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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, 2002
___ 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
Trust Preferred Income Equity Redeemable
Securities (PIERS (sm)) Units 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. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _X_ No ___
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 June 30,
2002, as reported on the New York Stock Exchange was $615,225,696.
As of March 1, 2003, Registrant had outstanding 49,612,997 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2003
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, 2002, are incorporated by reference
in Part III of this Form 10-K.
2
REINSURANCE GROUP OF AMERICA, INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 2002
INDEX
ITEM PAGE
NUMBER OF THIS FORM
- ------ ------------
PART I
1. BUSINESS............................................................................. 4
2. PROPERTIES........................................................................... 17
3. LEGAL PROCEEDINGS.................................................................... 17
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 17
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................................... 18
6. SELECTED FINANCIAL DATA.............................................................. 18
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................ 20
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............................................................... 74
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS...................................... 74
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 74
14. CONTROLS AND PROCEDURES.............................................................. 74
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................... 75
3
Item 1. BUSINESS
A. OVERVIEW
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company formed December 31, 1992. On December 31, 2002, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
48.8% 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 59.1%
of the outstanding shares of common stock of RGA as of December 31, 2002.
During 2002, MetLife Inc. purchased 327,600 additional common shares of
RGA. The purchases were intended to offset potential future dilution of
MetLife's holding of RGA stock arising from the issuance of convertible
securities by RGA in December 2001.
The consolidated financial statements include the assets, liabilities,
and results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"), RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life
Reinsurance Company of Canada ("RGA Canada") and RGA Americas Reinsurance
Company, Ltd. ("RGA Americas"), as well as several other subsidiaries, subject
to an ownership position of greater than fifty percent (collectively, the
"Company"). During 2000, the Company sold its interest in RGA Sudamerica, S.A.,
and its subsidiaries, and Benefit Resource Life Insurance Company (Bermuda) Ltd.
The Company is primarily engaged in traditional life, asset-intensive,
and financial reinsurance. RGA and its predecessor, the Reinsurance Division of
General American, have been engaged in the business of life reinsurance since
1973. Approximately 79.8% of the Company's 2002 net premiums were from its more
established operations in the U.S. and Canada. In 1994, the Company began
expanding into international markets and now has subsidiaries, branch
operations, or representative offices in Asia Pacific, including Australia,
Latin America, Europe and South Africa. The Company is considered one of the
leading life reinsurers in the North American market based on premiums and
inforce business. As of December 31, 2002, the Company had approximately $8.9
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 in
meeting 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. Asset-intensive reinsurance
primarily refers to reinsurance of corporate-owned life insurance and annuities.
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 the
binding limits specified in their automatic reinsurance treaties.
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
4
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, which 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) or in some cases due to changes in the financial
condition or ratings of the reinsurer. Recapture of business previously ceded
does not affect premiums ceded prior to the recapture of such business, but
would reduce premiums in subsequent periods. Additionally, some treaties give
the ceding company the right to request the Company to place assets in trust for
its benefit to support reserve credits, in the event of a downgrade of the
Company's ratings to specified levels. As of December 31, 2002, these treaties
had approximately $294.7 million in reserves. Assets placed in trust continue to
be owned by the Company, but their use is restricted based on the terms of the
trust agreement. Securities with an amortized cost of $532.8 million were held
in trust for the benefit of certain subsidiaries of the Company to satisfy
collateral requirements for reinsurance business at December 31, 2002.
Additionally, securities with an amortized cost of $931.6 million, as of
December 31, 2002, were held in trust to satisfy collateral requirements under
certain third-party reinsurance treaties. Under certain conditions, RGA may be
obligated to move reinsurance from one RGA subsidiary company to another RGA
subsidiary or make payments under the treaty. These conditions generally include
unusual or remote circumstances, such as change in control, insolvency,
nonperformance under a treaty, or loss of the reinsurance license of such
subsidiary.
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 considered 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.
B. CORPORATE STRUCTURE
RGA is a holding company, the principal assets of which consist of the
common stock of Reinsurance Company of Missouri, Incorporated ("RCM"), RGA
Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life Reinsurance
Company of Canada ("RGA Canada") and RGA Americas Reinsurance Company, Ltd.
("RGA Americas"), as well as investments in several other wholly-owned
subsidiaries, subject to an ownership position greater than 50%. The primary
sources of funds for RGA to make dividend distributions and to fund debt service
obligations are 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. Dividends paid by the Company's reinsurance
subsidiaries are subject to regulatory restrictions of the respective governing
bodies where each reinsurance subsidiary is domiciled.
As of December 31, 1998, the Company formally reported its accident and
health division as a discontinued operation. The accident and health operations
were 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. The nature of
the underlying risks is such that the claims may take years to reach the
reinsurers involved.
5
Thus, the Company expects to pay claims over a number of years as the level of
business diminishes. The Company will report a loss to the extent claims exceed
established reserves.
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Europe & South Africa, Asia Pacific, and Latin
America. The Europe & South Africa, Asia Pacific, and Latin America operational
segments are presented herein as one reportable segment, Other International.
The operational segment results do not include the corporate investment
activity, general corporate expenses, or 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 Company measures segment
performance primarily based on profit or loss from operations before income
taxes.
The U.S. operations represented 70.7% of the Company's consolidated net
premiums in 2002. The U.S. operations market life reinsurance, reinsurance of
asset-intensive products, and financial reinsurance primarily through RGA
Reinsurance, principally to the largest life insurance companies in the U.S.
Asset-intensive products primarily include reinsurance of corporate-owned life
insurance and annuities. RGA Reinsurance, a Missouri domiciled stock life
insurance company, is wholly owned by RCM, a wholly owned subsidiary of RGA.
The Company's Canada operations, which represented 9.1% of consolidated
net premiums in 2002, are conducted primarily through RGA Canada. The Canada
operations assist clients with capital management activity and mortality risk
management and provide traditional individual life reinsurance, including
preferred underwriting products, as well as creditor and critical illness
products.
The Company's Europe & South Africa operations represented 11.5% of
consolidated net premiums in 2002. This segment provides life and critical
illness reinsurance to clients throughout Europe and South Africa through yearly
renewable term and coinsurance agreements. These agreements may be either
facultative or automatic agreements covering primarily individual products but
also some group contracts. The Company conducts reinsurance through its
wholly-owned United Kingdom subsidiary, RGA Reinsurance (UK) Limited ("RGA UK"),
a South African wholly-owned subsidiary, RGA Reinsurance Company of South
Africa, Limited ("RGA South Africa") and a representative office in Spain. Also
in 2002, the Company opened a representative office in India to focus on the
Indian market.
The Company's Asia Pacific operations represented 8.1% of the Company's
consolidated net premiums in 2002. The Company conducts reinsurance business in
the Asia Pacific region through branch operations in Hong Kong and New Zealand,
and representative offices in Japan, Taiwan, and South Korea. In January 1996,
RGA formed RGA Australian Holdings Pty, Limited, a wholly-owned holding company,
and RGA Reinsurance Company of Australia Limited ("RGA Australia"), a
wholly-owned reinsurance company of RGA Australian Holdings Pty, Limited,
licensed to assume life reinsurance in Australia. Business is also conducted
through Malaysian Life Reinsurance Group Berhad ("MLRe"), a joint venture in
Malaysia in which the Company holds a 30% interest. 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 Latin America operations represented 0.6% of the
Company's consolidated net premiums in 2002. 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 effective July 1,
2001, ceased all treaty renewals. Due to the economic uncertainty in Argentina
and losses associated with the Argentine privatized pension system, the Company
has scaled back its operations in Argentina. The Company continues to market
additional types of reinsurance in the region such as traditional individual
life, credit, and group life insurance in Mexico and Chile. Through its
wholly-owned subsidiary, General American Argentina Seguros de Vida, S.A. ("GA
Argentina"), the Company also markets and sells direct policies including
individual, group, credit, universal life and disability insurance. However, the
current economic situation in Argentina has had a negative impact on growth
opportunities for direct insurance. The Company had direct and local reinsurance
operations in Chile until 2000 when those operations were sold.
RGA Barbados and RGA Americas were formed and capitalized in 1995 and
1999, respectively, providing reinsurance for a portion of certain business
assumed by RGA Reinsurance and other RGA insurance subsidiaries, as well as
assuming life reinsurance directly from clients.
6
Intercorporate Relationships
The Company has reinsurance agreements with MetLife and certain of its
subsidiaries. As of December 31, 2002, the Company had assets and liabilities
related to these agreements totaling $78.5 million and $183.1 million,
respectively. Under these agreements, the Company reflected net premiums of
approximately $172.1 million, $149.3 million, and $144.0 million in 2002, 2001,
and 2000, respectively. The premiums reflect the net of business assumed from
and ceded to MetLife and its subsidiaries, including General American. The
pre-tax gain on this business was approximately $25.9 million, $26.1 million,
and $17.8 million in 2002, 2001, and 2000, respectively.
Ratings
The ability of RGA Reinsurance to write reinsurance partially depends
on its financial condition and its ratings. RGA Reinsurance and RGA Canada have
been assigned ratings of "A+" (Superior) by A.M. Best Company. The ratings
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, as well as the implicit and explicit
benefits the Company derives from its affiliation with MetLife. 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 senior
long-term debt ratings of "A-" from S&P, "Baa1" from Moody's and "a" from A.M.
Best.
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 December 31, 1999. The report on 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, 2001. The report on this examination contained no material adverse findings.
The Company's other operating reinsurance subsidiaries are also subject to
periodic reporting requirements and regulatory examinations.
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
7
regulatory authority. However, the National Association of Insurance
Commissioners ("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
letters 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 yearly renewable term 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.
RGA Reinsurance and RCM prepare statutory financial statements in
conformity with accounting practices prescribed or permitted by the State of
Missouri. Beginning in 2001, the State of Missouri required that insurance
companies domiciled in the State of Missouri prepare their statutory basis
financial statements in accordance with the NAIC Accounting Practices and
Procedures manual - Version effective March 2002, subject to any deviations
prescribed or permitted by the State of Missouri insurance commissioner.
Accounting changes adopted to conform to the provisions of the NAIC
Accounting Practices and Procedures manual - Version effective March 2002 are
reported as changes in accounting principles. The cumulative effect of changes
in accounting principles is reported as an adjustment to unassigned funds
(surplus) in the period of the change in accounting principle. There were no
adjustments made to statutory surplus in 2002 as a result of implementing the
new standards.
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.
insurance 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 the 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 the 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 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 and 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 of the voting securities of another person.
8
The Company owns other international holding companies in addition to
RGA. These international holding companies are subject to various regulations in
their respective jurisdictions.
Restrictions on Dividends and Distributions
Current Missouri law (applicable to 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 2003
is approximately $64.0 million pursuant to this calculation. RGA Reinsurance's
allowable dividend without prior approval for 2003 is approximately $63.4
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, 2002, RCM and RGA Reinsurance had unassigned surplus of
approximately $28.9 million and $67.8 million, respectively. Any dividends paid
by RGA Reinsurance would be paid to RCM, which in turn has the ability to pay
dividends to RGA. Historically, RGA has not relied on dividends from its
subsidiaries to fund its obligations. However, the regulatory limitations
described here could limit the Company's financial flexibility in the future
should it choose to or need to use subsidiary dividends as a funding source for
its obligations.
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.
Missouri insurance laws and regulations also 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 call for a rescission of
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 the Missouri
insurance regulations.
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 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 payment. The maximum amount available for payment of
dividends by RGA Canada under the Canadian MCCSR guidelines was $33.4 million at
December 31, 2002. Dividend payments from other subsidiaries are subject to the
regulations in the country of domicile.
RGA Americas and RGA Barbados do not have material restrictions on
their ability to pay dividends out of retained earnings
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.
9
In addition to RCM, RGA Reinsurance and RGA Canada, the Company has an
interest in licensed insurance subsidiaries in Australia, Argentina, Barbados,
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 $4.0
million of coverage per individual life. For other currencies and for countries
with higher risk factors, the Company systematically reduces its retention. 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, RGA Barbados, or RGA Americas. Retrocessions
are arranged through the Company's retrocession pools for amounts in excess of
its retention. As of December 31, 2002, all retrocession pool members in this
excess retention pool reviewed by the A.M. Best Company were rated "B++" 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 the recoverability
of any such claims.
The Company maintains catastrophe insurance under a program that renews
on August 13th of each year. The program provides up to $50 million of coverage
per occurrence for events involving ten or more deaths. Under this program the
Company retains the first $20 million in claims, $10 million of the next $20
million, and none of the next $40 million in claims. Acts of terrorism are
covered except when arising from the use of nuclear, chemical, or biological
weapons. This insurance is provided through seven insurance companies and eight
Lloyds Syndicates with no single insurer providing more than $10 million of the
$50 million coverage.
Underwriting
Facultative. The Company 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 between 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 regularly performs internal reviews of its underwriters and underwriting
process.
The Company's management determines whether to accept facultative
reinsurance business on a prospective insured by reviewing the application,
medical information and all underwriting requirements based on age and the face
amount of the application. An assessment of medical and financial history
follows with decisions based on underwriting knowledge, manual review and
consultation with the Medical Directors as necessary. Most facultative
applications involve individuals with multiple medical impairments, such as
heart disease, high blood pressure, and diabetes, which require a difficult
underwriting/mortality assessment. To assist its underwriters in making these
assessments, RGA Reinsurance employs three full-time medical directors, as well
as a medical consultant.
10
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.
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 its primary
competitors in the U.S. life reinsurance market are currently Transamerica
Occidental Life Insurance Company, a subsidiary of Aegon N.V., Swiss Re Life of
America, ING Re, Munich American Reinsurance Company, and Employers Reinsurance
Company. However, within the reinsurance industry, this can change from year to
year. The Company believes that its major competitors in the Canadian life
reinsurance market are Munich Reinsurance Company, Employers Reassurance
Corporation, and Swiss Re Life and Health Canada.
The Company's international operations compete with subsidiaries of
several U.S. life insurers and reinsurers and other internationally based
insurers and reinsurers, some of which are larger, more established in their
markets, and have access to greater resources than RGA. Competition is based
primarily on the basis of price, service, and financial strength.
Employees
As of December 31, 2002, the Company had 684 employees located in the
United States, Canada, Argentina, Mexico, Hong Kong, Korea, Australia, Japan,
Taiwan, South Africa, Spain, India 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, morbidity, and
lapse risks associated with such products. With respect to asset-intensive
products, the Company has also provided reinsurance for investment-related
risks. The following table sets forth the Company's premiums attributable to
each of its segments for the periods indicated on both a gross assumed basis and
net of premiums ceded to third-parties:
GROSS AND NET PREMIUMS BY SEGMENT
(in millions)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
GROSS PREMIUMS:
U.S. $1,659.4 71.2 $1,366.7 73.9 $1,210.9 74.4
Canada 210.2 9.0 200.2 10.8 218.0 13.4
Europe & South Africa 272.0 11.7 96.2 5.2 30.5 1.9
Asia Pacific 175.4 7.5 135.6 7.3 100.7 6.2
Latin America 13.4 0.6 51.9 2.8 66.1 4.1
-------- ----- -------- ----- -------- -----
Total $2,330.4 100.0 $1,850.6 100.0 $1,626.2 100.0
======== ===== ======== ===== ======== =====
NET PREMIUMS:
U.S. $1,399.8 70.7 $1,222.9 73.6 $1,038.9 74.0
Canada 181.2 9.1 173.3 10.4 176.3 12.6
Europe & South Africa 226.9 11.5 94.8 5.7 29.7 2.1
Asia Pacific 160.2 8.1 119.7 7.2 94.3 6.7
Latin America 12.6 0.6 51.1 3.1 64.9 4.6
-------- ----- -------- ----- -------- -----
Total $1,980.7 100.0 $1,661.8 100.0 $1,404.1 100.0
======== ===== ======== ===== ======== =====
11
The following table sets forth selected information concerning assumed
reinsurance business in force by segment for the indicated periods. (The term
"in force" refers to insurance policy face amounts or net amounts at risk.)
REINSURANCE BUSINESS IN FORCE BY SEGMENT
(in billions)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
U.S. $ 540.0 71.2 $ 468.1 76.0 $ 412.7 75.6
Canada 64.5 8.5 55.8 9.1 54.3 10.0
Europe & South Africa 92.7 12.2 40.5 6.6 2.4 0.4
Asia Pacific 57.0 7.5 44.1 7.1 31.9 5.8
Latin America 4.7 0.6 7.5 1.2 44.6 8.2
-------- ----- -------- ----- -------- -----
Total $ 758.9 100.0 $ 616.0 100.0 $ 545.9 100.0
======== ===== ======== ===== ======== =====
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, and 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 $91.3 billion, $98.0 billion,
and $59.3 billion were released in 2002, 2001, and 2000, respectively.
The following table sets forth selected information concerning assumed
new business volume by segment for the indicated periods. (The term "volume"
refers to insurance policy face amounts or net amounts at risk.)
NEW BUSINESS VOLUME BY SEGMENT
(in billions)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
U.S. $ 146.9 63.9 $ 99.5 58.2 $ 115.7 71.8
Canada 11.3 4.9 8.5 5.0 13.8 8.6
Europe & South Africa 56.3 24.4 33.6 19.6 0.6 0.4
Asia Pacific 12.1 5.3 19.3 11.3 9.7 6.0
Latin America 3.4 1.5 10.2 5.9 21.3 13.2
-------- ----- -------- ----- -------- -----
Total $ 230.0 100.0 $ 171.1 100.0 $ 161.1 100.0
======== ===== ======== ===== ======== =====
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 70.7%, 73.6%, and 74.0% of the
Company's net premiums in 2002, 2001, and 2000, respectively. The U.S.
operations market life reinsurance, reinsurance of asset-intensive products and
financial reinsurance primarily to the largest U.S. life insurance companies.
Traditional
The U.S. traditional reinsurance sub-segment 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.
12
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, 2002, reinsurance of such
policies was reflected in interest-sensitive contract reserves of approximately
$896.6 million and policy loans of $841.1 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 also serves as an
effective means of expanding the U.S. operation's automatic business. In 2002,
2001, and 2000, approximately 21.5%, 21.8%, and 29.1%, 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. The amount of facultative business as a percent of premiums has
decreased over the past several years due to the increase in premiums from
automatic treaties on in force business.
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.
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 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. As of December 31, 2002, reinsurance of such policies was reflected
in interest-sensitive contract liabilities of approximately $2.5 billion.
Asset-intensive business that does not produce mortality risk
(annuities) is normally limited by size of the deposit, from any one depositor.
Business that does produce mortality risks (corporate-owned and bank-owned life
insurance) 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. A significant amount of this
business is written on a modified coinsurance or coinsurance with funds withheld
basis. See Management's Discussion and Analysis of Financial Condition and
Results of Operations--Investments appearing in Item 7 and Note 5 to the
Consolidated Financial Statements included in Item 8 of Part II for additional
information.
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
13
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 sub-segment 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.
The Company primarily targets highly rated insurance companies for
financial reinsurance due to the credit risk associated with this business. 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. If the future profits
of the business are not sufficient to repay the Company or if the ceding company
becomes financially distressed and is unable to make payments under the treaty,
the Company may incur losses. A staff of actuaries and accountants tracks
experience for each treaty 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 largest 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 2002, 53 clients generated annual gross premiums
of $5 million or more for the Company and the aggregate gross premiums from
these clients represented approximately 75.1% of 2002 U.S. life gross premiums.
For the purpose of this disclosure, companies that are within the same holding
company structure are combined.
In 2002, no single non-affiliated U.S. client accounted for more than
10% of the Company's consolidated gross premiums; however, one non-affiliated
U.S. client ceded more than 5% of U.S. life gross premiums. The client ceded
$92.1 million or 5.6% of U.S. operations gross premiums in 2002.
MetLife and its affiliates generated approximately $262.8 million or
15.9% of U.S. operation's gross premium for 2002.
Operations
During 2002, 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 departments are
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.
14
CANADA OPERATIONS
The Canada operations represented 9.1%, 10.4%, and 12.6% of the
Company's net premiums in 2002, 2001, and 2000, respectively. In 2002, the
Canadian life operations assumed $11.3 billion in new business, all of which
resulted from recurring new business. Approximately 88% of the 2002 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 assisting
clients with capital management activity and mortality risk management and is
primarily engaged in traditional individual life reinsurance, including
preferred underwriting products, as well as creditor and critical illness
products. Approximately 90% of RGA Canada's premium income is derived from life
reinsurance products.
Clients include most of the life insurers in Canada. During 2002, two
clients accounted for more than 10% of the Canada operation's gross premiums,
consisting of $62.5 million and $26.5 million, or 29.7% and 12.6%, respectively.
Six other clients, including General American, a related party, individually
accounted for more than 5% of Canada's gross premiums. The Canada operations
compete with a small number of individual and group life reinsurers primarily on
the basis of price, service, and financial strength.
RGA Canada has two offices and maintains a staff of seventy-three
people at the Montreal office and seventeen people at the office in Toronto. RGA
Canada employs its own underwriting, actuarial, claims, pricing, accounting,
systems, marketing and administrative staff.
EUROPE & SOUTH AFRICA OPERATIONS
The Europe & South Africa operations represented 11.5%, 5.7%, and 2.1%
of the Company's net premiums in 2002, 2001, and 2000, 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 and the reinsurance of
accelerated critical illness coverage (pays on the earlier of death or diagnosis
of a pre-defined critical illness). These agreements may be either facultative
or automatic agreements. During 2002, two clients of the Company's UK operations
generated approximately $156.4 million, or 57.5% of the total gross premiums for
the Europe & South Africa operations.
During 2000, RGA UK obtained approval as a licensed United Kingdom life
reinsurer, operating in the United Kingdom. In the United Kingdom, an increasing
number of insurers are ceding the mortality and accelerated critical illness
covers of individual life products 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 1998, the Company established RGA South Africa, with offices in Cape
Town and Johannesburg to promote life reinsurance in South Africa. In South
Africa, the Company's subsidiary has managed to establish a substantial position
in the individual facultative market, through excellent service and competitive
pricing as well as gaining an increasing share in the automatic market. Also,
life reinsurance is provided to Group Covers. The Company is concentrating on
the life insurance market, as opposed to competitors that are also in the health
market. The Company has a small portion of accelerated critical illness business
in South Africa.
In Spain, the Company has business relationships with more than twenty
of the leading companies covering both individual and group life business. In
2002, RGA opened a representative office in India.
The Company's subsidiaries in the United Kingdom and South Africa
employ their own underwriting, actuarial, claims, pricing, accounting,
marketing, and administration staff with additional support provided by the
Company's St. Louis operations. Divisional management through RGA International
Corporation (Nova Scotia ULC) ("RGA International") based in Toronto, provides
additional services for existing and future markets. The Toronto staff consists
of eleven people, operations in the United Kingdom maintains a staff of
twenty-six people, RGA South Africa maintains a staff of thirty-two people, five
people are on staff in the Spain office and four in the India office.
ASIA PACIFIC OPERATIONS
The Asia Pacific operations represented 8.1%, 7.2%, and 6.7% of the
Company's net premiums in 2002, 2001, and 2000, respectively. The Company has a
presence in the Asia Pacific region with licensed branch offices in Hong Kong
and New Zealand and representative offices in Tokyo, Taiwan, and South Korea,
and a regional office in Sydney. The Company also established a reinsurance
subsidiary in Australia in January 1996. During 2002, two clients, one each in
Australia and Hong Kong, generated approximately $52.9 million, or 30.2% of the
total gross premiums for the Asia Pacific operations.
15
Within the Asia Pacific segment, eight people are on staff in the Hong
Kong office, thirteen people are on staff in the Japan office, seven people are
on staff in the Taiwan office, four people are on staff in the South Korean
Office, five people are on staff in the Sydney regional office and RGA
Australian Holdings maintains a staff of twenty-five people. The Hong Kong,
Tokyo, Taiwan, and South Korea offices primarily provide marketing and
underwriting services to the direct life insurance companies with other service
support provided directly by the Company's St. Louis and Sydney regional
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 and Sydney regional
operations.
LATIN AMERICA OPERATIONS
The Latin America operations represented 0.6%, 3.1%, and 4.6% of the
Company's net premiums in 2002, 2001, and 2000, respectively. The Company
conducts reinsurance business in the Latin America region through RGA
Reinsurance Company. 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 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 effective July 1, 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. Due to the
economic uncertainty in Argentina and losses associated with the Argentine
privatized pension system, the Company has scaled back its operations in
Argentina. The Company continues to market additional types of reinsurance in
the region such as traditional life, credit and group life reinsurance
transactions in Mexico and Chile.
Direct insurance has been generated primarily from subsidiaries in
Argentina and Chile. During April 2000, the Company sold its Chilean interests.
In 1994, to develop markets in Argentina, RGA formed GA Argentina. GA
Argentina writes direct individual and group life insurance and 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 entered into new contracts related to the
privatized pension system, but continues to market individual universal life and
group products. However, the current economic situation in Argentina has had a
negative impact on growth opportunities for direct insurance.
The Latin America reinsurance operations are primarily supported by the
Latin America Division of RGA Reinsurance based in St. Louis with a staff of
seven people in St. Louis, and four people in a representative office in Mexico.
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 fifty-one people in Buenos Aires, Argentina,
and employs its own underwriting, actuarial, claims, pricing, accounting,
systems, marketing and administrative staff. The Company's net investment in GA
Argentina was approximately $7.2 million as of December 31, 2002.
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 (including Australia, and Europe & South
Africa. Revenue, income (loss) which includes net realized gains (losses) before
income tax, interest expense, depreciation and amortization, and identifiable
assets attributable to these geographic regions are identified in Note 17 to the
Consolidated Financial Statements within Item 8 of Part II.
E. AVAILABLE INFORMATION
Copies of the Company's Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are
available free of charge through the Company's website (www.rgare.com) as soon
as reasonably practicable after the Company electronically files such reports
with the Securities and Exchange Commission.
16
Item 2. PROPERTIES
U.S. segment and corporate
RGA Reinsurance houses its employees and the majority of RGA's officers in
approximately 136,000 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 $2,500,000 to $2,800,000. RGA
Reinsurance also conducts business from approximately 1,400 square feet of
office space in Norwalk, Connecticut and North Palm Beach, Florida. These
premises are leased through December 2003, at an annual rent of approximately
$36,000.
Canada segment
RGA Canada conducts business from approximately 29,000 square feet of office
space in Montreal and Toronto, Canada. These premises are leased through
November 2016, at annual rents ranging from approximately $345,000 to $490,000.
Other International segment
RGA Reinsurance also conducts business from a total of approximately 16,000
square feet of office space in Mexico City, Madrid, Hong Kong, Tokyo, Taipei,
Seoul, and Mumbai. These premises are leased through October 2005, at annual
rents of approximately $859,000. GA Argentina conducts business from
approximately 5,400 square feet of office space in Buenos Aires. These premises
are leased through July 2005, at annual rents of approximately $19,000. RGA
International conducts business from approximately 9,800 square feet of office
space in Toronto. These premises are leased through August 2007, at annual rents
of approximately $338,000. RGA UK conducts business from approximately 3,000
square feet of office space in London. These premises are leased through
September 2009, at annual rents of approximately $290,000. RGA South Africa
conducts business from approximately 10,900 square feet of office space in Cape
Town and Johannesburg. These premises are leased through September 2004, at
annual rents of approximately $144,000. RGA Australia conducts business from
approximately 9,000 square feet of office space in Sydney. These premises are
leased through July 2009, at annual rents of approximately $219,000.
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.
Item 3. LEGAL PROCEEDINGS
The Company is currently a party to various litigation and arbitrations
that involve medical reinsurance arrangements, personal accident business, and
aviation bodily injury carve-out business. As of January 31, 2003, the ceding
companies involved in these disputes have raised claims that are $41.7 million
in excess of the amounts held in reserve 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. In addition, the Company is in the process of auditing ceding
companies which have indicated that they anticipate asserting claims in the
future against the Company that are $8.5 million in excess of the amounts held
in reserve by the Company. Depending upon the audit findings in these cases,
they could result in litigation or arbitrations in the future. See Note 21 to
the Consolidated Financial Statements, "Discontinued Operations" for more
information. 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 litigation or
arbitrations or provide reasonable ranges of potential losses, it is the opinion
of management, after consultation with counsel, 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 2002.
17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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 the 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, 2002, 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 Consolidated Financial Statements and the Notes to
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.
18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in millions, except per share and operating data)
YEARS ENDING DECEMBER 31, 2002 2001 2000 1999 1998
INCOME STATEMENT DATA
Revenues:
Net premiums $ 1,980.7 $ 1,661.8 $ 1,404.1 $ 1,315.6 $ 1,016.4
Investment income, net of related expenses 374.5 340.6 326.5 340.3 301.8
Realized investment (losses) gains, net (14.6) (68.4) (28.7) (75.3) 3.1
Other revenues 41.4 34.3 23.8 26.5 23.2
--------- --------- --------- --------- ---------
Total revenues 2,382.0 1,968.3 1,725.7 1,607.1 1,344.5
Benefits and expenses:
Claims and other policy benefits 1,539.5 1,376.8 1,103.6 1,067.1 797.9
Interest credited 126.7 111.7 104.8 153.1 153.2
Policy acquisition costs and other insurance expenses 391.5 304.2 243.5 218.3 188.5
Other operating expenses 94.8 91.3 81.2 65.5 57.3
Interest expense 35.5 18.1 17.6 11.0 8.8
--------- --------- --------- --------- ---------
Total benefits and expenses 2,188.0 1,902.1 1,550.7 1,515.0 1,205.7
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes 194.0 66.2 175.0 92.1 138.8
Provision for income taxes 65.5 26.3 69.2 39.1 49.1
--------- --------- --------- --------- ---------
Income from continuing operations 128.5 39.9 105.8 53.0 89.7
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (5.7) (6.9) (28.1) (12.1) (27.6)
--------- --------- --------- --------- ---------
Net income $ 122.8 $ 33.0 $ 77.7 $ 40.9 $ 62.1
========= ========= ========= ========= =========
BASIC EARNINGS PER SHARE
Continuing operations $ 2.60 $ 0.81 $ 2.14 $ 1.16 $ 2.11
Discontinued operations (0.11) (0.14) (0.57) (0.27) (0.61)
--------- --------- --------- --------- ---------
Net income $ 2.49 $ 0.67 $ 1.57 $ 0.89 $ 1.50
DILUTED EARNINGS PER SHARE
Continuing operations $ 2.59 $ 0.80 $ 2.12 $ 1.15 $ 2.08
Discontinued operations (0.12) (0.14) (0.56) (0.27) (0.60)
--------- --------- --------- --------- ---------
Net income $ 2.47 $ 0.66 $ 1.56 $ 0.88 $ 1.48
Weighted average diluted shares, in thousands 49,648 49,905 49,920 46,246 42,559
Dividends per share on common stock $ 0.24 $ 0.24 $ 0.24 $ 0.22 $ 0.17
BALANCE SHEET DATA
Total investments $ 6,650.2 $ 5,088.4 $ 4,560.2 $ 3,811.9 $ 5,129.6
Total assets 8,892.6 7,016.1 6,090.0 5,077.6 6,318.6
Policy liabilities 6,603.7 5,077.1 4,617.7 3,998.1 5,053.1
Long-term debt 327.8 323.4 272.3 184.0 108.0
Total stockholders' equity 1,222.5 1,005.6 862.9 732.9 748.5
Total stockholders' equity per share $ 24.72 $ 20.30 $ 17.51 $ 14.68 $ 16.52
OPERATING DATA (IN BILLIONS)
Assumed ordinary life reinsurance in force $ 758.9 $ 616.0 $ 545.9 $ 446.9 $ 330.6
Assumed new business production 230.0 171.1 161.1 164.9 125.0
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Annual Report on Form 10-K 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") or 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 or values 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 and distribution opportunities,
(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 Annual Report and in
our other filings with the Securities and Exchange Commission ("SEC").
Forward-looking statements should be evaluated together with the many
risks and uncertainties that affect our business, including those mentioned in
this document and the cautionary statements described in the periodic reports we
file with the SEC. 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. For a discussion of
these risks and uncertainties that could cause actual results to differ
materially from those contained in the forward-looking statements, you are
advised to consult the sections named "Risk Factors" and "Cautionary Statement
Regarding Forward-Looking Statements" contained in our prospectus dated December
3, 2001, filed with our prospectus supplements, each dated December 12, 2001,
and filed with the SEC.
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, 2002, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
48.8% 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 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 59.1% of the outstanding shares of common stock
of RGA at December 31, 2002.
The consolidated financial statements include the assets, liabilities,
and results of operations of RGA, Reinsurance Company of Missouri, Incorporated
("RCM"), RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life
Reinsurance Company of Canada ("RGA Canada") and RGA Americas Reinsurance
Company, Ltd. ("RGA Americas"), as well as several other subsidiaries and a
joint venture, subject to an ownership position of greater than fifty percent
(collectively, the "Company").
20
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are described in Note 2 to the
Consolidated Financial Statements included in Item 8 of Part II. The Company
believes its most critical accounting policies include the capitalization and
amortization of deferred acquisition costs, the establishment of liabilities for
future policy benefits, other policy claims and benefits, including incurred but
not reported claims, the valuation of investment impairments, and the
establishment of arbitration or litigation reserves. The balances of these
accounts are significant to the Company's financial position and require
extensive use of assumptions and estimates, particularly related to the future
performance of the underlying business.
Additionally, for each of its reinsurance contracts, the Company must
determine if the contract provides indemnification against loss or liability
relating to insurance risk, in accordance with applicable accounting standards.
The Company must review all contractual features, particularly those that may
limit the amount of insurance risk to which the Company is subject or features
that delay the timely reimbursement of claims. If the Company determines that a
contract exposes it to a reasonable possibility of a significant loss from
insurance risk only under remote circumstances, the Company records the contract
on a deposit method of accounting with the net amount payable / receivable
reflected in other reinsurance assets or liabilities on the consolidated balance
sheet. Fees earned on the contracts are reflected as other revenues, as opposed
to premiums, on the consolidated statements of income.
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.
Deferred policy acquisition costs ("DAC") reflect our expectations about the
future experience of the business in force and include commissions and
allowances as well as certain costs of policy issuance and underwriting. Some of
the assumptions that can affect the carrying value of DAC include mortality,
interest spreads and policy lapse rates. The Company performs periodic tests to
determine that DAC remains recoverable, and the cumulative amortization is
re-estimated and, if necessary, adjusted by a cumulative charge or credit to
current operations. For the years ended December 31, 2002 and 2001, the Company
reflected charges of $1.0 million and $3.1 million, respectively, for
unrecoverable deferred policy acquisition costs. No such charges were reflected
in 2000 results. As of December 31, 2002, the Company estimates that
approximately 50 percent of its DAC balance is collateralized by surrender fees
due to the Company and the reduction of policy liabilities, in excess of
termination values, upon surrender or lapse of a policy.
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 unamortized acquisition costs and, to the
extent there are no unamortized acquisition costs, an increase in future policy
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 primarily invests in fixed maturity securities. The Company
monitors its fixed maturity securities to determine impairments in value. In
conjunction with its external investment managers, the Company evaluates factors
such as the financial condition of the issuer, payment performance, the extent
to which the market value has been below amortized cost, compliance with
covenants, general market conditions and industry sector, the intent and ability
to hold securities, and various other subjective factors. Securities, based on
management's judgments, with an other than temporary impairment in value are
written down to management's estimate of net realizable value.
Differences in actual experience compared with the assumptions and
estimates utilized in the justification of the recoverability of deferred
acquisition costs, in establishing reserves for future policy benefits and claim
liabilities, or in the determination of other than temporary impairments to
investment securities can have a material impact on the Company's results of
operations and financial condition.
The Company is currently a party to various litigation and
arbitrations. While it is not feasible to predict or determine the ultimate
outcome of the pending litigation or arbitrations or provide reasonable ranges
of potential losses, it is the opinion of management, after consultation with
counsel, 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. See Note 21 to the Consolidated
Financial Statements in Item 8 of Part II.
21
RESULTS OF OPERATIONS
The Company derives revenues primarily from renewal premiums from
existing reinsurance treaties, new business premiums from existing or new
reinsurance treaties, income earned on invested assets, and fees earned on
financial reinsurance.
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 individuals insured, 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, lapses or
surrenders of underlying policies, deaths of policyholders, and the exercise of
recapture options by the ceding companies.
Assumed insurance in force for the Company increased $142.9 billion to
$758.9 billion at December 31, 2002. Assumed new business production for 2002
totaled $230.0 billion compared to $171.1 billion in 2001 and $161.1 billion 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 significant fluctuation from quarter to quarter and year to year.
The Company maintains catastrophe insurance under a program that renews on
August 13th of each year. The program provides up to $50 million of coverage per
occurrence for events involving ten or more deaths. Under its current program
the Company retains the first $20 million in claims, $10 million of the next $20
million, and none of the next $40 million in claims. Acts of terrorism are
covered except when arising from the use of nuclear, chemical, or biological
weapons. This insurance is provided through seven insurance companies and eight
syndicates through Lloyds of London, with no single insurer providing more than
$10 million of the $50 million.
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. Additionally, the Company is exposed to the
economic and political risk associated with its net investment in foreign
locations. The Company's most significant foreign operations are in Canada. The
exchange rate from Canadian to U.S. currency was 0.6362, 0.6277, and 0.6676 at
December 31, 2002, 2001, and 2000, respectively. The Company's Latin America
operations primarily conduct business in Argentine and Mexican pesos. The
business generated from the Asia Pacific region is primarily denominated in U.S.
dollars, Australian dollars, and Japanese yen. Additionally, the Company
reinsures business in other international currencies including the Great British
pound and South African rand.
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. 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 over a
number of years as the level of business diminishes. The Company will report a
loss to the extent claims exceed established reserves. During 2002, the accident
and health division reported a net loss of $5.7 million due to claim payments in
excess of established reserves and legal fees. See Note 21 to the Consolidated
Financial Statements in Item 8 of Part II.
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Europe & South Africa, Asia Pacific and Latin
America operations. The Europe & South Africa, Asia Pacific and Latin America
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 life insurance and annuities.
The Canada operations provide insurers with reinsurance of traditional life
products as well as reinsurance of 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
reinsurance and, to a lesser extent, financial reinsurance through RGA
Reinsurance Company of Australia, Limited ("RGA Australia") and RGA Reinsurance
Company ("RGA Reinsurance"). Europe & South Africa operations include
traditional life reinsurance and critical illness business from Europe & South
Africa, in addition to other markets being developed by the Company. The
operational segment results do not include the corporate investment activity,
general
22
corporate expenses, interest expense of RGA, or 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.
Consolidated income from continuing operations increased 222.1% in 2002
to $128.5 million and decreased 62.3% in 2001 to $39.9 million. Diluted earnings
per share from continuing operations were $2.59 for 2002 compared to $0.80 for
2001 and $2.12 for 2000. Earnings during these years were attributed primarily
to the traditional reinsurance in the U.S. and Canada. Earnings during 2001 were
adversely affected by the terrorist attacks of September 11, 2001, investment
losses on sales and impairments of investment securities, the accrual of
additional reserves to support the Company's reinsurance of Argentine pension
business, and higher than expected mortality results in the U.S. operations.
Consolidated investment income increased 10.0% during 2002 and
increased 4.3% during 2001. The increase in 2002 and 2001 was related to an
increase in the invested asset base due to positive cash flows from operations
and deposits from several new annuity reinsurance treaties, offset, in part, by
a drop in the invested asset yield primarily due to a decline in prevailing
interest rates. Investment income during 2001 was affected by the write-off of
accrued investment income associated with the write-down of impaired securities
as well as the general decline in interest rates. The cost basis of invested
assets increased by $1.4 billion, or 27.5% in 2002 and increased $0.6 billion,
or 13.0% in 2001. The increase in the cost basis of invested assets during 2001
was primarily a result of proceeds from the Company's capital raising efforts in
December 2001, in addition to the factors previously discussed. The average
yield earned on investments was 6.51% in 2002, compared with 6.79% in 2001, and
7.30% in 2000. 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 is allocated to the segments based upon average
assets and related capital levels deemed appropriate to support the segment
business volumes.
The consolidated provision for income taxes for continuing operations
represented approximately 33.8%, 39.7%, and 39.6% of pre-tax income for 2002,
2001, and 2000, respectively. The effective tax rate for 2002 includes the
effect of a $2.0 million reduction in tax liabilities subsequent to a settlement
of an IRS audit. The effective tax rate for 2001 and 2000 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 $3.1 million, $3.7 million, and $15.1
million related to the discontinued operations in 2002, 2001, and 2000,
respectively. The effective tax rate on the discontinued operations was 35.1% in
2002 and 35.0% in 2001 and 2000.
Further discussion and analysis of the results for 2002 compared to
2001 and 2000 are presented by segment. Certain prior year amounts have been
reclassified to conform to the current year presentation.
U.S. OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(in thousands)
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------------------------------------------------------------
REVENUES:
Net premiums $ 1,396,005 $ 3,786 $ - $ 1,399,791
Investment income, net of related expenses 160,945 110,019 191 271,155
Realized investment losses, net (6,129) (4,135) - (10,264)
Other revenues 2,713 7,277 26,586 36,576
----------------------------------------------------------------
Total revenues 1,553,534 116,947 26,777 1,697,258
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,091,630 17,376 - 1,109,006
Interest credited 56,480 65,504 - 121,984
Policy acquisition costs and other insurance expenses 224,707 18,560 8,196 251,463
Other operating expenses 27,216 1,242 9,295 37,753
----------------------------------------------------------------
Total benefits and expenses 1,400,033 102,682 17,491 1,520,206
Income before income taxes $ 153,501 $ 14,265 $ 9,286 $ 177,052
----------------------------------------------------------------
23
FOR THE YEAR ENDED DECEMBER 31, 2001
(in thousands)
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------------------------------------------------------------
REVENUES:
Net premiums $ 1,219,674 $ 3,248 $ - $ 1,222,922
Investment income, net of related expenses 150,262 93,252 474 243,988
Realized investment gains (losses), net (29,933) 1,193 - (28,740)
Other revenues 2,232 2,379 25,958 30,569
----------------------------------------------------------------
Total revenues 1,342,235 100,072 26,432 1,468,739
BENEFITS AND EXPENSES:
Claims and other policy benefits 976,740 4,658 - 981,398
Interest credited 51,596 58,087 - 109,683
Policy acquisition costs and other insurance expenses 181,307 21,632 9,925 212,864
Other operating expenses 30,363 740 7,980 39,083
----------------------------------------------------------------
Total benefits and expenses 1,240,006 85,117 17,905 1,343,028
Income before income taxes $ 102,229 $ 14,955 $ 8,527 $ 125,711
----------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
(in thousands)
ASSET- FINANCIAL TOTAL
TRADITIONAL 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 revenues 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 $ 147,929 $ 11,678 $ 7,602 $ 167,209
----------------------------------------------------------------
Income before taxes for the U. S. operations segment totaled $177.1
million for 2002 compared to $125.7 million in 2001 and $167.2 million in 2000.
Strong growth in revenue in the traditional subsegment contributed to the
increase in income for 2002. Income was down in 2001 due primarily to
unfavorable claims experience, higher realized net investment losses, and claims
arising from the terrorist attacks of September 11, 2001.
Traditional Reinsurance
The U.S. traditional sub-segment 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 agreements. These reinsurance arrangements
may be either facultative or automatic agreements. During 2002 production
totaled $146.9 billion face amount of new business, compared to $99.5 billion in
2001 and $115.7 billion in 2000. The strong growth in production was realized on
both new and existing treaties. Management believes industry consolidation,
demutualizations, and the trend toward reinsuring mortality risks should
continue to provide opportunities for growth.
Income before income taxes for U.S. traditional reinsurance increased
50.2% and decreased 30.9% in 2002 and 2001, respectively. The variances in
income for the comparable periods are primarily due to $16.1 million in net
claims
24
associated with the terrorist attacks on September 11, 2001, higher realized
losses on investment securities in 2001, and generally higher mortality. Also
contributing to the increase in 2002 was the continued growth in premiums.
Net premiums for U.S. traditional reinsurance increased 14.5% in 2002
and 17.7% in 2001. New premiums from facultative and automatic treaties and
renewal premiums on existing blocks of business all contributed to the growth.
The increased premium reflects the growth of total U.S. business in force, which
grew to $540.0 billion in 2002, a 15.4% increase over the prior year. 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 7.1% and 7.6% in 2002 and 2001,
respectively. The increase in both years is due to growth in the invested asset
base, primarily due to increased operating cash flows on traditional
reinsurance, which was partially offset by lower yields, primarily as a result
of a general decline in interest rates.
Realized investment losses of $6.1 million were reported in 2002
compared to $29.9 million and $12.2 million in 2001 and 2000, respectively.
Claims and other policy benefits, as a percentage of net premiums, were
78.2%, 80.1%, and 76.5% in 2002, 2001, and 2000, respectively. The 2001 loss
ratio, when adjusted for claims of $16.1 million related to the events of
September 11, 2001, is reduced to 78.8%. The lower percentage in 2000 is the
result of favorable mortality experience. In 2002, liabilities established in
2001 for claims related to the terrorists attacks of September 11, 2001 were
adjusted down $1.9 million as reported claims from this event are lower than
originally projected. The Company's catastrophe coverage program has limited its
net losses related to the terrorist attack. As of December 31, 2002, the amount
recoverable from catastrophe coverage was approximately $2.9 million. Death
claims are reasonably predictable over a period of many years, but are less
predictable over shorter periods and are subject to significant fluctuation.
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 deposit levels, cash surrender
values, and investment performance.
The amount of policy acquisition costs and other insurance expenses, as
a percentage of net premiums, was 16.1%, 14.9%, and 14.5% in 2002, 2001, and
2000, respectively. The increase in this ratio for the comparable periods can be
attributed to the proportional increase in the volume of coinsurance business
written versus yearly renewable term business. These percentages will fluctuate
due to variations in the mixture of business being written.
Other operating expenses, as a percentage of net premiums, were 1.9%,
2.5%, and 2.4% in 2002, 2001, and 2000, respectively. The improvement in this
ratio can be attributed to continued growth in premiums and a decline in
operating expenses for 2002. The decrease in operating expenses for 2002 is the
result of lower overhead costs being allocated to this sub-segment as the
international operations have grown. This percentage will fluctuate based on
premium levels and the mix of fixed versus variable operating expenses.
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 decreased in 2002 to $14.3 million from
$15.0 million in 2001, a 4.6% decrease over prior year. The decrease for the
year is the result of a $5.3 million increase in realized losses on investment
securities in 2002. Excluding realized gains and losses on investment
securities, income before income taxes increased $4.6 million for the comparable
periods. The increase in income can be attributed to the completion of several
new annuity transactions that added over $700.0 million of invested assets to
the balance sheet in 2002 for this sub-segment. The growth in income was
partially offset by a $3.1 million pre-tax loss on an existing annuity treaty,
due primarily to high policy lapses. Income before income taxes increased 28.1%
in 2001 compared to the prior year. Contributing to this increase was the
completion of a new annuity treaty in 2001 with assets of approximately $200.0
million and increased gains on the sale of investment securities of $2.3
million.
Total revenues, which is comprised primarily of investment income,
increased 16.9% and 10.2% in 2002 and 2001, respectively. The increase in 2002
can primarily be attributed to the new annuity transactions, which significantly
increased the investment asset base for this sub-segment. The average invested
asset balance was $1.9 billion, $1.3 billion, and $1.0
25
billion for 2002, 2001 and 2000, respectively. Invested assets outstanding as of
December 31, 2002, and 2001 were $2.4 billion and $1.4 billion, of which $1.4
billion and $0.6 billion were funds withheld at interest, respectively.
Total expenses, which is comprised primarily of interest credited,
policy benefits and acquisition costs increased 20.6% and 7.5% in 2002 and 2001,
respectively. The increase in 2002 can be attributed to the increase in policy
benefits and interest credited. The higher policy benefits can be attributed to
an increase in the option cost associated with an existing treaty while the
growth in interest credited is primarily the result of the new annuity
transactions.
Financial Reinsurance
The U.S. financial reinsurance sub-segment includes net fees earned on
financial reinsurance and the Company's investment in RGA Financial Group.
During 2000, the Company increased its ownership of RGA Financial Group from 40%
to 100%. The majority of the financial reinsurance transactions assumed by the
Company are retroceded to other insurance companies. Financial reinsurance
agreements represent low 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 increased 8.9% and 12.2% in 2002 and 2001,
respectively. The increase for 2002 can be attributed to higher net fees
retained as result of the continued growth in financial reinsurance. The growth
in fees was somewhat offset by higher operating expenses allocated to this
sub-segment in 2002. At December 31, 2002, 2001 and 2000, the amount of
reinsurance assumed from client companies, as measured by pre-tax statutory
surplus, was $872.7 million, $547.8 million and $498.4 million, respectively.
CANADA OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
(in thousands)
REVENUES:
Net premiums $ 181,224 $ 173,269 $ 176,326
Investment income, net of related expenses 70,518 65,006 61,950
Realized investment gains (losses), net (163) 9,148 (1,291)
Other revenues 136 201 318
--------- --------- ---------
Total revenues 251,715 247,624 237,303
BENEFITS AND EXPENSES:
Claims and other policy benefits 186,398 172,799 171,417
Interest credited 1,070 299 763
Policy acquisition costs and other insurance
Expenses 16,136 14,101 16,563
Other operating expenses 9,480 8,909 8,702
--------- --------- ---------
Total benefits and expenses 213,084 196,108 197,445
Income before income taxes $ 38,631 $ 51,516 $ 39,858
========= ========= =========
The Company conducts reinsurance business in Canada through RGA Canada.
RGA Canada assists clients with capital management activity and mortality risk
management and is primarily engaged in traditional individual life reinsurance,
including preferred underwriting products, as well as creditor and
non-guaranteed critical illness products. The Canadian operation is one of the
leading life reinsurers in Canada. RGA Canada's reinsurance inforce totals
approximately $64.5 billion and $55.8 billion at December 31, 2002 and 2001,
respectively. At December 31, 2002, RGA Canada includes most of the life
insurance companies in Canada as clients.
Income before income taxes decreased 25.0% in 2002 and increased 29.2%
in 2001. Excluding net realized investment gains (losses), income before taxes
decreased by 8.4% in 2002 and increased by 3.0% in 2001. The decrease in 2002
was the result of below-average mortality experience in the current year,
primarily due to two treaties, and favorable mortality experience in the prior
year. The increase in 2001 was primarily driven by favorable mortality
experience.
26
Net premiums increased by 4.6% to $181.2 million in 2002 and decreased
by 1.7% to $173.3 million in 2001. In original currency, net premiums increased
by 6.5% in 2002 and 2.4% in 2001. The decline in the strength of the Canadian
dollar had an adverse effect on the amount of net premiums reported of $2.1
million, or 1.2%, in 2002 and $7.6 million, or 4.4%, in 2001. Premium levels are
significantly influenced by large transactions, mix of business, and reporting
practices of ceding companies and therefore can fluctuate from period to period.
Net investment income increased by 8.5% and 4.9% during 2002 and 2001,
respectively. Investment income is allocated to the segments based upon average
assets and related capital levels deemed appropriate to support business
volumes. The investment income allocation to the Canadian operations was $4.0
million and $5.3 million in 2002 and 2001, respectively. Investment performance
varies with the composition of investments. The increase in investment income
was mainly the result of an increase in the invested asset base offset by the
effects of changes in the foreign currency exchange rates. In 2002 and 2001, 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 one treaty.
Claims and other policy benefits, as a percentage of net premiums, were
102.9% of total 2002 net premiums compared to 99.7% in 2001 and 97.2% in 2000.
The increased percentages are primarily the result of several large inforce
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 and increase over time. 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. Additionally, the increased
percentages experienced are the result of unfavorable mortality experience in
2002 as compared to more favorable experience in 2001 and 2000. Claims and other
policy benefits as a percentage of net premiums and investment income were 74.0%
of total 2002 net premiums compared to 72.5% in 2001 and 71.9% in 2000. The
Company expects mortality to fluctuate somewhat from period to period but
believes it is fairly constant over longer periods of time.
Policy acquisition costs and other insurance expenses as a percentage
of net premiums totaled 8.9% in 2002, 8.1% in 2001, and 9.4% in 2000. The
fluctuation in this ratio is primarily due to the changing mix of business. In
2002, more business was derived from coinsurance agreements than yearly
renewable term agreements. The coinsurance agreements tend to have higher
commission costs compared to yearly renewable term agreements. The decrease in
the percentage in 2001 is the result of the mix of business which was higher in
yearly renewable term agreements compared to 2000.
Other operating expenses increased $0.6 million in 2002 and $0.2
million in 2001 compared to their respective prior-year periods. The overall
increase in operating expenses was attributed to planned increases in costs
associated with the ongoing growth of the business.
OTHER INTERNATIONAL OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(in thousands)
TOTAL
EUROPE & LATIN OTHER
SOUTH AFRICA ASIA PACIFIC AMERICA INTERNATIONAL
------------ ------------ --------- -------------
REVENUES:
Net premiums $ 226,846 $ 160,197 $ 12,608 $ 399,651
Investment income, net of related expenses 1,009 7,059 4,201 12,269
Realized investment gains (losses), net 894 (268) (4,087) (3,461)
Other revenues 2,064 2,363 251 4,678
--------- --------- --------- ---------
Total revenues 230,813 169,351 12,973 413,137
BENEFITS AND EXPENSES:
Claims and other policy benefits 130,975 110,806 2,279 244,060
Interest credited -- -- 3,661 3,661
Policy acquisition costs and other insurance
expenses 82,700 36,660 4,545 123,905
Other operating expenses 13,049 14,727 5,992 33,768
Interest expense 680 842 -- 1,522
========= ========= ========= =========
Total benefits and expenses 227,404 163,035 16,477 406,916
Income (loss) before income taxes $ 3,409 $ 6,316 $ (3,504) $ 6,221
========= ========= ========= =========
27
FOR THE YEAR ENDED DECEMBER 31, 2001
(in thousands)
TOTAL
EUROPE & LATIN OTHER
SOUTH AFRICA ASIA PACIFIC AMERICA INTERNATIONAL
------------ ------------ --------- -------------
REVENUES:
Net premiums $ 94,800 $ 119,702 $ 51,069 $ 265,571
Investment income, net of related expenses 1,536 3,935 14,684 20,155
Realized investment gains (losses), net (137) 113 (32,619) (32,643)
Other revenues 256 2,903 547 3,706
--------- --------- --------- ---------
Total revenues
96,455 126,653 33,681 256,789
BENEFITS AND EXPENSES:
Claims and other policy benefits 59,429 75,595 87,581 222,605
Interest credited -- -- 1,730 1,730
Policy acquisition costs and other insurance
expenses 26,753 36,103 14,395 77,251
Other operating expenses 10,555 11,081 9,072 30,708
Interest expense 681 867 -- 1,548
========= ========= ========= =========
Total benefits and expenses 97,418 123,646 112,778 333,842
Income (loss) before income taxes $ (963) $ 3,007 $ (79,097) $ (77,053)
========= ========= ========= =========
FOR THE YEAR ENDED DECEMBER 31, 2000
(in thousands)
TOTAL
EUROPE & LATIN OTHER
SOUTH AFRICA ASIA PACIFIC AMERICA INTERNATIONAL
------------ ------------ --------- -------------
REVENUES:
Net premiums $ 29,690 $ 94,282 $ 64,897 $ 188,869
Investment income, net of related expenses 2,056 4,628 19,782 26,466
Realized investment gains (losses), net 365 (191) (9,099) (8,925)
Other revenues 3,177 2,266 364 5,807
--------- --------- --------- ---------
Total revenues 35,288 100,985 75,944 212,217
BENEFITS AND EXPENSES:
Claims and other policy benefits 20,151 56,377 62,205 138,733
Interest credited -- -- 1,568 1,568
Policy acquisition costs and other insurance
expenses 7,473 32,484 7,772 47,729
Other operating expenses 9,542 9,939 10,934 30,415
Interest expense 502 980 -- 1,482
========= ========= ========= =========
Total benefits and expenses 37,668 99,780 82,479 219,927
Income (loss) before income taxes $ (2,380) $ 1,205 $ (6,535) $ (7,710)
========= ========= ========= =========
The Other International reportable segment generates business from
reinsurance operations in Europe, South Africa, and the Asia Pacific and Latin
America regions. The Europe & South Africa segment provides life reinsurance for
a variety of products through yearly renewable term and coinsurance agreements,
and reinsurance of accelerated critical illness coverage (pays on the earlier of
death or diagnosis of a pre-defined critical illness). These agreements may be
either facultative or automatic agreements covering primarily individual risks
and, in some markets, group risks.
28
The Company conducts reinsurance business in the Asia Pacific region
through branch operations in Hong Kong and New Zealand and representative
offices in Japan, South Korea and 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 Latin America operations include traditional reinsurance, primarily
from Mexico, Argentina and Chile, reinsurance of privatized pension products
primarily in Argentina, which the Company ceased writing during 2001, and direct
life insurance through a subsidiary in Argentina. The Company had direct and
local reinsurance operations in Chile until 2000 when those operations were
sold. The Latin America segment has experienced losses and decreased new
business opportunity as a result of turbulent economic conditions in Argentina
in the past few years. Most of the growth of the reinsurance business has been
in Mexico over the last two years.
Income before income taxes for the Other International reportable
segment totaled $6.2 million for 2002, compared to losses of $77.1 million and
$7.7 million for 2001 and 2000, respectively. Each segment reported stronger
pre-tax results during 2002 compared to 2001. Europe & South Africa reported
income before income taxes of $3.4 million for 2002, an increase of $4.4 million
compared to 2001, primarily due to a significant increase in premium volume
during 2002. Asia Pacific reported income before income taxes of $6.3 million
for 2002, a $3.3 million improvement over 2001. Improvements in profitability
for 2002 were predominantly due to additional premium volume and further
persistency. For 2001, Asia Pacific income before income taxes increased $1.8
million compared to 2000. The improvement in profitability in 2001 over 2000 was
caused by a combination of better persistency and additional premium volume.
Loss before income taxes for the Latin America segment was $3.5 million for 2002
compared to losses of $79.1 million and $6.5 million for 2001 and 2000,
respectively. The current year results were affected by investment losses and
write-downs on Argentine securities that supported the direct operations in
Argentina which offset income from the reinsurance operations. The losses for
2001 were primarily attributable to realized investment losses on the Argentine
securities that supported the privatized pension reinsurance business as well as
an increase in reserves related to that business. In 2000, the sale of the
Chilean operations resulted in a realized investment loss that decreased overall
earnings.
Other International net premiums increased 50.5% to $399.7 million in
2002, and 40.6% to $265.6 million in 2001. The increases were primarily the
result of renewal premiums from existing blocks of business, new business
premiums from facultative and automatic treaties and several large blocks of
business, 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 the diagnosis of a defined
critical illness. Premiums earned from this coverage totaled $118.5 million,
$43.3 million and $9.8 million in 2002, 2001 and 2000, respectively. The
Company's operations in South Africa also contributed to the 2002 net premium
growth mainly through the facultative and automatic market. The Company's
representative office in Spain also contributed through reinsuring both
individual and group products. Increases in net premiums were slightly offset by
reduced premiums related to 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 $7.9 million or 39.1% in 2002, and $6.3
million or 23.8% in 2001. The decrease during 2002 was 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, while the sale of the
Chilean operations contributed to a smaller invested asset base and less
investment income for 2001. Asia Pacific reported a 79.4% increase in investment
income in 2002, predominantly due to an increase in the investment assets,
particularly in Australia. Investment income and realized investment gains and
losses are allocated to the various operating segments based on average assets
and related capital levels deemed appropriate to support the segment business
volumes. Investment performance varies with the composition of investments and
the relative allocation of capital to the operating segments.
Other revenue during 2002 and 2001 primarily represented profit and
fees associated with financial reinsurance in Taiwan and Japan. The Taiwanese
treaty commenced in late 1999, with a full year in 2002, 2001 and 2000. Fees
paid to retrocessionaires that were included in policy acquisition costs and
other insurance expenses partially offset the fees earned for these years.
Claims and other policy benefits as a percentage of net premiums
totaled 61.1%, 83.8% and 73.5% for 2002, 2001 and 2000, respectively. The
decrease in 2002 and the increase in 2001 are primarily related to an increase
in reserves for the Argentine privatized pension business in the Latin America
segment operations during the fourth quarter of 2001. Excluding
29
Latin America operations, claims and other policy benefits as a percentage of
premium totaled 62.5%, 62.9%, and 61.7% for 2002, 2001, and 2000, respectively.
Mortality may fluctuate somewhat from period to period, but is expected to be
fairly constant over longer periods of time.
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. 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 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. During 2002, the Company recorded
$32.0 million in transaction gains related to claims settlements. These gains
were generally offset by increases in reserves associated with the Argentine
pension contracts. 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 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 represented 31.0%, 29.1% and 25.3% for 2002, 2001, and 2000,
respectively. The percentages fluctuate due to timing of client company
reporting and variations in the mixture of business being reinsured. Policy
acquisition costs are capitalized and charged to expense in proportion to
premium revenue recognized. Acquisition costs, as a percentage of premiums,
associated with some treaties in the United Kingdom are typically higher than
those experienced in the Company's other segments. Future recoverability of the
capitalized policy acquisition costs on this business is primarily sensitive to
mortality and morbidity experience. If actual experience suggests higher
mortality and morbidity rates going forward than currently contemplated in
management's estimates, the Company would record a charge to income, due to a
reduction in the DAC asset and, to the extent there are no unamortized
acquisition costs, an increase in future policy benefits. The Company estimates
that a 10 percent increase in anticipated mortality and morbidity experience
would result in a pre-tax income statement charge of approximately $8.3 million
while a 15 percent increase would result in a pre-tax charge of approximately
$55.7 million, including appropriate offsets.
Other operating expenses increased 10.0% during 2002 and were
relatively flat for 2001. The increase during 2002 related to growth in the
Europe & South Africa and Asia Pacific segments. As a percentage of premiums,
other operating expenses decreased to 8.4% from 11.6% in 2002 and 2001,
respectively. The Company believes that sustained growth in premiums should
lessen the burden of start-up expenses and expansion costs over time.
CORPORATE AND OTHER
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, as
well as interest expense related to the $225.0 million, 5.75% mandatorily
redeemable trust preferred securities issued by a wholly-owned subsidiary in
2001 ("Preferred Securities"), the $200.0 million, 6.75% Senior Notes issued in
2001 ("2001 Senior Notes"), borrowings under the Company's $140 million credit
agreement executed during 2000 (the "U.S. Credit Agreement"), a $75.0 million
term loan note with an affiliate and the $100.0 million 7.25% Senior Notes
("Senior Notes") issued in 1996.
Corporate revenues increased $24.7 million in 2002 and decreased $9.5
million in 2001. The increase during 2002 was largely due to an increase in
investment income resulting from a larger base of invested assets. The decrease
during 2001 was primarily a result of unallocated investment losses associated
with the sale or impairment of investment securities. Corporate unallocated
other operating expenses were less than one percent of consolidated premiums in
2002, 2001 and 2000. Corporate interest expense was $34.0 million in 2002,
compared to $16.5 million in 2001 and $16.1 million in 2000. The substantial
increase during 2002 was primarily a result of the addition of the Preferred
Securities (See Note 16, "Issuance of Trust PIERS Units" of the Notes to
Consolidated Financial Statements) and the 2001 Senior Notes, both of which were
issued near the end of 2001. The Company essentially swapped variable rate debt
for fixed rate debt by using the proceeds of the 2001 Senior Notes to pay down
its U.S. Credit Agreement and to prepay and terminate the affiliate note. The
U.S. Credit Agreement and the MetLife Note had a combined weighted average
interest rate of 5.0% during 2001. As expected, interest expense during 2002 on
the 2001 Senior Notes, fixed at 6.75%, exceeded the combined interest expense on
the U.S. Credit Agreement and the MetLife Note during 2001. The Company views
its long-term debt at its current level as an integral and
30
ongoing part of its capital structure, and therefore felt it appropriate to
convert its shorter-term borrowings under its U.S. Credit Agreement and MetLife
Note into longer-term capital.
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. 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 over a
number of years as the level of business diminishes. The Company will report a
loss to the extent claims exceed established reserves.
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.
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. 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. In
particular, over the past several years a number of disputes have arisen in the
accident and health reinsurance markets with respect to London market personal
accident excess of loss ("LMX") reinsurance programs that involved alleged
"manufactured" claims spirals designed to transfer claims losses to higher-level
reinsurance layers. The Company is currently a party to arbitrations that
involve some of these LMX reinsurance programs. The Company and other involved
reinsurers and retrocessionaires have raised substantial defenses upon which to
contest these claims, including defenses based upon the failure of the ceding
company to disclose the existence of manufactured claims spirals. As a result,
there have been a significant number of claims for rescission, arbitration, and
litigation among a number of the parties involved in these various coverages.
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 indirect high-level common account coverages to
other reinsurers and retrocessionaires. To date, no such direct material
exposures have been identified. If any direct 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 rescission,
arbitration, or litigation. Thus, resolution of any disputes will likely take
several years.
While it is not feasible to predict the ultimate outcome of pending
arbitrations and litigation involving LMX reinsurance programs, any indirect
workers' compensation carve-out exposure, or other accident and health risks, or
provide reasonable ranges of potential losses, it is the opinion of management,
after consultation with counsel, 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 is currently a party to various litigation and arbitrations
that involve medical reinsurance arrangements, personal accident business, and
aviation bodily injury carve-out business. As of January 31, 2003, the ceding
companies involved in these disputes have raised claims that are $41.7 million
in excess of the amounts held in reserve 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. In addition, the Company is in the process of auditing ceding
companies which have indicated that they anticipate asserting claims in the
future against the Company that are $8.5 million in excess of the amounts held
in reserve by the Company. Depending upon the audit findings in these cases,
they could result in litigation or arbitrations in the future. While it is not
feasible to predict or determine the ultimate outcome of the pending litigation
or arbitrations or provide reasonable ranges of potential losses, it is the
opinion of management, after consultation with counsel, 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 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
31
December 31, 2002 and 2001 was $50.9 million and $55.3 million, respectively.
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, 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 $3.3 million, $3.0
million, and $23.7 million for 2002, 2001, and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
THE HOLDING COMPANY
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 indebtedness (See Notes 15, "Long-Term
Debt," and 16, "Issuance of Trust PIERS Units," of the Notes to Consolidated
Financial Statements), 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, interest income on undeployed corporate
investments, interest income received on surplus notes with RGA Reinsurance and
RCM, and dividends from operating subsidiaries. As the Company continues its
expansion efforts, RGA will continue to be dependent on these sources of
liquidity.
RCM and RGA Reinsurance are subject to statutory provisions that
restrict the payment of dividends. They 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 2003 would be $63.4 million. However, the applicable
statutory provisions only permit an insurer to pay a shareholder dividend from
unassigned surplus. As of December 31, 2002, RGA Reinsurance had unassigned
surplus of $67.8 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 January 1, 2003, RCM could pay a maximum dividend,
without prior approval, to RGA equal to its unassigned surplus, approximately
$28.9 million. The maximum amount available for dividends by RGA Canada to RGA
under the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR")
is $33.4 million. Dividend payments from other subsidiaries and joint ventures
are subject to regulations in the country of domicile. RGA Americas and RGA
Barbados do not have material restrictions on their ability to pay dividends out
of retained earnings.
The dividend limitation is based on statutory financial results.
Statutory accounting practices differ in certain respects from accounting
principles used in financial statements prepared in conformity with Generally
Accepted Accounting Principles ("GAAP"). The significant differences relate to
deferred acquisition costs, deferred income taxes, required investment reserves,
reserve calculation assumptions, and surplus notes.
RGA has repurchased shares in the open market in the past primarily to
satisfy obligations under its stock option program. In 2001, the Board of
Directors approved a repurchase program authorizing RGA to purchase up to $50
million of its shares of stock, as conditions warrant. As of December 31, 2002,
RGA purchased approximately 0.2 million shares of treasury stock under the
program at an aggregate cost of $6.6 million. The Company did not purchase
treasury stock during 2001. The Company purchased approximately 0.7 million
shares of treasury stock in 2000, under a prior repurchase program approved by
the Board, at an aggregate cost of $20.0 million.
The Company's $140.0 million U.S. credit facility expires in May 2003.
No amount was outstanding under this facility as of December 31, 2002; however,
the Company is currently planning on renewing this facility. The Company can
give no assurances though, that it will be successful in negotiating the
renewal, and if successful, that the terms, including cost, will be comparable
to the current terms.
Historically, RGA has paid quarterly dividends ranging from $0.027 per
share in 1993 to $0.06 per share in 2002. 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.
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
$600.0 million
32
to $700.0 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 $10.0 million or $25.0 million
depending on the agreement, bankruptcy proceedings, and any event which results
in the acceleration of the maturity of indebtedness. The facility fee and
interest rate for the Company's credit facilities is based on its senior
long-term debt ratings. A decrease in those ratings could result in an increase
in costs for the credit facilities. As of December 31, 2002, the Company had
$327.8 million in outstanding borrowings under its debt agreements and was in
compliance with all covenants under those agreements. Of that amount,
approximately $28.4 million is subject to immediate payment upon a downgrade of
the Company's senior long-term debt rating, unless a waiver is obtained from the
lenders. The ability of the Company to make debt principal and interest payments
depends primarily on the earnings and surplus of subsidiaries, investment
earnings on undeployed capital proceeds, and the Company's ability to raise
additional funds.
In December 2001, RGA, through its wholly owned subsidiary trust,
issued $225.0 million in Preferred Income Redeemable Securities ("PIERS") Units.
See Notes 2, "Summary of Significant Accounting Policies," and 16, "Issuance of
Trust PIERS Units," of the Notes to Consolidated Financial Statements for
additional information on the terms of the PIERS units. Each PIERS unit consists
of a preferred security with a face value of $50 and a stated maturity of March
18, 2051 and a warrant to purchase 1.2508 shares of RGA stock at an exercise
price of $50. The warrant expires on December 15, 2050. The holders of the PIERS
units have the ability to exercise their warrant for stock at any time and
require RGA to payoff the preferred security. Because the exercise price of the
warrant to be received from the holder is equal to the amount to be paid for the
preferred security, there is no net cash required on RGA's part. If on any date
after December 18, 2004, the closing price of RGA common stock exceeds and has
exceeded a price per share equal to $47.97 for at least 20 trading days within
the immediately preceding 30 consecutive trading days, the Company may redeem
the warrants in whole for cash, RGA common stock, or a combination of cash and
RGA common stock.
Consolidated interest expense increased significantly in 2002 due to
the addition, in December 2001, 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 $120.0 million on its U.S. revolving
credit facility and to prepay and terminate the $75.0 million term loan with
MetLife Credit Corp. Interest rates on the U.S. revolving credit facility and
$75.0 million term loan ranged from 2.6% to 7.1% in 2001. As of December 31,
2002, the average interest rate on long-term debt outstanding, excluding the
PIERS, was 6.74%.
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 RGA Reinsurance and RCM, 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.
REINSURANCE OPERATIONS
The Company's principal cash inflows from its reinsurance operations
are life insurance premiums and deposit funds received from ceding companies.
The primary liquidity concern with respect to these cash flows is early
recapture of the reinsurance contract by the ceding company. 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) or in some cases due to changes
in the financial condition or ratings of the reinsurer. Recapture of business
previously ceded does not affect premiums ceded prior to the recapture of such
business, but would reduce premiums in subsequent periods. Additionally, some
treaties give the ceding companies the right to request the Company to place
assets in trust for their benefit to support their reserve credits, in the event
of a downgrade of the Company's ratings to specified levels. As of December 31,
2002, these treaties had approximately $294.7 million in reserves. Assets placed
in trust continue to be owned by the Company, but their use is restricted based
on the terms of the trust agreement. Securities with an amortized cost of $532.8
million were held in trust for the benefit of certain subsidiaries of the
Company to satisfy collateral requirements for reinsurance business at December
31, 2002. Additionally, securities with an amortized cost of $931.6 million, as
of December 31, 2002, were held in trust to satisfy collateral requirements
under certain third-party reinsurance treaties. Under certain conditions, RGA
may be obligated to move reinsurance from one RGA subsidiary company to another
RGA subsidiary or make payments under the treaty. These conditions generally
include unusual or remote circumstances, such as change in control, insolvency,
33
nonperformance under a treaty, or loss of reinsurance license of such
subsidiary. RGA has issued guarantees of its subsidiaries' performance for the
payment of amounts due under certain reinsurance treaties, whereby if the
subsidiary fails to meet its obligations, RGA or one of its other subsidiaries
will make the payment. These guarantees are granted to ceding companies in order
to provide them additional security, particularly in cases where RGA's
subsidiary is relatively new or not of a significant size, relative to the
ceding company. Total liabilities supported by the guarantees, before
consideration for any legally offsetting amounts due from the guaranteed party,
totaled $126.6 million as of December 31, 2002 and are reflected on the
Company's consolidated balance sheet as future policy benefits.
The Company's principal cash inflows from its investing activities
results from investment income, maturity and sales of invested assets, and
repayments of principal. The primary liquidity concern with respect to these
cash inflows relates to the risk of default by debtors and interest rate
volatility. The Company manages these risks very closely. See -- Investments and
- --Interest Rate Risk below.
Additional sources of liquidity to meet unexpected cash outflows in
excess of operating cash inflows include selling short-term investments or fixed
maturity securities and drawing additional funds under existing credit
facilities, under which the Company had availability of $155.4 million as of
December 31, 2002. As previously mentioned, the Company is currently planning to
renew its $140.0 million U.S. credit facility that expires in May 2003. No
amount was outstanding under this facility as of December 31, 2002.
The Company's principal cash outflows primarily relate to the payment
of claims liabilities, interest credited, operating expenses, income taxes, and
principal and interest under debt obligations. 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 (See Note 2, "Summary of Significant
Accounting Policies" of the Notes to Consolidated Financial Statements). The
Company also retrocedes most of its financial reinsurance business to other
insurance companies to alleviate capital requirements created by this business.
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. The Company's management believes its current sources of liquidity are
adequate to meet its current cash requirements.
The Company's net cash flows provided by operating activities for the
years ended December 31, 2002, 2001, and 2000, were $161.9 million, $243.9
million, and $192.8 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.
The following table displays the Company's contractual obligations,
which primarily consist of the payment of outstanding debt upon maturity and
leases (in millions):
Payment Due by Period
--------------------------------------------------
Contractual Obligations Total 1 - 3 Years 4 - 5 Years After 5 Years
- ----------------------- ------ ----------- ----------- -------------
Long - Term Debt $327.8 $ 28.4 $ 99.5 $199.9
Operating Leases 28.8 13.2 7.5 8.1
Trust Preferred Securities of Subsidiary 225.0 -- -- 225.0
------ ------ ------ ------
Total $581.6 $ 41.6 $107.0 $433.0
====== ====== ====== ======
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. At December 31, 2002, there were approximately $39.7
million of outstanding bank letters of credit in favor of third parties.
Additionally, the Company utilizes letters of credit to secure reserve credits
when it retrocedes business to its offshore subsidiaries, including RGA
Americas, RGA Barbados, and Triad Re, Ltd. As of December 31, 2002, $339.4
million in letters of credit from various banks were outstanding between the
various subsidiaries of the Company. Fees associated with letters of credit are
not fixed and are
34
based on the Company's ratings and the general availability of these instruments
in the marketplace. The Company has direct policies and reinsurance agreements
in addition to certain investment, advisory, and administrative services
contracts with affiliated entities (See Note 11, "Related Party Transactions,"
of the Notes to Consolidated Financial Statements).
Net cash used in investing activities was $582.5 million, $576.4
million, and $712.5 million in 2002, 2001, and 2000, respectively. Changes in
cash used in investing activities primarily relate to the management of the
Company's investment portfolios and the investment of excess capital generated
by operating and financing activities.
Net cash provided by financing activities was $285.5 million, $487.9
million, and $565.5 million in 2002, 2001, and 2000, 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 under investment type
contracts.
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. Certain of these asset-intensive agreements,
primarily in the U.S. operating segment, are generally funded by fixed maturity
securities that are withheld by the ceding company. As of December 31, 2002,
funds withheld at interest on these transactions totaled approximately $1.4
billion.
Additionally, deferred costs related to interest-sensitive life and
investment-type contracts are amortized over the lives of the contracts, in
relation to the present value of estimated gross profits (EGP) from mortality,
investment income, and expense margins. The EGP for asset-intensive products
include the following components: (1) estimates of fees charged to policyholders
to cover mortality, surrenders and maintenance costs; (2) expected interest rate
spreads between income earned and amounts credited to policyholder accounts; and
(3) estimated costs of administration. EGP is also reduced by our estimate of
future losses due to defaults in fixed maturity securities. Deferred policy
acquisition costs ("DAC") are sensitive to changes in assumptions regarding
these EGP components, and any change in such an assumption could have an impact
on our profitability.
The Company continuously reviews the EGP valuation model and
assumptions so that the assumptions reflect a reasonable view of the future. Two
assumptions are considered to be most significant: (1) estimated interest
spread, and (2) estimated future policy lapses. The following table reflects the
possible change that would occur in a given year, if assumptions are changed as
illustrated, as a percentage of current deferred policy acquisition costs
related to asset-intensive products:
ONE-TIME ONE-TIME
QUANTITATIVE CHANGE IN SIGNIFICANT ASSUMPTIONS INCREASE IN DAC DECREASE IN DAC
---------------------------------------------- --------------- ---------------
Estimated interest spread increasing (decreasing) 25 basis 0.8% (1.0)%
points from the current spread
Estimated policy lapse rates decreasing (increasing) 20% on a 0.7% (1.4)%
permanent basis (including surrender charges)
In general, a change in assumption that improves our expectations
regarding EGP is going to have the impact of deferring the amortization of DAC
into the future, thus increasing earnings and the current DAC balance.
Conversely, a change in assumption that decreases EGP will have the effect of
speeding up the amortization of DAC, thus reducing earnings and lowering the DAC
balance. We also adjust DAC to reflect changes in the unrealized gains and
losses on available for sale fixed maturity securities since this impacts EGP.
This adjustment to DAC is reflected in accumulated other comprehensive income
(loss).
The DAC associated with the Company's non asset-intensive business is
less sensitive to changes in estimates for investment yields, mortality and
lapses. In accordance with Statement of Financial Accounting Standards No. 60,
"Accounting and Reporting by Insurance Enterprises", the estimates include
provisions for the risk of adverse deviation and are not adjusted unless
experience significantly deteriorates to the point where a premium deficiency
exists.
35
The following table displays DAC balances for asset-intensive business and
non-asset-intensive business by segment as of December 31, 2002:
ASSET-INTENSIVE NON-ASSET-INTENSIVE TOTAL
(IN THOUSANDS) DAC DAC DAC
-------------- --------------- ------------------ ----------
U.S. $ 183,696 $ 426,083 $ 609,779
Canada -- 113,447 113,447
Other International:
Asia Pacific -- 130,797 130,797
Europe & S.A -- 219,553 219,553
Latin America -- 11,360 11,360
---------- ---------- ----------
Total $ 183,696 $ 901,240 $1,084,936
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, 2002, 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 jurisdictions.
INVESTMENTS
The Company had total cash and invested assets of $6.7 billion and $5.3
billion at December 31, 2002 and 2001, respectively. 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, the operating companies Boards of Directors periodically 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 invested assets was 6.51% in 2002, compared with 6.79% in 2001, and
7.30% in 2000. See "Note 5 - INVESTMENTS" in the Notes to Consolidated Financial
Statements for additional information regarding the Company's investments.
Fixed maturity securities available for sale
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, 2002,
approximately 97% 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 32.2% of
fixed maturity securities as of December 31, 2002, an increase from 30.6% as of
December 31, 2001. A majority of these securities were classified as corporate
securities, with an average Standard and Poor's ("S&P") rating of A at December
31, 2002. The Company owns floating rate securities that represent approximately
2.8% of fixed maturity securities at December 31, 2002, compared to 6.1% at
December 31, 2001. 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.
Within the fixed maturity security portfolio, the Company holds
approximately $165.4 million in asset-backed securities at December 31, 2002,
which include credit card and automobile receivables, home equity loans and
collateralized bond obligations. The Company's asset-backed securities are
diversified by issuer and contain both floating and fixed rate securities.
Approximately 33.0%, or $54.5 million are collateralized bond obligations. In
addition to the risks associated with floating rate securities, principal risks
in holding asset-backed securities are structural, credit and capital market
risks. Structural risks include the securities priority in the issuer's capital
structure, the adequacy of and ability to realize proceeds from collateral, and
the potential for prepayments. Credit risks include consumer or corporate
credits such as credit card
36
holders, equipment lessees, and corporate obligors. Capital market risks include
general level of interest rates and the liquidity for these securities in the
marketplace.
The Company monitors its fixed maturity securities to determine
impairments in value. In conjunction with its external investment managers, the
Company evaluates factors such as financial condition of the issuer, payment
performance, the length of time and the extent to which the market value has
been below amortized cost, compliance with covenants, general market conditions
and industry sector, intent and ability to hold securities, and various other
subjective factors. As of December 31, 2002, the Company held fixed maturities
with a cost basis of $23.1 million and a market value of $22.9 million, or 0.7%
of fixed maturities, that were non-income producing. 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. The Company
recorded other than temporary write-downs of $33.9 million, $43.4 million, and
$10.1 million in 2002, 2001, and 2000, respectively. The circumstances that gave
rise to these impairments were bankruptcy proceedings and deterioration in
collateral value supporting certain asset-backed securities. During 2002, the
Company sold fixed maturity securities with a fair value of $466.1 million at a
loss of $44.4 million.
The following table presents the total gross unrealized losses for
fixed maturity securities where the estimated fair value had declined and
remained below amortized cost by the indicated amount (in thousands):
At December 31, 2002
------------------------------
Gross Unrealized
Losses % of Total
---------------- ----------
Less than 20% $27,460 49.1%
20% or more for less than six months 21,727 38.8%
20% or more for six months or longer 6,741 12.1%
------- -------
Total $55,928 100.0%
While all of these securities are monitored for potential impairment,
the Company's experience indicates that the first two categories do not present
as great a risk of impairment, and often, fair values recover over time. These
securities have generally been adversely affected by the downturn in the
financial markets, overall economic conditions, and continuing effects of the
September 11, 2001 tragedies. Substantially all of the $6.7 million in
unrealized losses on fixed maturity securities whose book has exceeded market
20% or more for six months or longer were related to Canadian zero coupon bonds
whose maturities are long term. Small movements in interest rates can have a
significant impact on the fair value of these securities due to their long-term
duration. The issuers of these bonds are substantially all highly rated Canadian
corporations or government agencies.
The following table presents the total gross unrealized losses for
fixed maturity securities as of December 31, 2002, by class of security, and
broken out between investment and non-investment grade investments whose market
value has been below amortized cost for the length of time indicated (in
thousands):
Number of months
----------------------------------------------------------
More than
Less than six, but More than
six less than twelve twelve Total
--------- ---------------- --------- -------
Investment grade securities:
Commercial and industrial $ 1,563 $ 244 $17,276 $19,083
Public utilities 16 110 6,176 6,302
Asset-backed securities 3,502 5 11,426 14,933
Canadian and Canadian provincial governments 450 -- 3,160 3,610
Mortgage-backed securities 145 672 7 824
Finance 125 245 2,338 2,708
U.S. government and agencies 15 -- 9 24
------- ------- ------- -------
Investment grade securities 5,816 1,276 40,392 47,484
------- ------- ------- -------
37
Number of months
-----------------------------------------------------------
More than
Less than six, but More than
six less than twelve twelve Total
--------- ---------------- --------- -------
Non-investment grade securities:
Commercial and industrial 609 603 1,693 2,905
Public utilities -- 586 2,151 2,737
Asset-backed securities 1,713 -- 1,069 2,782
Mortgage-backed securities 1 -- -- 1
Finance 19 -- -- 19
------- ------- ------- -------
Non-investment grade securities 2,342 1,189 4,913 8,444
------- ------- ------- -------
Total $ 8,158 $ 2,465 $45,305 $55,928
======= ======= ======= =======
Approximately $35.6 million of the total unrealized losses were related
to securities issued by the airline, financial, automotive, telecommunication,
and utility sectors. These securities have generally been adversely affected by
the downturn in the financial markets, overall economic conditions, and
continuing effects of the September 11, 2001 tragedies. The Company believes
that the analysis of each such security whose price has been below market for
greater than twelve months indicated that the financial strength, liquidity,
leverage, future outlook and/or recent management actions support the view that
the security was not other-than-temporarily impaired as of December 31, 2002.
Mortgage loans on real estate
Mortgage loans represented approximately 3.4% and 3.2% of the Company's
investments as of December 31, 2002 and 2001, respectively. As of December 31,
2002, 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 $11.5 million, with the average
mortgage loan investment as of December 31, 2002, totaling approximately $3.8
million. The mortgage loan portfolio was diversified by geographic region and
property type as discussed further in Note 5 of the Notes to Consolidated
Financial Statements. Substantially all mortgage loans are performing and no
valuation allowance has been established as of December 31, 2002.
Policy loans
Policy loans comprised approximately 12.6% and 15.2% of the Company's
investments as of December 31, 2002 and 2001, 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
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.
Funds withheld at interest
Funds withheld at interest comprised approximately 29.7% and 22.5% of the
Company's investments as of December 31, 2002 and 2001, respectively. 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 and managed by the ceding company, and are reflected
as funds withheld at interest on RGA's balance sheet. In the event of a ceding
company's insolvency, RGA would need to assert a claim on the assets supporting
its reserve liabilities. However, the risk of loss to RGA is mitigated by its
ability to offset amounts it owes the ceding company for claims or allowances
with amounts owed to RGA from the ceding company. Interest accrues to these
assets at rates defined by the treaty terms. The Company is subject to the
investment performance on the withheld assets, although it does not directly
control them. These assets are primarily fixed maturity investment securities
and pose risks similar to the fixed maturity securities the Company owns. To
mitigate this risk, the Company helps set the investment guidelines followed by
the ceding company and monitors compliance. Ceding companies with funds withheld
at interest had an average A.M. Best rating of "A-". Certain ceding companies
maintain segregated portfolios for the benefit of the Company. Based on data
provided by ceding companies as of December 31, 2002, funds withheld at interest
were approximately (in thousands):
38
At December 31, 2002
------------------------------------------
Underlying Security Type: Book Value Market Value % of Total
------------------------- ---------- ------------ ----------
Investment grade U.S. corporate securities $ 1,229,881 $ 1,280,210 87.0%
Below investment grade U.S. corporate securities 42,981 41,321 2.8%
Unrated securities 137,207 144,489 9.8%
Other 6,290 6,312 0.4%
------------ ------------ -----
Total segregated portfolios 1,416,359 1,472,332 100.0%
Funds withheld at interest associated with
non-segregated portfolios 558,712 558,712
------------ ------------
Total funds withheld at interest $ 1,975,071 $ 2,031,044
============ ============
Based on data provided by the ceding companies as of December 31, 2002,
the maturity distribution of the segregated portfolio portion of funds withheld
at interest was approximately (in thousands):
At December 31, 2002
------------------------------------------
Maturity: Book Value Market Value % of Total
--------- ---------- ------------ ----------
Within one year $ 19,176 $ 19,363 1.3%
More than one, less than five years 251,090 258,807 17.6%
More than five, less than ten years 466,445 496,331 33.7%
Ten years or more 679,648 697,831 47.4%
------------ ------------ -----
Total all years $ 1,416,359 $ 1,472,332 100.0%
============ ============ =====
The Company utilizes derivative financial instruments on a very limited
basis, primarily to improve the management of the investment-related risks
associated with the reinsurance of equity-indexed annuities. The Company invests
primarily in exchange-traded and customized Standard and Poor's equity index
options. The Company 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, 2002, the majority of the Company's invested assets
were managed by third-party companies; however, the Company's chief investment
officer has the primary responsibility for the day-to-day oversight of all the
Company's investments.
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 manages its exposure to interest
rates principally by matching floating rate liabilities with corresponding
floating rate assets and by matching fixed rate liabilities with corresponding
fixed rate assets. On a limited basis, the Company uses equity options to
minimize its exposure to movements in equity markets that have a direct
correlation with certain of its reinsurance products.
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 in fair value, net interest income, and cash flows
are not within the limits established, management may adjust its asset and
liability mix to bring interest rate risk within board-approved limits.
39
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 liabilities in the event of a hypothetical 10% change in market
interest rates. The Company does not have fixed-rate instruments classified as
trading securities. The Company's projected loss in fair value of financial
instruments in the event of a 10% unfavorable change in market interest rates at
its fiscal years ended December 31, 2002 and 2001 was $78.4 million and $61.0
million, respectively.
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, 2001, with adjustments made to reflect the shift in the treasury
yield curve as appropriate.
At December 31, 2002, 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 and
liabilities 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 hypothetical 10%
change (increase or decrease) in market interest rates. The Company does not
have variable-rate instruments classified as trading securities. The Company's
projected decrease in cash flows in the near term associated with floating-rate
instruments in the event of a 10% unfavorable change in market interest rates at
its fiscal years ended December 31, 2002 and 2001 was $0.3 million and $6.0
million, respectively.
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, 2002, 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.
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 manages its exposure to currency
principally by matching invested assets with the underlying reinsurance
liabilities, but 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). The majority of the Company's foreign currency
transactions are denominated in Australian dollars, Argentine pesos, Canadian
dollars, and Great British pounds. Currently, the Company believes its foreign
currency transaction exposure, with the possible exception of its Argentine peso
exposure, to be immaterial to the consolidated results of operations. In an
effort to reduce its exposure to the Argentine peso, during 2001, the Company
liquidated substantially all its Argentine based investment securities and
reinvested the proceeds into investment securities denominated in U.S. dollars.
The Company's obligations under its insurance and reinsurance contracts continue
to be denominated in Argentine pesos, which is the functional currency for this
segment. Those net contract liabilities totaled approximately 65.1 million
Argentine pesos as of December 31, 2002. The net unrealized foreign currency
gain of $45.7 million, is reflected in accumulated other comprehensive income on
the
40
consolidated balance sheet as of December 31, 2002. The Company does not expect
the ongoing economic turmoil in Argentina, including the devaluation of the
Argentine peso, to have additional negative impact on its Argentine policy
liabilities; however, because the Company cannot reasonably predict the timing
of its claim settlements and what the exchange rate will be at settlement,
reported results may be volatile in the future. 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 February 2003, the Financial Accounting Standards Board ("FASB")
issued for comment Statement of Financial Accounting Standards ("SFAS") No. 133
Implementation Issue No. B36, "Embedded Derivatives: Bifurcation of a Debt
Instrument That Incorporates Both Interest Rate Risk and Credit Risk Exposures
That are Unrelated or Only Partially Related to the Creditworthiness of the
Issuer of That Instrument" ("FASB B36"). In this tentative guidance, the FASB
has concluded that funds withheld by a ceding company, for modified coinsurance
and coinsurance with funds withheld contracts, may contain an embedded
derivative which should be bifurcated and valued. The effective date of the
implementation guidance, as currently proposed, is the first day of the first
fiscal quarter beginning after June 15, 2003. As of December 31, 2002, the
Company has not separately reported any potential embedded derivatives
associated with these contracts, which it believes is consistent with industry
practice. At this time, the Company cannot estimate the impact, if any, of the
FASB B36 proposed guidance.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. All variable interests acquired before February 1, 2003 must follow the
new rule in accounting periods beginning after June 15, 2003. The Company does
not believe the implementation of FIN 46 will have a material effect on its
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123." Effective January 1, 2003, the Company will prospectively
adopt the fair value-based employee stock-based compensation expense recognition
provisions of SFAS No. 123, as amended by SFAS No. 148. The Company currently
applies the intrinsic value-based expense provisions set forth in APB Opinion
No. 25, Accounting for Stock Issued to Employees, ("APB 25"). The estimated
impact of the adoption of the fair value-based method on 2003 net income is
estimated at approximately $1.1 million, net of tax. This amount represents
estimated compensation cost associated with stock option grants expected to be
issued in 2003.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 identifies
characteristics of certain guarantee contracts and requires that a liability be
recognized at fair value at the inception of such guarantees for the obligations
undertaken by the guarantor. Additional disclosures also are prescribed for
certain guarantee contracts. The initial recognition and initial measurement
provisions of FIN 45 are effective for these guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for the
Company for its fiscal year ended December 31, 2002. The Company does not
believe the implementation of FIN 45 will have a material effect on its
consolidated financial statements.
In June 2002, the FASB issued 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.
41
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 reported 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 2002,
there were no changes to goodwill as a result of acquisitions or disposals.
Goodwill as of December 31, 2002 totaled $7.0 million and was related to the
Company's purchase of RGA Financial Group L.L.C. in 2000. Goodwill amortization
in the comparable prior-year periods was not material to the Company's results
of operations.
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
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
------------ ------------
(dollars in thousands)
ASSETS
Fixed maturity securities available for sale, at fair value $ 3,477,916 $ 2,768,285
Mortgage loans on real estate 227,492 163,948
Policy loans 841,120 774,660
Funds withheld at interest 1,975,071 1,142,643
Short-term investments 4,269 140,573
Other invested assets 124,327 98,315
-------------- --------------
Total investments 6,650,195 5,088,424
Cash and cash equivalents 88,101 226,670
Accrued investment income 35,514 30,454
Premiums receivable 253,892 161,436
Reinsurance ceded receivables 452,220 410,947
Deferred policy acquisition costs 1,084,936 800,319
Other reinsurance balances 288,833 268,133
Other assets 38,906 29,668
-------------- --------------
Total assets $ 8,892,597 $ 7,016,051
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 2,430,042 $ 2,101,777
Interest sensitive contract liabilities 3,413,462 2,325,264
Other policy claims and benefits 760,166 650,082
Other reinsurance balances 233,286 169,393
Deferred income taxes 291,980 162,092
Other liabilities 55,235 120,374
Long-term debt 327,787 323,396
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company 158,176 158,085
-------------- --------------
Total liabilities 7,670,134 6,010,463
Commitments and contingent liabilities (Note 14) - -
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, 2002 and 2001) 511 511
Warrants 66,915 66,915
Additional paid-in-capital 613,042 611,806
Retained earnings 480,301 369,349
Accumulated other comprehensive income (loss):
Accumulated currency translation adjustment, net of income taxes 715 (6,088)
Unrealized appreciation (depreciation) of securities, net of income taxes 102,768 (87)
-------------- --------------
Total stockholders' equity before treasury stock 1,264,252 1,042,406
Less treasury shares held of 1,596,629 and 1,526,730 at cost at
December 31, 2002 and 2001, respectively (41,789) (36,818)
-------------- --------------
Total stockholders' equity 1,222,463 1,005,588
-------------- --------------
Total liabilities and stockholders' equity $ 8,892,597 $ 7,016,051
============== ==============
See accompanying notes to consolidated financial statements.
43
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
---------------------------------------------
2002 2001 2000
------------- ------------- -------------
(in thousands, except per share data)
REVENUES:
Net premiums $ 1,980,666 $ 1,661,762 $ 1,404,066
Investment income, net of related expenses 374,512 340,559 326,505
Realized investment losses, net (14,651) (68,431) (28,651)
Other revenues 41,436 34,394 23,815
------------ ------------ ------------
Total revenues 2,381,963 1,968,284 1,725,735
------------ ------------ ------------
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,539,464 1,376,802 1,103,548
Interest credited 126,715 111,712 104,782
Policy acquisition costs and other insurance expenses 391,504 304,217 243,542
Other operating expenses 94,786 91,306 81,209
Interest expense 35,516 18,097 17,596
------------ ------------ ------------
Total benefits and expenses 2,187,985 1,902,134 1,550,677
------------ ------------ ------------
Income from continuing operations
before income taxes 193,978 66,150 175,058
Provision for income taxes 65,515 26,249 69,271
------------ ------------ ------------
Income from continuing operations 128,463 39,901 105,787
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (5,657) (6,855) (28,118)
------------ ------------ ------------
Net income $ 122,806 $ 33,046 $ 77,669
============ ============ ============
Earnings per share from continuing operations:
Basic earnings per share $ 2.60 $ 0.81 $ 2.14
============ ============ ============
Diluted earnings per share $ 2.59 $ 0.80 $ 2.12
============ ============ ============
Earnings per share from net income:
Basic earnings per share $ 2.49 $ 0.67 $ 1.57
============ ============ ============
Diluted earnings per share $ 2.47 $ 0.66 $ 1.56
============ ============ ============
Weighted average number of diluted shares outstanding
(in thousands) 49,648 49,905 49,920
============ ============ ============
See accompanying notes to consolidated financial statements.
44
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Additional
Preferred Common Paid In Retained
Stock Stock Warrants Capital Earnings
--------- ------ -------- ---------- ---------
Balance, January 1, 2000 $ - $ 511 $ - $ 611,016 $ 282,389
Comprehensive income:
Net income 77,669
Other comprehensive income, net of income tax
Currency translation adjustments
Unrealized investment gains, net of related
offsets and reclassification adjustment
Other comprehensive income
Comprehensive income
Dividends to stockholders (11,900)
Purchase of treasury stock
Reissuance of treasury stock 333
--------- ------ -------- ---------- ---------
Balance, December 31, 2000 - 511 - 611,349 348,158
--------- ------ -------- ---------- ---------
Comprehensive income:
Net income 33,046
Other comprehensive income, net of income tax
Currency translation adjustments
Unrealized investment gains, net of related
offsets and reclassification adjustment
Other comprehensive income
Comprehensive income
Dividends to stockholders (11,855)
Issuance of warrants 66,915
Reissuance of treasury stock 457
--------- ------ -------- ---------- ---------
Balance, December 31, 2001 - 511 66,915 611,806 369,349
--------- ------ -------- ---------- ---------
Comprehensive income:
Net income 122,806
Other comprehensive income, net of income tax
Currency translation adjustments
Unrealized investment gains, net of related
offsets and reclassification adjustment
Other comprehensive income
Comprehensive income
Dividends to stockholders (11,854)
Purchase of treasury stock
Reissuance of treasury stock 1,236
--------- ------ -------- ---------- ---------
Balance, December 31, 2002 $ - $ 511 $ 66,915 $ 613,042 $ 480,301
========= ====== ======== ========== =========
Accumulated
Other
Comprehensive Comprehensive Treasury
Income (Loss) Income (Loss) Stock Total
------------- ------------- -------- ----------
Balance, January 1, 2000 $ (141,250) $ (19,718) $ 732,948
Comprehensive income:
Net income $ 77,669 77,669
Other comprehensive income, net of income tax
Currency translation adjustments (5,958) (5,958)
Unrealized investment gains, net of related
offsets and reclassification adjustment 89,337 89,337
----------
Other comprehensive income 83,379 83,379
----------
Comprehensive income $ 161,048
==========
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
------------ ---------- ----------
Comprehensive income:
Net income $ 33,046 33,046
Other comprehensive income, net of income tax
Currency translation adjustments 9,779 9,779
Unrealized investment gains, net of related
offsets and reclassification adjustment 41,917 41,917
----------
Other comprehensive income 51,696 51,696
----------
Comprehensive income $ 84,742
==========
Dividends to stockholders (11,855)
Issuance of warrants 66,915
Reissuance of treasury stock 2,406 2,863
------------ ---------- ----------
Balance, December 31, 2001 (6,175) (36,818) 1,005,588
------------ ---------- ----------
Comprehensive income:
Net income $ 122,806 122,806
Other comprehensive income, net of income tax
Currency translation adjustments 6,803 6,803
Unrealized investment gains, net of related
offsets and reclassification adjustment 102,855 102,855
----------
Other comprehensive income 109,658 109,658
----------
Comprehensive income $ 232,464
==========
Dividends to stockholders (11,854)
Purchase of treasury stock (6,594) (6,594)
Reissuance of treasury stock 1,623 2,859
------------ ---------- ----------
Balance, December 31, 2002 $ 103,483 $ (41,789) $1,222,463
============ ========== ==========
See accompanying notes to consolidated financial statements.
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 122,806 $ 33,046 $ 77,669
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (4,958) 7,101 (379)
Premiums receivable (95,989) 64,929 68,407
Deferred policy acquisition costs (274,033) (180,110) (154,229)
Reinsurance ceded balances (41,273) (114,579) (908)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 460,601 357,840 188,595
Deferred income taxes 73,793 (32,901) 57,210
Other assets and other liabilities (74,576) 70,139 (24,958)
Amortization of net investment discounts, goodwill and other (35,902) (38,985) (35,884)
Realized investment losses, net 14,651 68,431 28,651
Other, net 16,731 9,020 (11,375)
------------ ------------ ------------
Net cash provided by operating activities 161,851 243,931 192,799
------------ ------------ ------------
CASH FLOWS FROM 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 2,204,813 1,129,263 576,240
Maturities of fixed maturity securities - available for sale 22,863 12,410 20,153
Purchases of fixed maturity securities - available for sale (2,749,069) (1,211,104) (1,352,647)
Cash invested in mortgage loans on real estate (78,605) (51,050) (21,951)
Cash invested in policy loans (70,240) (67,784) (63,812)
Cash invested in funds withheld at interest (41,828) (257,101) (64,394)
Principal payments on mortgage loans on real estate 15,069 15,376 9,525
Principal payments on policy loans 3,780 1 16,997
Change in short-term investments and other invested assets 110,717 (146,388) 162,746
------------ ------------ ------------
Net cash used in investing activities (582,500) (576,377) (712,484)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (11,854) (11,855) (11,900)
Proceeds from PIERS units offering, net - 217,340 -
Debt issuance and borrowings under credit agreements, net 1,610 49,029 88,303
Purchase of treasury stock (6,594) - (20,000)
Exercise of stock options 1,623 4,684 827
Excess deposits on universal life and other
investment type policies and contracts 300,761 228,667 508,259
------------ ------------ ------------
Net cash provided by financing activities 285,546 487,865 565,489
Effect of exchange rate changes (3,466) 454 677
------------ ------------ ------------
Change in cash and cash equivalents (138,569) 155,873 46,481
Cash and cash equivalents, beginning of year 226,670 70,797 24,316
------------ ------------ ------------
Cash and cash equivalents, end of year $ 88,101 $ 226,670 $ 70,797
============ ============ ============
Supplementary disclosure of cash flow information:
Amount of interest paid $ 34,687 $ 18,483 $ 16,900
Amount of income taxes paid $ 17,403 $ 26,418 $ 6,521
See accompanying notes to consolidated financial statements.
46
Note 1 ORGANIZATION
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding
company formed December 31, 1992. On December 31, 2002, Equity Intermediary
Company, a Missouri holding company, directly owned approximately 48.8% 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 59.1% of the
outstanding shares of common stock of RGA as of December 31, 2002.
During 2002, MetLife purchased 327,600 additional common shares of RGA. The
purchases were intended to offset potential future dilution of MetLife's holding
of RGA stock arising from the issuance of convertible securities by RGA in
December 2001.
The consolidated financial statements include the assets, liabilities, and
results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"), RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life
Reinsurance Company of Canada ("RGA Canada") and RGA Americas Reinsurance
Company, Ltd. ("RGA Americas"), as well as several other wholly-owned
subsidiaries, subject to an ownership position greater than fifty percent
(collectively, the "Company").
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. The most significant estimates include those used in
determining deferred policy acquisition costs, premiums receivable, future
policy benefits, other policy claims and benefits, including incurred but not
reported claims, provision for adverse litigation, and valuation of investment
impairments. In all instances, actual results could differ materially from the
estimates and assumptions used by management.
For each of its reinsurance contracts, the Company must determine if the
contract provides indemnification against loss or liability relating to
insurance risk, in accordance with applicable accounting standards. The Company
must review all contractual features, particularly those that may limit the
amount of insurance risk to which the Company is subject to or features that
delay the timely reimbursement of claims. If the Company determines that a
contract does not expose it to a reasonable possibility of a significant loss
from insurance risk, the Company records the contract on a deposit method of
accounting with the net amount payable / receivable reflected in other
reinsurance assets or liabilities on the consolidated balance sheet. Fees earned
on the contracts are reflected as other revenues, as opposed to premiums, on the
consolidated statements of income.
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
greater than twenty percent, but less than or equal to fifty percent are
reported under 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 investment 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
47
carrying value. In conjunction with its external investment managers, the
Company evaluates factors such as financial condition of the issuer, payment
performance, the length of time and the extent to which the market value has
been below amortized cost, compliance with covenants, general market conditions
and industry sector, intent and ability to hold securities, and various other
subjective factors. The actual value at which such financial instruments could
actually be sold or settled with a willing buyer may differ from such estimated
realizable values.
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 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 are
established after management considers, among other things, the value of
underlying collateral and payment capabilities of debtors.
Short-term investments represent investments with original maturities of greater
than three months but less than twelve months and are stated at amortized cost,
which approximates fair value.
Policy loans are reported at the unpaid principal balance.
Funds withheld at interest 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. 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 modified coinsurance
reinsurance transactions with funds withheld executed on or after December 31,
1994, assets and liabilities are reported on a net or gross basis, depending on
the specific details within each treaty. Reinsurance agreements reported on a
net basis are generally included in other reinsurance balances on the
consolidated balance sheet because a legal right of offset exists.
Other invested assets include derivative contracts, common stocks and preferred
stocks, carried at fair value, and limited partnership interests, carried at
cost. Changes in fair value are recorded through accumulated other comprehensive
income (loss). Other invested assets are periodically reviewed for impairment.
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 $6.8 million. Changes in the fair value of
these derivatives are recorded as investment income on the consolidated
statements of income. It is the Company's policy to enter into derivative
contracts primarily with highly rated companies.
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 investments where declines in value are deemed to be other than
temporary in nature. The cost of investments sold is determined based upon the
specific identification method. Unrealized gains and losses on marketable equity
securities and fixed maturity securities classified as available for sale, less
applicable deferred income taxes as well as related adjustments to deferred
acquisition costs, if applicable, are reflected as a direct charge or credit to
accumulated other comprehensive income (loss) 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 statements
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.
Premiums Receivable. Premiums are accrued for when due from the ceding company,
as adjusted for management estimates for lapsed premiums given historical
experience, financial health of specific ceding companies, collateral value, and
the legal right of offset on related amounts owed to the ceding companies.
48
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. For the years ended December
31, 2002 and 2001, the Company reflected charges of $1.0 million and $3.1
million, respectively, for unrecoverable deferred policy acquisition costs. No
such charges were reflected in 2000 results.
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 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 that 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. Through December 31, 2001, goodwill
representing the excess of purchase price over the fair value of net assets
acquired was amortized on a straight-line basis over ten to twenty years.
Effective January 1, 2002, the Company accounts for goodwill pursuant to the
provisions of SFAS No. 142. Accordingly, 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 2002,
there were no changes to goodwill as a result of acquisitions or disposals.
Goodwill as of December 31, 2002 totaled $7.0 million and was related to the
purchase by the Company's U.S. Operations of RGA Financial Group L.L.C. in 2000.
Goodwill amortization in the comparable prior-year periods was not material to
the Company's results of operations. 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. The value
of business acquired was approximately $7.5 million and $9.8 million, including
accumulated amortization of $5.9 million and $3.6 million, as of December 31,
2002 and 2001, respectively. The value of business acquired amortization expense
for the years ended December 31, 2002, 2001, and 2000 was $2.2 million, $2.9
million, and $0.8 million, respectively. These amortized balances are included
in other assets on the consolidated balance sheet. Amortization of the value of
business acquired is estimated to be $1.7 million, $1.3 million, $1.0 million,
$0.8 million, and $0.6 million during 2003, 2004, 2005, 2006 and 2007,
respectively.
Other Assets. In addition to the goodwill and value of business acquired
previously discussed, other assets primarily includes separate accounts,
unamortized debt issuance costs, capitalized software, and other capitalized
assets. Capitalized software, is stated at cost, less accumulated amortization.
Purchased software costs, as well as internal and external costs incurred to
develop internal-use computer software during the application development stage,
are capitalized. As of December 31, 2002, the Company has capitalized
approximately $11.2 million of internally developed software, which is not yet
in production.
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 (lapse)
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
3.0% 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.
49
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 unamortized 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.
The Company reinsures asset-intensive products, including annuities and
corporate-owned life insurance. The investment portfolios for these products are
segregated for management purposes within the general account of RGA Reinsurance
Company ("RGA Reinsurance"). The liabilities under 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.
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, RGA Barbados, 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 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,
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.
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Company. During
December 2001, RGA Capital Trust I (the "Trust"), a wholly owned subsidiary of
RGA, sold Preferred Income Equity Redeemable Securities ("PIERS") Units. Each
unit consists of a preferred security issued by the Trust with a detachable
warrant to purchase 1.2508 shares of RGA common stock. The Trust sold 4.5
million PIERS units. The market value of the preferred security on the date
issued is recorded in liabilities on the consolidated balance sheet under the
caption "Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Company."
Warrants. During December 2001, the Trust sold 4.5 million PIERS units. Each
unit consists of a preferred security issued by the Trust with a detachable
warrant to purchase 1.2508 shares of RGA common stock. The market value of the
detachable warrants on the date issued is recorded in stockholders' equity on
the consolidated balance sheet under the caption "Warrants."
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.
50
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
losses 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 (quota share) 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, RGA Barbados, and RGA Americas. Retrocessions are
arranged through RGA Reinsurance's retrocession pools for amounts in excess of
its retention limit. As of December 31, 2002, all rated retrocession pool
participants followed by the A.M. Best Company were rated B++ 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. Life and health premiums are
recognized as revenue when due from the insured, and are reported net of amounts
retroceded. Benefits and expenses are reported net of amounts retroceded and 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. Any fees that are collected in
advance of the period benefited are deferred and recognized over the period
benefited. Initial reserve changes are netted against premiums when an in force
block of business is reinsured.
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 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 4.2%, 6.1% and
6.7%, during 2002, 2001 and 2000, respectively. Interest crediting rates for
U.S. dollar-denominated investment-type contracts ranged from 2.8% to 6.8%
during 2002, 3.6% to 7.3% during 2001 and 5.3% to 7.2% during 2000. Weighted
average interest crediting rates for Mexican peso-denominated investment-type
contracts were 15.9%, 12.8% and 26.0% for 2002, 2001 and 2000, respectively.
Net Earnings Per Share. Basic earnings per share exclude any dilutive effects of
options and warrants. Diluted earnings per share include the dilutive effects
assuming outstanding stock options and warrants were exercised.
New Accounting Pronouncements. In February 2003, the Financial Accounting
Standards Board ("FASB") issued for comment Statement of Financial Accounting
Standards ("SFAS") No. 133 Implementation Issue No. B36, "Embedded Derivatives:
Bifurcation of a Debt Instrument That Incorporates Both Interest Rate Risk and
Credit Risk Exposures That are Unrelated or Only Partially Related to the
Creditworthiness of the Issuer of That Instrument" ("FASB B36"). In this
tentative guidance, the FASB has concluded that funds withheld by a ceding
company, for modified coinsurance and coinsurance with funds withheld contracts,
may contain an embedded derivative which should be bifurcated and valued. The
effective date of the implementation guidance, as currently proposed, is the
first day of the first fiscal quarter beginning after June 15, 2003. As of
December 31, 2002, the Company has not separately reported any potential
embedded derivatives associated with these contracts, which it believes is
consistent with industry practice. At this time, the Company cannot estimate the
impact, if any, of the FASB B36 proposed guidance.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have
the characteristics of a controlling financial interest or do not have
51
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. All variable interests acquired before February 1, 2003 must follow the
new rule in accounting periods beginning after June 15, 2003. The Company does
not believe the implementation of FIN 46 will have a material effect on its
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123." Effective January 1, 2003, the Company will prospectively adopt the fair
value-based employee stock-based compensation expense recognition provisions of
SFAS No. 123, as amended by SFAS No. 148. The Company currently applies the
intrinsic value-based expense provisions set forth in APB Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB 25"). The estimated impact of
the adoption of the fair value-based method on 2003 net income is estimated at
approximately $1.1 million, net of tax. This amount represents estimated
compensation cost associated with stock option grants expected to be issued in
2003.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 identifies
characteristics of certain guarantee contracts and requires that a liability be
recognized at fair value at the inception of such guarantees for the obligations
undertaken by the guarantor. Additional disclosures also are prescribed for
certain guarantee contracts. The initial recognition and initial measurement
provisions of FIN 45 are effective for these guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for the
Company for its fiscal year ended December 31, 2002. The Company does not
believe the implementation of FIN 45 will have a material impact on its
consolidated financial statements.
In June 2002, the FASB issued 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.
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 reported 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 2002, there were
no changes to goodwill as a result of acquisitions or disposals. Goodwill as of
December 31, 2002 totaled $7.0 million and was related to the Company's purchase
of RGA Financial Group L.L.C. in 2000. Goodwill amortization in the comparable
prior-year periods was not material to the Company's results of operations.
Reclassification. The Company has reclassified the presentation of certain prior
period information to conform to the 2002 presentation.
Note 3 STOCK TRANSACTIONS
On September 18, 2001, the Board of Directors approved a repurchase program
authorizing the Company to purchase up to $25 million of its shares of stock.
Subsequent to December 31, 2001 the Board of Directors approved an additional
repurchase of $25 million shares under the program, for a total of up to $50
million of its shares of stock, as conditions warrant. The Board's action allows
management, in its discretion, to purchase shares on the open market. As of
December 31, 2002, the Company purchased 225,500 shares of treasury stock under
this program at an aggregate cost of $6.6 million. All purchases were made
during 2002. The Company generally uses treasury shares to support the future
exercise of options granted under its stock option plans.
Note 4 DIVIDENDS
RGA paid cash dividends on common shares of $0.24 per share in 2002, 2001, and
2000.
52
Note 5 INVESTMENTS
Major categories of net investment income consist of the following (in
thousands):
Years Ended December 31, 2002 2001 2000
---- ---- ----
Fixed maturity securities $ 203,534 $ 192,685 $ 189,750
Mortgage loans on real estate 14,385 11,569 10,003
Policy loans 59,058 54,713 44,712
Funds withheld at interest 89,831 72,753 69,715
Short-term investments 3,393 6,513 11,129
Other invested assets 7,290 5,092 3,497
---------- ---------- ----------
Investment revenue 377,491 343,325 328,806
Investment expense 2,979 2,766 2,301
---------- ---------- ----------
Net investment income $ 374,512 $ 340,559 $ 326,505
========== ========== ==========
The amortized cost, gross unrealized gains and losses, and estimated fair values
of investments in fixed maturity securities at December 31, 2002 and 2001 are as
follows (in thousands):
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
---- ----- ------ -----
Available for sale:
Commercial and industrial $1,092,373 $ 50,439 $ 21,930 $ 1,120,882
Public utilities 341,934 40,255 8,960 373,229
Asset-backed securities 178,988 4,733 18,309 165,412
Canadian and Canadian provincial governments 457,077 75,109 3,160 529,026
Mortgage-backed securities 423,505 24,287 824 446,968
Finance 337,119 19,561 2,726 353,954
U.S. government and agencies 410,143 11,883 19 422,007
Other foreign government securities 65,180 1,258 - 66,438
---------- ---------- ---------- -----------
$3,306,319 $ 227,525 $ 55,928 $ 3,477,916
========== ========== ========== ===========
Amortized Unrealized Unrealized Fair
2001 Cost Gains Losses Value
---- ----- ------ -----
Available for sale:
Commercial and industrial $ 861,369 $ 22,127 $ 37,052 $ 846,444
Public utilities 260,856 9,429 5,860 264,425
Asset-backed securities 244,736 6,590 38,348 212,978
Canadian and Canadian provincial governments 445,077 64,240 17,320 491,997
Mortgage-backed securities 460,245 13,190 6,922 466,513
Finance 260,630 6,939 12,619 254,950
U.S. government and agencies 165,416 2,104 2,206 165,314
Other foreign government securities 67,093 238 1,667 65,664
---------- ---------- ---------- -----------
$2,765,422 $ 124,857 $ 121,994 $ 2,768,285
========== ========== ========== ===========
There were no investments in any entity in excess of 10% of stockholders' equity
at December 31, 2002 or 2001, other than investments issued or guaranteed by the
U.S. government.
Common and preferred 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, primarily preferred stocks, at December
31, 2002 and 2001 was approximately $103.9 million and $78.6 million,
respectively. The cost basis of the derivative financial instruments at December
31, 2002 and 2001 was approximately $4.4 million.
The amortized cost and estimated fair value of fixed maturity securities
available for sale at December 31, 2002 are shown by contractual maturity for
all securities except certain U.S. government agencies 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
53
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.
At December 31, 2002, 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 $ 40,187 $ 41,162
Due after one year through five years 428,849 447,510
Due after five years through ten years 686,545 722,914
Due after ten years 1,145,862 1,240,271
Asset and mortgage-backed securities 1,004,876 1,026,059
---------- ----------
$3,306,319 $3,477,916
========== ==========
Net realized investment gains or losses consist of the following (in thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Fixed maturities and equity securities available for sale:
Realized gains $ 64,060 $ 34,108 $ 2,487
Realized losses (79,005) (101,854) (23,142)
Other, net 294 (685) (7,996)
---------- ---------- ----------
Net losses $ (14,651) $ (68,431) $ (28,651)
========== ========== ==========
Included in net realized losses are other than temporary write-downs of fixed
maturity securities of approximately $33.9 million, $43.4 million, and $10.1
million in 2002, 2001, and 2000, respectively. The Company incurred $24.2
million in realized losses due to the other than temporary impairment in value
of collateralized bond obligations during 2002. The Company also incurred
approximately $9.6 million in realized losses due to the sale of World Com/MCI
fixed maturity holdings during 2002. The Company incurred approximately $9.1
million in realized losses associated with the other than temporary write-down
and sale of Enron securities during 2001. Also during 2001, the Company incurred
approximately $27.0 million in realized capital losses when it liquidated
substantially all of its Argentine-based investment securities. The Company
reinvested the proceeds from these sales in U.S. dollar based securities in
order to reduce its exposure to the volatile Argentine economy. Losses during
2000 include $8.9 million in realized losses associated with the sale of
subsidiaries.
At December 31, 2002, fixed maturity securities held by the Company that were
below investment grade had an estimated fair value of approximately $123.9
million. At December 31, 2002, the Company owned non-income producing securities
with an amortized cost of $23.1 million and a market value of $22.9 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 75 percent or
less for domestic mortgages. The distribution of mortgage loans by property type
is as follows (in thousands):
2002 2001
---- ----
Carrying Percentage Carrying Percentage
Property Type: Value Of Total Value Of Total
---------- ---------- ---------- ----------
Apartment $ 15,080 6.63% $ 705 0.43%
Retail 61,395 26.99% 49,153 29.98%
Office building 89,765 39.46% 72,958 44.50%
Industrial 59,279 26.05% 39,037 23.81%
Other commercial 1,973 0.87% 2,095 1.28%
---------- ------ ---------- ------
Total $ 227,492 100.00% $ 163,948 100.00%
========== ====== ========== ======
54
All the Company's mortgage loans are amortizing loans. As of December 31, 2002
and 2001, the Company's mortgage loans were distributed as follows (in
thousands):
2002 2001
---- ----
Carrying Percentage Carrying Percentage
Value Of Total Value of Total
United States:
Arizona $ 7,023 3.09% $ 9,102 5.55%
California 59,186 26.02% 38,178 23.29%
Colorado 8,467 3.72% 7,998 4.88%
Florida 19,294 8.48% 7,944 4.85%
Georgia 23,619 10.38% 21,258 12.97%
Illinois 11,736 5.16% 12,187 7.43%
Indiana 11,745 5.16% 5,363 3.27%
Kansas 7,169 3.15% 7,379 4.50%
Maryland 4,164 1.83% 4,436 2.71%
Missouri 14,440 6.35% 7,301 4.45%
Nevada 1,259 0.55% 1,340 0.81%
New Mexico 3,965 1.74% - -
North Carolina 15,885 6.99% 16,301 9.94%
Pennsylvania 5,569 2.45% 5,668 3.46%
Rhode Island 5,355 2.35% - -
South Dakota 7,480 3.29% - -
Texas 9,376 4.12% 2,159 1.32%
Virginia 3,396 1.49% 3,442 2.10%
Washington 8,364 3.68% 13,892 8.47%
---------- ------ ---------- ------
Total $ 227,492 100.00% $ 163,948 100.00%
========== ====== ========== ======
Substantially all mortgage loans are performing and no valuation allowance has
been established as of December 31, 2002.
The maturities of the mortgage loans are as follows (in thousands):
2002 2001
---- ----
Due one year through five years $ 40,924 $ 8,609
Due after five years 108,337 84,839
Due after ten years 78,231 70,500
---------- ----------
Total $ 227,492 $ 163,948
========== ==========
Policy loans comprised approximately 12.6% and 15.2% of the Company's
investments as of December 31, 2002 and 2001, 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
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.
Funds withheld at interest comprised approximately 29.7% and 22.5% of the
Company's investments as of December 31, 2002 and 2001, respectively. 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 and managed by the ceding company and are reflected
as funds withheld at interest on RGA's balance sheet. In the event of a ceding
company's insolvency, RGA would need to assert a claim on the assets supporting
its reserve liabilities. However, the risk of loss to RGA is mitigated by its
ability to offset amounts it owes the ceding company for claims or allowances
with amounts owed to RGA from the ceding company. Interest accrues to these
assets at rates defined by the treaty terms. In most cases, the Company is
subject to the investment performance on the funds withheld assets, although it
does not control them. To mitigate this risk, the Company helps set the
investment guidelines followed by the ceding company and monitors compliance.
55
Note 6 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, 2002 and 2001. SFAS No. 107,
"Disclosures about 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):
2002 2001
---- ----
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets:
Fixed maturity securities $3,477,916 $3,477,916 $2,768,285 $2,768,285
Mortgage loans on real estate 227,492 248,483 163,948 164,904
Policy loans 841,120 841,120 774,660 774,660
Funds withheld at interest 1,975,071 2,031,044 1,142,643 1,133,781
Short-term investments 4,269 4,269 140,573 140,573
Other invested assets 124,327 124,327 98,315 98,315
Liabilities:
Interest-sensitive contract liabilities $3,413,462 $3,223,005 $2,325,264 $2,264,432
Long-term debt 327,787 347,179 323,396 328,905
Company-obligated mandatorily
redeemable preferred securities 158,176 177,401 158,085 158,839
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
approximates fair value except where the funds withheld are specifically
identified in the agreement. The carrying value of short-term investments at
December 31, 2002 and 2001 approximates fair value. Common and preferred 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 and the company-obligated mandatorily
redeemable preferred securities are estimated based on quoted market prices for
corporations with similar credit quality.
Note 7 REINSURANCE
Retrocession reinsurance treaties 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, 2002 and 2001, no allowances were deemed necessary. The Company regularly
evaluates the financial condition of its reinsurers / retrocessionaires.
The effect of reinsurance on net premiums and amounts earned is as follows (in
thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Direct $ 4,986 $ 11,471 $ 26,077
Reinsurance assumed 2,325,512 1,839,083 1,600,106
Reinsurance ceded (349,832) (188,792) (222,117)
---------- ---------- ----------
Net premiums and amounts earned $1,980,666 $1,661,762 $1,404,066
========== ========== ==========
The effect of reinsurance on policyholder claims and other policy benefits is as
follows (in thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Direct $ 3,330 $ 6,104 $ 27,327
Reinsurance assumed 1,744,630 1,525,248 1,290,175
Reinsurance ceded (208,496) (154,550) (213,954)
---------- ---------- ----------
Net policyholder claims and benefits $1,539,464 $1,376,802 $1,103,548
========== ========== ==========
56
At December 31, 2002 and 2001, there were no reinsurance receivables associated
with a single reinsurer with a carrying value in excess of 5% of total assets.
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, 2002 $ 75 $ 758,875 $ 162,395 $ 596,555 127.21%
December 31, 2001 73 615,990 117,748 498,315 123.61%
December 31, 2000 86 545,950 78,226 467,810 116.70%
At December 31, 2002, the Company has provided approximately $872.7 million of
statutory financial reinsurance, as measured by pre-tax statutory surplus, 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. The Company earns
a fee based on the amount of net outstanding financial reinsurance.
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) or in some
cases due to changes in the financial condition or ratings of the reinsurer.
Recapture of business previously ceded does not affect premiums ceded prior to
the recapture of such business, but would reduce premiums in subsequent periods.
Additionally, some treaties give the ceding company the right to request the
Company to place assets in trust for their benefit to support their reserve
credits, in the event of a downgrade of the Company's ratings to specified
levels. As of December 31, 2002, these treaties had approximately $294.7 million
in reserves. Assets placed in trust continue to be owned by the Company, but
their use is restricted based on the terms of the trust agreement. Securities
with an amortized cost of $532.8 million were held in trust to satisfy
collateral requirements for reinsurance business for the benefit of certain
subsidiaries of the company at December 31, 2002. Additionally, securities with
an amortized cost of $931.6 million, as of December 31, 2002, were held in trust
to satisfy collateral requirements under certain third-party reinsurance
treaties. Additionally, under certain conditions, RGA may be obligated to move
reinsurance from one RGA subsidiary company to another RGA subsidiary or make
payments under the treaty. These conditions generally include unusual or remote
circumstances, such as change in control, insolvency, nonperformance under a
treaty, or loss of reinsurance license of such subsidiary.
Note 8 DEFERRED POLICY ACQUISITION COSTS
The following reflects the amounts of policy acquisition costs deferred and
amortized (in thousands):
Years Ended December 31 2002 2001 2000
- ----------------------- ---------- ---------- ----------
Deferred policy acquisition costs
Assumed $1,162,255 $ 860,971 $ 692,345
Retroceded (77,319) (60,652) (70,870)
---------- ---------- ----------
Net $1,084,936 $ 800,319 $ 621,475
========== ========== ==========
Years Ended December 31 2002 2001 2000
- ----------------------- ---------- ---------- ----------
Beginning of year $ 800,319 $ 621,475 $ 478,389
Capitalized
Assumed 620,050 481,697 379,126
Retroceded (16,331) (11,377) (22,490)
Amortized
Assumed (331,873) (324,641) (230,415)
Retroceded 12,771 33,165 16,865
---------- ---------- ----------
End of year $1,084,936 $ 800,319 $ 621,475
========== ========== ==========
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
57
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 9 INCOME TAX
The provision for income tax expense attributable to income from continuing
operations consists of the following (in thousands):
Years Ended December 31 2002 2001 2000
- ----------------------- ---- ---- ----
Current income tax expense (benefit) $ (14,412) $ 49,738 $ 12,789
Deferred income tax expense (benefit) 57,221 (31,866) 46,494
Foreign current tax expense (benefit) 6,134 9,412 (728)
Foreign deferred tax expense (benefit) 16,572 (1,035) 10,716
---------- ---------- ----------
Provision for income taxes $ 65,515 $ 26,249 $ 69,271
========== ========== ==========
Provision for income tax expense 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 2002 2001 2000
- ----------------------- ---- ---- ----
Tax provision at U.S. statutory rate $ 67,892 $ 23,153 $ 61,371
Increase (decrease) in income taxes resulting from:
Foreign tax rate differing from U.S. tax rate (124) (784) 1,049
Settlement of IRS audit (2,000) - -
Travel and entertainment 129 32 134
Intangible amortization 199 65 215
Deferred tax valuation allowance (211) 3,501 2,369
Basis differential on sale of Chilean subsidiaries - - 2,447
Other, net (370) 282 1,686
---------- ---------- ----------
Total provision for income taxes $ 65,515 $ 26,249 $ 69,271
========== ========== ==========
Total income taxes were as follows (in thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Income tax from continuing operations: $ 65,515 $ 26,249 $ 69,271
Tax benefit on discontinued operations (3,066) (3,691) (15,140)
Income tax from stockholders' equity:
Unrealized holding gain on debt and equity securities
recognized for financial reporting purposes 51,591 21,320 51,766
Exercise of stock options (1,943) (1,653) (344)
Foreign currency translation (3,664) (5,266) 3,208
---------- ---------- ----------
Total income tax provided $ 108,433 $ 36,959 $ 108,761
========== ========== ==========
58
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at December 31, 2002 and 2001,
are presented in the following tables (in thousands):
Years Ended December 31 2002 2001
---- ----
Deferred income tax assets:
Nondeductible accruals $ 21,120 $ 19,433
Differences in foreign currency translation - 3,824
Deferred acquisition costs capitalized for tax 33,561 28,103
Net operating loss carryforward 148,803 122,852
Foreign tax & AMT credit carryforward 9,494 7,540
Capital loss carryforward 4,831 4,748
---------- ----------
Subtotal 217,809 186,500
Valuation allowance (12,458) (13,748)
---------- ----------
Total deferred income tax assets 205,351 172,752
---------- ----------
Deferred income tax liabilities:
Deferred acquisition costs capitalized for financial reporting 386,953 296,290
Differences between tax and financial reporting amounts concerning
certain reinsurance transactions and future policy benefits 69,521 22,661
Differences in foreign currency translation 385 -
Differences in the tax basis of cash and invested assets 40,472 15,893
---------- ----------
Total deferred income tax liabilities 497,331 334,844
---------- ----------
Net deferred income tax liabilities $ 291,980 $ 162,092
========== ==========
As of December 31, 2002 and 2001, a valuation allowance for deferred tax assets
of approximately $12.5 million and $13.7 million, respectively, was provided on
the foreign tax credits, net operating and capital losses of RGA, RGA
Reinsurance, RGA Australia, GA Argentina, RGA South Africa, and RGA UK. The
Company utilizes valuation allowances when it cannot assume, based on the weight
of the available evidence, that the deferred income taxes will 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.
During 2002, 2001, and 2000, the Company received federal income tax refunds of
approximately $5.2 million, $5.0 million and $44.8 million, respectively. The
Company made federal income tax payments of approximately $17.4 million, $26.4
million and $6.5 million in 2002, 2001 and 2000, respectively. At December 31,
2002 and 2001, the Company recognized deferred tax assets associated with net
operating losses of approximately $391.9 million and $313.9 million,
respectively, that will expire between 2011 and 2017. However, these net
operating losses are expected to be utilized in the normal course of business
during the period allowed for carryforwards and, in any event, are not expected
to be lost given tax planning strategies available to the Company.
The Company's tax returns have been audited by the relevant taxing authorities
for all years through 1999. The Company believes that any adjustments that might
be required for subsequent years will not have a material effect on the
Company's financial statements.
Note 10 EMPLOYEE BENEFIT PLANS
Most of the Company's U.S. employees participate in a non-contributory qualified
defined benefit pension plan sponsored by RGA Reinsurance. The benefits under
the pension plan are based on years of service and compensation levels. Certain
management individuals participate in several nonqualified defined benefit and
defined contribution plans sponsored by RGA Reinsurance. Those plans are
unfunded and are deductible for federal income tax purposes when the benefits
are paid. The Company recorded net benefits expense of approximately $1.5
million, $1.1 million, and $0.9 million for 2002, 2001 and 2000, respectively,
related to these plans. The unfunded benefit liability related to these plans as
of December 31, 2002 and 2001 was approximately $8.4 million and $6.5 million,
respectively. The weighted-average discount rate and long-term rate
59
of return assumptions used were 7.25% and 9.00% for 2002, and 7.5% and 9.0% for
both 2001 and 2000, respectively. The weighted-average discount rate and
long-term rate of return assumptions to be used in 2003 are 6.75% and 8.75%,
respectively. The impact of the change in assumptions is not expected to be
material to the Company's results of operations in 2003.
The Company's full time U.S. employees may participate in a defined contribution
profit sharing plan. The plan also has a cash or deferred option under Internal
Revenue Code section 401(k). The Company's contributions, which are partially
tied to RGA's operating results and employee 401(k) contributions, were
approximately $1.2 million and $1.3 million in 2002 and 2001, respectively. The
Company also provides certain health care and life insurance benefits for
retired employees. The health care benefits are provided through a self-insured
welfare benefit 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 Company
recorded benefits expense of approximately $0.6 million, $0.5 million, and $0.3
million for 2002, 2001 and 2000, respectively, related to these postretirement
plans. The projected obligation was approximately $4.5 million and $3.5 million
as of December 31, 2002 and 2001, respectively.
The 2002 postretirement benefit cost assumes a 12% annual rate of increase in
the per capita cost of covered health care benefits. The rate is assumed to
decrease gradually to 5% for 2008 and remain at that level thereafter. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plan. A one-percentage point increase in assumed health care
cost trend rates would increase the 2002 net periodic benefit cost by
approximately $0.1 million and the 2002 postretirement benefit obligation by
approximately $0.9 million.
Note 11 RELATED PARTY TRANSACTIONS
General American and MetLife have historically provided certain administrative
services to RGA and RGA Reinsurance. Such services have included legal, risk
management and corporate travel. The cost for the years ended December 31, 2002,
2001 and 2000 was approximately $1.2 million, $1.1 million and $2.6 million
respectively.
The Company also has direct policies and reinsurance agreements with MetLife and
certain of its subsidiaries. As of December 31, 2002 and 2001, the Company had
assets and liabilities related to these agreements totaling $78.5 million and
$183.1 million, and $112.5 million and $109.0 million, respectively.
Additionally, the Company reflected net premiums of approximately $172.1
million, $149.3 million, and $144.0 million in 2002, 2001, and 2000,
respectively. The premiums reflect the net of business assumed from and ceded to
MetLife and its subsidiaries. The pre-tax gain on this business was
approximately $25.9 million, $26.1 million, and $17.8 million in 2002, 2001, and
2000, respectively.
Note 12 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, 2002
are as follows:
2003 $4.9 million
2004 $4.5 million
2005 $3.8 million
2006 $3.8 million
2007 $3.7 million
Thereafter $8.1 million
Rent expenses amounted to approximately $6.0 million, $5.3 million, and $4.7
million for the years ended December 31, 2002, 2001, and 2000, respectively.
60
Note 13 FINANCIAL CONDITION AND NET INCOME ON A STATUTORY BASIS
- - SIGNIFICANT SUBSIDIARIES
The following table presents selected statutory financial information for the
Company's primary life reinsurance legal entities, as of December 31, 2002 and
2001 (in thousands):
Statutory Statutory
Capital & Surplus Net Income
2002 2001 2002 2001 2000
---- ---- ---- ---- ----
RCM $ 639,809 $ 544,522 $ 1,922 $ 4,025 $ (7,348)
RGA Reinsurance $ 633,557 $ 540,543 $ 13,640 $ (84,633) $ 80,575
RGA Canada $ 181,830 $ 179,289 $ 229 $ 12,285 $ 6,646
RGA Barbados $ 101,077 $ 78,276 $ 17,481 $ 22,986 $ 11,037
RGA Americas $ 79,635 $ 41,458 $ 14,611 $ 800 $ 5,129
Other reinsurance
subsidiaries $ 67,138 $ 53,466 $ 490 $ 1,197 $ (20,288)
The total capital and surplus positions of RCM, RGA Reinsurance and RGA Canada
exceed the risk based capital requirements of the applicable regulatory bodies.
RCM and RGA Reinsurance are subject to statutory provisions that restrict the
payment of dividends. They 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 2003 would be $63.4 million. However, the applicable statutory
provisions only permit an insurer to pay a shareholder dividend from unassigned
surplus. As of December 31, 2002, RGA Reinsurance had unassigned surplus of
$67.8 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 January 1, 2003, RCM could pay a maximum dividend, without
prior approval, to RGA equal to its unassigned surplus, approximately $28.9
million. The maximum amount available for dividends by RGA Canada to RGA under
the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR") is
$33.4 million. Dividend payments from other subsidiaries and joint ventures are
subject to regulations in the country of domicile. RGA Americas and RGA Barbados
do not have material restrictions on their ability to pay dividends out of
retained earnings
Note 14 COMMITMENTS AND CONTINGENT LIABILITIES
The Company is currently a party to various litigation and arbitrations that
involve medical reinsurance arrangements, personal accident business, and
aviation bodily injury carve-out business. As of January 31, 2003, the ceding
companies involved in these disputes have raised claims that are $41.7 million
in excess of the amounts held in reserve 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. In addition, the Company is in the process of auditing ceding
companies which have indicated that they anticipate asserting claims in the
future against the Company that are $8.5 million in excess of the amounts held
in reserve by the Company. Depending upon the audit findings in these cases,
they could result in litigation or arbitrations in the future. See Note 21,
"Discontinued Operations" for more information. 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
litigation or arbitrations or provide reasonable ranges of potential losses, it
is the opinion of management, after consultation with counsel, 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 credits. The letters of
credit issued by banks represent a guarantee of performance under the
reinsurance agreements. At December 31, 2002, there were approximately $39.7
million of outstanding letters of credit in favor of third-party entities.
Additionally, the Company utilizes letters of credit to secure reserve credits
when it retrocedes business to its offshore subsidiaries, including RGA Americas
and RGA Barbados. As of December 31, 2002, $339.4 million in letters of credit
from various banks were outstanding between the various subsidiaries of the
Company. Fees associated with letters of credit are not fixed for periods
61
in
excess of one year and are based on the Company's ratings and the general
availability of these instruments in the marketplace.
RGA has issued guarantees of its subsidiaries' performance for the payment of
amounts due under certain reinsurance treaties, whereby if the subsidiary fails
to meet its obligations, RGA or one of its other subsidiaries will make the
payment. These guarantees are granted to ceding companies in order to provide
them additional security, particularly in cases where RGA's subsidiary is
relatively new or not of a significant size, relative to the ceding company.
Total liabilities supported by the guarantees, before consideration for any
legally offsetting amounts due from the guaranteed party, totaled $126.6 million
as of December 31, 2002 and are reflected on the Company's consolidated balance
sheet as future policy benefits.
Note 15 LONG-TERM DEBT
The Company's long-term debt consists of the following (in millions):
2002 2001
---- ----
Senior Notes @ 6.75% due 2011 $199.9 $ 199.8
Senior Notes @7.25% due 2006 99.5 99.4
Revolving Credit Facilities 28.4 24.2
------ ------
Total $327.8 $323.4
====== ======
On December 19, 2001, RGA issued 6.75% Senior Notes with a face value of $200.0
million. These senior notes have been registered with the SEC. The net proceeds
from the offering were approximately $198.5 million and were used to pay down a
balance of $120 million on a revolving credit facility and to prepay and
terminate a $75 million term loan with MetLife Credit Corp. Capitalized issuance
costs, recorded in other assets, relate to the issuance of the 6.75% Senior
Notes were $2.1 million.
The Company has revolving credit facilities in the United States, the United
Kingdom, and Australia, under which it may borrow up to approximately $183.8
million. As of December 31, 2002, the Company had drawn approximately $28.4
million under these facilities at rates ranging from 4.39% to 5.57%. The Company
increased its borrowings under the United Kingdom credit facility by $1.6
million during 2002. Terminations of revolving credit facilities and maturities
of senior notes over the next five years, assuming the exercise of extension
options, would be $28.4 million in 2005 and $100.0 million in 2006. The Company
may draw up to $140.0 million on its U.S. revolving credit facility that expires
in May 2003.
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 consolidated 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 other event which
results in the acceleration of the maturity of indebtedness. As of December 31,
2002, the Company had $327.8 million in outstanding borrowings under its debt
agreements and was in compliance with all covenants under those agreements. Of
that amount, approximately $28.4 million is subject to immediate payment upon a
downgrade of the Company's senior long-term debt rating, unless a waiver is
obtained from the lenders. The ability of the Company to make debt principal and
interest payments depends on the earnings and surplus of subsidiaries,
investment earnings on undeployed capital proceeds, and the Company's ability to
raise additional funds. Interest paid on debt during 2002, 2001 and 2000 totaled
$34.7 million, $18.5 million and $16.9 million, respectively.
RGA guarantees the payment of amounts outstanding under the credit facilities
maintained by its subsidiary operations in the United Kingdom and Australia. The
guarantees were granted to the banks providing the facilities in order to
enhance their security. The total amount of debt outstanding, subject to the
guarantees, as of December 31, 2002 was $28.4 million and is reflected on the
Company's consolidated balance sheet under long-term debt. These lines of credit
provide for additional borrowings of up to $15.4 million, which if drawn, would
also be subject to the guarantees.
Note 16 ISSUANCE OF TRUST PIERS UNITS
In December 2001, RGA, through its wholly-owned trust ("RGA Capital Trust I" or
"the Trust") issued $225.0 million in Preferred Income Equity Redeemable
Securities ("PIERS") Units.
Each PIERS unit consists of:
62
1) A preferred security issued by RGA Capital Trust I (the Trust), having a
stated liquidation amount of $50 per unit, representing an undivided beneficial
ownership interest in the assets of the Trust, which consist solely of junior
subordinated debentures issued by RGA which have a principal amount at maturity
of $50 and a stated maturity of March 18, 2051. The preferred securities and
subordinated debentures were issued at a discount (original issue discount) to
the face or liquidation value of $14.87 per security. The securities will
accrete to their $50 face/liquidation value over the life of the security on a
level yield basis. The interest rate on the preferred securities and the
subordinated debentures is 5.75% per annum of the face amount.
2) A warrant to purchase, at any time prior to December 15, 2050, 1.2508 shares
of RGA stock at an exercise price of $50. The fair market value of the warrant
on the issuance date is $14.87 and is detachable from the preferred security.
RGA fully and unconditionally guarantees, on a subordinated basis, the
obligations of the Trust under the preferred securities. The Trust exists for
the sole purpose of issuing the PIERS units. The discounted value of the
preferred securities ($158.1 million) and the market value of the warrants
($66.9 million) at the time of issuance are reflected in the balance sheet in
the line items "Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Company"
and "Warrants," respectively.
If on any date after December 18, 2004, the closing price of RGA common stock
exceeds and has exceeded a price per share equal to $47.97 for at least 20
trading days within the immediately preceding 30 consecutive trading days, the
Company may redeem the warrants in whole for cash, RGA common stock, or a
combination of cash and RGA common stock.
Associated with the issuance of the PIERS units, the Company capitalized
issuance expenses of $5.4 million to "Other assets" and recorded $2.3 million
directly to "Additional paid in capital."
Note 17 SEGMENT INFORMATION
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and Europe & South
Africa. 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 life insurance policies and reinsurance
annuities. The Canada operations provide insurers with reinsurance of
traditional life policies as well as credit and critical illness policies. Other
International operations primarily provide traditional life reinsurance,
privatized pension plan reinsurance, which the Company ceased renewing during
2001, and reinsurance of critical illness risks primarily in Asia Pacific, Latin
America, and Europe. The operational segment results do not include the
corporate investment activity, general corporate expenses or 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 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 primarily 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.
The Company's reportable segments are strategic business units that are
segregated by geographic region. Information related to revenues, income (loss)
before income taxes, interest expense, depreciation and amortization, and assets
of the Company's continuing operations are summarized below (in thousands).
For the Years ended December 31, 2002 2001 2000
---- ---- ----
Revenues
U.S. $1,697,258 $1,468,739 $1,271,629
Canada 251,715 247,624 237,303
Other International:
Europe & South Africa 230,813 96,455 35,288
Asia Pacific 169,351 126,653 100,985
Latin America 12,973 33,681 75,944
Corporate 19,853 (4,868) 4,586
-----------------------------------------------
Total from continuing operations $2,381,963 $1,968,284 $1,725,735
===============================================
63
For the Years ended December 31,
(in thousands) 2002 2001 2000
---- ---- ----
Income (loss) from continuing operations before income taxes
U.S. $ 177,052 $ 125,711 $ 167,209
Canada 38,631 51,516 39,858
Other International:
Europe & South Africa 3,409 (963) (2,380)
Asia Pacific 6,316 3,007 1,205
Latin America (3,504) (79,097) (6,535)
Corporate (27,926) (34,024) (24,299)
---------------------------------------------
Total from continuing operations $ 193,978 $ 66,150 $ 175,058
=============================================
Subsidiaries in which the Company has an ownership position greater than twenty
percent, but less than or equal to fifty percent are reported on the equity
basis of accounting. The equity in the net income of such 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 ended December 31, 2002 2001 2000
(in thousands) ---- ---- ----
Interest expense
Other International:
Europe & South Africa $ 680 $ 681 $ 502
Asia Pacific 842 867 980
Corporate 33,994 16,549 16,114
---------------------------------------------
Total from continuing operations $ 35,516 $ 18,097 $ 17,596
=============================================
For the Years ended December 31, 2002 2001 2000
(in thousands) ---- ---- ----
Depreciation and amortization
U.S. $ 260,065 $ 236,981 $ 178,490
Canada 22,537 33,048 16,794
Other International:
Europe & South Africa 33,251 15,621 4,001
Asia Pacific 37,937 35,236 29,844
Latin America 19,463 12,136 5,204
---------------------------------------------
Total from continuing operations $ 373,253 $ 333,022 $ 234,333
=============================================
The table above includes amortization of the Company's deferred acquisition
costs.
As of December 31, 2002 2001
(in thousands) ---- ----
Assets
U.S. $6,293,189 $ 4,486,194
Canada 1,533,339 1,432,986
Other International:
Europe & South Africa 263,136 137,499
Asia Pacific 273,503 238,788
Latin America 56,197 152,586
Corporate and discontinued operations 473,233 567,998
-----------------------------
Total assets $8,892,597 $ 7,016,051
=============================
64
Capital expenditures of each reporting segment were immaterial in the periods
noted.
During 2002, two clients accounted for more than 10% of the Canada operation's
gross premiums, consisting of $62.5 million and $26.5 million, or 29.7% and
12.6%, respectively. During 2002, two clients, one each in Australia and Hong
Kong, generated approximately $52.9 million, or 30.2% of the total gross
premiums for the Asia Pacific operations. During 2002, two clients of the
Company's UK operations generated approximately $156.4 million, or 57.5% of the
total gross premiums for the Europe & South Africa operations.
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, 2002,
shares authorized for the granting of Benefits under the Plan and the Directors
Plan totaled 4,533,407 and 112,500, respectively. Options are generally 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 follows.
2002 2001 2000
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise price Options Exercise price Options Exercise price
------- -------------- ------- -------------- ------- --------------
BALANCE AT BEGINNING OF YEAR 2,326,808 $ 24.42 2,065,731 $ 22.03 1,653,137 $ 21.41
Granted 554,233 $ 31.90 493,037 $ 30.05 456,407 $ 23.38
Exercised (147,927) $ 15.59 (224,892) $ 14.00 (43,058) $ 12.37
Forfeited (32,781) $ 29.63 (7,068) $ 34.37 (755) $ 35.33
-----------------------------------------------------------------------------------------
BALANCE AT END OF YEAR 2,700,333 $ 26.36 2,326,808 $ 24.42 2,065,731 $ 22.03
Options Outstanding Options Exercisable
----------------------------------------------------- -----------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Range of Outstanding as Remaining Exercise Exercisable as Exercise
Exercise Prices of Contractual Life Price of Price
12/31/2002 12/31/2002
- ----------------- -------------- ---------------- ---------------- ----------------- ----------------
10.00 - $14.99 235,931 0.9 $12.10 235,931 $12.10
15.00 - $19.99 32,522 3.0 $15.61 29,247 $15.61
20.00 - $24.99 879,845 4.3 $21.76 647,801 $21.25
25.00 - $29.99 669,618 7.0 $28.80 264,650 $27.75
30.00 - $34.99 567,141 8.9 $31.90 22,500 $32.03
35.00 - $39.99 315,276 5.6 $35.81 222,107 $35.78
--------------------------------------------- -------------------------
TOTALS 2,700,333 5.8 $26.36 1,422,236 $23.27
============================================= =========================
The per share weighted-average fair value of stock options granted during 2002,
2001, and 2000 was $11.71, $11.87, and $9.40 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 2002-expected dividend yield of 0.8%, risk-free interest rate of
5.00%, expected life of 5.0 years, and an expected rate of volatility of the
stock of 35% over the expected life of the options; 2001-expected dividend yield
of 0.8%, risk-free interest rate of 5.04%, expected life of 5.8 years, and an
expected rate of volatility of the stock of 35% over the expected life of the
options; 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.
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
65
net income for future years. See Note 2 regarding New Accounting Pronouncements
and the Company's prospective adoption of SFAS No. 148.
2002 2001 2000
---- ---- ----
Net income (in thousands) As reported $ 122,806 $ 33,046 $ 77,669
Pro forma $ 119,824 $ 29,827 $ 75,105
Basic earnings per share As reported $ 2.49 $ 0.67 $ 1.57
Pro forma $ 2.43 $ 0.60 $ 1.52
Diluted earnings per share As reported $ 2.47 $ 0.66 $ 1.56
Pro forma $ 2.41 $ 0.60 $ 1.50
In January 2003, the Board approved an additional 735,655 incentive stock
options at $27.29 per share under the Company's Stock Plans.
Note 19 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations (in thousands, except per share information):
Earnings: 2002 2001 2000
---- ---- ----
Income from continuing operations (numerator for
basic and diluted calculations) $ 128,463 $ 39,901 $ 105,787
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 49,381 49,420 49,538
Equivalent shares from outstanding stock options 267 485 382
----------------------------------
Diluted shares (denominator for diluted calculation) 49,648 49,905 49,920
Earnings per share from continuing operations:
Basic $ 2.60 $ 0.81 $ 2.14
Diluted $ 2.59 $ 0.80 $ 2.12
----------------------------------
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.
Approximately 1.4 million, 0.2 million and 0.4 million outstanding stock options
were not included in the calculation of common equivalent shares during 2002,
2001 and 2000, respectively. Diluted earnings per share exclude the antidilutive
effect of 5.6 million shares that would be issued upon exercise of the
outstanding warrants associated with the PIERS units (See Note 16), as the
Company could repurchase more shares than it issues with the exercise proceeds.
Note 20 COMPREHENSIVE INCOME
The following table presents the components of the Company's accumulated other
comprehensive income (loss) for the years ended December 31, 2002, 2001 and 2000
(in thousands):
66
FOR THE YEAR ENDED DECEMBER 31, 2002:
- -------------------------------------------------------------------------------------------------------------------------
BEFORE-TAX TAX (EXPENSE)
AMOUNT BENEFIT AFTER-TAX AMOUNT
- -------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments:
Change arising during year $ 10,467 $ (3,664) $ 6,803
Unrealized gains on securities:
Unrealized holding gains arising during the year 139,795 (47,698) 92,097
Less: reclassification adjustment for losses realized
in net income (14,651) 3,893 (10,758)
-------- -------- --------
Net unrealized gains 154,446 (51,591) 102,855
-------- -------- --------
Other comprehensive income $164,913 $(55,255) $109,658
======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2001:
- -------------------------------------------------------------------------------------------------------------------------
BEFORE-TAX TAX (EXPENSE)
AMOUNT BENEFIT AFTER-TAX AMOUNT
- -------------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments:
Change arising during year $ 15,045 $ (5,266) $ 9,779
Unrealized gains on securities:
Unrealized holding gains arising during the year (5,193) (136) (5,329)
Less: reclassification adjustment for losses realized
in net income (68,431) 21,185 (47,246)
-------- -------- --------
Net unrealized gains 63,238 (21,321) 41,917
-------- -------- --------
Other comprehensive income $ 78,283 $(26,587) $ 51,696
======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000:
- -------------------------------------------------------------------------------------------------------------------------
BEFORE-TAX TAX (EXPENSE)
AMOUNT BENEFIT AFTER-TAX 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
======== ======== ========
- -------------------------------------------------------------------------------------------------------------------------
A summary of the components of net unrealized appreciation (depreciation) of
balances carried at fair value is as follows (in thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Change in net unrealized appreciation (depreciation) on:
Fixed maturity securities available for sale $ 168,732 $ 63,555 $ 147,598
Other investments (541) 1,138 1,592
Effect of unrealized appreciation (depreciation) on:
Deferred policy acquisition costs (13,739) (1,266) (8,716)
Other (6) (189) 629
---------- --------- ---------
Net unrealized appreciation (depreciation) $ 154,446 $ 63,238 $ 141,103
========== ========= =========
67
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 over a number of
years as the level of business diminishes. The Company will report a loss to the
extent claims exceed established reserves.
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.
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. 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. In
particular, over the past several years a number of disputes have arisen in the
accident and health reinsurance markets with respect to London market personal
accident excess of loss ("LMX") reinsurance programs that involved alleged
"manufactured" claims spirals designed to transfer claims losses to higher-level
reinsurance layers. The Company is currently a party to arbitrations that
involve some of these LMX reinsurance programs. The Company and other involved
reinsurers and retrocessionaires have raised substantial defenses upon which to
contest these claims, including defenses based upon the failure of the ceding
company to disclose the existence of manufactured claims spirals. As a result,
there have been a significant number of claims for rescission, arbitration, and
litigation among a number of the parties involved in these various coverages.
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 indirect high-level common account coverages to other
reinsurers and retrocessionaires. To date, no such direct material exposures
have been identified. If any direct 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 rescission,
arbitration, or litigation. Thus, resolution of any disputes will likely take
several years.
While it is not feasible to predict the ultimate outcome of pending arbitrations
and litigation involving LMX reinsurance programs, any indirect workers'
compensation carve-out exposure, or other accident and health risks, or provide
reasonable ranges of potential losses, it is the opinion of management, after
consultation with counsel, 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 is currently a party to various litigation and arbitrations that
involve medical reinsurance arrangements, personal accident business, and
aviation bodily injury carve-out business. As of January 31, 2003, the ceding
companies involved in these disputes have raised claims that are $41.7 million
in excess of the amounts held in reserve 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. In addition, the Company is in the process of auditing ceding
companies which have indicated that they anticipate asserting claims in the
future against the Company that are $8.5 million in excess of the amounts held
in reserve by the Company. Depending upon the audit findings in these cases,
they could result in litigation or arbitrations in the future. While it is not
feasible to predict or determine the ultimate outcome of the pending litigation
or arbitrations or provide reasonable ranges of potential losses, it is the
opinion of management, after consultation with counsel, 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 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, 2002 and 2001 was $50.9 million and $55.3 million,
respectively. 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
68
rescission, 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 $3.3 million, $3.0 million, and $23.7
million for 2002, 2001, and 2000, respectively.
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.
69
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Reinsurance Group of America, Incorporated:
We have audited the accompanying consolidated balance sheets of Reinsurance
Group of America, Incorporated and subsidiaries (the "Company") as of December
31, 2002 and 2001, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also included the financial statement
schedules listed in the index at Item 15. 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
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 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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Reinsurance Group of America,
Incorporated and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, 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
St. Louis, Missouri
February 3, 2003
70
Report of Management Responsibility for Financial Statements
The consolidated balance sheets of Reinsurance Group of America, Incorporated
and subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of income, cash flows and stockholders' equity for the years ended
December 31, 2002, 2001 and 2000, 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
consolidated 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
consolidated 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/ A. Greig Woodring /s/ Jack B. Lay
A. Greig Woodring Jack B. Lay
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
/s/ Todd C. Larson
Todd C. Larson
Senior Vice President, Controller and Treasurer
71
Quarterly Data (Unaudited)
Years Ended December 31
(in thousands, except per share data)
2002 First Second Third Fourth
----- ------ ----- ------
Revenues from continuing operations $ 560,212 $ 557,309 $ 550,154 $ 714,288
Revenues from discontinued operations $ 906 $ 1,365 $ 604 $ 428
Income from continuing operations before income taxes $ 45,191 $ 45,065 $ 54,030 $ 49,692
Income from continuing operations $ 29,036 $ 28,924 $ 34,723 $ 35,780
Loss from discontinued operations (1,256) (873) (1,135) (2,393)
--------- ---------------------------------
Net income $ 27,780 $ 28,051 $ 33,588 $ 33,387
Total outstanding common shares - end of period 49,302 49,355 49,365 49,457
BASIC EARNINGS PER SHARE
Continuing operations $ 0.59 $ 0.59 $ 0.70 $ 0.72
Discontinued operations (0.03) (0.02) (0.02) (0.04)
--------- ---------------------------------
Net Income $ 0.56 $ 0.57 $ 0.68 $ 0.68
DILUTED EARNINGS PER SHARE
Continuing operations $ 0.59 $ 0.58 $ 0.70 $ 0.72
Discontinued operations (0.03) (0.02) (0.02) (0.05)
--------- ---------------------------------
Net Income $ 0.56 $ 0.56 $ 0.68 $ 0.67
Dividends per share on common stock $ 0.06 $ 0.06 $ 0.06 $ 0.06
Market price of common stock
Quarter end $ 31.12 $ 30.69 $ 25.78 $ 27.08
Common stock price, high 33.38 33.11 31.77 28.45
Common stock price, low 24.40 29.58 24.60 23.95
2001 First Second Third Fourth
---------- ---------- ---------- ----------
Revenues from continuing operations $ 493,655 $ 465,527 $ 458,116 $ 550,986
Revenues from discontinued operations $ (428) $ 1,399 $ 635 $ 1,411
Income (loss) from continuing operations before income taxes $ 35,682 $ 50,138 $ 12,969 $ (32,360)
Income (loss) from continuing operations $ 21,642 $ 30,514 $ 8,985 $ (21,240)
Loss from discontinued operations - - - (6,855)
--------- --------- --------- ---------
Net income (loss) $ 21,642 $ 30,514 $ 8,985 $ (28,095)
Total outstanding common shares - end of period 49,391 49,405 49,475 49,527
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.44 $ 0.62 $ 0.18 $ (0.43)
Discontinued operations - - - (0.14)
--------- --------- --------- ---------
Net Income (loss) $ 0.44 $ 0.62 $ 0.18 $ (0.57)
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.43 $ 0.61 $ 0.18 $ (0.43)
Discontinued operations - - - (0.14)
--------- --------- --------- ---------
Net Income (loss) $ 0.43 $ 0.61 $ 0.18 $ (0.57)
Dividends per share on common stock $ 0.06 $ 0.06 $ 0.06 $ 0.06
Market price of common stock
Quarter end $ 38.34 $ 37.77 $ 34.05 $ 33.28
Common stock price, high 41.93 39.53 39.36 36.23
Common stock price, low 29.23 32.33 27.95 27.90
Reinsurance Group of America, Incorporated common stock is traded on the New
York Stock Exchange (NYSE) under the symbol "RGA". There were 103 stockholders
of record of RGA's common stock on March 1, 2003.
72
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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 and Mr. St-Amour, each individual holds the same position at RGA,
RCM and RGA Reinsurance.
David B. Atkinson, 49, became President and Chief Executive Officer of
RGA Reinsurance Company in January 1998. Mr. Atkinson has served 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 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 several RGA subsidiaries.
Todd C. Larson, 39, 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 that position was an
accountant for KPMG LLP from 1985 through 1993. Mr. Larson also serves as a
director and officer of several RGA subsidiaries.
Jack B. Lay, 48, 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 several RGA subsidiaries.
Andre St-Amour, 52, is an Executive Vice President 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. Mr. St-Amour also serves as a director and officer of
several RGA subsidiaries.
Paul A. Schuster, 49, 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. Mr. Schuster also serves as a
director and officer of several RGA subsidiaries.
73
James E. Sherman, 49, 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 from 1995 until December
31, 2000. Mr. Sherman also serves as an officer of several RGA subsidiaries.
Graham S. Watson, 53, is Executive Vice President, International and
Chief Marketing Officer of RGA, and Chief Executive Officer of RGA International
Corporation. 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 several RGA subsidiaries.
A. Greig Woodring, 51, President and Chief Executive Officer of the
Company. Mr. Woodring also is an executive officer of General American Life
Insurance Company ("General American"). He headed General American's reinsurance
business from 1986 until the Company's formation in December 1992. He also
serves as a director and officer of a number of subsidiaries of the 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
AND RELATED STOCKHOLDERS MATTERS
Information of this subject is found in the Proxy Statement under the
captions "Securities Ownership of Directors, Management and Certain Beneficial
Owners", "Nominees and Continuing Directors", and "Equity Compensation Plan
Information" 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.
Item 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Within 90 days
prior to the date of filing this report, the Company evaluated, under the
supervision and with the participation of the Company's Disclosure Committee and
the Company's management, including the Chief Executive Officer and the Chief
Financial Officer, the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and
15d-14(c) under the Securities Exchange Act of 1934, as amended) are effective.
(b) Changes and Internal Controls. Subsequent to the date of that
evaluation, there have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls and
there were no corrective actions with regard to significant deficiencies and
material weaknesses.
74
PART IV
Item 15. 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 Stockholders' Equity 45
Consolidated Statements of Cash Flows 46
Notes to Consolidated Financial Statements 47-69
Independent Auditors' Report 70
Quarterly Data (unaudited) 72
2. Schedules, Reinsurance Group of America, Incorporated and
Subsidiaries
Schedule Page
I Summary of Investments 76
II Condensed Financial Information of the Registrant 77
III Supplementary Insurance Information 78-79
IV Reinsurance 80
V Valuation and Qualifying Accounts 81
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.
3. Exhibits
See the Index to Exhibits on page 85.
(b) Reports on Form 8-K during the three months ended December 31, 2002:
None.
75
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002
(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 $ 410.1 $ 422.0 $ 422.0
Foreign governments (2) 522.3 595.5 595.5
Public utilities 341.9 373.2 373.2
All other corporate bonds 2,032.0 2,087.2 2,087.2
---------- ---------- ----------
Total fixed maturities 3,306.3 3,477.9 3,477.9
---------- ---------- ----------
Equity securities 4.2 3.7 3.7
Preferred stock 99.7 99.9 99.9
Mortgage loans on real estate 227.5 XXX 227.5
Policy loans 841.1 XXX 841.1
Funds withheld at interest 1,975.1 XXX 1,975.1
Short-term investments 4.3 XXX 4.3
Other invested assets 18.3 20.7 20.7
---------- ----------
Total investments $ 6,476.5 XXX $ 6,650.2
========== ==========
(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 $0.6362/C$1.00
Argentina peso $0.2976/A$1.00
Australian dollar $0.5616/$1.00 Aus
Great British Pound $1.6100/(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.
76
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(IN THOUSANDS)
CONDENSED BALANCE SHEETS 2002 2001 2000
Assets:
Fixed maturity securities (available for sale) $ 7,544 $ 322
Short-term investments - 10,502
Cash and cash equivalents 10,719 136,354
Investment in subsidiaries 1,457,791 1,103,589
Other assets 219,806 234,586
-------------------------------
Total assets $ 1,695,860 $ 1,485,353
===============================
Liabilities and stockholders' equity:
Long-term debt $ 464,333 $ 464,006
Other liabilities 9,064 15,759
Stockholders' equity 1,222,463 1,005,588
-------------------------------
Total liabilities and stockholders' equity $ 1,695,860 $ 1,485,353
===============================
CONDENSED STATEMENTS OF INCOME
Interest income $ 20,412 $ 16,879 $ 14,334
Realized investments gains (losses), net 2,942 - (8,981)
Operating expenses (3,107) (2,757) (1,985)
Interest expense (34,685) (16,977) (16,458)
---------------------------------------------------
Loss before income tax and undistributed earnings of subsidiaries (14,438) (2,855) (13,090)
Income tax expense (benefit) (7,471) 4,158 (472)
---------------------------------------------------
Net loss before undistributed earnings of subsidiaries (6,967) (7,013) (12,618)
Equity in undistributed earnings of subsidiaries 129,773 40,059 90,287
---------------------------------------------------
Net income $ 122,806 $ 33,046 $ 77,669
===================================================
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 122,806 $ 33,046 $ 77,669
Equity in earnings (losses) of subsidiaries (129,773) (40,059) (90,287)
Other, net 7,195 2,782 1,276
---------------------------------------------------
Net cash provided by (used in) operating activities 228 (4,231) (11,342)
---------------------------------------------------
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 278,744 - -
Purchases of fixed maturity securities available for sale (283,759) - -
Change in short-term investments 10,502 (3,017) 13,813
Capital contributions to subsidiaries (115,761) (123,346) (58,375)
---------------------------------------------------
Net cash used in investing activities (110,274) (126,363) (39,903)
---------------------------------------------------
Financing activities:
Dividends to stockholders (11,854) (11,855) (11,900)
Reissuance (acquisition) of treasury stock, net (3,735) 4,684 (19,173)
Proceeds from long-term debt borrowings, net - 206,113 80,000
Proceeds from warrant / private placement offering - 66,915 -
---------------------------------------------------
Net cash provided by financing activities (15,589) 265,857 48,927
---------------------------------------------------
Net change in cash and cash equivalents (125,635) 135,263 (2,318)
Cash and cash equivalents at beginning of year 136,354 1,091 3,409
---------------------------------------------------
Cash and cash equivalents at end of year $ 10,719 $ 136,354 $ 1,091
===================================================
77
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
As of December 31,
===========================================================================================
Future Policy Benefits and
Deferred Policy Interest-Sensitive Other Policy Claims and
Acquisition Costs Contract Liabilities Benefits Payable
-------------------------------------------------------------------------------------------
Assumed Ceded Assumed Ceded Assumed Ceded
- --------------------------------------------------------------------------------------------------------------------------------
2001
U.S. operations $ 499,892 $ (52,819) $ 3,504,098 $ (197,836) $ 418,595 $ (42,372)
Canada operations 98,406 (1,096) 726,812 (66,272) 64,076 (34,378)
Europe & South Africa operations 131,551 (67) 34,686 7,349 27,327 3,927
Asia Pacific operations 103,098 (6,724) 95,718 (4,699) 35,286 (3,780)
Latin America operations 28,024 54 38,317 1,029 73,248 188
Discontinued operations - - 27,410 (1,695) 31,550 (1,966)
-------------------------------------------------------------------------------------------
Total $ 860,971 $ (60,652) $ 4,427,041 $ (262,124) $ 650,082 $ (78,381)
=========== =========== =========== =========== =========== ===========
2002
U.S. operations $ 658,354 $ (48,575) $ 4,727,994 $ (214,731) $ 487,681 $ (29,829)
Canada operations 114,359 (912) 846,768 (78,167) 33,421 (2,081)
Europe & South Africa operations 237,731 (18,178) 100,458 (5,548) 90,472 (3,869)
Asia Pacific operations 140,451 (9,654) 119,376 (9,717) 73,790 (8,969)
Latin America operations 11,360 - 22,274 (23) 46,889 784
Discontinued operations - - 26,634 (1,489) 27,913 (2,202)
-------------------------------------------------------------------------------------------
Total $ 1,162,255 $ (77,319) $ 5,843,504 $ (309,675) $ 760,166 $ (46,166)
=========== =========== =========== =========== =========== ===========
78
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
--------------------------------------------------------------------------
2000
U.S. operations $ 1,038,872 $ 228,652 $ (895,850) $ (155,558) $ (53,012)
Canada operations 176,326 61,950 (172,180) (11,181) (14,084)
Europe & South Africa operations 29,690 2,056 (20,151) (2,793) (14,724)
Asia Pacific operations 94,282 4,628 (56,377) (33,105) (10,298)
Latin America operations 64,897 19,782 (63,773) (2,197) (16,509)
Corporate (1) 9,437 1 - (28,886)
--------------------------------------------------------------------------
Total $ 1,404,066 $ 326,505 $(1,208,330) $ (204,834) $ (137,513)
=========== =========== =========== =========== ===========
2001
U.S. operations $ 1,222,922 $ 243,988 $(1,091,081) $ (205,314) $ (46,633)
Canada operations 173,269 65,006 (173,098) (26,625) 3,615
Europe & South Africa operations 94,800 1,536 (59,429) (10,177) (27,812)
Asia Pacific operations 119,702 3,935 (75,595) (38,991) (9,060)
Latin America operations 51,069 14,684 (89,311) (9,102) (14,365)
Corporate - 11,410 - - (29,156)
--------------------------------------------------------------------------
Total $ 1,661,762 $ 340,559 $(1,488,514) $ (290,209) $ (123,411)
=========== =========== =========== =========== ===========
2002
U.S. operations $ 1,399,791 $ 271,155 $(1,230,990) $ (221,064) $ (68,152)
Canada operations 181,224 70,518 (187,468) (15,427) (10,189)
Europe & South Africa operations 226,846 1,009 (130,975) (22,096) (74,333)
Asia Pacific operations 160,197 7,059 (110,806) (29,317) (22,912)
Latin America operations 12,608 4,201 (5,940) (17,458) 6,921
Corporate - 20,570 - - (47,779)
--------------------------------------------------------------------------
Total $ 1,980,666 $ 374,512 $(1,666,179) $ (305,362) $ (216,444)
=========== =========== =========== =========== ===========
79
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
--------- ------------ ------------ ------------- ----------
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%
Europe & South Africa
operations 0.1 0.8 30.4 29.7 102.36%
Asia Pacific operations - 6.4 100.7 94.3 106.79%
Latin America operations 23.2 1.2 42.9 64.9 66.10%
----------------------------------------------------
Total $ 26.1 $ 222.1 $ 1,600.1 $ 1,404.1 113.96%
======== ============ ============ ============= ======
2001
Life insurance in force $ 73 $ 117,748 $ 615,990 $ 498,315 123.61%
Premiums
U.S. operations $ 2.9 $ 143.8 $ 1,363.8 $ 1,222.9 111.52%
Canada operations - 26.9 200.2 173.3 115.52%
Europe & South Africa
operations 0.1 1.4 96.1 94.8 101.37%
Asia Pacific operations - 15.9 135.6 119.7 113.28%
Latin America operations 8.4 0.8 43.5 51.1 85.13%
----------------------------------------------------
Total $ 11.4 $ 188.8 $ 1,839.2 $ 1,661.8 110.68%
========= ============ ============ ============= ======
2002
Life insurance in force $ 75 $ 162,395 $ 758,875 $ 596,555 127.21%
Premiums
U.S. operations $ 2.9 $ 259.6 $ 1,656.5 $ 1,399.8 118.34%
Canada operations - 29.0 210.2 181.2 116.00%
Europe & South Africa
operations - 45.2 272.0 226.8 119.93%
Asia Pacific operations - 15.2 175.4 160.2 109.49%
Latin America operations 2.1 0.8 11.3 12.6 89.68%
----------------------------------------------------
Total $ 5.0 $ 349.8 $ 2,325.4 $ 1,980.6 117.41%
========= ============ ============ ============= ======
80
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
- -----------------------------------------------------------------------------------------------------------
2000
Mortgage loan
valuation allowance $ 0.7 - - 0.5 $ 0.2
Allowance on income
taxes $ 3.7 2.5 - - $ 6.2
2001
Mortgage loan
valuation allowance $ 0.2 - - 0.2 $ 0.0
Allowance on income
taxes $ 6.2 7.5 - - $ 13.7
2002
Mortgage loan
valuation allowance $ - - - - $ -
Allowance on income
taxes $ 13.7 - - 1.2 $ 12.5
Deductions represent normal activity associated with the Company's underlying
mortgage loan portfolio and the release of income tax valuation allowances.
81
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 18, 2003
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 18, 2003.
Signatures Title
---------- -----
/s/ Stewart G. Nagler March 18, 2003* Chairman of the Board and Director
- -----------------------------------------------
Stewart G. Nagler
/s/ A. Greig Woodring March 18, 2003 President, Chief Executive Officer,
- ----------------------------------------------- and Director
A. Greig Woodring (Principal Executive Officer)
/s/ Mary Ann Brown March 18, 2003* Director
- -----------------------------------------------
Mary Ann Brown
/s/ J. Cliff Eason March 18, 2003* Director
- -----------------------------------------------
J. Cliff Eason
/s/ Stuart I. Greenbaum March 18, 2003* Director
- -----------------------------------------------
Stuart I. Greenbaum
/s/ Alan C. Henderson March 18, 2003* Director
- -----------------------------------------------
Alan C. Henderson
/s/ William A. Peck, M.D. March 18, 2003* Director
- -----------------------------------------------
William A. Peck, M.D.
/s/ Joseph A. Reali March 18, 2003* Director
- -----------------------------------------------
Joseph A. Reali
/s/ Jack B. Lay March 18, 2003 Executive Vice President and Chief
- ----------------------------------------------- Financial Officer (Principal Financial
Jack B. Lay and Accounting Officer)
By: /s/ Jack B. Lay March 18, 2003
- -----------------------------------------------
Jack B. Lay Attorney-in-fact
82
CEO CERTIFICATION
I, A. Greig Woodring, certify that:
1. I have reviewed this annual report on Form 10-K of Reinsurance Group of
America, Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 18, 2003 /s/ A. Greig Woodring
A. Greig Woodring
President & Chief Executive Officer
83
CFO CERTIFICATION
I, Jack B. Lay, certify that:
1. I have reviewed this annual report on Form 10-K of Reinsurance Group of
America, Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 18, 2003 /s/ Jack B. Lay
Jack B. Lay
Executive Vice President & Chief Financial
Officer
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"),
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
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"),
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
2.3 Reinsurance Agreement dated as of January 1, 1993 between RGA Reinsurance Company ("RGA Reinsurance",
formerly "Saint Louis Reinsurance Company") and General American"), 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
3.1 Restated Articles of Incorporation of Reinsurance Group of America, Incorporated ("RGA"), 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), incorporated by reference to Amendment No. 1 to Form 10-Q for the quarter ended March 31,
1997 (No. 1-11848) filed on May 21, 1997 at the corresponding exhibit
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 May 21, 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. 333-51777) filed on June 4, 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
85
Exhibit
Number Description
- ------ -----------
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
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), filed 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
4.19 Registration Rights agreement dated as of April 15, 1993 between RGA and General American, 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
4.20 Registration Rights agreement dated as of November 23, 1999 between RGA and MetLife, incorporated by
reference to Exhibit 99.3 to Current Report on Form 8-K dated November 23, 1999 (No. 1-11848), filed on
December 6, 1999
86
Exhibit
Number Description
- ------ -----------
10.1 Marketing Agreement dated as of January 1, 1993 between RGA Reinsurance and General American,
incorporated by reference to Amendment No. 2 to Registration Statement Form S-1 (No. 33-58960), filed on
April 29, 1993 at the corresponding exhibit
10.2 Administrative Services Agreement dated as of January 1, 1993 between RGA and General American,
incorporated by reference to Amendment No. 2 to Registration Statement Form S-1 (No. 33-58960), filed on
April 29, 1993 at the corresponding exhibit
10.3 Management Agreement dated as of January 1, 1993 between RGA Canada and General American, 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 *
10.4 Standard Form of General American Automatic Agreement, 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
10.5 Standard Form of General American Facultative Agreement, 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
10.6 Standard Form of General American Automatic and Facultative YRT Agreement, 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
10.7 RGA Reinsurance Management Incentive Plan, as amended and restated effective November 1, 1996
incorporated by reference to Form 10-K for the year ended December 31, 1996 (No. 1-11848) filed on March
24, 1997, at the corresponding exhibit *
10.8 RGA Reinsurance Management Deferred Compensation Plan (ended January 1, 1995), 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 *
10.9 RGA Reinsurance Executive Deferred Compensation Plan (ended January 1, 1995), 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 *
10.10 RGA Reinsurance Executive Supplemental Retirement Plan (ended January 1, 1995), 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 *
10.11 RGA Reinsurance Augmented Benefit Plan (ended January 1, 1995), 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 *
87
Exhibit
Number Description
- ------ -----------
10.12 RGA Flexible Stock Plan as amended and restated effective November 1, 1996, incorporated by reference to
Form 10-K for the year ended December 31, 1996 (No. 1-11848) filed on March 24, 1997, at the
corresponding exhibit *
10.13 Form of Directors' Indemnification Agreement, 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
10.14 RGA Executive Performance Share Plan as amended and restated effective November 1, 1996, incorporated by
reference to Form 10-K for the year ended December 31, 1996 (No. 1-11848) filed on March 24, 1997, at the
corresponding exhibit *
10.15 RGA Flexible Stock Plan for Directors, incorporated by reference to Registration Statement on Form S-8
(No. 333-27167) filed on May 15, 1997, at the corresponding exhibit *
10.16 Employment Agreement dated April 6, 1992 between RGA Canada and Andre St-Amour, incorporated by reference
to Form 10-K for the year ended December 31, 1997 (No. 1-11848) filed on March 25, 1998, at the
corresponding exhibit *
10.17 Restricted Stock Award to A. Greig Woodring dated January 28, 1998, incorporated by reference to Form
10-Q/A Amendment No. 1 for the quarter ended March 31, 1998 (No. 1-11848) filed on May 14, 1998, at the
corresponding exhibit *
10.18 Credit Agreement dated as of May 24, 2000 between Reinsurance Group of America, Incorporated, as
borrower, the financial institutions listed on the signature pages thereof, The Bank of New York, as
Administrative Agent, Bank of America, N.A., as Syndication Agent, Fleet National Bank, as Documentation
Agent and Royal Bank of Canada, as Co-Agent, incorporated by reference to Exhibit 10.1 to Form 10-Q for
the quarter ended June 30, 2000 (No. 1-11848), filed August 11, 2000
10.19 Administrative Services Agreement, effective as of January 1, 1997, by and between RGA Reinsurance and
General American, incorporated by reference to Exhibit 10.24 to Current Report on Form 8-K dated
September 24, 2001 (File No. 1-11848), filed September 24, 2001
21.1 Subsidiaries of RGA
23.1 Consent of Deloitte & Touche LLP
24.1 Powers of Attorney for Ms. Brown and Messrs. Eason, Greenbaum, Henderson, Nagler, Peck, and Reali
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
* Represents a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this form pursuant to Item 15(c) of this Report.
88