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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[X] 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 (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1370 TIMBERLAKE MANOR PARKWAY
CHESTERFIELD, MISSOURI 63017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(636) 736-7439
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [ ]
COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 31, 2002: 49,309,717
SHARES.
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I - FINANCIAL INFORMATION
1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2002 and 2001 5
Notes to Unaudited Condensed Consolidated Financial
Statements (Unaudited) 6
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
3 Qualitative and Quantitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
1 Legal Proceedings 21
4 Submission of Matters to a Vote of Security Holders 21
6 Exhibits and Reports on Form 8-K 21
Signatures 22
Index to Exhibits 23
2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
2002 2001
-------------- --------------
(Dollars in thousands)
ASSETS
Fixed maturity securities:
Available-for-sale at fair value (amortized cost of $3,087,319 and
$2,765,422 at June 30, 2002 and December 31, 2001, respectively) $3,104,875 $2,768,285
Mortgage loans on real estate 190,487 163,948
Policy loans 779,828 774,660
Funds withheld at interest 1,329,378 1,142,643
Short-term investments 4,937 140,573
Other invested assets 115,610 98,315
---------- ----------
Total investments 5,525,115 5,088,424
Cash and cash equivalents 187,887 226,670
Accrued investment income 60,207 30,454
Premiums receivable 168,028 161,436
Reinsurance ceded receivables 477,742 410,947
Deferred policy acquisition costs 894,894 800,319
Other reinsurance balances 133,577 146,427
Other assets 43,720 29,668
---------- ----------
Total assets $7,491,170 $6,894,345
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $2,325,623 $2,101,777
Interest sensitive contract liabilities 2,530,329 2,325,264
Other policy claims and benefits 661,063 650,082
Other reinsurance balances 118,656 47,687
Deferred income taxes 214,161 162,092
Other liabilities 70,861 120,374
Long-term debt 325,376 323,396
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company 158,180 158,085
---------- ----------
Total liabilities 6,404,249 5,888,757
Commitments and contingent liabilities - -
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 June 30, 2002 and December 31, 2001,
respectively) 511 511
Warrants 66,915 66,915
Additional paid-in capital 612,347 611,806
Retained earnings 419,250 369,349
Accumulated other comprehensive income (loss):
Accumulated currency translation adjustment, net of income taxes 23,811 (6,088)
Unrealized appreciation (depreciation) of securities, net of income taxes 6,856 (87)
---------- ----------
Total stockholders' equity before treasury stock 1,129,690 1,042,406
Less treasury shares held of 1,743,556 and 1,526,730 at cost at
June 30, 2002 and December 31, 2001, respectively (42,769) (36,818)
---------- ----------
Total stockholders' equity 1,086,921 1,005,588
---------- ----------
Total liabilities and stockholders' equity $7,491,170 $6,894,345
========== ==========
See accompanying notes to unaudited condensed consolidated financial
statements.
3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------- ------------------------
2002 2001 2002 2001
--------- ----------- ---------- -----------
(Dollars in thousands, except per share data)
REVENUES:
Net premiums $465,258 $387,336 $ 934,363 $791,921
Investment income, net of related expenses 90,267 76,276 178,280 160,365
Realized investment losses, net (8,426) (7,526) (12,017) (9,032)
Other revenues 10,210 9,441 16,895 15,928
-------- -------- ---------- --------
Total revenues 557,309 465,527 1,117,521 959,182
BENEFITS AND EXPENSES:
Claims and other policy benefits 366,770 302,204 754,496 639,770
Interest credited 29,896 19,547 57,621 46,951
Policy acquisition costs and other insurance expenses 84,804 67,442 156,303 133,275
Other operating expenses 21,859 21,819 41,376 44,078
Interest expense 8,915 4,377 17,469 9,288
-------- -------- ---------- --------
Total benefits and expenses 512,244 415,389 1,027,265 873,362
-------- -------- ---------- --------
Income from continuing operations before income taxes 45,065 50,138 90,256 85,820
Provision for income taxes 16,141 19,624 32,296 33,664
-------- -------- ---------- --------
Income from continuing operations 28,924 30,514 57,960 52,156
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (873) -- (2,129) --
-------- -------- ---------- --------
Net income $ 28,051 $ 30,514 $ 55,831 $ 52,156
======== ======== ========== ========
Earnings per share from continuing operations:
Basic earnings per share $ 0.59 $ 0.62 $ 1.17 $ 1.06
======== ======== ========== ========
Diluted earnings per share $ 0.58 $ 0.61 $ 1.17 $ 1.04
======== ======== ========== ========
Earnings per share from net income:
Basic earnings per share $ 0.57 $ 0.62 $ 1.13 $ 1.06
======== ======== ========== ========
Diluted earnings per share $ 0.56 $ 0.61 $ 1.12 $ 1.04
======== ======== ========== ========
See accompanying notes to unaudited condensed consolidated financial statements.
4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
June 30,
------------------------------
2002 2001
------------ ----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 55,831 $ 52,156
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (29,753) (17,913)
Premiums receivable (6,592) 76,626
Deferred policy acquisition costs (102,025) (104,892)
Reinsurance ceded balances (66,795) (13,036)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 342,947 134,792
Deferred income taxes 34,080 23,232
Other assets and other liabilities (63,564) (25,187)
Amortization of net investment discounts, goodwill and other (19,483) (19,621)
Realized investment losses, net 12,017 9,032
Other, net (8,920) 1,386
----------- -----------
Net cash provided by operating activities 147,743 116,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and maturities of fixed maturity securities - Available for sale 885,427 753,027
Purchases of fixed maturity securities - Available for sale (1,163,189) (754,318)
Cash invested in mortgage loans on real estate (33,750) (13,975)
Cash invested in funds withheld at interest (42,012) (36,564)
Cash invested in policy loans (8,948) (9,156)
Principal payments on mortgage loans on real estate 7,215 1,974
Change in short-term investments and other invested assets 121,260 (9,741)
----------- -----------
Net cash used in investing activities (233,997) (68,753)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (5,930) (5,921)
Borrowings under credit agreements -- 45,746
Purchase of treasury stock (6,594) --
Exercise of stock options 643 1,187
Excess deposits (withdrawals) on universal life and other
investment type policies and contracts 60,341 (4,112)
----------- -----------
Net cash provided by financing activities 48,460 36,900
Effect of exchange rate changes (989) 273
----------- -----------
Change in cash and cash equivalents (38,783) 84,995
Cash and cash equivalents, beginning of period 226,670 70,797
----------- -----------
Cash and cash equivalents, end of period $ 187,887 $ 155,792
=========== ===========
Supplementary disclosure of cash flow information:
Amount of interest paid $ 17,172 $ 10,307
Amount of income taxes paid $ 15,777 $ 24,147
See accompanying notes to unaudited condensed consolidated financial statements.
5
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Reinsurance Group of America, Incorporated ("RGA") and Subsidiaries
(collectively, the "Company") have been prepared in conformity with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the
six-month period ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. These
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001
("Annual Report").
The accompanying unaudited condensed consolidated financial statements include
the accounts of Reinsurance Group of America, Incorporated and its Subsidiaries.
All material intercompany accounts and transactions have been eliminated. The
Company has reclassified the presentation of certain prior period information to
conform to the 2002 presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share on income from continuing operations (in thousands, except per share
information):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Earnings:
Income from continuing operations
(numerator for basic and diluted
calculations) $28,924 $30,514 $57,960 $52,156
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 49,304 49,402 49,362 49,371
Equivalent shares from outstanding stock
options 365 559 341 552
------- ------- ------- -------
Denominator for diluted calculation 49,669 49,961 49,703 49,923
Earnings per share:
Basic $ 0.59 $ 0.62 $ 1.17 $ 1.06
Diluted $ 0.58 $ 0.61 $ 1.17 $ 1.04
======= ======= ======= =======
The calculation of equivalent shares from outstanding stock options does not
include the impact of options having a strike price that exceeds the average
stock price for the earnings period, as the result would be antidilutive. For
the three and six month periods ended June 30, 2002, approximately 0.9 million
in outstanding stock options were not included in the calculation of common
equivalent shares. For the three and six month periods ended June 30, 2001,
approximately 0.1 million in outstanding stock options were not included in the
calculation of common equivalent shares. These options were outstanding at the
end of their respective periods. Additionally, outstanding warrants to purchase
Company common stock under certain circumstances were antidilutive to the
calculation of earnings per share.
3. COMPREHENSIVE INCOME (LOSS)
The following schedule reflects the change in accumulated other comprehensive
income (loss) for the three and six-month periods ended June 30, 2002 and 2001
(dollars in thousands):
6
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ---------------------------------
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- ------------- -------------
Net income $ 28,051 $ 30,514 $ 55,831 $ 52,156
Accumulated other comprehensive
income (expense), net of income taxes:
Unrealized gains (losses) on securities 52,731 (29,046) 6,943 (18,351)
Foreign currency items 13,364 8,967 29,899 (4,966)
-------- -------- -------- --------
Comprehensive income $ 94,146 $ 10,435 $ 92,673 $ 28,839
======== ======== ======== ========
4. SEGMENT INFORMATION
The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies in Note 2 of the Annual Report. The
Asia Pacific, Latin America and Europe & South Africa operational segments are
presented herein as one reportable segment, Other International. The Company
measures segment performance based on profit or loss from operations before
income taxes. 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.
Due to the economic uncertainty in Argentina and losses associated with
Argentine privatized pension business, the Company has scaled back its
operations in Latin America. Reinsurance of the Argentine pension business is
conducted through the Company's principal operating subsidiary based in
Missouri.
The Company's reportable segments are strategic business units that are
segregated by geographic region. Information related to total revenues and
income from continuing operations before income taxes are summarized below
(dollars in thousands).
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- ----------------------------------
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- ------------- -------------
REVENUES
U.S $ 400,702 $ 335,202 $ 811,409 $ 702,330
Canada 61,766 62,539 123,794 126,612
Other International 90,010 67,809 171,956 129,083
Corporate 4,831 (23) 10,362 1,157
----------- ----------- ----------- -----------
Total from continuing operations $ 557,309 $ 465,527 $ 1,117,521 $ 959,182
=========== =========== =========== ===========
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
U.S $ 38,729 $ 43,857 $ 77,502 $ 74,129
Canada 9,905 14,994 18,750 32,143
Other International 3,058 (1,325) 5,403 (5,966)
Corporate (6,627) (7,388) (11,399) (14,486)
----------- ----------- ----------- -----------
Total from continuing operations $ 45,065 $ 50,138 90,256 $ 85,820
=========== =========== =========== ===========
Other International assets increased approximately 24% from the amounts
disclosed in Note 18 of the Annual Report. This increase was primarily related
to growth in the Europe & South Africa and Asia Pacific sub-segments offset by a
decrease in allocated assets required to support the Argentine pension business
as a result of the devaluation of the Argentine peso. Assets for the U.S. and
Canada segments have not changed by more than 10% since year end.
5. DIVIDENDS
The board of directors declared a dividend of six cents per share of common
stock on April 24, 2002. This dividend was paid on May 28, 2002 to shareholders
of record as of May 7, 2002.
7
6. STOCK TRANSACTIONS
Under a plan approved by the board of directors, the Company may purchase up to
$50 million of its shares of stock on the open market as conditions warrant.
During the three months ended March 31, 2002, the Company purchased 225,500
shares of treasury stock at an aggregate cost of $6.6 million. No shares were
repurchased during the three months ended June 30, 2002. The Company generally
uses treasury shares to support the future exercise of options granted under its
stock option plan.
7. COMMITMENTS AND CONTINGENT LIABILITIES
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. The Company is currently a party to arbitrations that
involve three separate medical reinsurance arrangements, three arbitrations
relative to the Company's portfolio of personal accident business, one lawsuit
seeking to enforce an arbitration award relating to a medical reinsurance
arrangement, and one lawsuit involving aviation bodily injury carve-out
reinsurance coverage. Currently, the ceding companies involved in these disputes
have raised claims that are $39.5 million in excess of the amounts held as a
liability by the Company. The Company believes it has substantial defenses upon
which to contest these claims, including but not limited to misrepresentation
and breach of contract by direct and indirect ceding companies. See Note 22 of
the Annual Report for more information. While it is not feasible to predict the
outcome of the pending arbitrations 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. However, the impact on the Company's results of
operations in any particular future period could be material.
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 credits. The letters of
credit issued by banks represent a guarantee of performance under the
reinsurance agreements. Additionally, the Company utilizes letters of credit to
secure reserve credits when it retrocedes business to its offshore subsidiaries.
As of June 30, 2002, there were approximately $37.9 million of outstanding
letters of credit in favor of unaffiliated entities and $323.7 million in favor
of entities affiliated with the Company. Fees associated with letters of credit
are not fixed and are based on the Company's ratings and the general
availability of these instruments in the marketplace. The letters of credit are
for a term of one year and renew automatically unless the issuing financial
institution notifies the Company of its intent not to renew at least 30 days
prior to their expiration.
8. NEW ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Under SFAS No. 146, costs
associated with an exit or disposal activity shall be recognized at fair value
in the period in which the liability is incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of the statement will be
effective for exit or disposal activities that are initiated after December 31,
2002. The Company is currently evaluating whether the impact of the statement
will have a material effect on earnings.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
are not amortized into results of operations, but instead are reviewed for
impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value.
During the first quarter of 2002, the company completed the transitional
impairment test of goodwill. The results of the impairment test did not have a
material impact to the Company's results of operations. During the six months
ended June 30, 2002, there were no changes to goodwill as a result of
acquisitions or disposals. Goodwill as of June 30, 2002 totaled $7.0 million and
was related to the Company's purchase of RGA Financial Group in 2000. Goodwill
amortization in the comparable prior-year period was not material to the
Company's results of operations.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and Europe & South
Africa operations. The Asia Pacific, Latin America, and Europe & South Africa
operational segments are presented herein as one reportable segment, Other
International. The U.S. operations provide traditional life, asset-intensive,
and financial reinsurance to domestic clients. Asset-intensive products
primarily include reinsurance of corporate-owned and bank-owned life insurance
and annuities. The Canada operations provide insurers with traditional
reinsurance as well as creditor and critical illness products. The Latin America
operations include traditional reinsurance, reinsurance of privatized pension
products primarily in Argentina, which the Company ceased writing during 2001,
and direct life insurance through a subsidiary in Argentina. Asia Pacific
operations provide primarily traditional life and critical illness reinsurance
and, to a lesser extent, financial reinsurance. Europe & South Africa operations
include traditional life and critical illness 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.
A variety of new laws and regulatory initiatives have been introduced recently
that have changed or will change the reporting practices of public companies.
One such initiative was the announcement by the Securities and Exchange
Commission (the "SEC") that it would review the annual reports on Form 10-K
submitted by all Fortune 500 companies in 2002. As a result, the SEC reviewed
the annual report on Form 10-K of MetLife, Inc. ("MetLife") for the year ended
December 31, 2001. MetLife and certain affiliates beneficially own approximately
59% of the Company's outstanding shares. Accordingly, the Company's results are
included in the consolidated financial statements of MetLife. MetLife received
correspondence from the SEC in connection with this review in July 2002. MetLife
has responded, on a timely basis, to all of the SEC's comments and expects all
matters to be resolved in the near future.
One of the items still pending is related to "funds withheld at interest" on
certain types of modified coinsurance reinsurance contracts to which the Company
is a party. The comment relates to whether the Company's reporting for these
contracts considered the existence of embedded derivatives. While MetLife
believes that it has been responsive to the SEC's comments, there can be no
assurance that the SEC will not have further comments or request additional
information.
Consolidated income from continuing operations before income taxes decreased
$5.1 million for the second quarter and increased $4.4 million for the six
months ended June 30, 2002, as compared to the respective prior-year periods.
After-tax diluted earnings per share from continuing operations were $0.58 and
$1.17 for the second quarter and first six months of 2002, respectively,
compared to $0.61 and $1.04 for the prior-year periods.
Consolidated investment income from continuing operations increased 18.3% and
11.2% during the second quarter and first six months of 2002, respectively. The
increase was primarily attributable to a larger invested asset base due to funds
received from the issuance of Preferred Income Equity Redeemable Securities
("PIERS") units in December of 2001 and normal cash flows from operations offset
slightly by a lower yield. The average invested asset book yield earned on
investments was 6.68% for the second quarter of 2002 compared to 7.16% for the
comparable prior-year period. The decrease in overall yield reflected declining
interest rates and a rise in defaults on fixed maturity securities. Investment
income is allocated to the segments based upon average assets and related
capital levels deemed appropriate to support the segment business volumes.
Consolidated other expenses include general corporate expenses that are not
allocated to the operational segments.
The consolidated provision for income taxes on continuing operations decreased
17.7% and 4.1% for the second quarter and first six months of 2002,
respectively, primarily a result of a decrease in the effective tax-rate in both
periods and lower pre-tax income for the second quarter. The effective tax rate
was 35.8% for both the second quarter and first six months of 2002, compared to
39.1% and 39.2% for the comparable prior-year periods. The decrease in the
effective tax rate was primarily due to a reduction of the Canadian income tax
rate and earnings in certain foreign subsidiaries, which resulted in a release
of valuation allowances in those entities.
Further discussion and analysis of the results for 2002 compared to 2001 are
presented by segment.
9
U.S. OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2002
--------------------------------------------------------------
NON-TRADITIONAL
---------------------------
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- --------- ----------- ---------
REVENUES:
Net premiums $ 333,876 $ 1,125 $ -- $ 335,001
Investment income, net of related expenses 39,137 22,730 24 61,891
Realized investment losses, net (957) (4,524) -- (5,481)
Other revenues 679 2,908 5,704 9,291
--------- --------- --------- ---------
Total revenues 372,735 22,239 5,728 400,702
BENEFITS AND EXPENSES:
Claims and other policy benefits 264,570 1,715 -- 266,285
Interest credited 13,859 15,118 -- 28,977
Policy acquisition costs and other insurance
expenses 51,366 4,584 1,938 57,888
Other operating expenses 6,177 186 2,460 8,823
--------- --------- --------- ---------
Total benefits and expenses 335,972 21,603 4,398 361,973
Income before income taxes $ 36,763 $ 636 $ 1,330 $ 38,729
========= ========= ========= =========
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2001
--------------------------------------------------------------
NON-TRADITIONAL
---------------------------
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- --------- ----------- ---------
REVENUES:
Net premiums $ 279,377 $ 1,090 $ -- $ 280,467
Investment income, net of related expenses 37,382 13,549 195 51,126
Realized investment gains (losses), net (5,779) 612 -- (5,167)
Other revenues 386 2,088 6,302 8,776
--------- --------- --------- ---------
Total revenues 311,366 17,339 6,497 335,202
BENEFITS AND EXPENSES:
Claims and other policy benefits 214,111 787 -- 214,898
Interest credited 12,642 6,357 -- 18,999
Policy acquisition costs and other insurance
expenses 40,655 4,920 2,411 47,986
Other operating expenses 7,212 154 2,096 9,462
--------- --------- --------- ---------
Total benefits and expenses 274,620 12,218 4,507 291,345
Income before income taxes $ 36,746 $ 5,121 $ 1,990 $ 43,857
========= ========= ========= =========
10
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2002
--------------------------------------------------------------
NON-TRADITIONAL
---------------------------
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- --------- ----------- ---------
REVENUES:
Net premiums $ 678,018 $ 1,993 $ -- $ 680,011
Investment income, net of related expenses 75,963 46,448 127 122,538
Realized investment losses, net (2,984) (3,960) -- (6,944)
Other revenues 780 3,169 11,855 15,804
--------- --------- --------- ---------
Total revenues 751,777 47,650 11,982 811,409
BENEFITS AND EXPENSES:
Claims and other policy benefits 550,573 7,716 -- 558,289
Interest credited 27,639 28,811 -- 56,450
Policy acquisition costs and other insurance
expenses 92,168 6,429 3,838 102,435
Other operating expenses 11,955 386 4,392 16,733
--------- --------- --------- ---------
Total benefits and expenses 682,335 43,342 8,230 733,907
Income before income taxes $ 69,442 $ 4,308 $ 3,752 $ 77,502
========= ========= ========= =========
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2001
--------------------------------------------------------------
NON-TRADITIONAL
---------------------------
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- --------- ----------- ---------
REVENUES:
Net premiums $ 584,866 $ 1,388 $ -- $ 586,254
Investment income, net of related expenses 74,083 36,708 394 111,185
Realized investment gains (losses), net (10,347) 846 -- (9,501)
Other revenues 504 1,370 12,518 14,392
--------- --------- --------- ---------
Total revenues 649,106 40,312 12,912 702,330
BENEFITS AND EXPENSES:
Claims and other policy benefits 463,541 3,868 -- 467,409
Interest credited 25,258 20,745 -- 46,003
Policy acquisition costs and other insurance
expenses 83,151 8,022 5,265 96,438
Other operating expenses 13,904 283 4,164 18,351
--------- --------- --------- ---------
Total benefits and expenses 585,854 32,918 9,429 628,201
Income before income taxes $ 63,252 $ 7,394 $ 3,483 $ 74,129
========= ========= ========= =========
Income before income taxes for the U.S. operations segment totaled $38.7 million
and $77.5 million for the second quarter and first six months of 2002,
respectively, a decrease of 11.7% and an increase of 4.6% from the comparable
prior-year periods. The decrease in income during the second quarter of 2002
compared to the prior-year period can be primarily attributed to higher claims
and other policy benefits as a percentage of premiums. The increase in income
for the first six months can primarily be attributed to premium growth somewhat
offset by higher than expected death claims on certain inforce blocks of
business, and a $2.6 million decrease in realized losses on securities
transactions compared to the same period last year. Net premium growth for the
U.S. operations segment remained strong with a 19.4% and 16.0% increase in the
second quarter and first six months of 2002, respectively, compared to the same
periods last year.
11
Traditional Reinsurance
The U.S. traditional reinsurance is the oldest and largest sub-segment of the
Company. This sub-segment 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 the second quarter and first
six months of 2002, production totaled $37.7 billion and $74.2 billion,
respectively, compared to $21.5 billion and $39.2 billion for the same face
amount of new business periods in 2001. The strong growth in production was
realized on both new and existing treaties. Management believes industry
consolidation, demutualizations, and the trend towards reinsuring mortality
risks should continue to provide reinsurance opportunities, although the timing
and level of production is uncertain.
Income before income taxes for U.S. traditional reinsurance remained the same
and increased 9.8% for the second quarter and six months ended 2002,
respectively. The increase in income for the first six months of 2002 was
primarily due to a decrease in realized losses on investment securities of $7.4
million for comparable periods.
Net premiums for U.S. traditional reinsurance increased 19.5% and 15.9% in the
second quarter and first six months of 2002, respectively. New premiums from
facultative and automatic treaties and renewal premiums on existing blocks of
business all contributed to continued growth.
Net investment income increased 4.7% and 2.5% for the second quarter and first
six months of 2002, respectively. The increase was due to the growth in the
invested asset base, primarily due to increased operating cash flows on
traditional reinsurance, which was partially offset by the lower yields as a
result of the general decline in interest rates.
The amount of claims and other policy benefits increased 23.6% and 18.8% in the
second quarter and first six months of 2002, respectively. Claims and other
policy benefits, as a percentage of net premiums, were 79.2% and 81.2% in the
second quarter and first six months of 2002, respectively, compared to 76.6% and
79.3% for the same periods in 2001. The increase in claims as a percentage of
premiums relates primarily to higher claims on certain inforce blocks of
business. The level of death claims may fluctuate from period to period, but
exhibits less volatility over the long term.
Interest credited relates to amounts credited on the Company's cash value
products in this sub-segment, which have a significant mortality component. This
amount fluctuates with the changes in deposit levels, cash surrender values and
investment performance.
As a percentage of net premiums, policy acquisition costs and other insurance
expenses were 15.4% and 13.6% for the second quarter and first six months of
2002, respectively, compared to 14.6% and 14.2% for the same periods in 2001.
This percentage fluctuates due to variations in the mixture of business being
written.
Asset-Intensive Reinsurance
The U.S. asset-intensive reinsurance sub-segment includes the reinsurance of
annuities and corporate-owned and bank-owned life insurance. Most of these
agreements are coinsurance or modified coinsurance of non-mortality risks such
that the Company recognizes profit or losses primarily from the spread between
the investment earnings and interest credited on the underlying deposit
liabilities.
Income before income taxes for the second quarter and first six months of 2002
decreased to $0.6 million and $4.3 million, respectively, as compared to $5.1
million and $7.4 million in the prior periods. The decrease was primarily the
result of the increase in realized losses on investment securities of $5.1
million and $4.8 million in the second quarter and first six months of 2002.
Total revenues, which are comprised primarily of investment income, increased
28.3% and 18.2% in the second quarter and first six months of 2002,
respectively. Contributing to the growth in revenues were new single premium
deferred annuity coinsurance treaties during the third quarter of 2001 and the
first quarter of 2002, partially offset by the increase in realized losses on
investment securities. Assets outstanding as of June 30, 2002 and 2001 were $1.7
12
billion and $1.3 billion, respectively. Average invested assets outstanding for
this sub-segment increased by $357.6 million and $291.3 million for the second
quarter and first six months of 2002, respectively, compared to the comparable
prior-year periods.
Total benefits and expenses, which includes interest credited and policy
acquisition costs and other insurance expenses, increased 76.8% and 31.7% in the
second quarter and first six months of 2002, respectively. Contributing to the
increase in expenses is the additional interest credited on contract liabilities
related to the new single premium deferred annuity coinsurance treaties during
the third quarter of 2001 and the first quarter of 2002. The Company performs
periodic tests to determine that deferred policy acquisition costs remain
recoverable, and if necessary, the cumulative amortization is re-estimated and
adjusted by a cumulative charge or credit to current operations. To the extent
the Company reduces its expectations of gross margins on certain business due to
emerging experience on lapses, investment performance or other factors, a
negative adjustment to deferred acquisition costs would be necessary.
Financial Reinsurance
The U.S. financial reinsurance sub-segment includes net fees earned on financial
reinsurance agreements and the Company's investment in RGA Financial Group
L.L.C. ("RGA Financial Group"). Financial reinsurance agreements represent low
mortality risk business that the Company assumes and generally 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 was $1.3 million and $3.8 million in the second
quarter and first six months of 2002, respectively, as compared to $2.0 million
and $3.5 million in the prior-year periods. The decrease over the prior quarter
can be attributed to higher operating expenses resulting from an increase in
allocated expenses and the timing of when fees are earned based on the
completion of new financial reinsurance treaties. The increase over the prior
year can be attributed to higher amounts of financial reinsurance outstanding
during the respective periods.
13
CANADA OPERATIONS (dollars in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- -------------------------------
JUNE 30, 2002 JUNE 30, 2001 JUNE 30, 2002 JUNE 30, 2001
------------- ------------- ------------- -------------
REVENUES:
Net premiums $ 44,144 $ 44,148 $ 90,677 $ 86,714
Investment income, net of related expenses 17,776 15,651 33,381 31,297
Realized investment gains (losses), net (105) 2,902 (186) 8,516
Other revenues (49) (162) (78) 85
--------- --------- --------- ---------
Total revenues 61,766 62,539 123,794 126,612
BENEFITS AND EXPENSES:
Claims and other policy benefits 45,103 41,888 90,826 83,095
Interest credited 388 72 388 179
Policy acquisition costs and other
insurance expenses 4,045 3,368 9,262 6,854
Other operating expenses 2,325 2,217 4,568 4,341
--------- --------- --------- ---------
Total benefits and expenses 51,861 47,545 105,044 94,469
Income before income taxes $ 9,905 $ 14,994 $ 18,750 $ 32,143
========= ========= ========= =========
Income before income taxes decreased by 33.9% and 41.7% in the second quarter
and first six months of 2002, respectively. Excluding realized investment gains
(losses), income before income taxes was $10.0 million and $18.9 million in the
second quarter and first six months of 2002, respectively, compared to $12.1
million and $23.6 million in the prior-year periods. The decrease in pre-tax
income excluding realized investment gains and losses reflects favorable
mortality in the previous year as well as unfavorable mortality experience in
the current year.
Net premiums remained flat and increased 4.6% in the second quarter and first
six months of 2002, respectively. The year to date increase is primarily the
result of current-year production offset by a decrease in creditor premiums as
prescribed by treaty parameters. 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 13.6% and 6.7% in the second quarter and first
six months of 2002, respectively. The increase is due to an increase in the
invested asset base. The invested asset base growth is due to operating cash
flows on traditional reinsurance, proceeds from capital contributions made to
the segment, and interest on the growth of funds withheld at interest.
Claims and other policy benefits increased by 7.7% and 9.3% during the second
quarter and first six months of 2002, respectively. Claims and other policy
benefits as a percentage of net premiums were 102.2% and 100.2% in the second
quarter and first six months of 2002, respectively, compared to 94.9% and 95.8%
in the prior-year periods. The higher percentages are a reflection of a change
in the mix of business and favorable mortality in the prior year. The level of
death claims may fluctuate from period to period, but exhibits less volatility
over the long term.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums totaled 9.2% and 10.2% for the second quarter and first six months of
2002, respectively, compared to 7.6% and 7.9% in the prior-year periods. The
increase is primarily due to the mix of business in the segment, which varies
from period to period, primarily due to new production.
14
OTHER INTERNATIONAL OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2002
----------------------------------------------------------------------
TOTAL
EUROPE & OTHER
ASIA PACIFIC LATIN AMERICA SOUTH AFRICA INTERNATIONAL
-------------- --------------- -------------- ---------------
REVENUES:
Net premiums $ 31,840 $ 2,331 $ 51,942 $ 86,113
Investment income, net of related expenses 1,785 1,345 17 3,147
Realized investment losses, net (123) (104) (1) (228)
Other revenues 579 69 330 978
-------- -------- -------- --------
Total revenues 34,081 3,641 52,288 90,010
BENEFITS AND EXPENSES:
Claims and other policy benefits 21,592 784 33,006 55,382
Interest credited -- 531 -- 531
Policy acquisition costs and other insurance
expenses 5,792 755 16,332 22,879
Other operating expenses 3,546 1,264 2,862 7,672
Interest expense 215 -- 273 488
-------- -------- -------- --------
Total benefits and expenses 31,145 3,334 52,473 86,952
Income (loss) before income taxes $ 2,936 $ 307 $ (185) $ 3,058
======== ======== ======== ========
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2001
----------------------------------------------------------------------
TOTAL
EUROPE & OTHER
ASIA PACIFIC LATIN AMERICA SOUTH AFRICA INTERNATIONAL
-------------- --------------- -------------- ---------------
REVENUES:
Net premiums $ 25,934 $ 18,397 $ 18,390 $ 62,721
Investment income, net of related expenses 1,246 4,857 596 6,699
Realized investment gains (losses), net 58 (2,480) 6 (2,416)
Other revenues 617 88 100 805
-------- -------- -------- --------
Total revenues 27,855 20,862 19,092 67,809
BENEFITS AND EXPENSES:
Claims and other policy benefits 17,261 17,785 10,372 45,418
Interest credited -- 476 -- 476
Policy acquisition costs and other insurance
expenses 6,565 3,832 5,691 16,088
Other operating expenses 2,310 2,095 2,408 6,813
Interest expense 194 -- 145 339
-------- -------- -------- --------
Total benefits and expenses 26,330 24,188 18,616 69,134
Income (loss) before income taxes $ 1,525 $ (3,326) $ 476 $ (1,325)
======== ======== ======== ========
15
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2002
----------------------------------------------------------------------
TOTAL
EUROPE & OTHER
ASIA PACIFIC LATIN AMERICA SOUTH AFRICA INTERNATIONAL
-------------- --------------- -------------- ---------------
REVENUES:
Net premiums $ 64,992 $ 6,528 $ 92,155 $ 163,675
Investment income, net of related expenses 3,154 3,902 248 7,304
Realized investment losses, net (173) (259) (296) (728)
Other revenues 1,275 94 336 1,705
--------- --------- --------- ---------
Total revenues 69,248 10,265 92,443 171,956
BENEFITS AND EXPENSES:
Claims and other policy benefits 44,160 3,025 58,196 105,381
Interest credited -- 783 -- 783
Policy acquisition costs and other insurance
expenses 14,016 2,310 28,280 44,606
Other operating expenses 6,277 3,418 5,349 15,044
Interest expense 388 -- 351 739
--------- --------- --------- ---------
Total benefits and expenses 64,841 9,536 92,176 166,553
Income before income taxes $ 4,407 $ 729 $ 267 $ 5,403
========= ========= ========= =========
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2001
----------------------------------------------------------------------
TOTAL
EUROPE & OTHER
ASIA PACIFIC LATIN AMERICA SOUTH AFRICA INTERNATIONAL
-------------- --------------- -------------- ---------------
REVENUES:
Net premiums $ 54,821 $ 32,495 $ 31,637 $ 118,953
Investment income, net of related expenses 2,281 7,736 1,251 11,268
Realized investment gains (losses), net 143 (2,868) (30) (2,755)
Other revenues 1,342 179 96 1,617
--------- --------- --------- ---------
Total revenues 58,587 37,542 32,954 129,083
BENEFITS AND EXPENSES:
Claims and other policy benefits 36,763 32,121 20,382 89,266
Interest credited -- 769 -- 769
Policy acquisition costs and other insurance
expenses 14,877 6,106 9,000 29,983
Other operating expenses 5,168 4,221 4,888 14,277
Interest expense 464 -- 290 754
--------- --------- --------- ---------
Total benefits and expenses 57,272 43,217 34,560 135,049
Income (loss) before income taxes $ 1,315 $ (5,675) $ (1,606) $ (5,966)
========= ========= ========= =========
Income before income taxes for the Other International segment was $3.1 million
and $5.4 million for the second quarter and first six months of 2002,
respectively, compared to losses of $1.3 million and $6.0 million for the
comparable prior-year periods.
Net premiums increased 37.3% and 37.6% during the second quarter and first six
months of 2002, respectively. The increase was primarily the result of renewal
premiums from existing blocks of business, new business premiums from
facultative and automatic treaties, and premiums associated with accelerated
critical illness coverage in Asia Pacific and Europe & South Africa. Accelerated
critical illness coverage provides a benefit in the event of a death from or
16
the diagnosis of a defined critical illness. Premiums earned during the second
quarter and first six months of 2002 from this coverage totaled $27.4 million
and $46.7 million, respectively, compared to $9.4 million and $13.9 million in
the prior-year periods. The overall increase was partially offset by the exit
from the privatized pension business in 2001 and declining sales of direct
insurance in Argentina. 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 decreased 53.0% and 35.2% in the second quarter and first
six months of 2002, respectively. The decrease is primarily due to a decrease in
allocated assets required to support the Argentine pension business as a result
of the devaluation of the Argentine peso. Investment income is allocated to the
segments based upon average assets and related capital levels deemed appropriate
to support the segment business volumes.
The amount of claims and other policy benefits increased 21.9% and 18.1% in the
second quarter and first six months of 2002. The increase is due primarily to
overall increased business volume for the segment. Claims and other policy
benefits, as a percentage of net premiums, were 64.3% and 64.4% in the second
quarter and first six months of 2002, respectively, compared to 72.4% and 75.0%
in the prior-year period. For the Latin America sub-segment, the amount of
claims and other policy benefits decreased 95.6% and 90.6% in the second quarter
and first six months of 2002 due primarily to decreased business volume and
recognition of transaction gains on settlement of privatized pension claims.
During 2001, the Company ceased renewal of reinsurance treaties associated with
privatized pension contracts in Argentina because of adverse experience on this
business, as several aspects of the pension fund claims flow did not develop as
was contemplated when the reinsurance programs were initially priced, and in
order to focus on other traditional opportunities in the region. Although
premiums will continue to decline, it is estimated that claims for the
privatized pension business will continue to be paid over the next several
years. As the underlying reserves for the privatized pension business are in
Argentine pesos, the functional currency of this sub-segment, the devaluation of
the peso during 2002 is not expected to have an impact on earnings until actual
claims settlement or adjustment to the underlying peso-denominated reserves
occur. Transaction gains/losses on the claims settlements are included in the
claims and other policy benefits total. The impact of fluctuating exchange rates
will continue to be closely monitored by the Company's management and is
expected to be volatile over the near term. Claims and other policy benefits
include claims paid, claims in the course of payment and establishment of
additional reserves to provide for unreported claims. The level of claims may
fluctuate from period to period, but exhibits less volatility over the long
term. The Company monitors mortality claims trends to evaluate the
appropriateness of reserve levels and adjusts the reserve levels on a periodic
basis.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums were 26.6% and 27.3% in the second quarter and first six months of
2002, respectively, compared to 25.7% and 25.2% in 2001. These percentages
fluctuate due to the timing of client company reporting and variations in the
mixture of business being written. Other operating expenses remained fairly
constant between periods. As a percentage of premiums, other operating expenses
decreased to 8.9% and 9.2% in the second quarter and first six months of 2002,
respectively, from 10.9% and 12.0% in the comparable prior-year periods. The
Company believes that sustained growth in premiums should lessen the burden of
start-up expenses and expansion costs over time.
CORPORATE AND OTHER SELECTED CONSOLIDATED INFORMATION
Corporate activity generally represents investment income on invested assets not
allocated to support segment operations, undeployed proceeds from the Company's
capital raising efforts, unallocated realized capital gains or losses, corporate
expenses that include unallocated overhead and executive costs, and interest
expense related to debt and the $225.0 million, 5.75% mandatorily redeemable
trust preferred securities issued by a wholly-owned subsidiary in 2001
("Preferred Securities").
Corporate revenues increased $4.9 million and $9.2 million during the second
quarter and first six months of 2002, respectively. The increase is primarily a
result of unallocated investment income associated with an increase in invested
assets not allocated to support segment operations. Corporate unallocated other
operating expenses were less than one percent of consolidated premiums in the
second quarter of 2002 and 2001. Corporate interest expense was $8.4 million and
$16.7 million in the second quarter and first six months of 2002, respectively,
and $4.0 million and $8.5 million in the prior-year periods. The increase was
primarily due to the issuance of the Preferred Securities.
17
DISCONTINUED OPERATIONS
At December 31, 1998, the Company formally reported its accident and health
division as a discontinued operation for financial reporting purposes. The
accident and health division was placed into run-off with all treaties being
terminated at the earliest possible date. This discontinued segment reported a
loss of $0.9 million and $2.1 million for the second quarter and first six
months of 2002, respectively, compared to breakeven results for prior-year
periods. 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. 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
rescission, and projected future premium run-off, all of which may affect the
level of the claim reserve liability. Due to the uncertainty associated with the
run-off of this business, the impact on the Company's results of operations in
any particular future period could be material.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows from operating activities for the six months ended
June 30, 2002 and 2001 were $147.7 million and $116.6 million, respectively.
Cash flows from operating activities are affected by the timing of premiums
received, claims paid, and working capital changes. The Company believes the
short-term cash requirements of its business operations will be sufficiently met
by the positive cash flows generated. Additionally, the Company maintains a very
high quality fixed maturity portfolio with good liquidity characteristics. These
securities are available for sale and can be easily sold to meet the Company's
obligations, if necessary.
Net cash used in investing activities was $234.0 million and $68.8 million in
2002 and 2001, respectively. Changes in cash provided by investing activities
primarily relate to the management of the Company's investment portfolios and
the investment of excess funds generated by operating and financing activities.
Net cash provided by financing activities was $48.5 million and $36.9 million in
2002 and 2001, respectively. Changes in cash provided by financing activities
primarily relate to the issuance of equity or debt securities, borrowings or
payments under the Company's existing credit agreements, treasury stock
activity, and excess deposits or withdrawals under investment type contracts.
RGA is a holding company whose primary uses of liquidity include, but are not
limited to, the immediate capital needs of its operating companies associated
with the Company's primary businesses, dividends paid by RGA to its
shareholders, interest payments on its senior indebtedness and junior
subordinated notes (See Notes 16, "Long-Term Debt," and 17, "Issuance of Trust
Piers Units," in the Annual Report), and repurchases of RGA common stock under a
board of director approved plan. The primary sources of RGA's liquidity include
proceeds from its capital raising efforts, borrowings under its U.S. revolving
credit facility, interest income on undeployed corporate investments, interest
income received on surplus notes with two operating subsidiaries, and dividends
from operating subsidiaries. As the Company continues its expansion efforts, RGA
will continue to be dependent on these sources of liquidity.
Certain of the Company's debt agreements contain financial covenant restrictions
related to, among others, liens, the issuance and disposition of stock of
restricted subsidiaries, minimum requirements of net worth ranging from $600
million to $700 million, and minimum rating requirements. A material ongoing
covenant default could require immediate payment of the amount due, including
principal, under the various agreements. Additionally, the Company's debt
agreements contain cross-default covenants, which would make outstanding
borrowings immediately payable in the event of a material uncured covenant
default under any of the agreements, including, but not limited to, non-payment
of indebtedness when due for amounts greater than $10 million or $25 million
depending on the agreement, bankruptcy proceedings, and any event which results
in the acceleration of the maturity of indebtedness. As of June 30, 2002, the
Company had $325.4 million in outstanding borrowings under its debt agreements
and was in compliance with all covenants under those agreements.
The ability of the Company to make debt principal and interest payments depends
primarily on the earnings and surplus of its subsidiaries, investment earnings
on undeployed capital proceeds, and the Company's ability to raise additional
funds. At June 30, 2002, Reinsurance Company of Missouri, Inc. (RCM) and RGA
Canada had statutory capital and surplus of $570.5 million and $188.4 million,
respectively. RCM's primary asset is its investment in RGA Reinsurance, the main
operating company. The transfer of funds from the subsidiaries to the Company is
subject to applicable insurance laws and regulations. The Company expects any
future increases in liquidity needs
18
due to treaty recaptures, relatively large policy loans or unanticipated
material claims levels would be met first by operating cash flows and then by
selling fixed-income securities or short-term investments.
The Company expects consolidated interest expense to increase significantly in
2002 due to the addition of the $225.0 million face amount, 5.75% trust
preferred securities issued by RGA Capital Trust I and the interest expense
associated with its $200.0 million 6.75% Senior Notes due 2011, the proceeds of
which were used to pay down a balance of $120 million on its U.S. revolving
credit facility and to prepay and terminate the $75 million term loan with
MetLife Credit Corp. As of June 30, 2002, the Company had available capacity of
approximately $156.7 million through its U.S. and foreign revolving credit
facilities and the average interest rate on long-term debt outstanding was
6.34%. Currently, the $140.0 million U.S. revolving credit facility has a zero
balance and terminates in May, 2003, at which time the Company plans to renew
the existing credit facility or enter into another credit agreement to replace
the terminated facility.
Based on the historic cash flows and the current financial results of the
Company, subject to any dividend limitations which may be imposed by various
insurance regulations, management believes RGA's cash flows from operating
activities, together with undeployed proceeds from its capital raising efforts,
including interest and investment income on those proceeds, interest income
received on surplus notes with two operating subsidiaries, and its ability to
raise funds in the capital markets, will be sufficient to enable RGA to make
dividend payments to its shareholders, to make interest payments on its senior
indebtedness and junior subordinated notes, to repurchase RGA common stock under
the board of director approved plan, and to meet its other obligations.
The Company has catastrophe insurance coverage that expires August 13, 2002,
providing benefits of up to $100 million per occurrence for claims involving
three or more deaths in a single accident. As of August 12, 2002, the Company
has received commitments on 94% of a total of $50.0 million in new catastrophe
coverage. Under the new coverage, the Company retains the first $20 million in
claims and $10 million of the next $20 million in claims. Additionally, the cost
of coverage has increased significantly compared to the policy expiring August
13, 2002.
A general economic downturn or a downturn in the equity and other capital
markets could adversely affect the market for many annuity and life insurance
products. Because the Company obtains substantially all of its revenues through
reinsurance arrangements that cover a portfolio of life insurance products, as
well as annuities, its business would be harmed if the market for annuities or
life insurance were adversely affected.
INVESTMENTS
Invested assets, including cash and short-term investments, totaled $5.7 billion
at June 30, 2002 compared to $5.3 at December 31, 2001. Increases from positive
operating cash flows and deposits on asset intensive products contributed to the
increase in invested assets during the first six months of 2002. The Company has
historically generated positive cash flows from operations.
Within the fixed maturity security portfolio, the Company holds approximately
$217.4 million in asset-backed securities at June 30, 2002, which include credit
card and automobile receivables, home equity loans and collateralized bond
obligations. The Company's asset-backed securities are primarily floating rate
securities and are diversified by issuer. Approximately 55.4%, or $120.4 million
are collateralized bond obligations. The Company recorded $8.7 million in
realized losses during the second quarter of 2002 due to the sale of
WorldCom/MCI fixed maturity holdings.
The Company monitors its fixed maturity securities to determine impairments in
value. In conjunction with its external investments manager, the Company
evaluates factors such as financial condition of the issuer, payment
performance, market value, compliance with covenants, general market conditions,
intent and ability to hold securities, and various other subjective factors.
Securities, based on management's judgment, with an other than temporary
impairment in value are written down to management's estimate of net realizable
value.
COUNTERPARTY RISK
In the normal course of business, the Company seeks to limit its exposure to
reinsurance contracts by ceding a portion of the reinsurance to other insurance
companies or reinsurers. If a counterparty was unable to fulfill its obligation
to us under our reinsurance agreement with them, the impact could be material to
the Company's financial condition and results of operations.
19
MARKET RISK
Market risk is the risk of loss that may occur when fluctuations 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 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 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. Due to the economic uncertainty in
Argentina and losses associated with Argentine privatized pension business, the
Company has scaled back its operations in Latin America. Reinsurance of the
Argentine pension business is conducted through the Company's principal
operating subsidiary based in Missouri. 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.
There has been no significant change in the Company's quantitative or
qualitative aspects of market risk during the quarter ended June 30, 2002 from
that disclosed in the Annual Report on Form 10-K for the year ended December 31,
2001.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, including,
among others, statements relating to projections of the earnings, revenues,
income or loss, future financial performance and growth potential of Reinsurance
Group of America, Incorporated and its subsidiaries (which we refer to in the
following paragraphs as "we," "us" or "our"). The words "intend," "expect,"
"project," "estimate," "predict," "anticipate," "should," "believe," and other
similar expressions also are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results, performance and achievements could differ materially from those set
forth in, contemplated by or underlying the forward-looking statements.
Numerous important factors could cause actual results and events to differ
materially from those expressed or implied by forward-looking statements
including, without limitation, (1) material changes in mortality and claims
experience, (2) market or economic conditions that adversely affect our ability
to make timely sales of investment securities, (3) competitive factors and
competitors' responses to our initiatives, (4) general economic conditions
affecting the demand for insurance and reinsurance in our current and planned
markets, (5) changes in our financial strength and credit ratings or those of
Metropolitan Life Insurance Company ("MetLife"), General American Life Insurance
Company ("General American"), and their respective affiliates, and the effect of
such changes on our future results of operations and financial condition, (6)
fluctuations in U.S. or foreign currency exchange rates, interest rates, or
securities and real estate markets, (7) changes in investment portfolio yields
due to interest rate or credit quality changes, (8) the stability of governments
and economies in the markets in which we operate, (9) adverse litigation or
arbitration results, (10) the success of our clients, (11) successful execution
of our entry into new markets, (12) successful development and introduction of
new products, (13) regulatory action that may be taken by state Departments of
Insurance with respect to us, MetLife, or General American, (14) changes in
laws, regulations, and accounting standards applicable to us, our subsidiaries,
or our business, and (15) other risks and uncertainties described in this
document and in our other filings with the Securities and Exchange Commission.
Forward-looking statements should be evaluated together with the many risks and
uncertainties that affect our business, including those mentioned in this
document and described in the periodic reports we file with the Securities
20
and Exchange Commission. You are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date on which they are
made. We do not undertake any obligations to update these forward-looking
statements, even though our situation may change in the future. We qualify all
of our forward-looking statements by these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Market Risk" which are incorporated by reference
herein.
PART II -- OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
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. The Company is currently a party to arbitrations that
involve three separate medical reinsurance arrangements, three arbitrations
relative to the Company's portfolio of personal accident business, one lawsuit
seeking to enforce an arbitration award relating to a medical reinsurance
arrangement, and one lawsuit involving aviation bodily injury carve-out
reinsurance coverage. Currently, the ceding companies involved in these disputes
have raised claims that are $39.5 million in excess of the amounts held as a
liability by the Company. The Company believes it has substantial defenses upon
which to contest these claims, including but not limited to misrepresentation
and breach of contract by direct and indirect ceding companies. See Note 22 of
the Annual Report for more information. While it is not feasible to predict the
outcome of the pending arbitrations 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, however the impact on its results of operations
could be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders was held on May 22, 2002
(b) At the Annual Meeting, the following proposals were voted upon by the
shareholders as indicated below:
1. To elect three directors to serve terms ending in 2005.
Directors Voted For Withheld
- --------- ------------ ----------
J. Cliff Eason 48,491,836 425,596
Stewart G. Nagler 49,786,835 130,597
Joseph A. Reali 49,699,185 218,247
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) See index to exhibits.
(b) The following report on Form 8-K was filed with the Securities and
Exchange Commission during the three months ended June 30, 2002:
None.
21
SIGNATURES
Pursuant to the requirements 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 August 13, 2002
------------------------------------------------
A. Greig Woodring
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Jack B. Lay August 13, 2002
------------------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
22
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation of Reinsurance Group of
America, Incorporated, as amended, 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.
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, incorporated
by reference to Amendment No. 1 to Registration Statement on Form
S-1 (No. 33-58960), filed on April 14, 1993 at the corresponding
exhibit.
4.2 Rights Agreement dated as of May 4, 1993, between RGA and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
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.
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,
incorporated by reference to Registration Statement on Form S-3
(No. 333-5177) filed on 4 June 1998 at the corresponding exhibit.
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.
4.6 Form of Unit Agreement among the Company and the Trust, as Issuers
and The Bank of New York, as Agent, Warrant Agent and Property
Trustee, incorporated by reference to Exhibit 4.1 to Registration
Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001
4.7 Form of Global Unit Certificate, incorporated by reference to
Exhibit A of Exhibit 4.6 of this Report, incorporated by reference
to Registration Statement on Form 8-A12B (No. 1-11848) filed on
December 18, 2001
4.8 Form of Warrant Agreement between the Company and the Bank of New
York, as Warrant Agent, incorporated by reference to Exhibit 4.3
to Registration Statement on Form 8-A12B (No. 1-11848) filed on
December 18, 2001
4.9 Form of Warrant Certificate, incorporated by reference to Exhibit
A of Exhibit 4.8 of this Report
23
Exhibit
Number Description
- ------- -----------
4.10 Trust Agreement of RGA Capital Trust I, incorporated by reference
to Exhibit 4.11 to the Registration Statements on Form S-3 (File
Nos. 333.55304, 333-55304-01 and 333-55304-02), previously filed
with the SEC on February 9, 2001, as amended (the "Original S-3")
4.11 Form of Amended and Restated Trust Agreement of RGA Capital Trust
I, incorporated by reference to Exhibit 4.7 to Registration
Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001
4.12 Form of Preferred Security Certificate for the Trust, included as
Exhibit A to Exhibit 4.11 to this Report
4.13 Form of Remarketing Agreement between the Company, as Guarantor,
and The Bank of New York, as Guarantee Trustee, incorporated by
reference to Exhibit 4.12 to Registration Statement on Form 8-A12B
(No. 1-11848) filed on December 18, 2001
4.14 Form of Junior Subordinated Indenture, incorporated by reference
to Exhibit 4.3 of the Original S-3
4.15 Form of First Supplemental Junior Subordinated Indenture between
the Company and The Bank of New York, as Trustee, incorporated by
reference to Exhibit 4.10 to Registration Statement on Form 8-A12B
(No. 1-11848) filed on December 18, 2001
4.16 Form of Guarantee Agreement between the Company, as Guarantor, and
The Bank of New York, as Guarantee Trustee, incorporated by
reference to Exhibit 4.11 to Registration Statement on Form 8-A12B
(No. 1-11848) filed on December 18, 2001
4.17 Form of Senior Indenture between Reinsurance Group of America,
Incorporated and The Bank of New York, as Trustee, incorporated by
reference to Exhibit 4.1 to the Original S-3
4.18 Form of First Supplemental Indenture between Reinsurance Group of
America, Incorporated and The Bank of New York, as Trustee,
relating to the 6-3/4 Senior Notes Due 2011, incorporated by
reference to Exhibit 4.8 to Form 8-K dated December 12, 2001 (No.
1-11848), filed December 18, 2001
10.21 Amendment No. 1 and waiver dated as of December 12, 2001 to Credit
Agreement dated as of May 24, 2000
10.22 Amendment No. 2 dated as of July 16, 2002 to Credit Agreement
dated May 24, 2000
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
24