. As
a result, there have been a significant number of claims for recission,
arbitration, and litigation among a number of the parties involved. This has had
the effect of significantly slowing the reporting of claims between parties, as
the various outcomes of a series of arbitrations and similar actions affects the
extent to which higher level reinsurers and retrocessionaires may ultimately
have exposure to claims.
While RGA did not underwrite workers' compensation carve-out business directly,
it did offer certain high level common account coverages to other reinsurers and
retrocessionaires. The Company continues to investigate to determine if any
material indirect claims exposures arise from workers' compensation carve-out or
personal accident plans through pool participations or high level common account
retrocessional coverage. To date, no such material exposures have been
identified. If any material exposure is identified at some point in the future,
based upon the experience of others involved in these markets, any exposures
will potentially be subject to claims for recission, arbitration, or litigation.
Thus, resolution of any disputes will likely take several years. In any event,
it is management's opinion that future developments, if any, will not materially
adversely affect the Company's financial position.
The only arbitrations currently underway to which the Company is a party involve
three separate group medical reinsurance coverages. The Company expects those
arbitrations to be completed during 2001 and 2002. Reserves are established on
those treaties based upon estimates of the expected findings of the related
arbitration panels. There are no arbitrations underway as of December 31, 2000,
relative to the Company's portfolio of personal accident business, although such
arbitrations could commence at some point in the future.
The calculation of the claim reserve liability for the entire portfolio of
accident and health business requires management to make estimates and
assumptions that affect the reported claim reserve levels. The reserve balance
as of December 31, 2000 and 1999 was $89.1 million and $53.8 million,
respectively. The balance as of December 31, 2000 includes an additional $25.0
million charge taken by the Company during the fourth quarter of 2000 based upon
the most recent claims development to strengthen its reserves. Management must
make estimates and assumptions based on historical loss experience, changes in
the nature of the business, anticipated outcomes of claim disputes and claims
for recission, anticipated outcomes of arbitrations, and projected future
premium run-off, all of which may affect the level of the claim reserve
liability. Due to the significant uncertainty associated with the run-off of
this business, net income in future periods could be affected positively or
negatively. The consolidated statements of income for all periods presented
reflect this line of business as a discontinued operation. Revenues associated
with discontinued operations, which are not reported on a gross basis in the
Company's consolidated statements of income, totaled $23.7 million, $113.6
million, and $158.2 million for 2000, 1999, and 1998.
Note 22 SALE OF SUBSIDIARIES
As of April 1, 2000, the Company reached an agreement to sell its interest in
RGA Sudamerica, S.A. and its subsidiaries, RGA Reinsurance Company Chile, S.A.
and Bhif America Seguros de Vida, S.A. The transaction closed on April 27, 2000.
The Company received approximately $26.5 million in proceeds and recorded a loss
on the sale of approximately $8.6 million. The loss included $4.7 million of
accumulated foreign currency depreciation on the Company's net investment and
$1.4 million in previously unrealized depreciation of the investment portfolio.
During 2000, the Company also sold its interest in RGA Bermuda for nominal
consideration.
67
68
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Reinsurance Group of America, Incorporated:
We have audited the accompanying consolidated balance sheet of
Reinsurance Group of America, Incorporated and subsidiaries (the Company) as of
December 31, 2000 and the related consolidated statements of income,
stockholders' equity, and cash flows for the year ended December 31, 2000. Our
audit also included the financial statement schedules as of December 31, 2000
and for the year then ended listed in the index at Item 14. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Reinsurance
Group of America, Incorporated and subsidiaries as of December 31, 2000 and the
results of their operations and their cash flows for the year ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
St. Louis, Missouri
February 5, 2001
68
69
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Reinsurance Group of America, Incorporated:
We have audited the accompanying consolidated balance sheet of Reinsurance Group
of America, Incorporated and subsidiaries (the Company) as of December 31, 1999
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the years in the two-year period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statement referred to above present
fairly, in all material respects, the financial position of Reinsurance Group of
America, Incorporated and subsidiaries as of December 31, 1999 and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
St. Louis, Missouri
January 25, 2000
69
70
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Reinsurance Group of America, Incorporated:
Under date of January 25, 2000, we reported on the consolidated balance sheet of
Reinsurance Group of America, Incorporated and subsidiaries (the Company) as of
December 31, 1999, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the years in the two-year period
ended December 31, 1999, as contained in the 2000 annual report to stockholders.
These consolidated financial statements and our report thereon are incorporated
by reference in the annual report on Form 10-K for the year 2000. In connection
with our audits of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedules as listed in the
accompanying index. These financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
St. Louis, Missouri
January 25, 2000
70
71
Report of Management Responsibility for Financial Statements
The consolidated balance sheets of Reinsurance Group of America,
Incorporated and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, cash flows and stockholders' equity for the
years ended December 31, 2000, 1999, and 1998, have been prepared by management,
which is responsible for their integrity and objectivity. The statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America and include some amounts that are based upon
management's best estimates and judgments. The financial information contained
elsewhere in this annual report is consistent with that contained in the
financial statements.
Management is responsible for establishing and maintaining a system of
internal control designed to provide reasonable assurance as to the integrity
and reliability of financial reporting. The concept of reasonable assurance is
based on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits derived therefrom. A professional staff of internal auditors reviews,
on an ongoing basis, the related internal control system design, the accounting
policies and procedures supporting this system, and compliance therewith.
Management believes this system of internal control effectively meets its
objective of reliable financial reporting.
In connection with annual audits, independent certified public
accountants perform an audit in accordance with auditing standards generally
accepted in the United States of America, which includes the consideration of
the system of internal control to the extent necessary to form an independent
opinion on the financial statements prepared by management.
The Board of Directors, through its Audit Committee, which is composed
solely of directors who are not employees of the Company, is responsible for
overseeing the integrity and reliability of the Company's accounting and
financial reporting practices and the effectiveness of its system of internal
controls. The independent certified public accountants and internal auditors
meet regularly with, and have access to, this committee, with and without
management present, to discuss the results of their audit work.
/s/ Richard A. Liddy /s/ A. Greig Woodring
Richard A. Liddy A. Greig Woodring
Chairman of the Board of Directors President and Chief Executive Officer
/s/ Jack B. Lay /s/ Todd C. Larson
Jack B. Lay Todd C. Larson
Executive Vice President and Senior Vice President, Controller and
Chief Financial Officer Treasurer
71
72
Quarterly Data (Unaudited--see accompanying accountants' report)
Years Ended December 31
(in thousands, except per share data)
2000 First Second Third Fourth
----------- ----------- ----------- -----------
Revenues from continuing operations $ 402,134 $ 419,275 $ 402,362 $ 501,964
Revenues from discontinued operations $ 18,196 $ 1,358 $ 2,837 $ 1,267
Income from continuing operations before
income taxes and minority interest $ 40,114 $ 39,219 $ 50,687 $ 45,325
Income from continuing operations $ 23,904 $ 21,410 $ 31,370 $ 29,103
Loss from discontinued operations(1) $ (3,482) $ (2,506) $ (2,261) $ (19,869)
----------- ----------- ----------- -----------
Net income $ 20,422 $ 18,904 $ 29,109 $ 9,234
Total outstanding common shares - end of period 49,869 49,335 49,258 49,294
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.48 $ 0.43 $ 0.64 $ 0.59
Discontinued operations $ (0.07) $ (0.05) $ (0.05) $ (0.40)
----------- ----------- ----------- -----------
Net Income $ 0.41 $ 0.38 $ 0.59 $ 0.19
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.48 $ 0.43 $ 0.63 $ 0.58
Discontinued operations $ (0.07) $ (0.05) $ (0.04) $ (0.39)
----------- ----------- ----------- -----------
Net Income $ 0.41 $ 0.38 $ 0.59 $ 0.19
Dividends per share $ 0.06 $ 0.06 $ 0.06 $ 0.06
Market price of common stock
Quarter end $ 23 13/16 $ 30 1/8 $ 34 1/4 $ 35 1/2
Common stock price, high 30 1/4 35 1/8 34 1/2 38 3/8
Common stock price, low 15 3/8 22 26 1/4 31 7/8
1999 First Second Third Fourth
----------- ----------- ----------- -----------
Revenues from continuing operations $ 443,107 $ 409,307 $ 326,244 $ 428,424
Revenues from discontinued operations $ 39,903 $ 22,059 $ 25,749 $ 25,919
Income (loss) from continuing operations before
income taxes and minority interest $ 35,757 $ 44,443 $ (18,545) $ 31,417
Income (loss) from continuing operations $ 21,978 $ 25,647 $ (13,937) $ 19,357
Loss from discontinued operations $ (21) $ (4,971) $ (3,212) $ (3,983)
----------- ----------- ----------- -----------
Net income (loss) $ 21,957 $ 20,676 $ (17,149) $ 15,374
Outstanding common shares - end of period (voting)(2) 37,929 37,931 45,130 49,940
Outstanding common shares - end of period (non-voting)(2) 7,418 7,418 -- --
----------- ----------- ----------- -----------
Total outstanding common shares - end of period(2) 45,347 45,349 45,130 49,940
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.48 $ 0.57 $ (0.31) $ 0.41
Discontinued operations $ -- $ (0.11) $ (0.07) $ (0.08)
----------- ----------- ----------- -----------
Net Income $ 0.48 $ 0.46 $ (0.38) $ 0.33
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.48 $ 0.56 $ (0.31) $ 0.41
Discontinued operations $ -- $ (0.11) $ (0.07) $ (0.09)
----------- ----------- ----------- -----------
Net Income $ 0.48 $ 0.45 $ (0.38) $ 0.32
Dividends per share(3) $ 0.05 $ 0.05 $ 0.06 $ 0.06
Market price of common stock (voting)
Quarter end $ 42 9/16 $ 35 1/4 $ 25 11/16 $ 27 3/4
Common stock price, high 49 1/6 44 1/4 40 3/4 34 1/2
Common stock price, low 38 11/12 34 1/4 24 3/4 22 1/8
Market price of common stock (non-voting)(2)
Quarter end(2) $ 33 49/60 $ 33 1/2 N/A N/A
Common stock price, high(2) 41 33/53 33 7/8 N/A N/A
Common stock price, low(2) 31 15/17 28 1/2 N/A N/A
(1) Loss from discontinued operations for the fourth quarter of 2000 includes a
$25.0 million pre-tax charge to increase reserves.
(2) Non-voting shares were issued on June 6, 1998 and were converted to voting
shares on September 14, 1999.
(3) Dividends are payable on voting and non-voting shares of common stock.
Reinsurance Group of America, Incorporated common stock is traded on the New
York Stock Exchange (NYSE) under the symbol "RGA". There were 116 stockholders
of record of RGA's common stock on March 1, 2001.
72
73
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Previously reported on the Company's Current Report on Form 8-K dated
March 30, 2000 (filed April 6, 2000).
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company is incorporated by
reference to the Proxy Statement under the captions "Nominees and Continuing
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance." The
Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the
end of the Company's fiscal year.
The following is certain additional information concerning each
executive officer of the Company who is not also a director. With the exception
of Mr. Watson, Mr. Nitsou, and Mr. St-Amour, each individual holds the same
position at RGA and RGA Reinsurance.
Wayne D. Adams, 42, is Senior Vice President of Sales and Chief
Marketing Officer for the U.S. Division. He served as head of sales and
marketing for RGA's nontraditional reinsurance business from 1994 to 1996. Prior
to the formation of RGA, he served as Director of Reinsurance Administration for
General American's reinsurance business from 1983 to 1986, and as regional Sales
Vice President for the Western United States from 1987 to 1994.
David B. Atkinson, 47, became President and Chief Executive Officer of
RGA Reinsurance Company in January 1998. Mr. Atkinson also serves as Executive
Vice President and Chief Operating Officer of RGA, since January 1997. He served
as Executive Vice President and Chief Operating Officer, U.S. Operations of the
Company from 1994 to 1996 and Executive Vice President and Chief Financial
Officer from 1993 to 1994. Prior to the formation of RGA, Mr. Atkinson served as
Reinsurance Operations Vice President of General American. Mr. Atkinson joined
General American in 1987 as Second Vice President and was promoted to Vice
President later the same year. Prior to joining General American, he served as
Vice President and Actuary of Atlas Life Insurance Company from 1981 to 1987, as
Chief Actuarial Consultant at Cybertek Computer Products from 1979 to 1981, and
in a variety of actuarial positions with Occidental Life Insurance Company of
California from 1975 to 1979. Mr. Atkinson also serves as a director and officer
of certain RGA subsidiaries.
Anne E. Bookwalter, 36, is Senior Vice President and Chief Investment
Officer. Prior to joining RGA in 2000, she was a senior investment consultant
for Scudder Kemper Investments, an investment advisor. She also has worked as a
portfolio manager at Lincoln National Corporation and American Bankers Insurance
Group. In addition to undergraduate and MBA degrees, she holds a J.D. and is a
Chartered Financial Analyst.
Jaime Correa, 41, is Senior Vice President of the Latin American
Division. He previously served as Vice President and Chief Underwriter of the
Latin American Division, and joined RGA in 1995 as Executive Director of RGA's
facultative services in Latin America. Prior to joining RGA, he worked for The
Travelers Insurance Company for 13 years in a variety of underwriting and
marketing positions.
James Dallas, 39, is Senior Vice President, Financial Markets. He
joined RGA in 1994, and has served in a variety of actuarial roles. He began his
career in 1983 at General American, and worked for ITT Lyndon Insurance Group
from 1992 to 1994.
Brendan J. Galligan, 47, is Senior Vice President, Asia Pacific
Division. Prior to joining RGA, Mr. Galligan was Senior Vice President of RGA
Canada, and its predecessor, National Re, for five years. His insurance and
reinsurance career commenced in Canada in 1977.
Joel S. Iskiwitch, 46, is Senior Vice President, Accident and Health
Division. In 1995, Mr. Iskiwitch joined Great Rivers Reinsurance, a subsidiary
of RGA, as a participant in General American's Management Rotation Program.
Prior to joining Great
73
74
Rivers Reinsurance Management and RGA, Mr. Iskiwitch held the position of Vice
President of Business Markets and Advanced Underwriting for GenMark/Individual
Line at General American. After joining General American in 1988, Mr.
Iskiwitch held a series of increasingly responsible positions leading to his
current position at RGA.
Todd C. Larson, 37, is Senior Vice President, Controller and Treasurer.
Mr. Larson previously was Assistant Controller at Northwestern Mutual Life
Insurance Company from 1994 through 1995 and prior to this position he was an
accountant for KPMG LLP from 1985 through 1993 (most recently as a Senior
Manager).
Jack B. Lay, 46, is Executive Vice President and Chief Financial
Officer. Prior to joining the Company in 1994, Mr. Lay served as Second Vice
President and Associate Controller at General American. In that position, he was
responsible for all external financial reporting as well as merger and
acquisition support. Before joining General American in 1991, Mr. Lay was a
partner in the financial services practice with the St. Louis office of KPMG
LLP. Mr. Lay also serves as a director and officer of certain RGA subsidiaries.
Paul Nitsou, 39, is Senior Vice President, Market Development Division
for RGA. Prior to joining RGA in 1996, Mr. Nitsou was Vice President,
Reinsurance for Manulife Financial. Mr. Nitsou joined RGA in 1996 as Vice
President, Market Development and was promoted within his first year of
employment to Senior Vice President, Market Development Division.
Andre St-Amour, 50, is Executive Vice President and Chief International
Operating Officer of RGA, and President and Chief Executive Officer of RGA
Canada. Mr. St-Amour joined RGA Canada in 1992 when the company acquired the
reinsurance business of National Re. Mr. St-Amour served as Executive Vice
President, Life Division, of National Re from 1989 to 1991. Prior to joining
National Re, Mr. St-Amour served in a variety of actuarial positions with
Canadian National Railways and Laurentian Mutual Insurance Company.
Paul A. Schuster, 47, is Executive Vice President, U. S. Division. He
served as Senior Vice President, U.S. Division from January 1997 to December
1998. Mr. Schuster was Reinsurance Actuarial Vice President in 1995 and Senior
Vice President & Chief Actuary of the Company in 1996. Prior to the formation of
RGA, Mr. Schuster served as Second Vice President and Reinsurance Actuary of
General American. Prior to joining General American in 1991, he served as Vice
President and Assistant Director of Reinsurance Operations of the ITT Lyndon
Insurance Group from 1988 to 1991 and in a variety of actuarial positions with
General Reassurance Corporation from 1976 to 1988.
James E. Sherman, 47, is Senior Vice President, General Counsel and
Secretary of the Company. Mr. Sherman joined General American in 1983, and
served as Associate General Counsel of General American since 1995. Mr. Sherman
is an officer of RCM as well as RGA Reinsurance.
Kenneth D. Sloan, 55, has been Senior Vice President, U.S. Facultative
Division since January 1997. He served as Vice President, Underwriting of the
Company from 1993 to 1997. Prior to the formation of RGA, Mr. Sloan served as
Second Vice President of Reinsurance Underwriting for General American. Mr.
Sloan joined General American in 1968 in an underwriting capacity and held a
series of increasingly responsible positions leading to his current position.
Michael Stein, 41, is Senior Vice President and Chief Actuary for the
U.S. Division. He joined RGA in 1998 and has been responsible for Pricing and
Product Development, managing assumed interest-sensitive reinsurance, and other
risk management functions within RGA. Prior to joining RGA, he was responsible
for Reinsurance Pricing at Transamerica Reinsurance.
Graham S. Watson, 51, is Executive Vice President and Chief Marketing
Officer of RGA. Upon joining RGA in 1996, Mr. Watson was President and CEO of
RGA Australia. Prior to joining RGA in 1996, Mr. Watson was the President and
CEO of Intercedent Limited in Canada and has held various positions of
increasing responsibility for other life insurance companies. Mr. Watson also
serves as a director and officer of certain RGA subsidiaries.
A. Greig Woodring, 49, is President, Chief Executive Officer, and
director. As President and CEO of the Company, Mr. Woodring is also an executive
officer of General American Life Insurance Company. Prior to the formation of
RGA, Mr. Woodring had headed General American's reinsurance business since 1986.
He also serves as a director and officer of a number of
74
75
the Company's subsidiaries. Before joining General American Life Insurance
Company, Mr. Woodring was an actuary at United Insurance Company.
Item 11. EXECUTIVE COMPENSATION
Information on this subject is found in the Proxy Statement under the
captions "Executive Compensation" and "Nominees and Continuing Directors" and is
incorporated herein by reference. The proxy Statement will be filed pursuant to
Regulation 14A within 120 days of the end of the Company's fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information of this subject is found in the Proxy Statement under the
captions "Common Stock Ownership of Certain Beneficial Owners" and "Nominees and
Continuing Directors" and is incorporated herein by reference. The Proxy
Statement will be filed pursuant to Regulations 14A within 120 days of the end
of the Company's fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on this subject is found in the Proxy Statement under the
caption "Certain Relationships and Related Transactions" and incorporated herein
by reference. The Proxy Statement will be filed pursuant to Regulation 14A
within 120 days of the end of the Company's fiscal year.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated statements are included within Item 8 under the
following captions:
Index Page
- ----- ----
Consolidated Balance Sheets 43
Consolidated Statements of Income 44
Consolidated Statements of Cash Flows 45
Consolidated Statements of Stockholders' Equity 46
Notes to Consolidated Financial Statements 47-67
Independent Auditors' Reports 68-70
Quarterly Data 72
2. Schedules, Reinsurance Group of America, Incorporated and Subsidiaries
Schedule Page
- -------- ----
I Summary of Investments 77
II Condensed Financial Information of the Registrant 78
III Supplementary Insurance Information 79-80
IV Reinsurance 81
V Valuation and Qualifying Accounts 82
All other schedules specified in Regulation S-X are omitted for the reason
that they are not required, are not applicable, or that equivalent information
has been included in the consolidated financial statements, and notes thereto,
appearing in Item 8.
75
76
3. Exhibits
See the Index to Exhibits on page 84.
(b) No other reports on Form 8-K were filed during the three months ended
December 31, 2000.
76
77
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2000
(in millions)
Amount at
Which
shown in
Fair the Balance
Type of Investment Cost Value(3) Sheets(1)(3)
------------------ ---- --------- ------------
Fixed maturities:
Bonds:
United States government and government agencies
and authorities $ 87.2 $ 89.7 $ 89.7
Foreign governments (2) 361.7 411.5 411.5
Public utilities 366.8 385.8 385.8
All other corporate bonds 1,937.8 1,805.8 1,805.8
-------- -------- --------
Total fixed maturities 2,753.5 2,692.8 2,692.8
-------- -------- --------
Equity securities 15.4 XXX 15.4
Mortgage loans on real estate 128.1 131.7 128.1
Policy loans 706.9 XXX 706.9
Funds withheld at interest 938.4 935.7 938.4
Short-term investments 68.7 XXX 68.7
Other 9.9 XXX 9.9
-------- --------
Total investments $4,620.9 XXX $4,560.2
======== ========
(1) Fixed maturities are classified as available for sale and carried at
fair value.
(2) The following exchange rates have been used to convert foreign
securities to U.S. dollars:
Canadian dollar $0.6676/C$1.00
Argentina peso $1.0016/A$1.00
Australian dollar $0.5591/$1.00 Aus
Great British Pound $1.4585/(pound)1.00
(3) Fair value represents the closing sales prices of marketable
securities. Estimated fair values for private placement securities,
included in all other corporate bonds, are based on the credit quality
and duration of marketable securities deemed comparable by the
Company, which may be of another issuer.
77
78
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (in thousands)
CONDENSED BALANCE SHEETS 2000 1999 1998
Assets:
Fixed maturity securities (available for sale) $ 580 $ 535 $ 34,648
Short-term investments 7,485 21,298 850
Cash 1,091 3,409 (995)
Investment in subsidiaries 883,988 688,885 713,057
Other assets 231,830 199,532 106,161
----------- ----------- -----------
Total assets $ 1,124,974 $ 913,659 $ 853,721
=========== =========== ===========
Liabilities and stockholders' equity:
Long-term debt $ 254,003 $ 174,412 $ 99,116
Other liabilities 8,048 6,299 6,128
Stockholders' equity 862,923 732,948 748,477
----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,124,974 $ 913,659 $ 853,721
=========== =========== ===========
CONDENSED STATEMENTS OF INCOME
Interest income $ 14,334 $ 7,844 $ 4,306
Dividend from subsidiary -- 50,000 --
Realized investments gains/(losses), net (8,981) (7,733) 1,517
Operating expenses (1,985) (3,676) (2,964)
Interest expense (16,458) (10,779) (8,050)
----------- ----------- -----------
(Loss) Income before income tax and undistributed earnings of (13,090) 35,656 (5,191)
subsidiaries
Income tax benefit (472) (5,478) (1,609)
----------- ----------- -----------
Net (loss) income before undistributed earnings of subsidiaries (12,618) 41,134 (3,582)
Equity in undistributed earnings (losses) of subsidiaries 90,287 (276) 65,663
----------- ----------- -----------
Net income $ 77,669 $ 40,858 $ 62,081
=========== =========== ===========
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net (losses) income $ 77,669 $ 40,858 $ 62,081
Equity (losses) in earnings of subsidiaries (90,287) 276 (65,663)
Other, net 1,276 5,290 9,501
----------- ----------- -----------
Net cash (used in) provided by operating activities (11,342) 46,424 5,919
----------- ----------- -----------
Investing activities:
Proceeds from sale of subsidiaries 26,509 -- --
Purchase of business - net of cash received (21,850) -- --
Sales of fixed maturity securities available for sale -- 33,146 21,619
Purchases of fixed maturity securities available for sale -- -- (115,162)
Change in short-term investments 13,813 (20,448) 1,725
Purchases of subsidiary debt securities -- (100,000) --
Capital contributions to subsidiaries (58,374) (144,886) (130,898)
----------- ----------- -----------
Net cash used in investing activities (39,902) (232,188) (222,716)
----------- ----------- -----------
Financing activities:
Dividends to stockholders (11,900) (9,981) (7,254)
Reissuance (acquisition) of treasury stock, net (19,174) 229 987
Proceeds from long-term debt borrowings 80,000 75,000
-----------
Proceeds from private placement / stock offering -- 124,920 221,837
----------- ----------- -----------
Net cash provided by financing activities 48,926 190,168 215,570
----------- ----------- -----------
Net change in cash and cash equivalents (2,318) 4,404 (1,227)
Cash and cash equivalents at beginning of year 3,409 (995) 232
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,091 $ 3,409 $ (995)
78
79
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
as of December 31,
-------------------------------------------------------------------------------
Future Policy Benefits
Deferred Policy and Interest Sensitive Other Policy Claims and
Acquisition Costs Contract Liabilities Benefits Payable
------------------------ ------------------------ -------------------------
Assumed Ceded Assumed Ceded Assumed Ceded
---------- ---------- ---------- ---------- ---------- ----------
1998
U.S. operations $ 247,424 $ (5,691) $3,797,712 $ (182,275) $ 261,661 $ (9,093)
Canada operations 56,159 (3,064) 515,632 (60,289) 29,048 (14,881)
Latin America operations 9,532 -- 138,550 (108) 56,453 (4,894)
Asia Pacific operations 45,053 -- 89,671 (42,888) 17,021 (6,453)
Other international operations 54 -- 4,054 -- 5,759 --
Discontinued operations 1,724 (149) 25,402 (2,224) 112,107 (21,412)
---------- ---------- ---------- ---------- ---------- ----------
Total $ 359,946 $ (8,904) $4,571,021 $ (287,784) $ 482,049 $ (56,733)
========== ========== ========== ========== ========== ==========
1999
U.S. operations $ 360,934 $ (36,409) $2,503,361 $ (210,387) $ 361,725 $ (37,012)
Canada operations 71,394 -- 652,609 (88,956) 70,276 (41,492)
Latin America operations 21,388 -- 170,937 -- 79,039 (5,240)
Asia Pacific operations 53,893 -- 58,949 (319) 19,438 --
Other international operations 7,917 (728) 10,261 (651) 9,888 --
Discontinued operations -- -- 19,874 (1,936) 41,700 (5,870)
---------- ---------- ---------- ---------- ---------- ----------
Total $ 515,526 $ (37,137) $3,415,991 $ (302,249) $ 582,066 $ (89,614)
========== ========== ========== ========== ========== ==========
2000
U.S. operations $ 464,773 $ (67,512) $3,204,812 $ (201,705) $ 333,453 $ (25,050)
Canada operations 113,198 (22,972) 683,027 (59,056) 62,478 (44,257)
Latin America operations 29,216 (1) 32,293 334 72,543 (1,782)
Asia Pacific operations 81,518 (1,541) 72,662 (316) 31,020 (985)
Other international operations 26,613 (1,817) 18,425 (201) 13,262 (7)
Discontinued operations -- -- 51,032 (1,837) 42,667 (2,801)
---------- ---------- ---------- ---------- ---------- ----------
Total $ 715,318 $ (93,843) $4,062,251 $ (262,781) $ 555,423 $ (74,882)
========== ========== ========== ========== ========== ==========
79
80
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
(IN THOUSANDS)
Year ended December 31,
--------------------------------------------------------------------------
Net Benefits, Other
Premium Investment Claims and Amortization Operating
Income Income Losses of DAC Expenses
----------- ----------- ----------- ----------- -----------
1998
U.S. operations $ 716,244 $ 231,472 $ (693,034) $ (114,498) $ (34,974)
Canada operations 144,784 38,857 (128,880) (27,785) (5,321)
Latin America operations 98,679 17,785 (94,649) (6,597) (11,642)
Asia Pacific operations 53,072 2,545 (31,900) (20,316) (9,573)
Other international operations 3,641 479 (2,685) (122) (7,341)
Corporate -- 10,642 -- -- (17,128)
----------- ----------- ----------- ----------- -----------
Total $ 1,016,420 $ 301,780 $ (951,148) $ (169,318) $ (85,979)
=========== =========== =========== =========== ===========
1999
U.S. operations $ 950,434 $ 250,458 $ (891,232) $ (142,216) $ (39,258)
Canada operations 162,482 52,767 (155,993) (13,337) (13,925)
Latin America operations 104,167 23,753 (112,914) 5,826 (17,375)
Asia Pacific operations 73,887 2,182 (46,785) (28,926) (8,408)
Other international operations 24,668 775 (13,305) (8,794) (7,404)
Corporate -- 10,345 -- -- (19,964)
----------- ----------- ----------- ----------- -----------
Total $ 1,315,638 $ 340,280 $(1,220,229) $ (187,447) $ (106,334)
=========== =========== =========== =========== ===========
2000
U.S. operations $ 1,038,872 $ 228,652 $ (895,850) $ (155,558) $ (55,012)
Canada operations 176,326 61,950 (172,180) (11,181) (14,084)
Latin America operations 64,897 19,782 (63,773) (2,197) (16,222)
Asia Pacific operations 94,282 4,628 (56,377) (15,788) (27,615)
Other international operations 29,690 2,056 (20,151) (2,793) (14,724)
Corporate (1) 9,437 1 -- (28,886)
----------- ----------- ----------- ----------- -----------
Total $ 1,404,066 $ 326,505 $(1,208,330) $ (187,517) $ (154,543)
=========== =========== =========== =========== ===========
80
81
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE IV - REINSURANCE
(IN MILLIONS)
As of or for the Year ended December 31,
----------------------------------------------------------------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
----- --------- ---------- ------- ----------
1998
Life insurance in force $ 83 $16,171 $330,615 $314,527 105.11%
Premiums
U.S. operations $ 2.6 $ 186.7 $ 900.3 $ 716.2 125.71%
Canada operations -- 48.1 192.9 144.8 133.22%
Latin America operations 48.4 9.6 59.9 98.7 60.69%
Asia Pacific operations -- 3.8 56.9 53.1 107.16%
Other international -- 0.1 3.7 3.6 102.78%
----- ------- -------- --------
Total $51.0 $ 248.3 $1,213.7 $1,016.4 119.41%
===== ======= ======== ======== ==========
1999
Life insurance in force $ 81 $36,569 $446,943 $410,455 108.89%
Premiums
U.S. operations $ 2.7 $ 207.8 $1,155.5 $ 950.4 121.58%
Canada operations -- 56.6 219.1 162.5 134.83%
Latin America operations 38.4 1.4 67.1 104.1 64.46%
Asia Pacific operations -- 2.7 76.6 73.9 103.65%
Other international 0.1 0.7 25.3 24.7 102.43%
----- ------- -------- --------
Total $41.2 $ 269.2 $1,543.6 $1,315.6 117.33%
===== ======= ======== ======== ==========
2000
Life insurance in force $ 86 $78,226 $545,950 $467,810 116.70%
Premiums
U.S. operations $ 2.8 $ 172.0 $1,208.1 $1,038.9 116.29%
Canada operations -- 41.7 218.0 176.3 123.65%
Latin America operations 23.2 (0.7) 41.0 64.9 63.17%
Asia Pacific operations -- 6.4 100.7 94.3 106.79%
Other international 0.1 0.8 30.4 29.7 102.36%
----- ------- -------- --------
Total $26.1 $ 220.2 $1,598.2 $1,404.1 113.82%
===== ======= ======== ======== ==========
81
82
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31,
(in millions)
Balance at Charges to Charged to Other
Beginning of Costs and Accounts- Deductions- Balance at End
Description Period Expenses Describe Describe of Period
- ----------------------- ------------ ---------- ---------------- ----------- --------------
1998
Mortgage loan
valuation allowance $0.4 0.3 -- -- $0.7
==== ==== ==== ==== ====
1999
Mortgage loan
valuation allowance $0.7 -- -- -- $0.7
==== ==== ==== ==== ====
2000
Mortgage loan
valuation allowance $0.7 -- -- 0.5 $0.2
==== ==== ==== ==== ====
The deduction during 2000 represents normal activity associated with the
Company's underlying mortgage loan portfolio.
82
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Reinsurance Group of America, Incorporated.
By: /s/ A. Greig Woodring
-------------------------
A. Greig Woodring
President and Chief Executive Officer
Date: March 16, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities indicated on March 16, 2000.
Signatures Title
---------- -----
/s/ Richard A. Liddy March 16, 2001 * Chairman of the Board and Director
- ---------------------------------------------
Richard A. Liddy
/s/ A. Greig Woodring March 16, 2001 President, Chief Executive Officer,
- --------------------------------------------- and Director
A. Greig Woodring (Principal Executive Officer)
/s/ Mary Ann Brown March 16, 2001 * Director
- ---------------------------------------------
Mary Ann Brown
/s/ J. Cliff Eason March 16, 2001 * Director
- ---------------------------------------------
J. Cliff Eason
/s/ Stuart I. Greenbaum March 16, 2001 * Director
- ---------------------------------------------
Stuart I. Greenbaum
/s/ Terrence I. Lennon March 16, 2001 * Director
- ---------------------------------------------
Terrence I. Lennon
/s/ William A. Peck, M.D. March 16, 2001 * Director
- ---------------------------------------------
William A. Peck, M.D.
/s/ William P. Stiritz March 16, 2001 * Director
- ---------------------------------------------
William P. Stiritz
/s/ H. Edwin Trusheim March 16, 2001 * Director
- ---------------------------------------------
H Edwin Trusheim
/s/ John H. Tweedie March 16, 2001 * Director
- ---------------------------------------------
John H. Tweedie
/s/ Jack B. Lay March 16, 2001 Executive Vice President and Chief
- --------------------------------------------- Financial Officer
Jack B. Lay (Principal Financial and Accounting
Officer)
* By: /s/ Jack B. Lay March 16, 2001
----------------------------------------
Jack B. Lay Attorney-in-fact
83
84
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
2.1 Reinsurance Agreement dated as of December 31, 1992 between
General American Life Insurance Company ("General American")
and General American Life Reinsurance Company of Canada ("RGA
Canada")
2.2 Retrocession Agreement dated as of July 1, 1990 between
General American and The National Reinsurance Company of
Canada, as amended between RGA Canada and General American on
December 31, 1992
2.3 Reinsurance Agreement dated as of January 1, 1993 between RGA
Reinsurance Company ("RGA Reinsurance", formerly "Saint Louis
Reinsurance Company") and General American
3.1 Restated Articles of Incorporation of Reinsurance Group of
America, Incorporated ("RGA"), as amended
3.2 Bylaws of RGA, as amended, incorporated by reference to
Exhibit 3.2 to Form 10-Q for the quarter ended September 30,
2000 (No. 1-11848), filed on November 13, 2000
3.3 Certificate of Designations for Series A Junior Participating
Preferred Stock (included as Exhibit A to Exhibit 4.2)
4.1 Form of Specimen Certificate for Common Stock of RGA
4.2 Rights Agreement dated as of May 4, 1993, between RGA and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent
4.3 Second Amendment to Rights Agreement, dated as of April 22,
1998, between RGA and ChaseMellon Shareholder Services, L.L.C.
(as successor to Boatmen's Trust Company), as Rights Agent
4.4 Third Amendment to Rights Agreement dated as of August 12,
1999, between Reinsurance Group of America, Incorporated and
ChaseMellon Shareholder Services, L.L.C. (as successor to
Boatmen's Trust Company), as Rights Agent, incorporated by
reference to Exhibit 4.4 to Form 8-K dated August 10, 1999
(No. 1-11848), filed August 25, 1999
4.5 Fourth Amendment to Rights Agreement dated as of August 23,
1999, between Reinsurance Group of America, Incorporated and
ChaseMellon Shareholder Services, L.L.C. (as successor to
Boatmen's Trust Company), as Rights Agent, incorporated by
reference to Exhibit 4.1 to Form 8-K dated August 26, 1999
(No. 1-11848), filed September 10, 1999.
84
85
Source
EXHIBIT (See footnotes
NUMBER DESCRIPTION that follow)
- ------ ----------- --------------
10.1 Marketing Agreement dated as of January 1, 1993 between RGA 3
Reinsurance and General American
10.2 Administrative Services Agreement dated as of January 1, 1993 3
between RGA and General American
10.3 Administrative Services Agreement dated as of January 1, 1993 3
between RGA Reinsurance and General American
10.4 Management Agreement dated as of January 1, 1993 between RGA 2*
Canada and General American
10.5 Standard Form of General American Automatic Agreement 2
10.6 Standard Form of General American Facultative Agreement 2
10.7 Standard Form of General American Automatic and Facultative 2
YRT Agreement
10.8 Registration Rights Agreement dated as of April 15, 1993 2
between RGA and General American
10.9 RGA Reinsurance Management Incentive Plan, as amended and 5*
restated effective November 1, 1996
10.10 RGA Reinsurance Management Deferred Compensation Plan (ended 2*
January 1, 1995)
10.11 RGA Reinsurance Executive Deferred Compensation Plan (ended 2*
January 1, 1995)
10.12 RGA Reinsurance Executive Supplemental Retirement Plan (ended 2*
January 1, 1995)
10.13 RGA Reinsurance Augmented Benefit Plan (ended January 1, 1995) 2*
10.14 RGA Flexible Stock Plan as amended and restated effective 5*
November 1, 1996
10.15 Form of Directors' Indemnification Agreement 2
10.16 RGA Executive Performance Share Plan as amended and restated 5*
effective November 1, 1996
10.17 RGA Flexible Stock Plan for Directors 6*
85
86
Source
EXHIBIT (See footnotes
NUMBER DESCRIPTION that follow)
- ------ ----------- --------------
10.18 Employment Agreement dated April 6, 1992 between RGA Canada 7*
and Andre St-Amour
10.19 Restricted Stock Award to A. Greig Woodring dated January 28, 8*
1998
16.1 Letter from KPMG LLP pursuant to Item 304 of Regulation S-K --
Document incorporated by reference to Form 8-K (No. 1-11848)
filed on April 6, 2000, at the corresponding exhibit
21.1 Subsidiaries of RGA --
23.1 Consent of Deloitte & Touche LLP --
23.2 Consent of KPMG LLP --
24.1 Powers of Attorney for Ms. Brown and Messrs. Eason, Greenbaum, --
Lennon, Liddy, Peck, Stiritz, Trusheim, and Tweedie
(1) Documents incorporated by reference to Form 10-Q for the quarter ended
September 30, 1999 (No. 1-11848) filed on November 12, 1999 at the
corresponding exhibit.
(2) Documents incorporated by reference to Amendment No. 1 to Registration
Statement on Form S-1 (No. 33-58960), filed on 14 April 1993 at the
corresponding exhibit.
(3) Documents incorporated by reference to Amendment No. 2 to Registration
Statement Form S-1 (No. 33-58960), filed on 29 April 1993 at the
corresponding exhibit.
(4) Documents incorporated by reference to Amendment No. 1 to Form 10-Q for
the quarter ended March 31, 1997 (No. 1-11848) filed on 21 May 1997 at
the corresponding exhibit.
(5) Documents incorporated by reference to Form 10-K for the year ended
December 31, 1996 (No. 1-11848) filed on 24 March 1997 at the
corresponding exhibit.
(6) Documents incorporated by reference to Registration Statement on Form
S-8 (No. 333-27167) filed on 15 May 1997 at the corresponding exhibit.
(7) Documents incorporated by reference to Form 10-K for the year ended
December 31, 1997 (No. 1-11848) filed on 25 March 1998 at the
corresponding exhibit.
(8) Documents incorporated by reference to Form 10-Q/A Amendment No. 1 for
the quarter ended March 31, 1998 (No. 1-11848) filed on 14 May 1998 at
the corresponding exhibit.
(9) Documents incorporated by reference to Registration Statement on Form
S-3 (No. 333-51777) filed on 4 June 1998 at the corresponding exhibit.
* Represents a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form pursuant to Item 14(c) of this Part IV.
86