Back to GetFilings.com
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, 2003
[ ] 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
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,
2003, as reported on the New York Stock Exchange was $659,226,979.
As of March 1, 2004, Registrant had outstanding 62,235,428 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2004
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, 2003, 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, 2003
INDEX
ITEM PAGE
NUMBER OF THIS FORM
- ------ ------------
PART I
1. BUSINESS........................................................................ 4
2. PROPERTIES...................................................................... 16
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................... 48
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................... 48
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................. 83
9A. CONTROLS AND PROCEDURES......................................................... 83
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................. 83
11. EXECUTIVE COMPENSATION.......................................................... 84
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................................. 84
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................. 85
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.......................................... 85
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............ 85
3
Item 1. BUSINESS
A. OVERVIEW
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company that was formed on December 31, 1992. As of December 31, 2003,
Equity Intermediary Company, a Missouri holding company, directly owned
approximately 51.9% of the outstanding shares of common stock of RGA. Equity
Intermediary Company is a wholly-owned subsidiary of MetLife, Inc., a New
York-based insurance and financial services holding company.
The consolidated financial statements include the assets, liabilities,
and results of operations of RGA, RGA Reinsurance Company ("RGA Reinsurance"),
RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life Reinsurance
Company of Canada ("RGA Canada"), RGA Americas Reinsurance Company, Ltd. ("RGA
Americas"), RGA Reinsurance Company of Australia, Limited ("RGA Australia") and
RGA Reinsurance UK Limited ("RGA UK") as well as several other subsidiaries
subject to an ownership position of greater than fifty percent (collectively,
the "Company").
The Company is primarily engaged in traditional life, asset-intensive,
and financial reinsurance. RGA and its predecessor, the Reinsurance Division of
General American Life Insurance Company ("General American"), have been engaged
in the business of life reinsurance since 1973. Approximately 76.3% of the
Company's 2003 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
Australia, Barbados, Hong Kong, India, Ireland, Japan, Mexico, South Africa,
South Korea, Spain, Taiwan and the United Kingdom. The Company is considered one
of the leading life reinsurers in the North American market based on amounts of
life reinsurance in force. As of December 31, 2003, the Company had
approximately $12.1 billion in consolidated assets.
Reinsurance is an arrangement under which an insurance company, the
"reinsurer," agrees to indemnify another insurance company, the "ceding
company," for all or a portion of the insurance risks underwritten by the ceding
company. Reinsurance is designed to (i) reduce the net liability on individual
risks, thereby enabling the ceding company to increase the volume of business it
can underwrite, as well as increase the maximum risk it can underwrite on a
single life or risk; (ii) stabilize operating results by leveling fluctuations
in the ceding company's loss experience; (iii) assist the ceding company 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 last survivor insurance policies. Asset-intensive
reinsurance primarily refers to reinsurance of annuities and corporate-owned
life insurance. Financial reinsurance primarily involves assisting ceding
companies in meeting applicable regulatory requirements while enhancing the
ceding companies' financial strength and regulatory surplus position. Ceding
companies typically contract with more than one reinsurance 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 directly to the reinsurer. Reinsurers also may purchase reinsurance,
known as retrocession reinsurance, to cover their risk exposure. Reinsurance
companies enter into retrocession agreements for reasons similar to those that
drive primary insurers to purchase reinsurance.
Reinsurance generally is written on a facultative or 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 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. Under a yearly renewable
term treaty, the reinsurer assumes only the mortality or morbidity risk. Under a
4
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 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 may 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, 2003, these treaties
had approximately $308.4 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 $605.8 million were held
in trust for the benefit of certain subsidiaries of the Company to satisfy
collateral requirements for reinsurance business at December 31, 2003.
Additionally, securities with an amortized cost of $1,453.8 million, as of
December 31, 2003, 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. If RGA was ever required to perform under these obligations, the
risk to the consolidated company under the reinsurance treaties does not change;
however, additional capital may be required due to the change in jurisdiction of
the subsidiary reinsuring the business and may create a strain on liquidity.
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. Potential 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, 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. 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.
Prior to January 1, 2003, the Company aggregated the results of its
five main operational segments into three reportable segments: U.S., Canada, and
Other International. The Other International reportable segment formerly
included operations in Latin America, Asia Pacific, and Europe & South Africa.
Effective January 1, 2003, as a result of the
5
Company's declining presence in Argentina and changes in management
responsibilities for part of the Latin America region, the Other International
reportable segment no longer included Latin America operations. Latin America
results relating to the Argentine privatized pension business as well as direct
insurance operations in Argentina are now reported in the Corporate and Other
segment. The results for all other Latin America business, primarily traditional
life reinsurance business in Mexico, are reported as part of U.S. operations in
the Traditional sub-segment. Additionally, the remaining operations of the Other
International reportable segment, Asia Pacific and Europe & South Africa, are
now presented herein as separate reportable segments. Prior-year segment
information has been reclassified to conform to this new presentation. 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 income or loss before income taxes.
The U.S. operations represented 68.2% of the Company's consolidated net
premiums in 2003. 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 annuities and
corporate-owned life insurance. 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 8.1% of consolidated
net premiums in 2003, are conducted primarily through RGA Canada. The Canada
operations provide traditional individual life reinsurance, including preferred
underwriting products, as well as critical illness products.
The Company's Europe & South Africa operations represented 13.8% of
consolidated net premiums in 2003. This segment primarily 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. RGA 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 various other wholly-owned
subsidiaries. The Company opened a representative office in India during 2002 to
focus on the Indian market.
The Company's Asia Pacific operations represented 9.8% of the Company's
consolidated net premiums in 2003. The Company conducts reinsurance business in
the Asia Pacific region through branch operations in Hong Kong, Japan and New
Zealand, and representative offices in 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. The Company also holds a 30%
interest in Malaysian Life Reinsurance Group Berhad ("MLRe"). 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.
Corporate and Other operations include investment income on invested
assets not allocated to support segment operations and undeployed proceeds from
the Company's capital raising efforts, in addition to unallocated realized
investment gains or losses. General corporate expenses consist of unallocated
overhead and executive costs and interest expense related to debt and the $225.0
million, 5.75% mandatorily redeemable trust preferred securities. Additionally,
the Corporate and Other operations segment includes results from RGA Technology
Partners ("RTP"), a wholly-owned subsidiary that develops and markets technology
solutions for the insurance industry, the Company's Argentine privatized pension
business, which is currently in run-off, and an insignificant amount of direct
insurance operations in Argentina.
RGA Barbados and RGA Americas were formed and capitalized in 1995 and
1999, respectively, to provide reinsurance for a portion of certain business
assumed by various RGA operating subsidiaries and to assume reinsurance directly
from clients.
Intercorporate Relationships
The Company has direct policies and reinsurance agreements with MetLife
and certain of its subsidiaries. As of December 31, 2003, the Company had
reinsurance related assets and liabilities from these agreements totaling $175.0
million and $169.6 million, respectively. Prior-year comparable assets and
liabilities were $156.6 million and $190.1 million, respectively. Additionally,
the Company reflected net premiums of approximately $157.9 million, $172.8
million, and $149.3 million in 2003, 2002, and 2001, 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 $19.4 million,
$23.3 million, and $26.1 million in 2003, 2002, and 2001, respectively.
6
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 primarily the Company's strong franchise in the North American life
reinsurance market, high level of expertise in assessing mortality risk,
sustained earnings growth in its core businesses, and strong risk-adjusted
capitalization. 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. 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; General American Argentina Seguros
de Vida, S.A. ("GA Argentina"); RGA Barbados, and RGA Americas; 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 that 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.
The Company's insurance subsidiaries are required to file annual,
semi-annual, or quarterly statutory financial statements in each jurisdiction in
which they are licensed and may be subject to periodic examinations by the
insurance regulators of the jurisdictions in which each is licensed, authorized,
or accredited. RGA Reinsurance and RCM are currently being examined by the
Missouri Department of Insurance through the year ended December 31, 2002, and
the Company has not been informed of any material adverse findings to date. RGA
Canada was last examined by the Canadian Superintendent of Financial
Institutions for the year ended December 31, 2001. The report on this
examination contained no material adverse findings.
Although some of the rates and policy terms of U.S. direct insurance
agreements are regulated by state insurance departments, the rates, policy
terms, and conditions of reinsurance agreements generally are not subject to
regulation by any regulatory authority. However, the 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, liquidity and solvency issues, and, in some instances, has
resulted in new interpretation of existing law,
7
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. The State of Missouri requires 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 subject to
any deviations prescribed or permitted by the State of Missouri insurance
commissioner.
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 various jurisdictions also require certain
minimum capital levels, and subject the companies operating there to oversight
by the applicable regulatory bodies. The Company's operations 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.
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 its wholly-owned
subsidiary, 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. Additionally, dividends may
be paid only to the extent the insurer has unassigned surplus (as opposed to
contributed surplus). Pursuant to these restrictions, RCM's and RGA
Reinsurance's allowable dividends without prior approval for 2004 are
approximately $12.8 million and $56.1 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.
8
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 $58.9 million at
December 31, 2003.
RGA Americas and RGA Barbados do not have material restrictions on
their ability to pay dividends out of retained earnings. Dividend payments from
other subsidiaries are subject to the regulations in the country of domicile.
Default or Liquidation
In the event of a default on any debt that may be incurred by RGA or
the bankruptcy, liquidation, or other reorganization of RGA, the creditors and
stockholders of RGA will have no right to proceed against the assets of RCM, RGA
Reinsurance, RGA Canada, or other insurance or reinsurance company subsidiaries
of RGA. If RCM or RGA Reinsurance were to be liquidated, such liquidation would
be conducted by the Missouri Director of Insurance as the receiver with respect
to such insurance company's property and business. If RGA Canada were to be
liquidated, such liquidation would be conducted pursuant to the general laws
relating to the winding-up of Canadian federal companies. In both cases, all
creditors of such insurance company, including, without limitation, holders of
its reinsurance agreements and, if applicable, the various state guaranty
associations, would be entitled to payment in full from such assets before RGA,
as a direct or indirect stockholder, would be entitled to receive any
distributions made to it prior to commencement of the liquidation proceedings,
and, if the subsidiary was insolvent at the time of the distribution,
shareholders of RGA might likewise be required to refund dividends subsequently
paid to them.
In addition to RCM, RGA Reinsurance and RGA Canada, RGA 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
Corporate Risk Management
RGA has a Corporate Risk Management Department that reports to the chief
operating officer and provides quarterly updates to the board of directors. This
department is primarily responsible for managing, measuring and monitoring
risks, including establishing appropriate corporate risk tolerance levels.
9
Mortality 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. In the U.S., the Company retains a maximum
of $6.0 million of coverage per individual life. For other countries,
particularly those with higher risk factors or smaller books of business, 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, 2003, 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, letters of credit or trust assets have 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 material 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 current program, which began August 13, 2003
and expires August 12, 2004, provides up to $50 million of coverage per
occurrence for events involving 40 or more deaths. Under this program, RGA
retains the first $50 million in claims, the catastrophe program covers the next
$50 million in claims, and RGA retains all claims in excess of $100 million.
Acts of terrorism are covered except when arising from the use of nuclear,
chemical, or biological weapons. The insurance is provided through seven
insurance companies and seven Lloyds Syndicates with no single insurer providing
more than $10 million of 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 in the
U.S. and six in various international locations, as well as a medical
consultant.
Automatic. The Company's management determines whether to write
automatic reinsurance business by considering many factors, including the types
of risks to be covered; the ceding company's retention limit and binding
authority, product, and pricing assumptions; and the ceding company's
underwriting standards, financial strength and distribution systems. For
automatic business, the Company ensures that the underwriting standards and
procedures of its ceding companies are compatible with those of RGA. To this
end, the Company conducts periodic reviews of the ceding companies' underwriting
and claims personnel and procedures.
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
10
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 Scottish Re Group Ltd.
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 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. The Company believes its
primary international competitors are Swiss Re Life and Health Ltd., General Re,
Munich Reinsurance Company and GE Frankona Reinsurance Limited. Competition is
based primarily on the basis of price, service, and financial strength.
Employees
As of December 31, 2003, the Company had 702 employees located in the
United States, Canada, Argentina, Mexico, Hong Kong, South 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, joint and last
survivor insurance, critical illness, 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,
2003 2002 2001
-------------------- -------------------- --------------------
Amount % Amount % Amount %
---------- ----- --------- ----- ---------- -----
GROSS PREMIUMS:
U.S. $ 2,013.4 68.9 $ 1,671.7 71.7 $ 1,382.4 74.7
Canada 238.8 8.2 210.2 9.0 200.2 10.8
Europe & South Africa 385.7 13.2 272.0 11.7 96.2 5.2
Asia Pacific 281.0 9.6 175.4 7.5 135.6 7.3
Corporate and Other 3.5 0.1 1.1 0.1 36.2 2.0
---------- ----- ---------- ----- ---------- -----
Total $ 2,922.4 100.0 $ 2,330.4 100.0 $ 1,850.6 100.0
========== ===== ========== ===== ========== =====
NET PREMIUMS:
U.S. $ 1,801.8 68.2 $ 1,411.5 71.3 $ 1,238.1 74.5
Canada 214.7 8.1 181.2 9.1 173.3 10.4
Europe & South Africa 364.2 13.8 226.9 11.5 94.8 5.7
Asia Pacific 259.0 9.8 160.2 8.1 119.7 7.2
Corporate and Other 3.5 0.1 0.9 - 35.9 2.2
---------- ----- ---------- ----- ---------- -----
Total $ 2,643.2 100.0 $ 1,980.7 100.0 $ 1,661.8 100.0
========== ===== ========== ===== ========== =====
The Company executed a coinsurance agreement with Allianz Life
Insurance Company of North America ("Allianz Life") during 2003. This agreement
contributed $246.1 million in gross and net premiums to the U.S. segment.
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,
2003 2002 2001
--------------------- ----------------- ------------------
Amount % Amount % Amount %
----------- ----- --------- ----- ---------- -----
U.S. $ 896.8 71.6 $ 544.7 71.8 $ 475.6 77.2
Canada 84.0 6.7 64.5 8.5 55.8 9.1
Europe & South Africa 153.4 12.3 92.7 12.2 40.5 6.6
Asia Pacific 118.0 9.4 57.0 7.5 44.1 7.1
---------- ----- -------- ----- -------- -----
Total $ 1,252.2 100.0 $ 758.9 100.0 $ 616.0 100.0
========== ===== ======== ===== ======== =====
The coinsurance agreement with Allianz Life provided $278.0 billion in
reinsurance inforce to the U.S. segment at December 31, 2003.
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 $89.9 billion, $91.3 billion,
and $98.0 billion were released in 2003, 2002, and 2001, 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,
2003 2002 2001
--------------------- ----------------- ------------------
Amount % Amount % Amount %
----------- ----- --------- ----- ---------- -----
U.S. $ 423.4 77.8 $ 150.3 65.3 $ 109.7 64.1
Canada 11.0 2.0 11.3 4.9 8.5 5.0
Europe & South Africa 65.3 12.0 56.3 24.5 33.6 19.6
Asia Pacific 44.7 8.2 12.1 5.3 19.3 11.3
---------- ----- -------- ----- -------- -----
Total $ 544.4 100.0 $ 230.0 100.0 $ 171.1 100.0
========== ===== ======== ===== ======== =====
The agreement with Allianz Life increased new business volume by $287.2
billion during 2003 to the U.S. segment.
Additional information regarding the operations of the Company's
segments and geographic operations is contained in Note 17 to the Consolidated
Financial Statements.
U.S. OPERATIONS
The U.S. operations represented 68.2%, 71.3%, and 74.5% of the
Company's net premiums in 2003, 2002, and 2001, respectively. The U.S.
operations market traditional life reinsurance, reinsurance of asset-intensive
products and financial reinsurance primarily to the largest U.S. life insurance
companies.
Traditional Reinsurance
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
12
under many different rate scales, with rates often tailored to suit the
underlying product and the needs of the ceding company. Premiums typically vary
for smokers and non-smokers, males and females, and may include a preferred
underwriting class discount. Reinsurance premiums are paid in accordance with
the treaty, regardless of the premium mode for the underlying primary insurance.
This business is made up of facultative and automatic treaty business.
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 each risk 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.
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 2003,
2002, and 2001, approximately 21.1%, 21.6%, and 21.8%, 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.
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.
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, 2003, reinsurance of such
policies was reflected in interest-sensitive contract reserves of approximately
$968.1 million and policy loans of $902.9 million.
Asset-Intensive Reinsurance
Asset-intensive reinsurance primarily concentrates on the investment
risk within underlying annuities and corporate-owned life insurance policies.
Most of these agreements are coinsurance, coinsurance funds withheld, or
modified coinsurance of primarily investment risk 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, 2003, reinsurance of such business was reflected in
interest-sensitive contract liabilities of approximately $3.2 billion.
Annuities are normally limited by size of the deposit from any single
depositor. Corporate-owned life insurance normally involves a large number of
insureds associated with each deposit, and the Company's underwriting guidelines
limit the size of any single deposit. The individual policies associated with
any single 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" and Note 5 to the Consolidated Financial Statements for
additional information.
The Company targets highly rated, financially secure companies as
clients for asset-intensive business. These companies may wish to limit their
own exposure to certain products. Ongoing asset/liability analysis is required
for the management of asset-intensive business. The Company performs this
analysis internally, in conjunction with asset/liability analysis performed by
the ceding companies.
13
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. We estimate that over 75% of the top
100 U.S. life insurance companies, based on premiums, are clients. 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 2003,
48 non-affiliated clients generated annual gross premiums of $5.0 million or
more and the aggregate gross premiums from these clients represented
approximately 84.0% of 2003 U.S. life gross premiums. For the purpose of this
disclosure, companies that are within the same holding company structure are
combined.
The 2003 reinsurance agreement with Allianz Life Insurance Company of
North America ("Allianz Life") resulted in gross premiums greater than 10% of
U.S. life gross premiums. Allianz Life ceded $246.1 million or 12.2% of gross
premiums to the U.S. operations in 2003. In addition, there were two other
non-affiliated U.S. clients ceding more than 5% of U.S. life gross premiums.
These two clients ceded $235.9 million or 11.7% of gross premiums for the U.S.
operations in 2003.
MetLife and its affiliates generated approximately $232.9 million or
11.6% of U.S. operations gross premiums in 2003.
Operations
During 2003, substantially all U.S. life business was obtained
directly, rather than through brokers. The Company has an experienced marketing
staff that works to provide responsive service and maintain existing
relationships.
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 departments review and verify reinsurance claims,
obtain the information necessary to evaluate claims, and arrange 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. The claims departments also investigate claims
generally for evidence of misrepresentation in the policy application and
approval process. In addition, the claims departments monitor both specific
claims and the overall claims handling procedures 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 8.1%, 9.1%, and 10.4% of the
Company's net premiums in 2003, 2002, and 2001, respectively. In 2003, the
Canadian life operations assumed $11.0 billion in new business, all of which
resulted from recurring new business. Approximately 83% of the 2003 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 critical illness products.
Approximately 94% of RGA Canada's premium income is derived from life
reinsurance products.
Clients include most of the major life insurers in Canada, although the
number of life insurers is much smaller compared to the U.S. During 2003, two
clients accounted for $96.0 million or 40.2% of gross premiums. Four other
clients individually accounted for more than 5% of Canada's gross premiums.
Together, these four clients represented 27.2% 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-one people
at the Montreal office and thirteen 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 13.8%, 11.5%, and 5.7%
of the Company's net premiums in 2003, 2002, and 2001, respectively. This
segment provides primarily life reinsurance to clients located in Europe
(primarily in the United Kingdom and Spain), South Africa, and more recently,
India. The principal type of business has been reinsurance of a variety of life
products through yearly renewable term and coinsurance agreements and the
reinsurance of accelerated critical illness coverage, which pays on the earlier
of death or diagnosis of a pre-defined critical illness. These agreements may be
either facultative or automatic agreements. During 2003, three clients of the
Company's U.K. operations generated approximately $287.3 million, or 74.5% 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
risks of individual life products on a quota share basis creating reinsurance
opportunities. The reinsurers present in the market include the large global
companies with which RGA also competes in other markets.
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, and has gained an increasing share in the automatic market. Life
reinsurance is also provided on group cases. 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 thirty
of the leading companies covering both individual and group life business. In
2000, a representation office was opened in Madrid to market life reinsurance
support on individual and group business.
In 2002, RGA opened a representative office in India marketing life
reinsurance support on individual and group business. The operation has
established business relations with a number of the local life insurers. Staff
primarily from the South African operation were identified and assigned the
responsibility to help develop and support the representative office in India.
RGA'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 U.S.
operations. Divisional management through RGA International Corporation (Nova
Scotia ULC) ("RGA International") based in Toronto, provides additional services
for existing and future markets. In total, this segment employs twenty people in
Toronto, thirty-two people in the United Kingdom, forty people in South Africa,
six people in Spain and two people in India.
ASIA PACIFIC OPERATIONS
The Asia Pacific operations represented 9.8%, 8.1%, and 7.2% of the
Company's net premiums in 2003, 2002, and 2001, respectively. The Company has a
presence in the Asia Pacific region with licensed branch offices in Hong Kong,
15
Japan, and New Zealand, and representative offices in Taiwan and South Korea,
and a regional office in Sydney. The Company also established a reinsurance
subsidiary in Australia in January 1996. During 2003, two clients, one each in
Australia and Hong Kong, generated approximately $62.3 million, or 22.2% of the
total gross premiums for the Asia Pacific operations.
Within the Asia Pacific segment, eight people are on staff in the Hong
Kong office, sixteen people are on staff in the Japan office, five people are on
staff in the Taiwan office, five people are on staff in the South Korean Office,
five people are on staff in the Sydney regional office, twelve are on staff at
the St. Louis office, and RGA Australian Holdings maintains a staff of
thirty-two 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 U.S. 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 U.S. and Sydney regional operations.
CORPORATE AND OTHER
Corporate and Other operations include investment income from invested
assets not allocated to support segment operations and undeployed proceeds from
the Company's capital raising efforts, in addition to unallocated realized
investment gains or losses. General corporate expenses consist of unallocated
overhead and executive costs and interest expense related to debt and the $225.0
million, 5.75% mandatorily redeemable trust preferred securities. Additionally,
the Corporate and Other operations segment includes results from RGA Technology
Partners ("RTP"), a wholly-owned subsidiary that develops and markets technology
solutions for the insurance industry, the Company's Argentine privatized pension
business, which is currently in run-off, and an insignificant amount of direct
insurance operations in Argentina. The Company ceased renewal of reinsurance
treaties associated with privatized pension contracts in Argentina in 2001
because of adverse experience on the business.
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.
D. FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS
The Company's foreign operations are primarily in Canada, the Asia
Pacific region, Europe and 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.
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.
Item 2. Properties
U.S. operations and Corporate and Other operations
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 a total of approximately 1,400 square
feet of office space in Norwalk, Connecticut and North Palm Beach, Florida.
These premises are leased through December 2004, at an annual rent of
approximately $36,000. RGA Reinsurance also leases approximately 2,000 square
feet of office space in Mexico at an annual rent of approximately $58,000. GA
Argentina, part of
16
the Corporate and Other operations, conducts business from approximately 7,500
square feet of office space in Buenos Aires. These premises are leased through
July 2005, at annual rents of approximately $36,000.
Canada operations
RGA Canada conducts business from approximately 26,000 square feet of
office space in Montreal and Toronto, Canada. These premises are leased through
November 2016, at annual rents ranging from approximately $365,000 to $542,000.
These rents are net of expected sublease income of approximately $300,000
annually through 2010.
Other International operations
RGA Reinsurance also conducts business from a total of approximately
18,000 square feet of office space in Madrid, Hong Kong, Tokyo, Taipei, Seoul,
and Mumbai. These premises are leased through April 2008, at annual rents of
approximately $874,000. RGA International conducts business from approximately
10,000 square feet of office space in Toronto. These premises are leased through
August 2007, at annual rents of approximately $409,000. RGA UK conducts business
from approximately 6,400 square feet of office space in London. These premises
are leased through April 2010, at annual rents of approximately $746,000. 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 $190,000. RGA Australia conducts business
from approximately 8,600 square feet of office space in Sydney. These premises
are leased through December 2009, at annual rents of approximately $285,000.
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 its discontinued accident and health business, including medical
reinsurance arrangements, personal accident business, and aviation bodily injury
carve-out business. As of January 31, 2004, the ceding companies involved in
these disputes have raised claims, or established reserves that may result in
claims, that are $62.6 million in excess of the amounts held in reserve by the
Company. The Company generally has little information regarding any reserves
established by the ceding companies, and it is possible that any such reserves
could be increased in the future. 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 $12.5 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 2003.
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".
The following table summarizes information regarding securities
authorized for issuance under equity compensation plans:
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, warrants options, warrants and rights future issuance under equity
and rights compensation plans
- --------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 2,694,653 $28.34 2,135,690
- --------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders - - -
- --------------------------------------------------------------------------------------------------------------------------
Total 2,694,653 $28.34 2,135,690
- --------------------------------------------------------------------------------------------------------------------------
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, 2003, have been prepared
in accordance with accounting principals generally accepted in the United States
of America. 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 ENDED DECEMBER 31, 2003 2002 2001
------------------------ ---- ---- ----
INCOME STATEMENT DATA
Revenues:
Net premiums $ 2,643.2 $ 1,980.7 $ 1,661.8
Investment income, net of related expenses 465.6 374.5 340.6
Realized investment gains (losses), net 5.3 (14.6) (68.4)
Change in value of embedded derivatives (net of amounts
allocable to deferred acquisition costs of $30.7 in 2003) 12.9 -- --
Other revenues 47.3 41.4 34.3
------------- ------------ ------------
Total revenues 3,174.3 2,382.0 1,968.3
Benefits and expenses:
Claims and other policy benefits 2,108.4 1,539.5 1,376.8
Interest credited 179.7 126.7 111.7
Policy acquisition costs and other insurance expenses (excluding
$30.7 allocated to embedded derivatives in 2003) 458.2 391.5 304.2
Other operating expenses 119.6 94.8 91.3
Interest expense 36.8 35.5 18.1
------------- ------------ ------------
Total benefits and expenses 2,902.7 2,188.0 1,902.1
------------- ------------ ------------
Income from continuing operations before income taxes 271.6 194.0 66.2
Provision for income taxes 93.3 65.5 26.3
------------- ------------ ------------
Income from continuing operations 178.3 128.5 39.9
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (5.7) (5.7) (6.9)
Cumulative effect of change in accounting principle,
net of income taxes 0.5 -- --
------------- ------------ ------------
Net income $ 173.1 $ 122.8 $ 33.0
============= ============ ============
BASIC EARNINGS PER SHARE
Continuing operations $ 3.47 $ 2.60 $ 0.81
Discontinued operations (0.11) (0.11) (0.14)
Accounting change 0.01 -- --
------------- ------------ ------------
Net income $ 3.37 $ 2.49 $ 0.67
DILUTED EARNINGS PER SHARE
Continuing operations $ 3.46 $ 2.59 $ 0.80
Discontinued operations (0.11) (0.12) (0.14)
Accounting change 0.01 -- --
------------- ------------ ------------
Net income $ 3.36 $ 2.47 $ 0.66
Weighted average diluted shares, in thousands 51,598 49,648 49,905
Dividends per share on common stock $ 0.24 $ 0.24 $ 0.24
BALANCE SHEET DATA
Total investments $ 8,883.4 $ 6,650.2 $ 5,088.4
Total assets 12,113.4 8,892.6 7,016.1
Policy liabilities 8,811.8 6,603.7 5,077.1
Long-term debt 398.1 327.8 323.4
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
junior subordinated debentures of the Company 158.3 158.2 158.1
Total stockholders' equity 1,947.7 1,222.5 1,005.6
Total stockholders' equity per share $ 31.33 $ 24.72 $ 20.30
OPERATING DATA (IN BILLIONS)
Assumed ordinary life reinsurance in force $ 1,252.2 $ 758.9 $ 616.0
Assumed new business production 544.4 230.0 171.1
YEARS ENDED DECEMBER 31, 2000 1999
------------------------ ---- ----
INCOME STATEMENT DATA
Revenues:
Net premiums $ 1,404.1 $ 1,315.6
Investment income, net of related expenses 326.5 340.3
Realized investment gains (losses), net (28.7) (75.3)
Change in value of embedded derivatives (net of amounts
allocable to deferred acquisition costs of $30.7 in 2003) -- --
Other revenues 23.8 26.5
---------- ------------
Total revenues 1,725.7 1,607.1
Benefits and expenses:
Claims and other policy benefits 1,103.6 1,067.1
Interest credited 104.8 153.1
Policy acquisition costs and other insurance expenses (excluding
$30.7 allocated to embedded derivatives in 2003) 243.5 218.3
Other operating expenses 81.2 65.5
Interest expense 17.6 11.0
---------- ------------
Total benefits and expenses 1,550.7 1,515.0
---------- ------------
Income from continuing operations before income taxes 175.0 92.1
Provision for income taxes 69.2 39.1
---------- ------------
Income from continuing operations 105.8 53.0
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (28.1) (12.1)
Cumulative effect of change in accounting principle,
net of income taxes -- --
---------- ------------
Net income $ 77.7 $ 40.9
========== ============
BASIC EARNINGS PER SHARE
Continuing operations $ 2.14 $ 1.16
Discontinued operations (0.57) (0.27)
Accounting change -- --
---------- ------------
Net income $ 1.57 $ 0.89
DILUTED EARNINGS PER SHARE
Continuing operations $ 2.12 $ 1.15
Discontinued operations (0.56) (0.27)
Accounting change -- --
---------- ------------
Net income $ 1.56 $ 0.88
Weighted average diluted shares, in thousands 49,920 46,246
Dividends per share on common stock $ 0.24 $ 0.22
BALANCE SHEET DATA
Total investments $ 4,560.2 $ 3,811.9
Total assets 6,090.0 5,077.6
Policy liabilities 4,617.7 3,998.1
Long-term debt 272.3 184.0
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
junior subordinated debentures of the Company -- --
Total stockholders' equity 862.9 732.9
Total stockholders' equity per share $ 17.51 $ 14.68
OPERATING DATA (IN BILLIONS)
Assumed ordinary life reinsurance in force $ 554.9 $ 446.9
Assumed new business production 161.1 164.9
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This report 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 (referred 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) adverse changes in mortality, morbidity or
claims experience, (2) changes in our financial strength and credit ratings or
those of MetLife, Inc. ("MetLife"), the beneficial owner of a majority of our
common shares, or its subsidiaries, and the effect of such changes on our future
results of operations and financial condition, (3) general economic conditions
affecting the demand for insurance and reinsurance in our current and planned
markets, (4) market or economic conditions that adversely affect our ability to
make timely sales of investment securities, (5) changes in investment portfolio
yields due to interest rate or credit quality changes, (6) fluctuations in U.S.
or foreign currency exchange rates, interest rates, or securities and real
estate markets, (7) adverse litigation or arbitration results, (8) the stability
of governments and economies in the markets in which we operate, (9) competitive
factors and competitors' responses to our initiatives, (10) the success of our
clients, (11) successful execution of our entry into new markets, (12)
successful development and introduction of new products, (13) our ability to
successfully integrate and operate reinsurance business that we acquire,
including without limitation, the traditional life reinsurance business of
Allianz Life, (14) regulatory action that may be taken by state Departments of
Insurance with respect to us, MetLife, or its subsidiaries, (15) changes in
laws, regulations, and accounting standards applicable to us, our subsidiaries,
or our business, and (16) other risks and uncertainties described in this
document 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 Registration
Statement on Form S-3, as amended, filed with the SEC on August 25, 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company that was formed on December 31, 1992. As of December 31, 2003,
Equity Intermediary Company, a Missouri holding company, directly owned
approximately 51.9% of the outstanding shares of common stock of RGA. Equity
Intermediary Company is a wholly-owned subsidiary of MetLife, Inc., a New
York-based insurance and financial services holding company.
The consolidated financial statements include the assets, liabilities,
and results of operations of RGA, RGA Reinsurance Company ("RGA Reinsurance"),
RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life Reinsurance
Company of Canada ("RGA Canada"), RGA Americas Reinsurance Company, Ltd. ("RGA
Americas"), RGA Reinsurance Company of Australia, Limited ("RGA Australia") and
RGA Reinsurance UK Limited ("RGA UK") as well as several other subsidiaries
subject to an ownership position of greater than fifty percent (collectively,
the "Company").
20
We are primarily engaged in traditional individual life,
asset-intensive, and financial reinsurance. RGA and its predecessor, the
Reinsurance Division of General American Life Insurance Company ("General
American"), have been engaged in the business of life reinsurance since 1973.
Approximately 76.3% of our 2003 net premiums were from our more established
operations in North America, which include our U.S. and Canada segments.
We are considered one of the leading life reinsurers in the North
American market based on premiums and inforce business. We believe, based on an
industry survey, that we have the second largest market share in North America
as measured by insurance inforce. Our approach to the North American market has
been to:
- focus on large, high quality life insurers as clients;
- provide quality facultative underwriting and automatic
reinsurance capacity; and
- deliver responsive and flexible service to our clients.
We conduct business with the majority of the largest U.S. and Canadian
life insurance companies, with no single non-affiliated client representing more
than 10% of 2003 consolidated gross premiums. We have also developed our
capacity and expertise in the reinsurance of asset-intensive products (primarily
annuities and corporate-owned life insurance) and financial reinsurance. In
2003, our North American operations earned $275.7 million of income from
continuing operations before income taxes.
In 1994, we began using our North American underwriting expertise and
industry knowledge to expand into international markets and now have
subsidiaries, branches or offices in Australia, Barbados, Hong Kong, India,
Ireland, Japan, Mexico, South Africa, South Korea, Spain, Taiwan and the United
Kingdom. These operations are included in either our Asia Pacific segment or our
Europe & South Africa segment. We generally start new operations from the ground
up in these markets as opposed to acquiring existing operations, and we often
enter these markets to support our North American clients as they expand
internationally. In 2003, these operations earned $39.5 million of income from
continuing operations before income taxes, or approximately 14.3% of the amount
earned by our more established North American operations.
INDUSTRY TRENDS
We believe that the following trends in the life insurance industry will
continue to create demand for life reinsurance.
Outsourcing of Mortality. Life reinsurance penetration of life
insurance in force has been increasing over the last several years.
Industry surveys and data suggest that approximately 28% of life
insurance inforce in the U.S. is currently reinsured compared with 20%
in 1998. During that time, life reinsurance inforce has grown from $2.6
trillion to $5.2 trillion. We believe this trend reflects increased
utilization by life insurance companies of reinsurance to manage
capital and mortality risk and to develop competitive products.
Reinsurers are able to efficiently aggregate a significant volume of
life insurance inforce, creating economies of scale and greater
diversification of risk. As a result of having larger amounts of data
at their disposal compared to primary life insurance companies,
reinsurers tend to have better insights into mortality trends, creating
more efficient pricing for mortality risk.
Increased Capital Sensitivity. Regulatory environments, rating agencies
and competitive business pressures are causing life insurers to
reinsure as a means to:
- manage risk-based capital by shifting mortality and other risks
to reinsurers, thereby reducing amounts of capital they need to
maintain;
- release capital to pursue new business initiatives; and
- unlock the capital supporting, and value embedded in, non-core
product lines.
21
Consolidation and Reorganization Within the Industry. The number of
merger and acquisition transactions within the life insurance industry
has increased in recent years. We believe that reorganizations and
consolidations of life insurers will continue. As reinsurance products
are increasingly used to facilitate these transactions and manage risk,
we expect demand for our products to continue.
Changing Demographics of Insured Populations. The aging of the
population in North America is increasing demand for financial products
among "baby boomers" who are concerned about protecting their peak
income stream and are considering retirement and estate planning. We
believe that this trend is likely to result in continuing demand for
annuity products and life insurance policies, larger face amounts of
life insurance policies and higher mortality risk taken by life
insurers, all of which should fuel the need for insurers to seek
reinsurance coverage.
We continue to follow a two-part business strategy to capitalize on
industry trends.
Continue Growth of Core North American Business. Our strategy includes
continuing to grow each of the following components of our North
American operations:
- Facultative Reinsurance. We intend to maintain our status as a
leader in facultative underwriting in North America by
emphasizing our underwriting standards, prompt response on
quotes, competitive pricing, capacity and flexibility in meeting
customer needs.
- Automatic Reinsurance. We intend to expand our presence in the
North American automatic reinsurance market by using our
mortality expertise and breadth of products and services to gain
additional market share.
- In Force Block Reinsurance. We anticipate additional
opportunities to grow our business by reinsuring "in force block"
insurance, as insurers and reinsurers seek to exit various
non-core businesses and increase financial flexibility in order
to, among other things, redeploy capital and pursue merger and
acquisition activity. We took advantage of one such opportunity
in 2003 when we assumed the traditional life reinsurance business
of Allianz Life Insurance Company of North America ("Allianz
Life").
Continue Expansion Into Selected Markets. Our strategy includes
building upon the expertise and relationships developed in our core
North American business platform to continue our expansion into
selected products and markets, including:
- Asset-intensive and Financial Reinsurance. We intend to continue
leveraging our existing client relationships and reinsurance
expertise to create customized reinsurance products and
solutions. Industry trends, particularly the increased pace of
consolidation and reorganization among life insurance companies
and changes in product distribution, are expected to enhance
existing opportunities for asset-intensive and financial
reinsurance.
- International Markets. Management believes that international
markets offer opportunities for growth, and we intend to
capitalize on these opportunities by establishing a presence in
selected markets. We intend to use our reinsurance expertise,
facultative underwriting abilities and market knowledge as we
continue to enter mature and emerging insurance markets. Many of
these markets are not utilizing reinsurance at the same levels as
North America, and therefore, we believe significant
opportunities exist to increase reinsurance penetration in these
markets.
RESULTS OF OPERATIONS
We derive 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 from financial
reinsurance transactions.
22
Our 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 ceding companies.
During December 2003, we completed a large coinsurance agreement with
Allianz Life Insurance Company of North America ("Allianz Life"). Under this
agreement, RGA Reinsurance assumed the traditional life reinsurance business of
Allianz Life, including yearly renewable term reinsurance and coinsurance of
term policies. The business assumed does not include any accident and health
risk, annuities or related guaranteed minimum death benefits or guaranteed
minimum income benefits. This transaction adds additional scale to our U.S.
traditional business, but does not significantly add to our client base since
most of the underlying ceding companies are already our clients. We have agreed
to use commercially reasonable efforts to novate the underlying treaties from
Allianz Life to RGA Reinsurance. Novation results in the underlying client
companies reinsuring the business directly to RGA Reinsurance versus passing
through Allianz Life. The profitability of the business is not dependent on
novation.
The transaction was effective retroactive to July 1, 2003. Under the
agreement, Allianz Life transferred to RGA Reinsurance $425.7 million in cash
and statutory reserves. RGA Reinsurance paid Allianz Life a ceding commission of
$310.0 million. As a result of this transaction, during the fourth quarter of
2003 our U.S. traditional sub-segment reflected $246.1 million in net premiums
and approximately $6.8 million of net income, after tax. Additionally, as of
December 31, 2003, we reflected $217.6 million in invested assets and cash,
$264.0 million in deferred policy acquisition costs and $455.5 million in future
policy benefits on our consolidated balance sheet.
Consolidated assumed insurance in force increased $493.3 billion to
$1,252.2 billion for the year ended December 31, 2003. Assumed new business
production for 2003 totaled $544.4 billion compared to $230.0 billion in 2002
and $171.1 billion in 2001. The transaction with Allianz Life contributed $287.2
billion of the current-year increase in new business production.
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 preparation of its
financial statements and the financial effects resulting from the incorporation
of revised data are reflected currently.
Our profitability primarily depends on the volume and amount of death
claims incurred and our ability to adequately price the risks we assume. 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. Effective July 1, 2003, we
increased the maximum amount of coverage that we retain per life from $4 million
to $6 million. This increase does not affect business written prior to July 1,
2003. Claims in excess of this retention amount are retroceded to
retrocessionaires; however, we remain fully liable to the ceding company, our
customer, for the entire amount of risk we assume. The increase in our retention
limit from $4 million to $6 million reduces the amount of premiums we pay to our
retrocessionaires, but increases the maximum impact a single death claim can
have on our results and therefore may result in additional volatility to our
results.
We maintain catastrophe insurance under a program that renews on August
13th of each year. The current program, which began August 13, 2003 and expires
August 12, 2004, provides up to $50 million of coverage per occurrence for
events involving 40 or more deaths. Under this program, we retain the first $50
million in claims, the catastrophe program covers the next $50 million in
claims, and we retain all claims in excess of $100 million. Acts of terrorism
are covered except when arising from the use of nuclear, chemical, or biological
weapons. The insurance is provided through seven insurance companies and seven
Lloyds Syndicates with no single insurer providing more than $10 million of
coverage.
We are exposed to 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, we are exposed
to the economic and political risk associated with our net investment in foreign
locations. Our most significant foreign operations are in Canada. The business
generated from the Asia Pacific region is primarily denominated in U.S. dollars,
Australian dollars, and Japanese yen. Additionally, we reinsure business in
other international currencies including the Great British pound and South
African rand. We generally do not hedge our net investment or translation
exposure since we view our operations as long-term investments and believe the
costs of hedging would outweigh the benefits.
23
Since December 31, 1998, we have formally reported our 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, we expect to pay claims over a number of years as the
level of business diminishes. We will report a loss to the extent claims and
related expenses exceed established reserves. During 2003, 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.
Prior to January 1, 2003, the Company aggregated the results of its
five main operational segments into three reportable segments: U.S., Canada, and
Other International. The Other International reportable segment formerly
included operations in Latin America, Asia Pacific, and Europe & South Africa.
Effective January 1, 2003, as a result of our declining presence in Argentina
and changes in management responsibilities for part of the Latin America region,
the Other International reportable segment no longer included Latin America
operations. Latin America results relating to the Argentine privatized pension
business as well as direct insurance operations in Argentina are now reported in
the Corporate and Other segment. The results for all other Latin America
business, primarily traditional reinsurance business in Mexico, are reported as
part of U.S. operations in the Traditional sub-segment. Additionally, the
remaining operations of the Other International reportable segment, Asia Pacific
and Europe & South Africa, are now presented as separate reportable segments.
Prior-period segment information has been reclassified to conform to this new
presentation.
The U.S. operations provide traditional life, asset-intensive, and
financial reinsurance primarily to domestic clients. The Canada operations
provide insurers with reinsurance of traditional life products as well as
reinsurance of critical illness products. Asia Pacific operations provide
primarily traditional life reinsurance and, to a lesser extent, financial
reinsurance. Europe & South Africa operations include traditional life
reinsurance and critical illness business from Europe and South Africa, in
addition to other markets we are developing. Our discontinued accident and
health business is excluded from continuing operations. We measure segment
performance based on profit or loss from operations before income taxes.
Consolidated income from continuing operations increased 38.8% in 2003
to $178.3 million and increased 222.1% in 2002 to $128.5 million. Diluted
earnings per share from continuing operations were $3.46 for 2003 compared to
$2.59 for 2002 and $0.80 for 2001. A majority of our earnings during these years
were attributed primarily to traditional reinsurance results in the U.S. and
Canada. Mortality experience during 2003 and 2002 was generally within our range
of expectations. Additionally, 2003 net income for our U.S. Traditional
operations benefited from the Allianz Life transaction by approximately $6.8
million. We expect that transaction to contribute $30 to $40 million to net
income in 2004. Earnings during 2001 were adversely affected by the terrorist
attacks of September 11, 2001, investment losses on sales and impairments of
investment securities, and the accrual of additional reserves to support our
reinsurance of Argentine pension business.
Consolidated investment income increased 24.3% and 10.0% during 2003
and 2002, respectively. These increases related to a growing invested asset base
due to positive cash flows from operations and deposits from several annuity
reinsurance treaties, offset, in part, by declining invested asset yields
primarily due to a decline in prevailing interest rates. The cost basis of
invested assets increased by $2.1 billion, or 32.3%, in 2003 and increased $1.4
billion, or 27.5%, in 2002. In excess of $400 million of the increase in the
cost basis of invested assets during 2003 was due to the Company's common equity
offering in which 12,075,000 new shares were issued. The additional increase
during 2003 is due to the factors previously discussed. The average yield earned
on investments, excluding funds withheld, was 6.39% in 2003, compared with 6.51%
in 2002, and 6.79% in 2001. The average yield will vary from year to year
depending on a number of variables, including the prevailing interest rate
environment, and changes in the mix of our underlying investments. Funds
withheld assets are associated with annuity contracts on which we earn a spread.
Fluctuations in the yield on funds withheld assets are generally offset by a
corresponding adjustment to the interest credited on the liabilities. Investment
income is allocated to the operating 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 34.3%, 33.8%, and 39.7% of pre-tax income for 2003,
2002, and 2001, respectively. Absent unusual items, we expect the consolidated
effective tax rate to be between 34% and 35%. The effective tax rate for 2002
includes the effect of a $2.0 million reduction in tax liabilities resulting
from a settlement of an Internal Revenue Service ("IRS") audit. The effective
tax rate for 2001 was
24
affected by realized capital losses domestically and operating losses from
foreign subsidiaries for which deferred tax assets cannot be fully established.
The Company calculated tax benefits related to its discontinued operations of
$3.1 million for 2003 and 2002, and $3.7 million for 2001. The effective tax
rate on the discontinued operations was approximately 35.0% for each of the
three years.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are described in Note 2 to the
Consolidated Financial Statements. 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
the possibility of a significant loss from insurance risk will occur only under
remote circumstances, it records the contract under 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 factors that can affect the carrying value of DAC include mortality
assumptions, 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. No adjustments were made during 2003, however,
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. As of December 31, 2003, the Company estimates that
approximately 51.9% 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. Further, it
establishes premium deficiency reserves if actual and anticipated experience
indicates that existing policy liabilities together with the present value of
future gross premiums are not 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 any adjustments to such estimates, if necessary,
are reflected in current operations.
The Company primarily invests in fixed maturity securities. The Company
monitors its fixed maturity securities to determine potential 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 and industry sector conditions, 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 fair value.
Differences in actual experience compared with the assumptions and
estimates utilized in the justification of the recoverability of DAC, 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 effect 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 even provide reasonable
ranges of potential losses,
25
it is the opinion of management, after consultation with counsel, that the
outcomes of such litigation and arbitrations, 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.
Further discussion and analysis of the results for 2003 compared to
2002 and 2001 are presented by segment. Certain prior-year amounts have been
reclassified to conform to the current year presentation. References to income
before income taxes exclude the effects of discontinued operations and the
cumulative effect of changes in accounting principles.
U.S. OPERATIONS
U.S. operations consist of two major sub-segments: Traditional and
Non-Traditional. The Traditional sub-segment primarily specializes in
mortality-risk reinsurance. The Non-traditional category consists of
Asset-Intensive and Financial Reinsurance.
FOR THE YEAR ENDED DECEMBER 31, 2003 NON-TRADITIONAL
(in thousands) ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- ----------- ----------- -----------
REVENUES:
Net premiums $ 1,797,478 $ 4,315 $ - $ 1,801,793
Investment income, net of related expenses 181,897 164,127 105 346,129
Realized investment losses, net (5,715) (1,674) - (7,389)
Change in value of embedded derivatives (net of amounts
allocable to deferred acquisition costs of $30,665) - 12,931 - 12,931
Other revenues 3,920 6,524 27,302 37,746
----------- ----------- ----------- -----------
Total revenues 1,977,580 186,223 27,407 2,191,210
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,457,886 2,976 - 1,460,862
Interest credited 58,317 119,621 - 177,938
Policy acquisition costs and other insurance expenses
(excluding $30,665 allocated to embedded derivatives) 241,877 34,422 9,900 286,199
Other operating expenses 41,186 3,809 5,128 50,123
----------- ----------- ----------- -----------
Total benefits and expenses 1,799,266 160,828 15,028 1,975,122
Income before income taxes $ 178,314 $ 25,395 $ 12,379 $ 216,088
=========== =========== =========== ===========
FOR THE YEAR ENDED DECEMBER 31, 2002 NON-TRADITIONAL
(in thousands) ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- ----------- ----------- -----------
REVENUES:
Net premiums $ 1,407,751 $ 3,786 $ - $ 1,411,537
Investment income, net of related expenses 161,869 110,019 191 272,079
Realized investment losses, net (6,194) (4,135) - (10,329)
Other revenues 2,802 7,277 26,586 36,665
----------- ----------- ----------- -----------
Total revenues 1,566,228 116,947 26,777 1,709,952
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,097,998 17,376 - 1,115,374
Interest credited 56,675 65,504 - 122,179
Policy acquisition costs and other insurance expenses 228,800 18,560 8,196 255,556
Other operating expenses 30,505 1,242 9,295 41,042
----------- ----------- ----------- -----------
Total benefits and expenses 1,413,978 102,682 17,491 1,534,151
Income before income taxes $ 152,250 $ 14,265 $ 9,286 $ 175,801
=========== =========== =========== ===========
26
FOR THE YEAR ENDED DECEMBER 31, 2001 NON-TRADITIONAL
(in thousands) ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- ----------- ----------- -----------
REVENUES:
Net premiums $ 1,234,817 $ 3,248 $ - $ 1,238,065
Investment income, net of related expenses 152,068 93,252 474 245,794
Realized investment gains (losses), net (30,764) 1,193 - (29,571)
Other revenues 2,344 2,379 25,958 30,681
----------- ----------- ----------- -----------
Total revenues 1,358,465 100,072 26,432 1,484,969
BENEFITS AND EXPENSES:
Claims and other policy benefits 983,460 4,658 - 988,118
Interest credited 52,428 58,087 - 110,515
Policy acquisition costs and other insurance expenses 187,422 21,632 9,925 218,979
Other operating expenses 34,056 740 7,980 42,776
----------- ----------- ----------- -----------
Total benefits and expenses 1,257,366 85,117 17,905 1,360,388
Income before income taxes $ 101,099 $ 14,955 $ 8,527 $ 124,581
=========== =========== =========== ===========
Income before taxes for the U.S. operations totaled $216.1 million for
2003 compared to $175.8 million in 2002 and $124.6 million in 2001. The Allianz
Life transaction was a contributing factor to the earnings growth during 2003,
as well as continued revenue growth and the change in fair value of embedded
derivatives. Growth in revenue and favorable mortality experience in the
traditional sub-segment contributed to the increase in income for 2002. Income
was down in 2001 due primarily to higher realized net investment losses, and
higher than expected claims, arising primarily from the terrorist attacks of
September 11, 2001.
Traditional Reinsurance
The U.S. traditional 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 2003 production
totaled $423.5 billion face amount of new business, compared to $150.3 billion
in 2002 and $109.7 billion in 2001. Production for 2003 includes $287.2 billion
related to the Allianz Life transaction. Management believes industry
consolidation and the trend toward reinsuring mortality risks should continue to
provide opportunities for growth, although transactions the size of Allianz Life
may or may not occur.
Income before income taxes for U.S. traditional reinsurance increased
17.1% in 2003 and increased 50.6% in 2002. Contributing to the increase for 2003
is the Allianz Life business, which generated $10.5 million of pre-tax income
coupled with the continued growth in our traditional business. The growth in
2002 can be attributed to premium growth and favorable claim experience. Income
was down in 2001 due primarily to higher realized net investment losses, and
higher than expected claims, arising primarily from the terrorist attacks of
September 11, 2001.
Net premiums for U.S. traditional reinsurance increased 27.7% in 2003,
17.5% of which related to the $246.1 million in net premiums from the Allianz
Life transaction. During 2002, net premiums increased 14.0%. New premiums from
facultative and automatic treaties and renewal premiums on existing blocks of
business all contributed to the growth. The increased premium is driven by the
growth of total U.S. business in force, which increased to $896.8 billion in
2003, a 64.6% increase over the prior year. This amount includes $278.0 billion
of inforce from the Allianz Life transaction. Premium levels can be influenced
by large transactions and reporting practices of ceding companies and therefore
can fluctuate from period to period.
Net investment income increased 12.4% and 6.4% in 2003 and 2002,
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. The Allianz Life transaction accounted
for 3.6% of the increase in 2003.
Claims and other policy benefits, as a percentage of net premiums, were
81.1%, 78.0%, and 79.6% in 2003, 2002, and 2001, respectively. The increase in
2003 compared to prior years is a result of slightly higher claims as well as
the impact of the Allianz Life transaction. The lower ratio in 2002 is the
result of generally favorable mortality experience. The
27
2001 loss ratio was affected by $16.1 million in claims related to the events of
September 11, 2001. Subsequent to 2001, our net loss resulting from the
terrorist attacks decreased to $11.2 million. This reduction ($3.0 million and
$1.9 million in 2003 and 2002, respectively) is the result of reported claims
from this event being lower than originally projected. The Company's catastrophe
coverage program limited its net losses related to the terrorist attacks. 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 13.5%, 16.3%, and 15.2% in 2003, 2002, and
2001, respectively. The Allianz Life transaction contributed a 0.9% decrease in
this ratio for 2003. These percentages will fluctuate due to varying allowance
levels within coinsurance-type arrangements, the timing of amounts due to and
from ceding companies, as well as the amortization pattern of previously
capitalized amounts which are based on the form of the reinsurance agreement and
the underlying insurance policies. Additionally, the mix of first year
coinsurance versus yearly renewable term can cause the percentage to fluctuate
from period to period.
Other operating expenses, as a percentage of net premiums, were 2.3%,
2.2%, and 2.8% in 2003, 2002, and 2001, respectively. The slight increase in
2003 can be attributed $9.0 million of expenses associated with the Allianz Life
transaction, of which $6.3 million are non-recurring and were capitalized as a
deferred acquisition cost. 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
Asset-intensive reinsurance primarily concentrates on the investment
risk within underlying annuities and corporate-owned life insurance policies.
Most of these agreements are coinsurance, coinsurance funds withheld 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. Several of the
coinsurance agreements are on a funds withheld basis.
During 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 133 Implementation Issue No. B36,
"Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments
That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Obligor under Those Instruments" ("Issue
B36"), recording a change in value of embedded derivatives of $12.9 million
within revenues, net of $30.7 million of related amortization of deferred
acquisition costs (see Note 2 - "New Accounting Pronouncements" in Notes to
Consolidated Financial Statements for further discussion).
Income before income taxes increased in 2003 to $25.4 million compared
to $14.3 million and $15.0 million in 2002 and 2001, respectively. The increase
during 2003 was mainly due to a $12.9 million benefit related to the change in
fair value of embedded derivatives. The fair value is expected to fluctuate
significantly on a quarterly basis since it is primarily tied to movements in
credit spreads. In addition, 2003 results were affected by higher credit losses
than expected within the funds withheld portfolios, somewhat offset by the
continued growth in the asset base. These credit losses were reflected in
investment income. Results during 2002 were favorably affected by the growth in
the asset base compared to 2001, however, realized losses on investment
securities increased $5.3 million during 2002, resulting in an overall decrease
of $0.7 million in income before income taxes.
Total revenues, which are comprised primarily of investment income,
increased 59.2% and 16.9% in 2003 and 2002, respectively. The increase in 2003
can be primarily attributed to continued growth in asset base for this segment.
The average invested asset balance was $2.7 billion, $1.9 billion, and $1.3
billion for 2003, 2002 and 2001, respectively. Invested assets outstanding as of
December 31, 2003, and 2002 were $3.1 billion and $2.4 billion, of which $2.0
billion and $1.4 billion were funds withheld at interest, respectively.
Total expenses, which is comprised primarily of interest credited,
policy benefits and acquisition costs increased 56.6% and 20.6% in 2003 and
2002, respectively. The increase in 2003 can be attributed to the increase in
policy acquisition costs and interest credited. The higher policy acquisition
costs and growth in interest credited is the result of the significant growth in
this segment. The higher expenses are offset by the increase in investment
income, which is reflective of the higher asset base. The growth in other
expenses in 2003 reflects the underlying growth and resource support for this
sub-segment.
28
Financial Reinsurance
The U.S. financial reinsurance sub-segment includes results from RGA
Financial Group, a wholly-owned subsidiary, and consists primarily of net fees
earned on financial reinsurance transactions. 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 33.3% and 8.9% in 2003 and 2002,
respectively. The increase for 2003 can be attributed to lower operating
expenses allocated to this sub-segment in 2003 compared to 2002 and 2001. At
December 31, 2003, 2002 and 2001, the amount of reinsurance assumed from client
companies, as measured by pre-tax statutory surplus, was $811.3 million, $872.7
million and $547.8 million, respectively.
CANADA OPERATIONS
The Company conducts reinsurance business in Canada through RGA Life
Reinsurance Company of Canada ("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 non-guaranteed critical illness products.
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
(in thousands) --------- --------- ---------
REVENUES:
Net premiums $ 214,738 $ 181,224 $ 173,269
Investment income, net of related expenses 87,212 70,518 65,006
Realized investment gains (losses), net 13,423 (163) 9,148
Other revenues (212) 136 201
--------- --------- ---------
Total revenues 315,161 251,715 247,624
BENEFITS AND EXPENSES:
Claims and other policy benefits 223,375 186,398 172,799
Interest credited 1,488 1,070 299
Policy acquisition costs and other insurance
expenses 20,293 16,136 14,101
Other operating expenses 10,441 9,480 8,909
--------- --------- ---------
Total benefits and expenses 255,597 213,084 196,108
Income before income taxes $ 59,564 $ 38,631 $ 51,516
========= ========= =========
The Canadian operation is one of the leading life reinsurers in Canada.
RGA Canada's reinsurance inforce totaled approximately $84.0 billion and $64.5
billion at December 31, 2003 and 2002, respectively. At December 31, 2003, RGA
Canada includes most of the life insurance companies in Canada as clients.
Income before income taxes increased 54.2% in 2003 and decreased 25.0%
in 2002. The increase in 2003 was the result of an increase of $13.6 million or
35.2% in realized investment gains as well as more favorable mortality
experience in the current year. Additionally, the Canadian dollar strengthened
against the U.S. dollar during 2003 relative to 2002, and contributed $6.7
million, or 17.3%, to income before income taxes in 2003. In local currency,
income before income taxes increased by 39.7%. The decrease in 2002 was the
result of a $9.3 million decrease in realized investment gains and unfavorable
mortality experience, primarily due to two treaties, and favorable mortality
experience in 2001.
Net premiums increased by 18.5%, to $214.7 million in 2003, and
increased by 4.6%, to $181.2 million in 2002. In original currency, net premiums
increased by 5.2% in 2003 and 6.5% in 2002. A stronger Canadian dollar in 2003
contributed $24.1 million, or 13.3%, to net premiums reported in 2003. The
decline in the strength of the Canadian dollar in 2002 had an adverse effect on
the amount of net premiums reported of $2.1 million, or 1.2%, in 2002. Premium
levels are
29
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 23.7% and 8.5% during 2003 and 2002,
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 $5.8
million and $5.2 million in 2003 and 2002, respectively. Investment performance
varies with the composition of investments. In 2003, the increase in investment
income was mainly the result of a stronger Canadian dollar during 2003 compared
to 2002, an increase in the invested asset base due to operating cash flows on
traditional reinsurance, and interest on an increasing amount of funds withheld
at interest related to one treaty. In 2002, 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
104.0% of total 2003 net premiums compared to 102.9% in 2002 and 99.7% in 2001.
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. Claims and other policy
benefits, as a percentage of net premiums and investment income, were 74.0%
during 2003 compared to 74.0% in 2002 and 72.5% in 2001. Death claims are
reasonably predictable over a period of many years, but are less predictable
over shorter periods and are subject to significant fluctuation.
Policy acquisition costs and other insurance expenses as a percentage
of net premiums totaled 9.5% in 2003, 8.9% in 2002, and 8.1% in 2001. The
increase in this ratio is primarily due to the changing mix of business. In 2003
and 2002, more business was derived from coinsurance agreements than yearly
renewable term agreements than in the prior year. The coinsurance agreements
tend to have higher commission costs compared to yearly renewable term
agreements.
Other operating expenses increased $1.0 million in 2003 and $0.6
million in 2002 compared to their respective prior-year periods. The increase in
2003 is attributable to the strengthening of the Canadian dollar.
EUROPE & SOUTH AFRICA OPERATIONS
The 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). Reinsurance agreements may be either facultative
or automatic agreements covering primarily individual risks and in some markets,
group risks.
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
(in thousands) --------- --------- ---------
REVENUES:
Net premiums $ 364,203 $ 226,846 $ 94,800
Investment income, net of related expenses 3,869 1,009 1,536
Realized investment gains (losses), net 3,999 894 (137)
Other revenues 1,067 2,064 256
--------- --------- ---------
Total revenues 373,138 230,813 96,455
BENEFITS AND EXPENSES:
Claims and other policy benefits 230,895 130,975 59,429
Policy acquisition costs and other insurance
expenses 105,062 82,700 26,753
Other operating expenses 15,866 13,049 10,555
Interest expense 1,043 680 681
--------- --------- ---------
Total benefits and expenses 352,866 227,404 97,418
Income (loss) before income taxes $ 20,272 $ 3,409 $ (963)
========= ========= =========
30
Europe & South Africa net premiums grew 60.6% during 2003 and 139.3% in
2002. The growth was primarily the result of new business from existing treaties
and from new treaties, combined with favorable currency exchange rates. Several
foreign currencies, particularly the British pound, the euro, and the South
African rand strengthened against the U.S. dollar in 2003. The effect of the
strengthening of the local currencies was an increase in 2003 premiums of $41.7
million over 2002. Also, a significant portion of the growth of premiums was due
to reinsurance of accelerated critical illness. This 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 $145.7 million, $103.5 million and
$29.6 million in 2003, 2002 and 2001, respectively. 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 $2.9 million in 2003, and decreased
$0.5 million in 2002. The increase in 2003 was primarily due to growth in the
investment assets in the U.K. and South Africa, growth in the allocated invested
asset base and favorable exchange rates. Investment performance varies with the
composition of investments and the relative allocation of capital to the
operating segments.
Claims and other policy benefits as a percentage of net premiums
totaled 63.4%, 57.7% and 62.7% for 2003, 2002 and 2001, respectively. Death
claims are reasonably predictable over a period of many years, but are less
predictable over shorter periods and are subject to significant fluctuation.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums represented 28.8%, 36.5% and 28.2% for 2003, 2002, and 2001,
respectively. These percentages fluctuate due to timing of client company
reporting, variations in the mixture of business being reinsured and the
relative maturity of the business. In addition, as the segment grows, renewal
premiums which have lower allowances than first year premiums, represent a
greater percentage of the total premiums. Accordingly, the ratio of allowances
to premiums declines.
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 may 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 have no impact while a 12 percent or 15 percent
increase would result in pre-tax income statement charges of approximately $21.4
million and $69.4 million, respectively.
Other operating expenses increased 21.6% during 2003 and 23.6% for
2002. The increase in other operating expenses in 2003 and 2002 is due to an
increase in costs associated with maintaining and supporting the significant
increase in business over the past two years. As a percentage of premiums, other
operating expenses fell to 4.4% in 2003 from 5.8% in 2002 and 11.1% in 2001,
respectively. The Company believes that sustained growth in premiums should
lessen the burden of start-up expenses and expansion costs over time.
ASIA PACIFIC OPERATIONS
The Asia Pacific segment has operations in Australia, Hong Kong, Japan,
Malaysia, New Zealand, South Korea and Taiwan. The principal types of
reinsurance for this segment include life, critical care and illness, disability
income, 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. Reinsurance agreements may be
either facultative or automatic agreements covering primarily individual risks
and in some markets, group risks. The Company operates multiple offices
throughout each region to best meet the needs of the local client companies.
31
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
(in thousands) --------- --------- ---------
REVENUES:
Net premiums $ 259,010 $ 160,197 $ 119,702
Investment income, net of related expenses 10,692 7,059 3,935
Realized investment gains (losses), net (761) (268) 113
Other revenues 1,191 2,363 2,903
--------- --------- ---------
Total revenues 270,132 169,351 126,653
BENEFITS AND EXPENSES:
Claims and other policy benefits 185,358 110,806 75,595
Policy acquisition costs and other insurance
expenses 47,513 36,660 36,103
Other operating expenses 16,903 14,727 11,081
Interest expense 1,096 842 867
--------- --------- ---------
Total benefits and expenses 250,870 163,035 123,646
Income before income taxes $ 19,262 $ 6,316 $ 3,007
========= ========= =========
Asia Pacific income before income taxes grew 205.0% during 2003 and
110.0% in 2002. The growth was primarily the result of the combination of
additional premium volume, lower acquisition costs relative to net premiums, and
economies of scale. As the segment grows, although the other operating expenses
increase, the substantial growth in premium volume covers these costs, creating
favorable economies of scale.
Asia Pacific net premiums grew 61.7% during 2003 and 33.8% in 2002. The
growth was primarily the result of new business from existing treaties and from
new treaties, combined with favorable exchange rates. Several foreign
currencies, particularly the Australian dollar, the New Zealand dollar and the
Japanese yen strengthened against the U.S. dollar in 2003. The effect of the
strengthening of the local currencies was an increase in 2003 premiums by $27.3
million over 2002, and $8.6 million for 2002 over 2001, caused mostly by the
Australian/New Zealand operations.
The premium growth in 2003 was primarily in the Australia/New Zealand,
Japan, and South Korea regions. The growth in Australia/New Zealand was split
evenly between premiums with new clients, additional premium from existing
clients, and the effect of exchange rates. In local currency, the Australia/New
Zealand business increased by approximately 55.9%, while in U.S. dollars the
premiums grew approximately 84.6%. Given the more mature nature of the
Australian and New Zealand insurance markets, it is unlikely that future growth
rates will continue at these rates, although additional growth is anticipated.
The growth in the Japanese market was attributable to having a full year of a
large treaty, versus a partial year in 2002, and additional business with most
existing clients. The creation of the Japanese branch in December 2003 helps
strengthen the Company's presence in the Japanese market and is expected to lead
to future growth. The growth in South Korean premiums in 2003 was attributable
to new business from an existing treaty and from a new large critical illness
treaty. Substantial growth in this region is anticipated going forward, although
this growth is off a small base of business. Premiums from the Hong Kong and
Taiwan regions were essentially flat for the year, with growth from new treaties
offset by the run-off of a large closed block. A portion of the growth of
premiums for the segment is due to reinsurance of accelerated critical illness.
This 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 $31.2
million, $15.0 million and $13.7 million in 2003, 2002 and 2001, respectively.
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 $3.6 million or 51.5% in 2003, and
increased $3.1 million or 79.4% in 2002. The increase in 2003 was primarily due
to growth in the investment assets in Australia and a favorable exchange rate,
along with an increase in allocated investment income. 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.
32
Other revenue during 2003 and 2002 primarily represented profit and
fees associated with financial reinsurance in Taiwan and South Korea. These
financial reinsurance treaties are in run-off and no new treaties were added in
2003, causing the decline in other revenue. 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
increased in 2003 and totaled 71.6%, 69.2% and 63.2% for 2003, 2002 and 2001,
respectively. This percentage will fluctuate due to timing of client company
reporting, variations in the mixture of business being reinsured and the
relative maturity of the business. In addition to the change in mix of business,
a portion of the increase in this percentage for 2003 over 2002 was attributable
to the unfavorable performance of one treaty. Death claims are reasonably
predictable over a period of many years, but are less predictable over shorter
periods and are subject to significant fluctuation.
Policy acquisition costs and other insurance expenses as a percentage
of net premiums represented 18.3%, 22.9% and 30.2% for 2003, 2002, and 2001,
respectively. As the segment grows, renewal premiums, which generally have lower
acquisition costs than first year premiums, account for a greater percentage of
the total premiums. Accordingly, the ratio of acquisition costs to premiums
should decline over time. The percentages also 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.
Other operating expenses increased 14.8% during 2003 and 32.9% for
2002. The increase in expenses is attributable to exchange rates, additional
expenses in the Sydney regional office to support the business in the regions,
expansion of the Japanese office to meet the requirements of branch status, and
a full year of the South Korean office as opposed to a start-up operation in
2002. As a percentage of premiums, other operating expenses fell to 6.5% in 2003
from 9.2% in 2002 and 9.3% in 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 and Other revenues include investment income from invested
assets not allocated to support segment operations and undeployed proceeds from
the Company's capital raising efforts, in addition to unallocated realized
capital gains or losses. General corporate expenses consist of unallocated
overhead and executive costs and interest expense related to debt and the $225.0
million of 5.75% mandatorily redeemable trust preferred securities.
Additionally, the Corporate and Other operations segment includes results from
RGA Technology Partners ("RTP"), a wholly-owned subsidiary that develops and
markets technology solutions for the insurance industry, the Company's Argentine
privatized pension business, which is currently in run-off (see discussion of
status below), and an insignificant amount of direct insurance operations in
Argentina.
FOR THE YEAR ENDED DECEMBER 31, 2003 2002 2001
(in thousands) --------- --------- ---------
REVENUES:
Net premiums $ 3,419 $ 862 $ 35,926
Investment income, net of related expenses 17,677 23,847 24,288
Realized investment losses, net (3,912) (4,785) (47,984)
Other revenues 7,508 208 353
--------- --------- ---------
Total revenues 24,692 20,132 12,583
BENEFITS AND EXPENSES:
Claims and other policy benefits 7,941 (4,089) 80,861
Interest credited 276 3,466 898
Policy acquisition costs and other insurance
expenses (902) 452 8,281
Other operating expenses 26,303 16,488 17,985
Interest expense 34,650 33,994 16,549
--------- --------- ---------
Total benefits and expenses 68,268 50,311 124,574
Loss before income taxes $ (43,576) $ (30,179) $(111,991)
========= ========= =========
33
Loss before income taxes grew approximately 44.4% during 2003 compared
to 2002, primarily due to a $6.4 million decrease in unallocated investment
income, a $5.5 million increase in unallocated general corporate expenses, and a
$2.9 million increase in unallocated realized investment losses. The Argentine
operations slightly offset these corporate results providing income before
income taxes of approximately $0.9 million. RTP operations, which have no
comparative prior-year results, broke even and added $4.8 million in other
revenues and other expenses in 2003 due to the growth in licensing, installation
and modification services associated with the Company's electronic underwriting
product.
Loss before income taxes decreased 73.1% during 2002 compared to 2001.
Results for 2002 and 2001 are difficult to compare due to the Company's decision
to exit the privatized pension business in Argentina during 2001. The privatized
pension business provided income from continuing operations of $4.7 million in
2002, compared to a loss from continuing operations of approximately $71.3
million during 2001. The 2001 loss primarily related to realized investment
losses on Argentine securities supporting the business and an increase to
reserves. Unallocated corporate revenues, consisting of unallocated investment
income and realized investment losses, increased $24.7 million. This increase in
corporate revenues was offset, in part, by an $18.6 million increase in
expenses, primarily interest expense. The substantial increase in interest
expense 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 views its long-term debt at its current
level as an integral and ongoing part of its capital structure.
Status of Argentine Privatized Pension Business
Administradoras de Fondos de Jubilaciones y Pensiones ("AFJPs") are
privately owned pension fund managers that were formed as a result of reform and
privatization of Argentina's social security system. Privatized pension
reinsurance covers the life insurance as well as the total and permanent
disability components of the pension program. The claims under that program are
initially established as units of the underlying pension fund ("AFJP fund
units") at the time they are filed. Because AFJP claims payments are linked to
the AFJP fund units, the ultimate amounts of claims paid by the reinsurer under
the program should vary with the underlying performance of the related pension
fund over the period in which the claims were adjudicated. In addition, the
reinsurer is subject to the mortality and morbidity risks associated with the
underlying plan participants. The Company ceased renewal of reinsurance treaties
associated with privatized pension contracts in Argentina during 2001 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.
Because AFJP claims payments are linked to the AFJP fund units and the
AFJP funds are heavily invested in Argentine government securities, the economic
crisis in Argentina should have significantly reduced the AFJP fund unit values,
and hence the claims payable. However, the opposite effect has occurred because
of regulatory intervention of the Argentine government in the AFJP system,
including the pesofication of the Argentine economy as it relates to AFJPs.
Specifically, AFJP fund unit values are still artificially high, inflating AFJP
yields. There have also been delays in the payment of permanent disability
claims. The artificially high AFJP fund unit values adversely affect reinsurers
like RGA Reinsurance by inflating the value of claims payments on quota share
reinsurance contracts, prematurely triggering attachment points on stop loss
reinsurance contracts, and prematurely triggering excess of retention
reinsurance contracts. Additionally, the delay in paying disability claims,
coupled with the artificially high AFJP fund unit values, has the effect of
inflating the disability claims payments that will ultimately have to be made by
reinsurers. Recent draft regulations issued by the Argentine government would
require payment of these deferred disability claims at the inflated AFJP fund
unit values. The Company cannot predict if or when these draft regulations may
become effective.
It is the Company's position that these actions of the Argentine
government constitute violations of the Treaty on Encouragement and Reciprocal
Protection of Investments, between the Argentine Republic and the United States
of America, dated November 14, 1991 (the "Treaty"). RGA Reinsurance has put the
Argentine Republic on notice of the Company's intent to file a request for
arbitration of its dispute relating to these violations pursuant to the
Washington Convention of 1965 on the Settlement of Investment Disputes under the
auspices of the International Centre for Settlement of Investment Disputes of
the World Bank (the "ICSID Arbitration"), if an amicable settlement can not be
reached. The Company is also exploring other possible remedies under U.S. and
Argentine law. While it is not feasible to predict or determine the ultimate
outcome of the contemplated ICSID Arbitration or other remedies that the Company
may pursue, or provide reasonable ranges of potential losses if the Argentine
government continues with its present course of action, 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.
34
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 provided by brokers 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. Additionally, 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, which could result in exposure to workers' compensation
carve-out risks. The Company and other reinsurers and retrocessionaires involved
have raised substantial defenses upon which to contest claims arising from these
coverages, including defenses based upon the failure of the ceding company to
disclose the existence of manufactured claims spirals, inappropriate or
unauthorized underwriting procedures, etc. 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 affect 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, 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, 2004, the ceding
companies involved in these disputes have raised claims, or established reserves
that may result in claims, that are $62.6 million in excess of the amounts held
in reserve by the Company. The Company generally has little information
regarding any reserves established by the ceding companies, and it is possible
that any such reserves could be increased in the future. 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 $12.5 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.
35
\
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, 2003 and 2002 was $54.5 million and $50.9 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 $4.8 million, $3.3
million, and $3.0 million for 2003, 2002, and 2001, respectively.
DEFERRED ACQUISITION COSTS
Deferred acquisition 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 ($236.5 million as of December 31, 2003):
ONE-TIME ONE-TIME
QUANTITATIVE CHANGE IN SIGNIFICANT ASSUMPTIONS INCREASE IN DAC DECREASE IN DAC
- -------------------------------------------------------------- ----------------- -----------------
Estimated interest spread increasing (decreasing) 25 basis 1.0% (1.2)%
points from the current spread
Estimated policy lapse rates decreasing (increasing) 20% on a 0.2% (0.1)%
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.
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.
36
The following table displays DAC balances for asset-intensive business
and non-asset-intensive business by segment as of December 31, 2003:
NON-ASSET-INTENSIVE TOTAL
(IN THOUSANDS) ASSET-INTENSIVE DAC DAC DAC
-------------- ------------------- ------------------- -----------------
U.S. $ 236,509 $ 769,875 $ 1,006,384
Canada - 153,140 153,140
Asia Pacific - 179,737 179,737
Europe & South Africa - 412,703 412,703
Corporate and Other - 5,132 5,132
------------------ ------------------ -----------------
Total $ 236,509 $ 1,520,587 $ 1,757,096
================== ================== =================
As of December 31, 2003, the Company estimates that approximately 51.9%
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.
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 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.
During the fourth quarter of 2003, the Company issued 12,075,000 shares
of its common stock at $36.65 per share, raising proceeds of approximately
$426.7 million, net of expenses. The Company expects to use the proceeds for
general corporate purposes, including funding its reinsurance operations.
Pending such use, RGA expects to invest the net proceeds in interest-bearing,
investment-grade securities, short-term investments, or similar assets. MetLife,
Inc. and its affiliates purchased 3,000,000 shares of common stock in the
offering with a total purchase price of approximately $110.0 million.
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. During 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 any treasury
stock during 2003.
STATUTORY DIVIDEND LIMITATIONS
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. The applicable statutory provisions only permit an insurer to pay a
shareholder dividend from unassigned surplus. 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, 2004,
RCM and RGA Reinsurance could pay maximum dividends, without prior approval,
equal to their unassigned surplus, approximately $12.8 million and $56.1
million, respectively. The maximum amount available for dividends by RGA Canada
to RGA under the Canadian Minimum Continuing Capital and Surplus Requirements
("MCCSR") is $58.9 million. RGA Americas and RGA Barbados do not have material
restrictions on their ability to pay dividends out of retained earnings.
Dividend payments from other subsidiaries are subject to regulations in the
country of domicile.
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.
37
SHAREHOLDER DIVIDENDS
Historically, RGA has paid quarterly dividends ranging from $0.027 per
share in 1993 to $0.06 per share in 2003. 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.
DEBT AND PREFERRED SECURITIES
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 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 covenant default under
any of the agreements which remains uncured, 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, 2003, the Company had
$398.1 million in outstanding borrowings under its debt agreements and was in
compliance with all covenants under those agreements. Of that amount,
approximately $48.6 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 Note 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, RGA may redeem the
warrants in whole for cash, RGA common stock, or a combination of cash and RGA
common stock.
Although consolidated long-term debt increased approximately 21.5%
during 2003, interest expense related to long-term debt increased just 3.6%,
primarily due to the timing of additional borrowings and favorable interest
rates on the Company's U.S. revolving credit facility. The Company borrowed
$50.0 million against this facility during 2003. Consolidated interest expense
during 2002 increased significantly compared to 2001 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. As of December 31, 2003,
the average interest rate on long-term debt outstanding, excluding the PIERS,
was 6.02% compared to 6.74% at the end of 2002.
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, make interest payments on its senior indebtedness
and junior subordinated notes, repurchase RGA common stock under the board of
director approved plan, and meet its other obligations.
A general economic downturn or a downturn in the equity and other
capital markets could adversely affect the market for many annuity and life
insurance products and RGA's ability to raise new capital. Because the Company
obtains substantially all of its revenues through reinsurance arrangements that
cover a portfolio of life insurance products, as well as annuities, its business
would be harmed if the market for annuities or life insurance were adversely
affected.
38
REINSURANCE OPERATIONS
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.
ASSETS IN TRUST
Some treaties give ceding companies the right to request that the
Company 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, 2003, these treaties had approximately $308.4 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 $605.8 million were held in trust for the benefit of certain
subsidiaries of the Company to satisfy collateral requirements for reinsurance
business at December 31, 2003. Additionally, securities with an amortized cost
of $1,453.8 million, as of December 31, 2003, 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
reinsurance license of such subsidiary. If RGA was ever required to perform
under these obligations, the risk to the consolidated company under the
reinsurance treaties does not change; however, additional capital may be
required due to the change in jurisdiction of the subsidiary reinsuring the
business and may create a strain on liquidity.
GUARANTEES
RGA has issued guarantees to third parties on behalf of its
subsidiaries' performance for the payment of amounts due under certain credit
facilities, reinsurance treaties and an office lease obligation, whereby if a
subsidiary fails to meet an obligation, RGA or one of its other subsidiaries
will make a payment to fulfill the obligation. In limited circumstances, treaty
guarantees are granted to ceding companies in order to provide them additional
security, particularly in cases where RGA's subsidiary is relatively new,
unrated, or not of a significant size, relative to the ceding company.
Liabilities supported by the treaty guarantees, before consideration for any
legally offsetting amounts due from the guaranteed party, totaled $188.3 million
as of December 31, 2003 and are reflected on the Company's consolidated balance
sheet in future policy benefits. Potential guaranteed amounts of future payments
will vary depending on production levels and underwriting results. Guarantees
related to credit facilities provide additional security to third party banks
should a subsidiary fail to make principal and/or interest payments when due. As
of December 31, 2003, RGA's exposure related to credit facility guarantees was
$48.6 million and is reflected on the consolidated balance sheet in long-term
debt. RGA's maximum potential guarantee under the credit facilities is $53.1
million. RGA has issued a guarantee on behalf of a subsidiary in the event the
subsidiary fails to make payment under its office lease obligation. As of
December 31, 2003, the maximum potential exposure was approximately $3.0
million.
In addition, the Company indemnifies its directors and officers as
provided in its charters and by-laws. Since this indemnity generally is not
subject to limitation with respect to duration or amount, the Company does not
believe that it is possible to determine the maximum potential amount due under
this indemnity in the future.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no obligations, assets or liabilities other than those
reflected in the financial statements. Further, the Company has not engaged in
trading activities involving non-exchange traded contracts reported at fair
value, nor has it engaged in relationships or transactions with persons or
entities that derive benefits from their non-independent relationship with RGA.
CASH FLOWS
The Company's principal cash inflows from its reinsurance operations
are 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. The Company's principal cash inflows
from its investing activities result 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.
39
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 $129.5 million as of
December 31, 2003. In May 2003, the Company successfully renewed its U.S. credit
facility which now expires in May 2006 and has a capacity of $175.0 million, up
from $140.0 million. As of December 31, 2003, the Company's outstanding balance
was $50 million under this facility.
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 regulatory 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 the 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, 2003, 2002, and 2001, were $572.3 million, $161.9
million, and $243.9 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 high-quality fixed maturity
portfolio with positive liquidity characteristics. These securities are
available for sale and can be sold to meet the Company's obligations, if
necessary.
Net cash used in investing activities was $1,285.2 million, $582.5
million, and $576.4 million in 2003, 2002, and 2001, 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 used in investing activities in
2003 includes the investment of approximately $426.7 million related to the
Company's stock offering.
Net cash provided by financing activities was $703.3 million in 2003,
including cash raised from the Company's stock offering. Net cash provided by
financing activities was $285.5 million and $487.9 million in 2002 and 2001,
respectively. Changes in cash provided by financing activities primarily relate
to the issuance of equity or debt securities, borrowings or payments under the
Company's existing credit agreements, treasury stock activity, and excess
deposits under investment type contracts.
CONTRACTUAL OBLIGATIONS
The following table displays the Company's contractual obligations,
other than those arising from its reinsurance business (in millions):
Payment Due by Period
---------------------------------------------------------------
Less than
Contractual Obligations: Total 1 Year 1 - 3 Years 4 - 5 Years After 5 Years
------------------------ -------- ------- ------------ ------------ --------------
Long - term debt $ 398.1 $ - $ 198.2 $ - $ 199.9
Operating leases 29.4 5.4 9.4 8.7 5.9
Trust preferred securities of subsidiary 225.0 - - - 225.0
Limited partnerships 15.3 - 11.4 - 3.9
Structured investment contracts 34.4 9.4 18.7 6.3 -
Mortgage purchase commitments 27.0 27.0 - - -
-------- ------- ---------- -------- --------
Total $ 729.2 $ 41.8 $ 237.7 $ 15.0 $ 434.7
======== ======= ========== ======== ========
40
See Note 9 - "Income Tax," Note 10 - "Employee Benefits" and Note 15 -
"Long-Term Debt" in Notes to Consolidated Financial Statements for information
related to the Company's obligations for taxes, funding requirements for
retirement and other post-employment benefits, and interest on long-term debt.
LETTERS OF CREDIT
The Company has obtained letters of credit, issued by banks, in favor
of various affiliated and unaffiliated insurance companies from which the
Company assumes business. These letters of credit represent guarantees of
performance under the reinsurance agreements and allow ceding companies to take
statutory reserve credits. At December 31, 2003, there were approximately $38.7
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
and RGA Barbados. The Company cedes business to its offshore affiliates to help
reduce the amount of regulatory capital required in certain jurisdictions such
as the U.S. and the United Kingdom. The capital required to support the business
in the offshore affiliates reflects more realistic expectations than the
original jurisdiction of the business, where capital requirements are often
considered to be quite conservative. As of December 31, 2003, $396.3 million in
letters of credit from various banks were outstanding between the various
subsidiaries of RGA. Based on the growth of the Company's business and the
pattern of reserve levels associated with term life business, the amount of
ceded reserve credits is expected to grow. This growth will require the Company
to obtain additional letters of credit, put additional assets in trust, or
utilize other mechanisms to support the reserve credits. If the Company is
unable to support the reserve credits, the regulatory capital levels of several
of its subsidiaries may be significantly reduced. The reduction in regulatory
capital would not impact the Company's consolidated shareholders' equity under
Generally Accepted Accounting Principles. Fees associated with letters of credit
are not fixed and are based on the Company's ratings and the general
availability of these instruments in the marketplace.
INVESTMENTS
The Company had total cash and invested assets of $9.0 billion and $6.7
billion at December 31, 2003 and 2002, 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 their
respective 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 6.39% in 2003, compared
with 6.51% in 2002, and 6.79% in 2001. 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, 2003,
approximately 98% 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 26.4% of
fixed maturity securities as of December 31, 2003, a decrease from 32.3% as of
December 31, 2002. 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, 2003. The Company owns floating rate securities that represent approximately
1.6% of fixed maturity securities at December 31, 2003, compared to 2.8% at
December 31, 2002. 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 $77.9 million in asset-backed securities at December 31, 2003,
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. Less
than 1.0%, or $0.1 million are collateralized bond obligations. In addition to
the risks associated with
41
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 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, 2003, the Company held fixed maturities
with a cost basis of $0.1 million and a market value of $0.1 million, or less
than 0.1% of fixed maturities, that were non-income producing. Based on
management's judgment, securities with an other than temporary impairment in
value are written down to management's estimate of fair value. The Company
recorded other than temporary write-downs of fixed maturities totaling $20.1
million, $33.9 million, and $43.4 million in 2003, 2002, and 2001, respectively.
The circumstances that gave rise to these impairments were bankruptcy
proceedings and deterioration in collateral value supporting certain
asset-backed securities. During 2003 and 2002, the Company sold fixed maturity
securities with fair values of $460.3 million and $466.1 million at losses of
$25.2 million and $44.4 million, respectively.
The following table presents the total gross unrealized losses for 425
fixed maturity securities where the estimated fair value had declined and
remained below amortized cost by the indicated amount (in thousands):
At December 31, 2003
------------------------------------------
Gross Unrealized
Losses % of Total
---------------- ----------
Less than 20% $20,343 100%
20% or more for less than six months - 0%
20% or more for six months or greater - 0%
------- ---
Total $20,343 100%
======= ===
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 overall economic
conditions.
All gross unrealized losses have been outstanding less than 12 months.
The following table presents the fair value and total gross unrealized losses
for 425 fixed maturity securities as of December 31, 2003, by class of security,
and broken out between investment and non-investment grade securities (in
thousands):
Unrealized
Fair value losses
---------- ----------
Investment grade securities:
Commercial and industrial $ 381,730 $ 7,553
Public utilities 126,550 2,517
Asset-backed securities 6,835 295
Canadian and Canadian provincial governments 32,734 1,276
Foreign governments 38,158 1,303
Mortgage-backed securities 144,263 511
Finance 295,764 2,733
U.S. government and agencies 79,549 4,059
---------- ----------
Investment grade securities 1,105,583 20,247
---------- ----------
Non-investment grade securities:
Commercial and industrial 654 46
Public utilities 2,945 50
---------- ----------
Non-investment grade securities 3,599 96
---------- ----------
Total $1,109,182 $ 20,343
========== ==========
42
Approximately $2.5 million of the total unrealized losses were related
to securities issued by the airline, automotive, telecommunication, and utility
sectors. These securities have generally been adversely affected by overall
economic conditions. The Company believes that the analysis of each such
security whose price has been below market indicates 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, 2003.
Mortgage loans on real estate
Mortgage loans represented approximately 5.4% and 3.4% of the Company's
investments as of December 31, 2003 and 2002, respectively. As of December 31,
2003, 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 $11.4 million, with the average
mortgage loan investment as of December 31, 2003 totaling approximately $4.5
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, 2003 or 2002.
Policy loans
Policy loans comprised approximately 10.2% and 12.6% of the Company's
investments as of December 31, 2003 and 2002, 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
Under Issue B36, the Company's funds withheld receivable under certain
reinsurance arrangements incorporate credit risk exposures that are unrelated or
only partially related to the creditworthiness of the obligor include an
embedded derivative feature that is not clearly and closely related to the host
contract. Therefore, the embedded derivative feature must be measured at fair
value on the balance sheet and changes in fair value reported in income.
Substantially all of the Company's funds withheld receivable balance is
associated with its reinsurance of annuity contracts. The funds withheld
receivable balance totaled $2.7 billion at December 31, 2003, of which $2.0
billion are subject to the provisions of Issue B36 (see Note 2 - "New Accounting
Pronouncements" in Notes to Consolidated Financial Statements for further
discussion).
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.
Funds withheld at interest comprised approximately 30.6% and 29.7% of the
Company's investments as of December 31, 2003 and 2002, 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 the Company's balance sheet. In the event of a
ceding company's insolvency, the Company would need to assert a claim on the
assets supporting its reserve liabilities. However, the risk of loss to the
Company is mitigated by its ability to offset amounts it owes the ceding company
for claims or allowances with amounts owed to the Company 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,
2003, funds withheld at interest were approximately (in thousands):
43
At December 31, 2003
--------------------
Underlying Security Type: Book Value Market Value % of Total
- ------------------------- ---------- ------------ ----------
Investment grade U.S. corporate securities $1,854,933 $1,934,579 90.8%
Below investment grade U.S. corporate securities 87,190 85,262 4.0%
Unrated securities 16,903 16,890 0.8%
Other 90,764 94,843 4.4%
---------- ---------- -----
Total segregated portfolios 2,049,790 2,131,574 100.0%
---------- ---------- -----
Funds withheld at interest associated with
non-segregated portfolios 667,488 667,488
---------- ----------
Total funds withheld at interest $2,717,278 $2,799,062
========== ==========
Based on data provided by the ceding companies as of December 31, 2003,
the maturity distribution of the segregated portfolio portion of funds withheld
at interest was approximately (in thousands):
At December 31, 2003
--------------------
Maturity: Book Value Market Value % of Total
- --------- ---------- ------------ ----------
Within one year $ 35,763 $ 40,361 1.9%
More than one, less than five years 473,441 495,177 23.2%
More than five, less than ten years 1,249,003 1,297,882 60.9%
Ten years or more 291,583 298,154 14.0%
---------- ---------- -----
Total all years $2,049,790 $2,131,574 100.0%
========== ========== =====
Other Invested Assets
Other invested assets represented approximately 2.0% and 1.5% of the
Company's investments as of December 31, 2003 and 2002, respectively. Other
invested assets include derivative contracts, common stocks and preferred stocks
and limited partnership interests.
The Company has utilized 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. Derivative investments totaled $6.7 million as of December
31, 2003 and consisted of S&P 500 options.
As of December 31, 2003, 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.
44
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.
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, 2003 and 2002 was $159.1 million and $78.4
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,
with adjustments made to reflect the shift in the treasury yield curve as
appropriate.
At December 31, 2003, 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, 2003 and 2002 was $0.1 million and $0.3
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, 2003, 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 to the extent possible, but generally does not hedge the foreign
currency translation or net investment 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.
45
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, the Company liquidated substantially all its
Argentine based investment securities and reinvested the proceeds into
investment securities denominated in U.S. dollars during 2001. 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 21.4 million
Argentine pesos as of December 31, 2003. A net unrealized foreign currency gain
of $14.2 million is reflected in accumulated other comprehensive income on the
consolidated balance sheet as of December 31, 2003. 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
Effective December 31, 2003, the Company adopted Emerging Issues Task
Force ("EITF") Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments, ("EITF 03-01"). EITF 03-1 provides
guidance on the disclosure requirements for other-than-temporary impairments of
debt and marketable equity investments that are accounted for under Statement of
Financial Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities. The adoption of EITF 03-1 requires
the Company to include certain quantitative and qualitative disclosures for debt
and marketable equity securities classified as available-for-sale or
held-to-maturity under SFAS 115 that are impaired at the balance sheet date but
for which an other-than-temporary impairment has not been recognized. The
initial adoption of EITF 03-1 did not have a material impact on the Company's
consolidated financial statements.
In December, 2003, the Financial Accounting Standards Board ("FASB")
revised SFAS No. 132, Employers' Disclosures about Pensions and Other Post
Retirement Benefits - an Amendment of FASB Statements No. 87, 88 and 106 ("SFAS
132(r)"). SFAS 132(r) retains most of the disclosure requirements of SFAS 132
and requires additional disclosure about assets, obligations, cash flows and net
periodic cost of defined benefit pension plans and other defined post retirement
plans. SFAS 132(r) is primarily effective for fiscal years ending after December
15, 2003; however, certain disclosures about foreign plans and estimated future
benefit payments are effective for fiscal years ending after June 15, 2004. The
Company's adoption of SFAS 132(r) on December 31, 2003 did not have a
significant impact on its consolidated financial statements since it only
revises disclosure requirements.
In July 2003, the Accounting Standards Executive Committee issued
Statement of Position ("SOP") 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts." SOP 03-1 provides guidance on separate account presentation and
valuation, the accounting for sales inducements and the classification and
valuation of long-duration contract liabilities. SOP 03-1 is effective for
fiscal years beginning after December 15, 2003. The Company estimates the impact
of SOP 03-1 will be less than a $1.0 million increase to future policy benefits.
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150 "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Effective July 1, 2003,
the Company adopted the provisions of SFAS No. 150, which did not materially
affect the Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". SFAS No. 149 requires that
contracts with comparable characteristics be accounted for similarly. In
46
particular, SFAS No. 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative and when a
derivative contains a financing component, amends the definition of an
underlying to conform it to language used in FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", and amends certain other
existing pronouncements. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, provisions of SFAS No. 149 should be applied
prospectively. Effective July 1, 2003, the Company adopted the provisions of
SFAS No. 149 with no impact to the consolidated financial statements.
In April 2003, the FASB cleared SFAS No. 133 Implementation Issue No.
B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only
Partially Related to the Creditworthiness of the Obligor under Those
Instruments" ("Issue B36"). Issue B36 concluded that (i) a company's funds
withheld payable and/or receivable under certain reinsurance arrangements and
(ii) a debt instrument that incorporates credit risk exposures that are
unrelated or only partially related to the creditworthiness of the obligor
include an embedded derivative feature that is not clearly and closely related
to the host contract. Therefore, the embedded derivative feature must be
measured at fair value on the balance sheet and changes in fair value reported
in income.
Substantially all of the Company's funds withheld receivable balance is
associated with its reinsurance of annuity contracts. The funds withheld
receivable balance totaled $2.7 billion at December 31, 2003, of which $2.0
billion are subject to the provisions of Issue B36. Management believes the
embedded derivative feature in each of these reinsurance treaties is similar to
a total return swap on the assets held by the ceding companies. The Company has
developed cash flow models as the basis for estimating the value of the total
return swap. The cash flow models are based on the Company's expectations of the
future cash flows under the reinsurance treaties that in turn are driven by the
underlying annuity contracts. The fair value of the total return swap is
affected by changes, both actual and expected, in the cash flows of the
underlying annuity contracts, changes in credit risk associated with the assets
held by the ceding company and changes in interest rates. The change in fair
value, which is a non-cash item, also affects the amortization of deferred
acquisition costs since the Company is required to include it in its expectation
of gross profits. The adoption of Issue B36 resulted in a net gain, after tax
and after related amortization of deferred acquisition costs, of approximately
$9.0 million, of which approximately $0.5 million was recorded as a cumulative
effect of change in accounting principle. At December 31, 2003, the fair value
of the embedded derivatives totaled $42.7 million and was included in the funds
withheld at interest line item on the consolidated balance sheet. Subsequent to
adoption, the change in the market value of the underlying is recorded in the
consolidated statement of income as change in value of embedded derivatives, net
of related amortization of deferred acquisition costs. Industry standards and
practices continue to evolve related to valuing these types of embedded
derivative features.
In addition to its annuity contracts, the Company has entered into
various financial reinsurance treaties on a funds withheld and modified
coinsurance basis. These treaties do not transfer significant insurance risk and
are recorded on a deposit method of accounting with the Company earning a net
fee. As a result of the experience refund and loss carry forward provisions
contained in these treaties, the value of the embedded derivatives in these
contracts is currently considered immaterial. The Company monitors the
performance of these treaties on a quarterly basis. Significant adverse
performance or losses on these treaties may result in a loss associated with the
embedded derivative.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46"), an interpretation of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," which requires the consolidation by a
business enterprise of variable interest entities if the business enterprise is
the primary beneficiary. FIN 46 was effective January 31, 2003, for the Company
with respect to interests in variable interest entities obtained after that
date. With respect to interests in variable interest entities existing prior to
February 1, 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), which extends the effective date of FIN 46 to the period ending May 31,
2004. The Company currently does not believe it will be required to consolidate
any material interests in variable interest entities.
Effective January 1, 2003, the Company adopted the provisions of SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities,"
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," and
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others." The
adoption of these provisions did not materially affect the Company's financial
position or results of operations.
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 prospectively adopted
the
47
fair value-based employee stock-based compensation expense recognition
provisions of SFAS No. 123, as amended by SFAS No. 148. The Company formerly
applied the intrinsic value-based expense provisions set forth in APB Opinion
No. 25, Accounting for Stock Issued to Employees, ("APB 25"). For the year ended
December 31, 2003, the Company recorded pre-tax compensation expense of
approximately $1.6 million associated with stock option grants issued during
January 2003.
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
48
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2003 2002
----------- -----------
(Dollars in thousands)
ASSETS
Fixed maturity securities available for sale, at fair value $ 4,575,735 $3,502,703
Mortgage loans on real estate 479,312 227,492
Policy loans 902,857 841,120
Funds withheld at interest 2,717,278 1,975,071
Short-term investments 28,917 4,269
Other invested assets 179,320 99,540
----------- ----------
Total investments 8,883,419 6,650,195
Cash and cash equivalents 84,586 88,101
Accrued investment income 47,961 35,514
Premiums receivable 412,413 253,892
Reinsurance ceded receivables 463,557 425,387
Deferred policy acquisition costs 1,757,096 1,084,936
Other reinsurance balances 387,108 288,833
Other assets 77,234 65,739
----------- ----------
Total assets $12,113,374 $8,892,597
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 3,550,156 $2,430,042
Interest sensitive contract liabilities 4,170,591 3,413,462
Other policy claims and benefits 1,091,038 760,166
Other reinsurance balances 267,706 233,286
Deferred income taxes 438,973 291,980
Other liabilities 90,749 55,235
Long-term debt 398,146 327,787
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company 158,292 158,176
----------- ----------
Total liabilities 10,165,651 7,670,134
Commitments and contingent liabilities - -
Stockholders' Equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) - -
Common stock (par value $.01 per share; 75,000,000 shares authorized,
63,128,273 and 51,053,273 shares issued at December 31, 2003 and 2002,
respectively) 631 511
Warrants 66,915 66,915
Additional paid-in-capital 1,042,444 613,042
Retained earnings 641,502 480,301
Accumulated other comprehensive income:
Accumulated currency translation adjustment, net of income taxes 53,601 715
Unrealized appreciation of securities, net of income taxes 170,658 102,768
----------- ----------
Total stockholders' equity before treasury stock 1,975,751 1,264,252
Less treasury shares held of 967,927 and 1,596,629 at cost at
December 31, 2003 and December 31, 2002, respectively (28,028) (41,789)
----------- ----------
Total stockholders' equity 1,947,723 1,222,463
----------- ----------
Total liabilities and stockholders' equity $12,113,374 $8,892,597
=========== ==========
See accompanying notes to consolidated financial statements.
49
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Twelve months ended December 31,
--------------------------------------------
2003 2002 2001
---------- ---------- ----------
(Dollars in thousands, except per share data)
REVENUES:
Net premiums $2,643,163 $1,980,666 $1,661,762
Investment income, net of related expenses 465,579 374,512 340,559
Realized investment gains (losses), net 5,360 (14,651) (68,431)
Change in value of embedded derivatives (net of amounts
allocable to deferred acquisition costs of $30,665 in 2003) 12,931 - -
Other revenues 47,300 41,436 34,394
---------- ---------- ----------
Total revenues 3,174,333 2,381,963 1,968,284
BENEFITS AND EXPENSES:
Claims and other policy benefits 2,108,431 1,539,464 1,376,802
Interest credited 179,702 126,715 111,712
Policy acquisition costs and other insurance expenses
(excluding $30,665 allocated to embedded derivatives in 2003) 458,165 391,504 304,217
Other operating expenses 119,636 94,786 91,306
Interest expense 36,789 35,516 18,097
---------- ---------- ----------
Total benefits and expenses 2,902,723 2,187,985 1,902,134
Income from continuing operations before
income taxes 271,610 193,978 66,150
Provision for income taxes 93,291 65,515 26,249
---------- ---------- ----------
Income from continuing operations 178,319 128,463 39,901
Discontinued operations:
Loss from discontinued accident and health
operations, net of income taxes (5,723) (5,657) (6,855)
---------- ---------- ----------
Income before cumulative effect of change in
accounting principle 172,596 122,806 33,046
Cumulative effect of change in accounting principle,
net of income taxes 545 - -
---------- ---------- ----------
Net income $ 173,141 $ 122,806 $ 33,046
========== ========== ==========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 3.47 $ 2.60 $ 0.81
Discontinued operations (0.11) (0.11) (0.14)
Cumulative effect of change in accounting principal 0.01 - -
---------- ---------- ----------
Net income $ 3.37 $ 2.49 $ 0.67
========== ========== ==========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 3.46 $ 2.59 $ 0.80
Discontinued operations (0.11) (0.12) (0.14)
Cumulative effect of change in accounting principal 0.01 $ - -
---------- ---------- ----------
Net income $ 3.36 $ 2.47 $ 0.66
========== ========== ==========
DIVIDENDS DECLARED PER SHARE $ 0.24 $ 0.24 $ 0.24
========== ========== ==========
See accompanying notes to consolidated financial statements.
50
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Additional
Preferred Common Paid In Retained Comprehensive
Stock Stock Warrants Capital Earnings Income
--------- ------ -------- ---------- -------- -------------
Balance, January 1, 2001 $ - $ 511 $ - $ 611,349 $348,158
Comprehensive income:
Net income 33,046 $ 33,046
Other comprehensive income, net of income tax
Currency translation adjustments 9,779
Unrealized investment gains, net of related
offsets and reclassification adjustment 41,917
--------
Other comprehensive income 51,696
--------
Comprehensive income $ 84,742
========
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 $122,806
Other comprehensive income, net of income tax
Currency translation adjustments 6,803
Unrealized investment gains, net of related
offsets and reclassification adjustment 102,855
--------
Other comprehensive income 109,658
--------
Comprehensive income $232,464
========
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
======== ====== ======== ========== ========
Comprehensive income:
Net income 173,141 $173,141
Other comprehensive income, net of income tax
Currency translation adjustments 52,886
Unrealized investment gains, net of related
offsets and reclassification adjustment 67,890
--------
Other comprehensive income 120,776
--------
Comprehensive income $293,917
========
Dividends to stockholders (11,940)
Issuance of common stock, net of expenses 120 426,581
Reissuance of treasury stock 2,821
-------- ------ -------- ---------- --------
Balance, December 31, 2003 $ - $ 631 $ 66,915 $1,042,444 $641,502
======== ====== ======== ========== ========
Accumulated
Other
Comprehensive Treasury
Income Stock Total
------------- -------- ----------
Balance, January 1, 2001 $ (57,871) $(39,224) $ 862,923
Comprehensive income:
Net income 33,046
Other comprehensive income, net of income tax
Currency translation adjustments 9,779
Unrealized investment gains, net of related
offsets and reclassification adjustment 41,917
Other comprehensive income 51,696
Comprehensive income
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
Other comprehensive income, net of income tax
Currency translation adjustments 6,803
Unrealized investment gains, net of related
offsets and reclassification adjustment 102,855
Other comprehensive income 109,658
Comprehensive income
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
=========== ======== ==========
Comprehensive income:
Net income 173,141
Other comprehensive income, net of income tax
Currency translation adjustments 52,886
Unrealized investment gains, net of related
offsets and reclassification adjustment 67,890
Other comprehensive income 120,776
Comprehensive income
Dividends to stockholders (11,940)
Issuance of common stock, net of expenses 426,701
Reissuance of treasury stock 13,761 16,582
----------- -------- ----------
Balance, December 31, 2003 $ 224,259 $(28,028) $1,947,723
=========== ======== ==========
See accompanying notes to consolidated financial statements.
51
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve months ended
December 31,
------------------------------------------
2003 2002 2001
----------- ----------- -----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 173,141 $ 122,806 $ 33,046
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (11,480) (4,958) 7,101
Premiums receivable (166,868) (95,989) 64,929
Deferred policy acquisition costs (596,482) (274,033) (180,110)
Reinsurance ceded balances (38,170) (41,273) (114,579)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 1,164,871 460,601 357,840
Deferred income taxes 63,895 73,793 (32,901)
Other assets and other liabilities, net 23,469 (74,576) 70,139
Amortization of net investment discounts and other (40,227) (35,902) (38,985)
Realized investment (gains) losses, net (5,360) 14,651 68,431
Other, net 5,485 16,731 9,020
----------- ----------- -----------
Net cash provided by operating activities 572,274 161,851 243,931
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturity securities-available for sale 1,768,107 2,204,813 1,129,263
Maturities of fixed maturity securities - available for sale 27,623 22,863 12,410
Purchases of fixed maturity securities - available for sale (2,536,847) (2,749,069) (1,211,104)
Cash invested in mortgage loans of real estate (264,205) (78,605) (51,050)
Cash invested in policy loans (67,727) (70,240) (67,784)
Cash invested in funds withheld at interest (137,125) (41,828) (257,101)
Principal payments on mortgage loans on real estate 12,812 15,069 15,376
Principal payments on policy loans 5,991 3,780 1
Change in short-term investments and other invested assets (93,857) 110,717 (146,388)
----------- ----------- -----------
Net cash used in investing activities (1,285,228) (582,500) (576,377)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (11,940) (11,854) (11,855)
Proceeds from PIERS units offering, net - - 217,340
Borrowings under credit agreements 64,662 1,610 49,029
Proceeds from offering of common stock, net 426,701 - -
Purchase of treasury stock - (6,594) -
Exercise of stock options 13,761 1,623 4,684
Excess deposits on universal life and other
investment type policies and contracts 210,160 300,761 228,667
----------- ----------- -----------
Net cash provided by financing activities 703,344 285,546 487,865
Effect of exchange rate changes 6,095 (3,466) 454
----------- ----------- -----------
Change in cash and cash equivalents (3,515) (138,569) 155,873
Cash and cash equivalents, beginning of period 88,101 226,670 70,797
----------- ----------- -----------
Cash and cash equivalents, end of period $ 84,586 $ 88,101 $ 226,670
=========== =========== ===========
Supplementary disclosure of cash flow information:
Amount of interest paid $ 35,873 $ 34,687 $ 18,483
Amount of income taxes paid $ 8,043 $ 17,403 $ 26,418
See accompanying notes to consolidated financial statements.
52
REINSURANCE GROUP OF AMERICA, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2003, 3002, AND 2001
Note 1 ORGANIZATION
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding
company that was formed on December 31, 1992. As of December 31, 2003, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
51.9% of the outstanding shares of common stock of RGA. Equity Intermediary
Company is a wholly-owned subsidiary of MetLife, Inc., a New York-based
insurance and financial services holding company.
The consolidated financial statements include the assets, liabilities, and
results of operations of RGA, RGA Reinsurance Company ("RGA Reinsurance"), RGA
Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life Reinsurance
Company of Canada ("RGA Canada"), RGA Americas Reinsurance Company, Ltd. ("RGA
Americas"), RGA Reinsurance Company of Australia, Limited ("RGA Australia") and
RGA Reinsurance UK Limited ("RGA UK") as well as several other subsidiaries,
subject to an ownership position of 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. 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 book 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 an other than temporary basis so that the fair value is reduced to an amount
less than the book 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
53
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 fair 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 agreements written on a coinsurance funds
withheld 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 through 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.
Change in value of embedded derivatives reflects the change in the market value
of specific financial instruments as required by Issue B36, net of related
amortization of deferred acquisition costs.
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. 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 $21.8 million,
which are carried at fair value of $6.7 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 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 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 company.
54
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. No adjustments were made
during 2003, however, 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. 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 less interest
credited, 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 are included in other reinsurance
assets/liabilities. The amount of revenue reported in other revenues 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 Statement of Financial Accounting Standards ("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 2003, there were no changes to
goodwill as a result of acquisitions or disposals. Goodwill as of December 31,
2003 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 prior to
2002 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 $5.8
million and $7.5 million, including accumulated amortization of $7.6 million and
$5.9 million, as of December 31, 2003 and 2002, respectively. The value of
business acquired amortization expense for the years ended December 31, 2003,
2002, and 2001 was $1.7 million, $2.2 million, and $2.9 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
$1.3 million, $1.0 million, $0.8 million, $0.6 million, and $0.4 million during
2004, 2005, 2006, 2007 and 2008, 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, 2003, the Company had capitalized
approximately $17.9 million of internally developed software. None of its
internally developed software had been amortized as of December 31, 2003.
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
2.5% 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.
55
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. 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. The Company
occasionally enters into sales of investment securities under agreements to
repurchase the same securities. These transactions are reported as
collateralized financings and the repurchase obligation is a component of other
liabilities. At December 31, 2003 and 2002, there were no repurchase agreements
outstanding.
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, RGA Technology Partners, Inc., RCM and Fairfield
Management Group, Inc. ("Fairfield"). Due to rules which affect the ability of
an entity to join in a consolidated tax return, RGA Americas Reinsurance
Company, Ltd. files a separate tax return even though it is considered to be a
U.S. taxpayer. The Company's Argentine, Australian, Bermudan, Canadian,
Malaysian, South African, Irish 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. The market value of the detachable warrants on the date the PIERS
units were 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 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 on the consolidated balance
sheet.
56
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. Effective July 1, 2003, the Company
increased its retention amount from $4.0 million of coverage per individual life
to $6.0 million. 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.
Various RGA insurance subsidiaries retrocede amounts in excess of their
retention to RGA Reinsurance, RGA Barbados and RGA Americas. Retrocessions are
arranged through the Company's retrocession pools for amounts in excess of the
Company's retention limit. As of December 31, 2003, 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, and 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 4.7%, 4.2% and
6.1%, during 2003, 2002 and 2001, respectively. Interest crediting rates for
U.S. dollar-denominated investment-type contracts ranged from 4.0% to 9.5%
during 2003, 2.8% to 6.8% during 2002 and 3.6% to 7.3% during 2001. Weighted
average interest crediting rates for Mexican peso-denominated investment-type
contracts were 21.8%, 15.9% and 12.8% for 2003, 2002 and 2001, 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. Effective December 31, 2003, the Company adopted
Emerging Issues Task Force ("EITF") Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,
("EITF 03-01"). EITF 03-1 provides guidance on the disclosure requirements for
other-than-temporary impairments of debt and marketable equity investments that
are accounted for under Statement of Financial Accounting Standards ("SFAS") No.
115, Accounting for Certain Investments in Debt and Equity Securities. The
adoption of EITF 03-1 requires the Company to include certain quantitative and
qualitative disclosures for debt and marketable equity securities classified as
available-for-sale or held-to-maturity under SFAS 115 that are impaired at the
balance sheet date but for which an other-than-temporary impairment has not been
recognized. The initial adoption of EITF 03-1 did not have a material impact on
the Company's consolidated financial statements.
In December, 2003, the Financial Accounting Standards Board ("FASB") revised
SFAS No. 132, Employers' Disclosures about Pensions and Other Post Retirement
Benefits - an Amendment of FASB Statements No. 87, 88 and 106 ("SFAS 132(r)").
SFAS 132(r) retains most of the disclosure requirements of SFAS 132 and requires
additional disclosure about assets, obligations, cash flows and net periodic
cost of defined benefit pension plans and other defined post retirement plans.
SFAS 132(r) is primarily effective for fiscal years ending after December 15,
2003; however, certain disclosures about
57
foreign plans and estimated future benefit payments are effective for fiscal
years ending after June 15, 2004. The Company's adoption of SFAS 132(r) on
December 31, 2003 did not have a significant impact on its consolidated
financial statements since it only revises disclosure requirements.
In July 2003, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts." SOP
03-1 provides guidance on separate account presentation and valuation, the
accounting for sales inducements and the classification and valuation of
long-duration contract liabilities. SOP 03-1 is effective for fiscal years
beginning after December 15, 2003. The Company estimates the impact of SOP 03-1
will be less than a $1.0 million increase to future policy benefits.
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Effective July 1, 2003, the Company
adopted the provisions of SFAS No. 150, which did not materially affect the
Company's financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 requires that
contracts with comparable characteristics be accounted for similarly. In
particular, SFAS No. 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative and when a
derivative contains a financing component, amends the definition of an
underlying to conform it to language used in FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", and amends certain other
existing pronouncements. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, provisions of SFAS No. 149 should be applied
prospectively. Effective July 1, 2003, the Company adopted the provisions of
SFAS No. 149 with no impact to the consolidated financial statements.
In April 2003, the FASB cleared SFAS No. 133 Implementation Issue No. B36,
"Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments
That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Obligor under Those Instruments" ("Issue
B36"). Issue B36 concluded that (i) a company's funds withheld payable and/or
receivable under certain reinsurance arrangements and (ii) a debt instrument
that incorporates credit risk exposures that are unrelated or only partially
related to the creditworthiness of the obligor include an embedded derivative
feature that is not clearly and closely related to the host contract. Therefore,
the embedded derivative feature must be measured at fair value on the balance
sheet and changes in fair value reported in income.
Substantially all of the Company's funds withheld receivable balance is
associated with its reinsurance of annuity contracts. The funds withheld
receivable balance totaled $2.7 billion at December 31, 2003, of which $2.0
billion are subject to the provisions of Issue B36. Management believes the
embedded derivative feature in each of these reinsurance treaties is similar to
a total return swap on the assets held by the ceding companies. The Company has
developed cash flow models as the basis for estimating the value of the total
return swap. The cash flow models are based on the Company's expectations of the
future cash flows under the reinsurance treaties that in turn are driven by the
underlying annuity contracts. The fair value of the total return swap is
affected by changes, both actual and expected, in the cash flows of the
underlying annuity contracts, changes in credit risk associated with the assets
held by the ceding company and changes in interest rates. The change in fair
value, which is a non-cash item, also affects the amortization of deferred
acquisition costs since the Company is required to include it in its expectation
of gross profits. During 2003, the Company recorded a net gain, after tax and
after related amortization of deferred acquisition costs, of approximately $9.0
million associated with Issue B36, of which approximately $0.5 million was
recorded as a cumulative effect of change in accounting principle. At December
31, 2003, the fair value of the embedded derivative totaled $42.7 million and is
included in the funds withheld at interest line item on the consolidated balance
sheet. Subsequent to adoption, the change in the market value of the underlying
is recorded in the consolidated statement of income as change in value of
embedded derivatives, net of related amortization of deferred acquisition costs.
Industry standards and practices continue to evolve related to valuing these
types of embedded derivative features.
In addition to its annuity contracts, the Company has entered into various
financial reinsurance treaties on a funds withheld and modified coinsurance
basis. These treaties do not transfer significant insurance risk and are
recorded on a deposit method of accounting with the Company earning a net fee.
As a result of the experience refund provisions contained in these treaties, the
value of the embedded derivatives in these contracts is currently considered
immaterial. The Company monitors
58
the performance of these treaties on a quarterly basis. Significant adverse
performance or losses on these treaties may result in a loss associated with the
embedded derivative.
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"),
an interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements," which requires the consolidation by a business enterprise
of variable interest entities if the business enterprise is the primary
beneficiary. FIN 46 was effective January 31, 2003, for the Company with respect
to interests in variable interest entities obtained after that date. With
respect to interests in variable interest entities existing prior to February 1,
2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), which
extends the effective date of FIN 46 to the period ending March 31, 2004. The
Company currently does not believe it will be required to consolidate any
material interests in variable interest entities.
Effective January 1, 2003, the Company adopted the provisions of SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities," and FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." The
adoption of these provisions did not materially affect the Company's financial
position or results of operations.
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 prospectively adopted the fair
value-based employee stock-based compensation expense recognition provisions of
SFAS No. 123, as amended by SFAS No. 148. The Company formerly applied the
intrinsic value-based expense provisions set forth in APB Opinion No. 25,
Accounting for Stock Issued to Employees, ("APB 25"). For the year ended
December 31, 2003, the Company recorded pre-tax compensation expense of
approximately $1.6 million associated with stock option grants issued during
January 2003. See Note 18 -- "Stock Options" for pro forma information.
Reclassification. The Company has reclassified the presentation of certain prior
period information to conform to the 2003 presentation.
Note 3 STOCK TRANSACTIONS
On November 13, 2003, RGA issued 10,500,000 shares of its common stock at $36.65
per share. On December 4, 2003, underwriters for the public offering exercised
their entire option to purchase an additional 1,575,000 newly issued shares of
common stock, also at a price of $36.65 per share. After giving effect to the
exercise of the option, RGA sold 12,075,000 shares of its common stock and
received proceeds of approximately $426.7 million, net of expenses. MetLife,
Inc. purchased 3,000,000 million of these newly issued shares.
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, 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, 2003, 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 SIGNIFICANT TRANSACTION
During December 2003, the Company completed a large coinsurance agreement with
Allianz Life Insurance Company of North America ("Allianz Life"). Under this
agreement, RGA Reinsurance assumed the traditional life reinsurance business of
Allianz Life, including yearly renewable term reinsurance and coinsurance of
term policies. The business assumed does not include any accident and health
risk, annuities or related guaranteed minimum death benefits or guaranteed
minimum income benefits. This transaction adds additional scale to our U.S.
traditional business, but does not significantly add to our client base since
most of the underlying ceding companies are already our clients. The Company has
agreed to use commercially reasonable efforts to novate the underlying treaties
from Allianz Life to RGA Reinsurance. Novation results in the underlying client
companies reinsuring the business directly to RGA Reinsurance versus passing
through Allianz Life. The profitability of the business is not dependent on
novation.
The transaction was effective retroactive to July 1, 2003. Under the agreement,
Allianz Life transferred to RGA Reinsurance $425.7 million in cash and statutory
reserves. RGA Reinsurance paid Allianz Life a ceding commission of $310.0
million. As a result of this transaction, during the fourth quarter of 2003 our
U.S. traditional sub-segment reflected $246.1 million in
59
net premiums and approximately $6.8 million of net income, after tax.
Additionally, as of December 31, 2003, we reflected $217.6 million in invested
assets and cash, $264.0 million in deferred policy acquisition costs and $455.5
million in future policy benefits on our consolidated balance sheet.
Note 5 INVESTMENTS
Major categories of net investment income consist of the following (in
thousands):
Years Ended December 31, 2003 2002 2001
-------- -------- --------
Fixed maturity securities available for sale $228,260 $203,534 $192,685
Mortgage loans on real estate 23,599 14,385 11,569
Policy loans 59,883 59,058 54,713
Funds withheld at interest 144,975 89,831 72,753
Short-term investments 2,501 3,393 6,513
Other invested assets 12,820 7,290 5,092
-------- -------- --------
Investment revenue 472,038 377,491 343,325
Investment expense 6,459 2,979 2,766
-------- -------- --------
Net investment income $465,579 $374,512 $340,559
======== ======== ========
The amortized cost, gross unrealized gains and losses, and estimated fair values
of investments in fixed maturity securities at December 31, 2003 and 2002 are as
follows (in thousands):
Amortized Unrealized Unrealized Fair
2003 Cost Gains Losses Value
---------- ---------- ---------- ----------
Available for sale:
Commercial and industrial $1,162,516 $ 53,545 $ 7,599 $1,208,462
Public utilities 663,491 102,479 2,567 763,403
Asset-backed securities 74,323 3,835 295 77,863
Canadian and Canadian provincial governments 440,207 73,336 1,276 512,267
Mortgage-backed securities 328,849 16,917 511 345,255
Finance 694,579 38,574 2,733 730,420
U.S. government and agencies 794,273 8,029 4,059 798,243
Other foreign government securities 140,359 766 1,303 139,822
---------- -------- ------- ----------
$4,298,597 $297,481 $20,343 $4,575,735
========== ======== ======= ==========
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
---------- ---------- ---------- ----------
Available for sale:
Commercial and industrial $1,104,453 $ 50,518 $ 23,578 $1,131,393
Public utilities 346,072 40,346 8,960 377,458
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 347,299 19,428 2,726 364,001
U.S. government and agencies 410,143 11,883 19 422,007
Other foreign government securities 65,180 1,258 - 66,438
---------- ---------- ---------- ----------
$3,332,717 $ 227,562 $ 57,576 $3,502,703
========== ========== ========== ==========
There were no investments in any entity in excess of 10% of stockholders' equity
at December 31, 2003 or 2002, other than investments issued or guaranteed by the
U.S. government.
Common and non-redeemable 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, 2003 and 2002 was approximately $142.5 million and $77.5
million, respectively. The net unrealized gain on equity investments at December
31, 2003 was approximately $5.5 million with an unrealized loss of $1.0
60
million at December 31, 2002. The cost basis of the derivative financial
instruments at December 31, 2003 and 2002 was approximately $3.8 million and
$4.4 million, respectively.
The amortized cost and estimated fair value of fixed maturity securities
available for sale at December 31, 2003 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 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, 2003, 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 $ 65,903 $ 67,506
Due after one year through five years 783,220 815,707
Due after five years through ten years 1,144,245 1,188,314
Due after ten years 1,397,052 1,573,272
Asset and mortgage-backed securities 908,177 930,936
---------- ----------
$4,298,597 $4,575,735
========== ==========
Net realized investment gains (losses) consist of the following (in thousands):
Years Ended December 31 2003 2002 2001
- ----------------------- --------- --------- -----------
Fixed maturities and equity securities available for sale:
Realized gains $ 52,602 $ 64,060 $ 34,108
Realized losses (45,742) (79,005) (101,854)
Other, net (1,500) 294 (685)
-------- -------- ----------
Net gains (losses) $ 5,360 $(14,651) $ (68,431)
======== ======== ==========
Included in net realized losses are other than temporary write-downs of fixed
maturity securities of approximately $20.1 million, $33.9 million, and $43.4
million in 2003, 2002, and 2001, respectively. The Company incurred realized
losses due to the other than temporary impairment in value of collateralized
bond obligations of $9.7 million, $24.2 million and $36.3 million during 2003,
2002 and 2001, respectively. 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.
At December 31, 2003, fixed maturity securities held by the Company that were
below investment grade had an estimated book value and fair value of
approximately $94.6 million and $101.6 million, respectively. At December 31,
2003, the Company owned non-income producing securities with an amortized cost
and market value of $0.1 million.
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, 2003, the Company held fixed maturities
with a cost basis of $0.1 million and a market value of $0.1 million, or less
than 0.1% of fixed maturities, that were non-income producing. Based on
management's judgment, securities with an other than temporary impairment in
value are written down to management's estimate of fair value. The Company
recorded other than temporary write-downs of fixed maturities totaling $20.1
million, $33.9 million, and $43.4 million in 2003, 2002, and 2001, respectively.
The circumstances that gave rise to these impairments were bankruptcy
proceedings and deterioration in collateral value supporting certain
asset-backed securities. During 2003 and 2002, the Company sold fixed maturity
securities with fair values of $460.3 million and $466.1 million at losses of
$25.2 million and $44.4 million, respectively.
61
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, 2003
------------------------------------------
Gross Unrealized Losses % of Total
----------------------- ----------
Less than 20% $20,343 100%
20% or more for less than six months - 0%
20% or more for six months or greater - 0%
------- ---
Total $20,343 100%
======= ===
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 overall economic
conditions.
All gross unrealized losses have been outstanding less than 12 months.
The following table presents the fair value and total gross unrealized losses
for 425 fixed maturity securities as of December 31, 2003, by class of security,
and broken out between investment and non-investment grade securities (in
thousands):
Fair value Unrealized losses
---------- -----------------
Investment grade securities:
Commercial and industrial $ 381,730 $ 7,553
Public utilities 126,550 2,517
Asset-backed securities 6,835 295
Canadian and Canadian provincial governments 32,734 1,276
Foreign governments 38,158 1,303
Mortgage-backed securities 144,263 511
Finance 295,764 2,733
U.S. government and agencies 79,549 4,059
---------- -------
Investment grade securities 1,105,583 20,247
---------- -------
Non-investment grade securities:
Commercial and industrial 654 46
Public utilities 2,945 50
---------- -------
Non-investment grade securities 3,599 96
---------- -------
Total $1,109,182 $20,343
========== =======
Approximately $2.5 million of the total unrealized losses were related to
securities issued by the airline, automotive, telecommunication, and utility
sectors. These securities have generally been adversely affected by overall
economic conditions. The Company believes that the analysis of each such
security whose price has been below market indicates 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, 2003.
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):
62
2003 2002
------------------------ -------------------------
Carrying Percentage Carrying Percentage
Value Of Total Value Of Total
--------- ---------- --------- ----------
Property Type:
Apartment $ 56,581 11.80% $ 15,080 6.63%
Retail 98,597 20.57% 61,395 26.99%
Office building 171,142 35.71% 89,765 39.46%
Industrial 147,617 30.80% 59,279 26.05%
Other commercial 5,375 1.12% 1,973 0.87%
--------- ------ --------- ------
Total $ 479,312 100.00% $ 227,492 100.00%
========= ====== ========= ======
All the Company's mortgage loans are amortizing loans. As of December 31, 2003
and 2002, the Company's mortgage loans were distributed as follows (in
thousands):
2003 2002
------------------------ -------------------------
Carrying Percentage Carrying Percentage
Value Of Total Value of Total
-------- ---------- --------- ----------
United States:
Arizona $ 26,030 5.43% $ 7,023 3.09%
California 102,296 21.33% 59,186 26.02%
Colorado 20,643 4.31% 8,467 3.72%
Florida 45,100 9.41% 19,294 8.48%
Georgia 31,882 6.65% 23,619 10.38%
Illinois 28,595 5.97% 11,736 5.16%
Indiana 11,438 2.39% 11,745 5.16%
Kansas 13,633 2.84% 7,169 3.15%
Louisiana 5,269 1.10% - -
Maine 4,980 1.04% - -
Maryland 6,949 1.45% 4,164 1.83%
Missouri 14,199 2.96% 14,440 6.35%
Nevada 11,155 2.33% 1,259 0.55%
New Hampshire 2,377 0.50% - -
New Jersey 16,159 3.37% - -
New Mexico 3,900 0.81% 3,965 1.74%
New York 3,605 0.75% - -
North Carolina 22,958 4.79% 15,885 6.99%
Oregon 5,849 1.22% - -
Pennsylvania 5,451 1.14% 5,569 2.45%
Rhode Island 5,266 1.10% 5,355 2.35%
South Dakota 7,365 1.54% 7,480 3.29%
Texas 20,943 4.37% 9,376 4.12%
Virginia 31,883 6.65% 3,396 1.49%
Washington 23,017 4.80% 8,364 3.68%
Wisconsin 8,370 1.75% - -
-------- ------ --------- ------
Total $479,312 100.00% $ 227,492 100.00%
======== ====== ========= ======
Substantially all mortgage loans are performing and no valuation allowance had
been established as of December 31, 2003 and 2002.
The maturities of the mortgage loans are as follows (in thousands):
2003 2002
---- ----
Due one year through five years $105,179 $ 40,924
Due after five years 297,321 108,337
Due after ten years 76,812 78,231
-------- --------
Total $479,312 $227,492
======== ========
63
Policy loans comprised approximately 10.2% and 12.6% of the Company's
investments as of December 31, 2003 and 2002, 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 30.6% and 29.7% of the
Company's investments as of December 31, 2003 and 2002, respectively. For
agreements written on a modified coinsurance basis and certain agreements
written on a coinsurance funds withheld 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 consolidated 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.
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, 2003 and 2002. 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):
2003 2002
---------------------------- -------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ---------- ----------
Assets:
Fixed maturity securities $ 4,575,735 $ 4,575,735 $3,502,703 $3,502,703
Mortgage loans on real estate 479,312 499,102 227,492 248,483
Policy loans 902,857 902,857 841,120 841,120
Funds withheld at interest 2,717,278 2,799,062 1,975,071 2,031,044
Short-term investments 28,917 28,917 4,269 4,269
Other invested assets 179,320 174,646 99,540 95,043
Liabilities:
Interest-sensitive contract liabilities $ 4,170,591 $ 3,900,244 $3,413,462 $3,223,005
Long-term debt 398,146 421,735 327,787 347,179
Company-obligated mandatorily
redeemable preferred securities 158,292 194,490 158,176 177,401
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, 2003 and 2002 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, while
limited partnership interests are carried at cost.
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 either quoted market
prices or quoted market prices for the debt of 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
64
established for amounts deemed uncollectible. At December 31, 2003 and 2002, 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, 2003 2002 2001
----------- ----------- -----------
Direct $ 3,966 $ 4,986 $ 11,471
Reinsurance assumed 2,918,488 2,325,512 1,839,083
Reinsurance ceded (279,291) (349,832) (188,792)
----------- ----------- -----------
Net premiums and amounts earned $ 2,643,163 $ 1,980,666 $ 1,661,762
=========== =========== ===========
The effect of reinsurance on policyholder claims and other policy benefits is as
follows (in thousands):
Years Ended December 31, 2003 2002 2001
----------- ----------- ------------
Direct $ 8,272 $ 3,330 $ 6,104
Reinsurance assumed 2,350,135 1,744,630 1,525,248
Reinsurance ceded (249,976) (208,496) (154,550)
----------- ----------- ------------
Net policyholder claims and benefits $ 2,108,431 $ 1,539,464 $ 1,376,802
=========== =========== ============
At December 31, 2003 and 2002, there were no reinsurance ceded 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, 2003 $ 75 $1,252,161 $ 254,822 $ 997,414 125.54%
December 31, 2002 75 758,875 162,395 596,555 127.21%
December 31, 2001 73 615,990 117,748 498,315 123.61%
At December 31, 2003, the Company has provided approximately $811.3 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, 2003, these treaties had approximately $308.4 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 $605.8 million were held in trust to satisfy
collateral requirements for reinsurance business for the benefit of certain
subsidiaries of the company at December 31, 2003. Additionally, securities with
an amortized cost of $1,453.8 million, as of December 31, 2003, 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 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.
65
Note 8 DEFERRED POLICY ACQUISITION COSTS
The following reflects the amounts of policy acquisition costs deferred and
amortized (in thousands):
Years Ended December 31, 2003 2002 2001
- ------------------------ ----------- ----------- -----------
Deferred policy acquisition costs:
Assumed $ 1,835,923 $ 1,162,256 $ 860,971
Retroceded (78,827) (77,320) (60,652)
----------- ----------- -----------
Net $ 1,757,096 $ 1,084,936 $ 800,319
=========== =========== ===========
Years Ended December 31, 2003 2002 2001
- ------------------------ ----------- ----------- -----------
Beginning of year $ 1,084,936 $ 800,319 $ 621,475
Capitalized
Assumed 1,045,932 615,431 469,734
Retroceded (23,772) (23,001) (13,893)
Amortized
Assumed (343,368) (314,146) (301,549)
Allocated to change in value of embedded derivatives (28,897) - -
Retroceded 22,265 6,333 24,552
----------- ----------- -----------
End of year $ 1,757,096 $ 1,084,936 $ 800,319
=========== =========== ===========
Some reinsurance agreements involve reimbursing the ceding company for
allowances and commissions in excess of first-year premiums. These amounts
represent an investment in the reinsurance agreement, and are capitalized to the
extent deemed recoverable from the future premiums and amortized against future
profits of the business. This type of agreement presents a risk to the extent
that the business lapses faster than originally anticipated resulting in future
profits being insufficient to recover the Company's investment.
Note 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, 2003 2002 2001
- ------------------------ ------- -------- --------
Current income tax expense (benefit) $27,347 $(14,412) $ 49,738
Deferred income tax expense (benefit) 46,313 57,221 (31,866)
Foreign current tax expense 2,048 6,134 9,412
Foreign deferred tax expense (benefit) 17,583 16,572 (1,035)
------- -------- --------
Provision for income taxes $93,291 $ 65,515 $ 26,249
======= ======== ========
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, 2003 2002 2001
- ------------------------ -------- --------- --------
Tax provision at U.S. statutory rate $ 95,064 $ 67,892 $ 23,153
Increase (decrease) in income taxes resulting from:
Foreign tax rate differing from U.S. tax rate (2,227) (124) (784)
Settlement of IRS audit - (2,000) -
Travel and entertainment 2 129 32
Intangible amortization - 199 65
Deferred tax valuation allowance 556 (211) 3,501
Other, net (104) (370) 282
-------- --------- --------
Total provision for income taxes $ 93,291 $ 65,515 $ 26,249
======== ========= ========
66
Total income taxes were as follows (in thousands):
Years Ended December 31 2003 2002 2001
-------- --------- -------
Income tax from continuing operations $ 93,291 $ 65,515 $26,249
Tax benefit on discontinued operations (3,082) (3,066) (3,691)
Tax effect on cumulative change in accounting principle 293 - -
Income tax from stockholders' equity:
Net unrealized holding gain on debt and equity securities
recognized for financial reporting purposes 36,637 51,591 21,320
Exercise of stock options (2,919) (1,943) (1,653)
Foreign currency translation 28,477 (3,664) (5,266)
-------- --------- -------
Total income tax provided $152,697 $ 108,433 $36,959
======== ========= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at December 31, 2003 and 2002,
are presented in the following tables (in thousands):
Years Ended December 31 2003 2002
---------- --------
Deferred income tax assets:
Nondeductible accruals $ 23,744 $ 21,120
Reserve for policies and investment income differences 140,049 86,602
Deferred acquisition costs capitalized for tax 40,711 33,561
Net operating loss carryforward 183,340 148,803
Foreign tax and AMT credit carryforward 12,394 9,494
Capital loss carryforward - 4,831
Subtotal 400,238 304,411
Valuation allowance (12,988) (12,458)
---------- --------
Total deferred income tax assets 387,250 291,953
Deferred income tax liabilities:
Deferred acquisition costs capitalized for financial reporting 617,492 386,953
Differences between tax and financial reporting amounts concerning
certain reinsurance transactions 35,474 156,123
Differences in foreign currency translation 28,862 385
Differences in the tax basis of cash and invested assets 144,395 40,472
---------- --------
Total deferred income tax liabilities 826,223 583,933
---------- --------
Net deferred income tax liabilities $ 438,973 $291,980
========== ========
As of December 31, 2003 and 2002, a valuation allowance for deferred tax assets
of approximately $13.0 million and $12.5 million, respectively, was provided on
the foreign tax credits and net operating losses of RGA Reinsurance, 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 are not expected to
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 2003, 2002, and 2001, the Company received federal income tax refunds of
approximately $1.6 million, $5.2 million and $5.0 million, respectively. The
Company made cash income tax payments of approximately $8.0 million, $17.4
million and $26.4 million in 2003, 2002 and 2001, respectively. At December 31,
2003 and 2002, the Company recognized deferred tax assets associated with net
operating losses of approximately $487.2 million and $391.9 million,
respectively, that will expire between 2011 and 2018. However, these net
operating losses are expected to be utilized in the normal course of
67
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 U.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 projected obligation was approximately $18.7 million and $16.1
million as of December 31, 2003 and 2002, respectively.
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 financial results and employee 401(k) contributions, were
approximately $1.9 million, $1.2 million and $1.3 million in 2003, 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 $0.7 million, $0.6 million, and $0.5
million for 2003, 2002 and 2001, respectively, related to these postretirement
plans. The projected obligation was approximately $5.3 million and $4.5 million
as of December 31, 2003 and 2002, respectively.
December 31,
------------------------------------------------------
(in thousands) Pension Benefits Other Benefits
--------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Projected benefit obligation at beginning of year $ 16,137 $14,249 $ 4,508 $ 3,467
Service cost 1,473 1,218 314 264
Interest cost 1,052 972 303 261
Participant contributions -- -- 11 8
Actuarial losses 280 38 265 559
Benefits paid (290) (340) (70) (51)
-------- ------- -------- --------
Projected benefit obligation at end of year $ 18,652 $16,137 $ 5,331 $ 4,508
======== ======= ======== ========
CHANGE IN PLAN ASSETS:
Contract value of plan assets at beginning of year $ 7,725 $ 7,719 $ -- $ --
Actual return on plan assets 1,857 (775) -- --
Employer and participant contributions 564 1,127 70 51
Benefits paid (307) (346) (70) (51)
-------- ------- -------- --------
Contract value of plan assets at end of year $ 9,839 $ 7,725 $ -- $ --
======== ======= ======== ========
Under funded $ (8,813) $(8,412) $ (5,331) $ (4,508)
Unrecognized net actuarial losses 1,760 2,818 1,629 1,423
Unrecognized prior service cost 276 306 -- --
-------- ------- -------- --------
Accrued benefit cost $ (6,777) $(5,288) $ (3,702) $ (3,085)
======== ======= ======== ========
Qualified plan accrued pension cost $ (2,445) $(1,401)
Non-qualified plan accrued pension cost (4,482) (4,065)
Intangible assets 117 127
Accumulated other comprehensive income 33 51
-------- -------
Accrued benefit cost $ (6,777) $(5,288)
======== =======
68
The aggregate projected benefit obligation and aggregate contract value of plan
assets for the pension plans were as follows (in thousands):
2003 2002
---- ----
Qualified Non-Qualified Qualified Non-Qualified
Plan Plan Plan Plan
--------- ------------- --------- -------------
Aggregate projected benefit obligation $(14,182) $(4,470) $(11,846) $ (4,291)
Aggregate contract value of plan assets 9,839 -- 7,725 --
-------- ------- -------- --------
Under funded $ (4,343) $(4,470) $ (4,121) $ (4,291)
-------- ------- -------- --------
Accumulated benefit obligation $ 11,290 $ 3,349 $ 9,380 $ 3,048
======== ======= ======== ========
Weighted average assumptions used to determine the accumulated benefit
obligation and net benefit cost or income for the year ended December 31:
Pension Benefits Other Benefits
---------------- --------------
2003 2002 2003 2002
---- ---- ---- ----
Discount rate 6.50% 6.75% 6.50% 6.75%
Expected rate of return on plan assets 8.75% 8.75% -- --
Rate of compensation increase 4.95% 4.95% -- --
The assumed health care cost trend rates used in measuring the accumulated
nonpension postretirement benefit obligation were as follows:
December 31,
------------
2003 2002
---- ----
Pre-Medicare eligible claims 10% down to 5% in 2008 11% down to 5% in 2008
Medicare eligible claims 10% down to 5% in 2008 11% down to 5% in 2008
Assumed health care cost trend rates may have a significant effect on the
amounts reported for health care plans. A one-percentage point change in assumed
health care cost trend rates would have the following effects (in thousands):
One Percent Increase One Percent Decrease
Effect on total of service and interest cost components $ 147 $(111)
Effect on accumulated postretirement benefit obligation 1,115 $(854)
The components of net periodic benefit cost were as follows (in thousands):
Pension Benefits Other Benefits
---------------- --------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Service cost $1,473 $1,218 $ 916 $314 $264 $213
Interest cost 1,052 972 954 303 261 218
Expected return on plan assets (643) (751) (815) -- -- --
Amortization of prior actuarial losses 141 7 9 60 41 29
Amortization of prior service cost 30 30 30 -- -- --
------ ------ ------ ---- ---- ----
Net periodic benefit cost $2,053 $1,476 $1,094 $677 $566 $460
====== ====== ====== ==== ==== ====
The Company expects to contribute $1.5 million in pension benefits and $0.1
million in other benefits during 2004.
69
The following benefit payments, which reflect expected future service as
appropriate, are expected to be paid (in thousands):
Pension Other
Benefits Benefits
-------- --------
2004 $ 1,095 $ 75
2005 1,266 79
2006 2,043 83
2007 1,722 87
2008 1,966 91
2009-2013 11,006 529
Results for the Pension and Other Benefits Plans are measured at December 31 for
each year presented.
Allocation of the Pension Plan's total plan fair value by asset type:
2003 2002
---- ----
ASSET CATEGORY:
Equity securities 73% 66%
Debt securities 27% 34%
--- ---
Total 100% 100%
2004 target range of allocation by asset type of the Pension Plan's
total plan fair value on a weighted average basis:
ASSET CATEGORY:
Equity securities 65% - 80%
Debt securities 25% - 50%
Target allocations of assets are determined with the objective of maximizing
returns and minimizing volatility of net assets through adequate asset
diversification and partial liability immunization. Adjustments are made to
target allocations based on the Company's assessment of the impact of economic
factors and market conditions.
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,
treasury, risk management and corporate travel. The cost for the years ended
December 31, 2003, 2002 and 2001 was approximately $1.0 million, $1.2 million
and $1.1 million respectively.
Management does not believe that the various amounts charged for these services
would be materially different if they had been incurred from an unrelated third
party.
RGA Reinsurance also has a product license and service agreement with MetLife.
Under this agreement, RGA has licensed the use of its electronic underwriting
product to MetLife and provides Internet hosting services, installation and
modification services for the product. Payments under the agreement for the
years ended December 31, 2003 and 2002 were approximately $3.2 million and $0.4
million, respectively.
The Company also has direct policies and reinsurance agreements with MetLife and
certain of its subsidiaries. As of December 31, 2003, the Company had
reinsurance related assets and liabilities from these agreements totaling $175.0
million and $169.6 million, respectively. Prior-year comparable assets and
liabilities were $156.6 million and $190.1 million, respectively. Additionally,
the Company reflected net premiums of approximately $157.9 million, $172.8
million, and $149.3 million in 2003, 2002, and 2001, 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 $19.4 million,
$23.3 million, and $26.1 million in 2003, 2002, and 2001, respectively.
70
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, 2003
are as follows:
2004 $5.4 million
2005 4.8 million
2006 4.6 million
2007 4.5 million
2008 4.2 million
Thereafter 5.9 million
The amounts above are net of expected sublease income of approximately $0.3
million annually through 2010. Rent expenses amounted to approximately $6.8
million, $6.0 million, and $5.3 million for the years ended December 31, 2003,
2002, and 2001, respectively.
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, 2003 and
2002 (in thousands):
Statutory Statutory
Capital & Surplus Net Income (Loss)
------------------- --------------------------------
2003 2002 2003 2002 2001
---- ---- ---- ---- ----
RCM $839,731 $639,809 $ 3,883 $ 1,922 $ 4,025
RGA Reinsurance 828,922 633,557 (73,285) 13,640 (84,633)
RGA Canada 245,911 186,726 18,231 177 12,285
RGA Barbados 121,705 101,077 19,380 17,481 22,986
RGA Americas 162,128 79,635 43,796 14,611 800
Other reinsurance subsidiaries 103,867 68,397 (16,805) 557 1,221
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. The
applicable statutory provisions only permit an insurer to pay a shareholder
dividend from unassigned surplus. 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, 2004, RCM and RGA Reinsurance
could pay maximum dividends, without prior approval, equal to their unassigned
surplus, approximately $12.8 million and $56.1 million respectively. The maximum
amount available for dividends by RGA Canada to RGA under the Canadian Minimum
Continuing Capital and Surplus Requirements ("MCCSR") is $58.9 million. RGA
Americas and RGA Barbados do not have material restrictions on their ability to
pay dividends out of retained earnings. Dividend payments from other
subsidiaries are subject to regulations in the country of domicile.
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, 2004, the ceding
companies involved in these disputes have raised claims, or established reserves
that may result in claims, that are $62.6 million in excess of the amounts held
in reserve by the Company. The Company generally has little information
regarding any reserves established by the ceding companies, and it is possible
that any such reserves could be increased in the future. 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 $12.5 million
71
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.
Additionally, from time to time, the Company is subject to litigation and
arbitration related to its life 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 reinsured privately owned pension funds that were formed as a
result of reform and privatization of Argentina's social security system. The
Company ceased renewal of reinsurance treaties associated with privatized
pension contracts in Argentina during 2001 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. It is the
Company's position that actions of the Argentine government, which may affect
future results from this business for the Company, constitute violations of the
Treaty on Encouragement and Reciprocal Protection of Investments, between the
Argentine Republic and the United States of America, dated November 14, 1991
(the "Treaty"). The Company has put the Argentine Republic on notice of the
Company's intent to file a request for arbitration of its dispute relating to
these violations pursuant to the Washington Convention of 1965 on the Settlement
of Investment Disputes under the auspices of the International Centre for
Settlement of Investment Disputes of the World Bank (the "ICSID Arbitration"),
if an amicable settlement can not be reached. The Company is also exploring
other possible remedies under U.S. and Argentine law. While it is not feasible
to predict or determine the ultimate outcome of the contemplated ICSID
Arbitration, other remedies that the Company may pursue, or provide reasonable
ranges of potential losses if the Argentine government continues with its
present course of action, it is the opinion of management, after consultation
with counsel, that their outcomes, after consideration of the provisions made in
the Company's 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, 2003, there were approximately $38.7
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, 2003, $396.3 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 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 to third parties on behalf of its subsidiaries'
performance for the payment of amounts due under certain credit facilities,
reinsurance treaties and an office lease obligation, whereby if a subsidiary
fails to meet an obligation, RGA or one of its other subsidiaries will make a
payment to fulfill the obligation. In limited circumstances, treaty guarantees
are granted to ceding companies in order to provide them additional security,
particularly in cases where RGA's subsidiary is relatively new, unrated, or not
of a significant size, relative to the ceding company. Liabilities supported by
the treaty guarantees, before consideration for any legally offsetting amounts
due from the guaranteed party, totaled $188.3 million as of December 31, 2003
and are reflected on the Company's consolidated balance sheet in future policy
benefits. Potential guaranteed amounts of future payments will vary depending on
production levels and underwriting results. Guarantees related to credit
facilities provide additional security to third party banks should a subsidiary
fail to make principal and/or interest payments when due. As of December 31,
2003, RGA's exposure related to credit facility guarantees was $48.6 million and
is reflected on the consolidated balance sheet in long-term debt. RGA's maximum
potential guarantee under the credit facilities is $53.1 million. RGA has issued
a guarantee on behalf of a subsidiary in the event the subsidiary fails to make
payment under its office lease obligation. As of December 31, 2003, the maximum
potential exposure was approximately $3.0 million.
In addition, the Company indemnifies its directors and officers as provided in
its charters and by-laws. Since this indemnity generally is not subject to
limitation with respect to duration or amount, the Company does not believe that
it is possible to determine the maximum potential amount due under this
indemnity in the future.
72
Note 15 LONG-TERM DEBT
The Company's long-term debt consists of the following (in millions):
2003 2002
------ ------
Senior Notes @ 6.75% due 2011 $199.9 $199.9
Senior Notes @ 7.25% due 2006 99.6 99.5
Revolving Credit Facilities 98.6 28.4
------ ------
Total $398.1 $327.8
====== ======
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, related to the issuance of the 6.75% Senior
Notes were $1.7 million at December 31, 2003.
The Company has revolving credit facilities in the United States, the United
Kingdom, and Australia, under which it may borrow up to approximately $228.1
million. As of December 31, 2003, the Company had drawn approximately $98.6
million under these facilities at rates ranging from 1.69% to 5.56%. The Company
increased its borrowings under the United States, the United Kingdom, and the
Australia credit facility during 2003 by $50.0 million, $7.1 million, and $7.5
million, respectively. Terminations of revolving credit facilities and
maturities of senior notes over the next five years would be $48.6 million in
2005 and $150.0 million in 2006. The Company may draw up to $175.0 million on
its U.S. revolving credit facility that expires in May 2006. As of December 31,
2003, the Company had $50.0 million outstanding under this facility.
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,
2003, the Company had $398.1 million in outstanding borrowings under its debt
agreements and was in compliance with all covenants under those agreements. Of
that amount, approximately $48.6 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 and trust preferred securities
(See Note 16) during 2003, 2002 and 2001 totaled $35.9 million, $34.7 million
and $18.5 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
total amount of debt outstanding, subject to the guarantees, as of December 31,
2003 was $48.6 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 $4.5 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:
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.
73
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 consolidated
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
Prior to January 1, 2003, the Company aggregated the results of its five main
operational segments into three reportable segments: U.S., Canada, and Other
International. The Other International reportable segment formerly included
operations in Latin America, Asia Pacific, and Europe & South Africa. Effective
January 1, 2003, as a result of the Company's declining presence in Argentina
and changes in management responsibilities for part of the Latin America region,
the Other International reportable segment no longer included Latin America
operations. Latin America results relating to the Argentine privatized pension
business as well as direct insurance operations in Argentina are now reported in
the Corporate and Other segment. The results for all other Latin America
business, primarily traditional reinsurance business in Mexico, are now reported
as part of U.S. operations in the Traditional sub-segment. Additionally, the
remaining operations of the Other International reportable segment, Asia Pacific
and Europe & South Africa, are now presented herein as separate reportable
segments. Prior-period segment information has been reclassified to conform to
this new presentation. 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 critical illness products.
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 Company's
discontinued accident and health operations are not reflected in the continuing
operations of the Company. The Company measures segment performance based on
income or loss before income taxes.
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 reinsurance 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
primarily 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, 2003 2002 2001
---------- ---------- ----------
Revenues:
U.S. $2,191,210 $1,709,952 $1,484,969
Canada 315,161 251,715 247,624
Europe & South Africa 373,138 230,813 96,455
Asia Pacific 270,132 169,351 126,653
Corporate and Other 24,692 20,132 12,583
---------- ---------- ----------
Total from continuing operations $3,174,333 $2,381,963 $1,968,284
========== ========== ==========
74
For the Years ended December 31, 2003 2002 2001
--------- -------- ---------
Income (loss) from continuing operations before income taxes:
U.S. $ 216,088 $175,801 $ 124,581
Canada 59,564 38,631 51,516
Europe & South Africa 20,272 3,409 (963)
Asia Pacific 19,262 6,316 3,007
Corporate and Other (43,576) (30,179) (111,991)
--------- -------- ---------
Total from continuing operations $ 271,610 $193,978 $ 66,150
========= ======== =========
For the Years ended December 31, 2003 2002 2001
--------- -------- ---------
Interest expense:
Europe & South Africa $ 1,043 $ 680 $ 681
Asia Pacific 1,096 842 867
Corporate and Other 34,650 33,994 16,549
--------- -------- ---------
Total from continuing operations $ 36,789 $ 35,516 $ 18,097
========= ======== =========
For the Years ended December 31, 2003 2002 2001
--------- -------- ---------
Depreciation and amortization:
U.S. $ 310,548 $267,341 $ 248,581
Canada 9,315 22,537 33,048
Europe & South Africa 85,657 33,251 15,620
Asia Pacific 39,723 25,542 30,681
Corporate and Other 1,981 12,186 537
--------- -------- ---------
Total from continuing operations $ 447,224 $360,857 $ 328,467
========= ======== =========
The table above includes amortization of deferred acquisition costs and the DAC
offset to the change in value of embedded derivatives related to Issue B36.
As of December 31, 2003 2002
----------- ------------
Assets:
U.S. $ 8,474,954 $ 6,302,237
Canada 1,935,604 1,533,339
Europe & South Africa 483,876 263,136
Asia Pacific 413,628 273,503
Corporate and Other and discontinued operations 805,312 520,382
----------- -----------
Total assets $12,113,374 $ 8,892,597
=========== ===========
Subsidiaries in which RGA 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.
Capital expenditures of each reporting segment were immaterial in the periods
noted.
During 2003, two clients represented $96.0 million or 40.2% of gross premiums
for the Canada operations. Four other clients individually represented more than
5% of Canada's gross premiums. Together, these four clients represented 27.2% of
Canada's gross premiums. Three clients of the Company's United Kingdom
operations generated approximately $287.3 million, or 74.5% of the total gross
premiums for the Europe & South Africa operations. Two clients, one each in
Australia and Hong Kong, generated approximately $62.3 million, or 22.2% of the
total gross premiums for the Asia Pacific operations.
75
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, 2003,
shares authorized for the granting of Benefits under the Plan and the Directors
Plan totaled 6,260,077 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.
2003 2002 2001
---------------------------- ------------------------------- ---------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise price Options Exercise price Options Exercise price
------- -------------- ------- -------------- ------- ----------------
Balance at beginning of year 2,700,333 $26.36 2,326,808 $24.42 2,065,731 $22.03
Granted 735,654 $27.29 554,233 $31.90 493,037 $30.05
Exercised (627,822) $18.51 (147,927) $15.59 (224,892) $14.00
Forfeited (113,512) $29.10 (32,781) $29.63 (7,068) $34.37
--------- ------ --------- ------ --------- ------
Balance at end of year 2,694,653 $28.34 2,700,333 $26.36 2,326,808 $24.42
========= ====== ========= ====== ========= ======
Options Outstanding Options Exercisable
---------------------------------------------------------------- -----------------------------------
Outstanding as of Weighted-Average Remaining Weighted-Average Exercisable as of Weighted-Average
Range of Exercise Prices 12/31/2003 Contractual Life Exercise Price 12/31/2003 Exercise Price
- ------------------------ ------------------ -------------------------- --------------- ----------------- ---------------
$10.00 - $14.99 5,481 1.0 $12.22 5,481 $12.22
$15.00 - $19.99 30,522 2.0 $15.61 30,522 $15.61
$20.00 - $24.99 524,325 4.9 $22.27 379,400 $21.91
$25.00 - $29.99 1,315,228 7.7 $28.04 356,358 $28.19
$30.00 - $34.99 527,401 7.8 $31.90 137,711 $31.87
$35.00 - $39.99 291,696 4.7 $35.81 257,856 $35.78
--------- --- ------ --------- ------
Totals 2,694,653 6.7 $28.34 1,167,328 $27.86
========= === ====== ========= ======
The per share weighted-average fair value of stock options granted during 2003,
2002, and 2001 was $9.51, $11.71, and $11.87 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 2003-expected dividend yield of .95%, risk-free interest rate of
2.79%, expected life of 6.0 years, and an expected rate of volatility of the
stock of 35% over the expected life of the options; 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.
Prior to January 1, 2003, the Company applied APB Opinion No. 25 in accounting
for its Stock Plans and, accordingly, no compensation cost was recognized for
its stock options in the financial statements. Had the Company determined
76
compensation cost based on the fair value at the grant date for its stock
options under SFAS 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 SFAS No. 123 may not be representative of the effects on reported net
income for future years. See Note 2 regarding New Accounting Pronouncements and
the Company's adoption of SFAS No. 148.
(in thousands) 2003 2002 2001
-------- -------- -------
Net income as reported $173,141 $122,806 $33,046
Add: Stock-based employee compensation expense included in reported net
income, net of related tax effects 1,673 - -
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects 3,626 2,982 3,219
-------- -------- -------
Pro forma net income $171,188 $119,824 $29,827
======== ======== =======
Net income per share:
Basic - as reported $ 3.37 $ 2.49 $ 0.67
Basic - pro forma $ 3.34 $ 2.43 $ 0.60
Diluted - as reported $ 3.36 $ 2.47 $ 0.66
Diluted - pro forma $ 3.32 $ 2.41 $ 0.60
In January 2004, the Board approved an incentive compensation package including
309,392 incentive stock options at $39.61 per share and 128,693 performance
contingent units 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):
2003 2002 2001
-------- -------- -------
Earnings:
Income from continuing operations (numerator for
basic and diluted calculations) $178,319 $128,463 $39,901
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 51,318 49,381 49,420
Equivalent shares from outstanding stock options 280 267 485
-------- -------- -------
Diluted shares (denominator for diluted calculation) 51,598 49,648 49,905
Earnings per share from continuing operations:
Basic $ 3.47 $ 2.60 $ 0.81
Diluted $ 3.46 $ 2.59 $ 0.80
======== ======== =======
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 0.3 million, 1.4 million and 0.2 million outstanding stock options
were not included in the calculation of common equivalent shares during 2003,
2002 and 2001, 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.
77
Note 20 COMPREHENSIVE INCOME
The following table presents the components of the Company's accumulated other
comprehensive income for the years ended December 31, 2003, 2002 and 2001 (in
thousands):
FOR THE YEAR ENDED DECEMBER 31, 2003:
BEFORE-TAX AMOUNT TAX EXPENSE AFTER-TAX AMOUNT
----------------- ----------- ----------------
Foreign currency translation adjustments:
Change arising during year $ 81,363 $ (28,477) $ 52,886
Unrealized gains on securities:
Unrealized net holding gains arising during the year 109,887 (38,176) 71,711
Less: Reclassification adjustment for net gains realized in net income 5,360 (1,539) 3,821
-------- --------- ---------
Net unrealized gains 104,527 (36,637) 67,890
-------- --------- ---------
Other comprehensive income $185,890 $ (65,114) $ 120,776
======== ========= =========
FOR THE YEAR ENDED DECEMBER 31, 2002:
TAX (EXPENSE)
BEFORE-TAX AMOUNT BENEFIT AFTER-TAX AMOUNT
----------------- ------------- ----------------
Foreign currency translation adjustments:
Change arising during year $ 10,467 $ (3,664) $ 6,803
Unrealized gains on securities:
Unrealized net holding gains arising during the year 139,795 (47,698) 92,097
Less: Reclassification adjustment for net 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:
TAX (EXPENSE)
BEFORE-TAX AMOUNT BENEFIT AFTER-TAX AMOUNT
----------------- ------------- ----------------
Foreign currency translation adjustments:
Change arising during year $ 15,045 $ (5,266) $ 9,779
Unrealized gains on securities:
Unrealized net holding gains arising during the year (5,193) (136) (5,329)
Less: Reclassification adjustment for net 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
======== ======== ========
A summary of the components of net unrealized appreciation of balances carried
at fair value is as follows (in thousands):
YEARS ENDED DECEMBER 31 2003 2002 2001
-------- --------- --------
Change in net unrealized appreciation on:
Fixed maturity securities available for sale $105,562 $ 168,732 $ 63,555
Other investments 5,715 (541) 1,138
Effect of unrealized appreciation on:
Deferred policy acquisition costs (6,750) (13,739) (1,266)
Other - (6) (189)
-------- --------- --------
Net unrealized appreciation $104,527 $ 154,446 $ 63,238
======== ========= ========
78
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 provided by brokers 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. Additionally, 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, which could result in exposure to workers' compensation
carve-out risks. The Company and other involved reinsurers and retrocessionaires
have raised substantial defenses upon which to contest claims arising from these
coverages, including defenses based upon the failure of the ceding company to
disclose the existence of manufactured claims spirals, inappropriate or
unauthorized underwriting procedures, etc. 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, 2004, the ceding
companies involved in these disputes have raised claims, or established reserves
that may result in claims, that are $62.6 million in excess of the amounts held
in reserve by the Company. The Company generally has little information
regarding any reserves established by the ceding companies, and it is possible
that any such reserves could be increased in the future. 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 $12.5 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.
79
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, 2003 and 2002 was $54.5 million and $50.9 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 $4.8 million, $3.3
million, and $3.0 million for 2003, 2002, and 2001, respectively.
80
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, 2003 and 2002, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2003. 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2003, 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.
As discussed in Note 2, the Company changed its method of accounting for
embedded derivatives in certain insurance products as required by new accounting
guidance which became effective on October 1, 2003, and recorded the impact as a
cumulative effect of a change in accounting principle.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
March 9, 2004
81
Quarterly Data (Unaudited)
Years Ended December 31
(in thousands, except per share data)
2003 First Second Third Fourth
--------- -------- -------- ---------
Revenues from continuing operations $653,549 $714,376 $712,500 $1,093,908
Revenues from discontinued operations $ 1,592 $ 814 $ 1,002 $ 1,395
Income from continuing operations before income taxes $ 49,853 $ 67,009 $ 63,007 $ 91,741
Income from continuing operations $ 33,160 $ 43,586 $ 42,224 $ 59,349
Loss from discontinued accident and health operations, net of income taxes (418) (1,027) (473) (3,805)
Cumulative effect of change in accounting principal, net of income taxes - - - 545
-------- -------- -------- ----------
Net income $ 32,742 $ 42,559 $ 41,751 $ 56,089
Total outstanding common shares - end of period 49,638 49,781 49,912 62,160
BASIC EARNINGS PER SHARE
Continuing operations $ 0.67 $ 0.88 $0.85 $ 1.06
Discontinued operations (0.01) (0.02) (0.01) (0.07)
Cumulative effect of change in accounting principal - - - 0.01
-------- -------- -------- ----------
Net income $ 0.66 $ 0.86 $0.84 $ 1.00
DILUTED EARNINGS PER SHARE
Continuing operations $ 0.67 $ 0.87 $ 0.84 $ 1.05
Discontinued operations (0.01) (0.02) (0.01) (0.07)
Cumulative effect of change in accounting principal - - - 0.01
-------- -------- -------- ----------
Net income $ 0.66 $ 0.85 $ 0.83 $ 0.99
Dividends per share on common stock $ 0.06 $ 0.06 $ 0.06 $ 0.06
Market price of common stock
Quarter end $ 26.28 $ 32.10 $ 40.75 $ 38.65
Common stock price, high 29.64 33.00 42.00 42.55
Common stock price, low 24.75 25.52 31.65 35.83
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 accident and health operations, net of income taxes (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
Reinsurance Group of America, Incorporated common stock is traded on the New
York Stock Exchange (NYSE) under the symbol "RGA". There were 89 stockholders of
record of RGA's common stock on March 1, 2004.
82
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by 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 (as defined in
Exchange Act Rule 13a-15(e)). Based upon that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There were no changes in the Company's
internal control over financial reporting during the quarter ended December 31,
2003 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
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 Company has adopted an Employee Code of Business Conduct and Ethics
(the "Employee Code"), a Directors' Code of Conduct (the "Directors' Code"), and
a Financial Management Code of Professional Conduct (the "Financial Management
Code"). The Employee Code applies to all employees and officers of the Company
and its subsidiaries. The Directors' Code applies to directors of the Company
and its subsidiaries. The Financial Management Code applies to the Company's
chief executive offer, chief financial officer, corporate controller, chief
financial officers in each business unit, and all professionals in finance and
finance-related departments. The Company intends to satisfy its disclosure
obligations under Item 10 of Form 8-K by posting on its website information
about amendments to, or waivers from a provision of the Financial Management
Code that applies to the Company's chief executive officer, chief financial
officer, and corporate controller. Each of the three Codes described above are
available on the Company's website at www.rgare.com.
Also available on the Company's website are the following other items:
Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee
Charter, and Nominating and Corporate Governance Committee Charter (collectively
"Governance Documents").
The Company will provide without charge upon written or oral request, a
copy of any of any of the Codes of Conduct or Governance Documents. Requests
should be directed to Investor Relations, Reinsurance Group of America,
Incorporated, 1370 Timberlake Manor Parkway, Chesterfield, MO 63017 by
electronic mail (investrelations@rgare.com) or by telephone (636-736-7243).
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, each individual holds the same position at RGA, RCM and RGA
Reinsurance.
David B. Atkinson, 50, 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
83
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, 40, 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, 49, 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.
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.
James E. Sherman, 50, is Executive 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, 54, 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, 52, 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.
84
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. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information on this subject is found in the Proxy Statement under the
caption "Principal Accountant Fees and Services " and incorporated herein by
reference. The Proxy Statement will be filed pursuant to Regulation 14A within
120 days of the end of the Company's fiscal year.
PART IV
Item 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 49
Consolidated Statements of Income 50
Consolidated Statements of Stockholders' Equity 51
Consolidated Statements of Cash Flows 52
Notes to Consolidated Financial Statements 53-80
Independent Auditors' Report 81
Quarterly Data (unaudited) 82
2. Schedules, Reinsurance Group of America, Incorporated and
Subsidiaries
Schedule Page
I Summary of Investments 87
II Condensed Financial Information of the Registrant 88
III Supplementary Insurance Information 89-90
IV Reinsurance 91
V Valuation and Qualifying Accounts 92
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 94.
(b) Reports on Form 8-K during the three months ended December 31, 2003:
1. On October 9, 2003, the Company filed a Current Report on Form
8-K, dated September 22, 2003, reporting under Items 5 and 7
that RGA Reinsurance Company, the primary operating subsidiary
of the Company, entered into a Master Agreement pursuant to
which RGA Reinsurance Company agreed to purchase and assume
through coinsurance the traditional life reinsurance business
of Allianz Life Insurance Company of North America. The
85
Master Agreement and a Life Coinsurance Retrocession Agreement
were attached thereto as Exhibits 2.1 and 2.2, respectively.
2. On October 23, 2003, the Company filed a Current Report on
Form 8-K (i) filing under Item 5 a press release reporting
that two new directors had been elected and (ii) furnishing
under Items 9 and 12 a press release discussing results of
operations for the nine months ended September 30, 2003. The
press releases were attached thereto as Exhibits 99.1 and
99.2.
3. On November 3, 2003, the Company filed a Current Report on
Form 8-K reporting under Item 5 certain historical financial
results, by segment, certain historical financial information
about RGA's consolidated stockholders' equity, certain
additional third quarter 2003 information and certain
supplemental data.
4. On November 3, 2003, the Company filed a Current Report on
Form 8-K furnishing under Item 9 its press release announcing
the offering of 10,500,000 shares of its common stock. The
press release was attached thereto as Exhibit 99.1.
5. On November 7, 2003, the Company filed a Current Report on
Form 8-K, dated as of November 6, 2003, providing under Item 5
the underwriting agreement and opinion of counsel required in
connection with the registration statement on Form S-3 (File
Nos. 333-108200, 333-108200-01 and 333-108200-02) and
providing certain exhibits under Item 7. The press release was
attached thereto as Exhibit 99.1.
6. On December 3, 2003, the Company filed a Current Report on
Form 8-K, dated as of November 24, 2003, providing under Item
5 a registration rights agreement between the registrant and
MetLife, Inc. and certain of its subsidiaries. Additionally,
the Company provided under Item 5 that the underwriters of its
recent stock offering had exercised their option to purchase
an additional 1,575,000 share of Company common stock. The
registration rights agreement and option exercise press
release are attached thereto as Exhibits 10.1 and 99.1,
respectively.
7. On December 5, 2003, the Company filed a Current Report on
Form 8-K, dated as of December 4, 2003, filing under Item 5
its press release announcing the closing of a coinsurance
agreement whereby it acquired the traditional life reinsurance
business of Allianz Life Insurance Company of North America.
The press release was attached thereto as Exhibit 99.1.
86
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2003
(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 $ 794 $ 798 $ 798
Foreign governments (2) 581 652 652
Public utilities 663 763 763
All other corporate bonds 2,261 2,363 2,363
----- ----- -----
Total fixed maturities 4,299 4,576 4,576
Equity securities 14 14 14
Preferred stock 129 134 134
Mortgage loans on real estate 479 XXX 479
Policy loans 903 XXX 903
Funds withheld at interest 2,717 XXX 2,717
Short-term investments 29 XXX 29
Other invested assets 31 XXX 31
------ ------
Total investments $8,601 XXX $8,883
====== ======
(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 $0.7710/C$1.00
South African rand $0.1496/1.0 rand
Australian dollar $0.7520/$1.00 Aus
Great British pound $1.7858/(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.
87
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(IN THOUSANDS)
2003 2002 2001
---------- ---------- ---------
CONDENSED BALANCE SHEETS
Assets:
Fixed maturity securities (available for sale) $ 154,868 $ 7,544
Cash and cash equivalents 590 10,719
Investment in subsidiaries 2,075,528 1,457,791
Other assets 262,457 219,806
---------- ----------
Total assets $2,493,443 $1,695,860
========== ==========
Liabilities and stockholders' equity:
Long-term debt $ 514,477 $ 464,333
Other liabilities 31,243 9,064
Stockholders' equity 1,947,723 1,222,463
---------- ----------
Total liabilities and stockholders' equity $2,493,443 $1,695,860
========== ==========
CONDENSED STATEMENTS OF INCOME
Interest income $ 17,949 $ 20,412 $ 16,879
Realized investments gains, net 677 2,942 -
Operating expenses (3,849) (3,107) (2,757)
Interest expense (35,189) (34,685) (16,977)
---------- ---------- ---------
Loss before income tax and undistributed earnings of subsidiaries (20,412) (14,438) (2,855)
Income tax expense (benefit) (10,614) (7,471) 4,158
---------- ---------- ---------
Net loss before undistributed earnings of subsidiaries (9,798) (6,967) (7,013)
Equity in undistributed earnings of subsidiaries 182,939 129,773 40,059
---------- ---------- ---------
Net income $ 173,141 $ 122,806 $ 33,046
---------- ---------- ---------
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 173,141 $ 122,806 $ 33,046
Equity in earnings of subsidiaries (182,939) (129,773) (40,059)
Other, net (46,258) 7,195 2,782
---------- ---------- ---------
Net cash provided by (used in) operating activities (56,056) 228 (4,231)
---------- ---------- ---------
Investing activities:
Sales of fixed maturity securities available for sale 141,149 278,744 -
Purchases of fixed maturity securities available for sale (287,408) (283,759) -
Change in short-term investments - 10,502 (3,017)
Capital contributions to subsidiaries (286,336) (115,761) (123,346)
---------- ---------- ---------
Net cash used in investing activities (432,595) (110,274) (126,363)
---------- ---------- ---------
Financing activities:
Dividends to stockholders (11,940) (11,854) (11,855)
Reissuance (acquisition) of treasury stock, net 13,761 (3,735) 4,684
Proceeds from long-term debt borrowings, net 50,000 - 206,113
Proceeds from warrant / private placement offering - - 66,915
Proceeds from stock offering, net 426,701 - -
---------- ---------- ---------
Net cash provided by (used in) financing activities 478,522 (15,589) 265,857
---------- ---------- ---------
Net change in cash and cash equivalents (10,129) (125,635) 135,263
Cash and cash equivalents at beginning of year 10,719 136,354 1,091
---------- ---------- ---------
Cash and cash equivalents at end of year $ 590 $ 10,719 $ 136,354
========== ========== =========
88
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
As of December 31,
--------------------------------------------------------------------------------------
Future Policy Benefits and
Deferred Policy Interest-Sensitive Contract Other Policy Claims and
Acquisition Costs Liabilities Benefits Payable
--------------------------- ---------------------------- -----------------------------
Assumed Ceded Assumed Ceded Assumed Ceded
- ------------------------------------ ------------- ------------- --------------- ------------ --------------- -------------
2002
U.S. operations $ 664,545 $(48,575) $4,741,836 $(214,754) $ 491,386 $ (28,702)
Canada operations 114,360 (913) 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)
Corporate and Other 5,169 -- 8,432 -- 43,184 (343)
Discontinued operations -- -- 26,634 (1,489) 27,913 (2,202)
---------- -------- ---------- --------- ---------- ---------
Total $1,162,256 $(77,320) $5,843,504 $(309,675) $ 760,166 $ (46,166)
========== ======== ========== ========= ========== =========
2003
U.S. operations $1,049,433 $(43,049) $6,114,334 $(199,817) $ 645,195 $ (10,302)
Canada operations 154,594 (1,454) 1,203,038 (174,534) 103,521 (72,060)
Europe & South Africa operations 435,323 (22,620) 201,208 (11,188) 151,990 (11,176)
Asia Pacific operations 191,442 (11,704) 163,756 (13,808) 118,900 (11,014)
Corporate and Other 5,131 -- 9,340 -- 44,472 (241)
Discontinued operations -- -- 29,071 (992) 26,960 (566)
---------- -------- ---------- --------- ---------- ---------
Total $1,835,923 $(78,827) $7,720,747 $(400,339) $1,091,038 $(105,359)
========== ======== ========== ========= ========== =========
89
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
-------------- ------------- ---------------- --------------- ---------------
2001
U.S. operations $1,238,065 $245,794 $(1,098,633) $(210,478) $ (51,277)
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)
Corporate and Other 35,926 24,288 (81,759) (3,938) (38,877)
---------- -------- ----------- --------- ---------
Total $1,661,762 $340,559 $(1,488,514) $(290,209) $(123,411)
========== ======== =========== ========= =========
2002
U.S. operations $1,411,537 $272,079 $(1,237,553) $(233,958) $ (62,640)
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)
Corporate and Other 862 23,847 623 (4,564) (46,370)
---------- -------- ----------- --------- ---------
Total $1,980,666 $374,512 $(1,666,179) $(305,362) $(216,444)
========== ======== =========== ========= =========
2003
U.S. operations $1,801,793 $346,129 $(1,638,800) $(252,163) $ (84,159)
Canada operations 214,738 87,212 (224,863) 240 (30,974)
Europe & South Africa operations 364,203 3,869 (230,895) (62,793) (59,178)
Asia Pacific operations 259,010 10,692 (185,358) (28,496) (37,016)
Corporate and Other 3,419 17,677 (8,217) (38) (60,013)
---------- -------- ----------- --------- ---------
Total $2,643,163 $465,579 $(2,288,133) $(343,250) $(271,340)
========== ======== =========== ========= =========
90
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
------------- --------- ----------- -------- -------------
2001
Life insurance in force $ 73 $117,748 $ 615,990 $498,315 123.61%
Premiums
U.S. operations $ 2.9 $ 144.3 $ 1,379.5 $1,238.1 111.42%
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%
Corporate and Other 8.4 0.3 27.8 35.9 77.44%
----- -------- ---------- --------
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 $ 260.2 $ 1,668.8 $1,411.5 118.23%
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%
Corporate and Other 2.1 0.2 (1.0) 0.9 (111.11)%
----- -------- ---------- --------
Total $ 5.0 $ 349.8 $ 2,325.4 $1,980.6 117.41%
===== ======== ========== ======== ========
2003
Life insurance in force $ 75 $254,822 $1,252,161 $997,414 125.54%
Premiums
U.S. operations $ 2.5 $ 211.6 $ 2,010.9 $1,801.8 111.61%
Canada operations - 24.1 238.8 214.7 111.22%
Europe & South Africa operations - 21.5 385.7 364.2 105.90%
Asia Pacific operations - 22.0 281.0 259.0 108.49%
Corporate and Other 1.5 - 2.0 3.5 57.14%
----- -------- ---------- -------- --------
Total $ 4.0 $ 279.2 $ 2,918.4 $2,643.2 110.41%
===== ======== ========== ======== ========
91
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
- --------------------------- --------------- ---------------- -------------------- ----------------- ----------------
2001
Mortgage loan
valuation allowance $ 0.2 - - 0.2 $ -
Allowance on income taxes $ 6.2 7.5 - - $13.7
2002
Allowance on income taxes $13.7 - - 1.2 $12.5
2003
Allowance on income taxes $12.5 0.5 - - $13.0
Deductions represent normal activity associated with the Company's underlying
mortgage loan portfolio and the release of income tax valuation allowances.
92
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 11, 2004
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 11, 2004.
Signatures Title
- ----------------------------------------------------- ----------------------------------
/s/ Stewart G. Nagler March 11, 2004 * Chairman of the Board and Director
- ----------------------------------------------------
Stewart G. Nagler
/s/ A. Greig Woodring March 11, 2004 President, Chief Executive Officer,
- ---------------------------------------------------- and Director
A. Greig Woodring (Principal Executive Officer)
/s/ Leland C. Launer, Jr. March 11, 2004 * Director
- ----------------------------------------------------
Leland C. Launer, Jr.
/s/ Lisa M. Weber March 11, 2004 * Director
- ----------------------------------------------------
Lisa M. Weber
/s/ J. Cliff Eason March 11, 2004 * Director
- ----------------------------------------------------
J. Cliff Eason
/s/ Stuart I. Greenbaum March 11, 2004 * Director
- ----------------------------------------------------
Stuart I. Greenbaum
/s/ Alan C. Henderson March 11, 2004 * Director
- ----------------------------------------------------
Alan C. Henderson
/s/ William A. Peck, M.D. March 11, 2004 * Director
- ----------------------------------------------------
William A. Peck, M.D.
/s/ Joseph A. Reali March 11, 2004 * Director
- ----------------------------------------------------
Joseph A. Reali
/s/ Jack B. Lay March 11, 2004 Executive Vice President and Chief
- ---------------------------------------------------- Financial Officer (Principal Financial
Jack B. Lay and Accounting Officer)
By: /s/ Jack B. Lay March 11, 2004
- ----------------------------------------------------
Jack B. Lay Attorney-in-fact
93
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
2.4 Master Agreement by and between Allianz Life Insurance of North
America and RGA Reinsurance Company, incorporated by reference to
Exhibit 2.1 to Current Report on Form 8-K filed on October 9,
2003 (file no. 1-11848)
2.5 Life Coinsurance Retrocession Agreement by and between Allianz
Life Insurance of North America and RGA Reinsurance Company,
incorporated by reference to Exhibit 2.2 to Current Report on
Form 8-K filed on October 9, 2003 (file no. 1-11848)
3.1 Second Restated Articles of Incorporation, incorporated by
reference to Exhibit 3.1 of Post-Effective Amendment No. 2 to the
Registration Statements on Form S-3/A (File Nos. 333-55304,
333-55304-01 and 333-55304-02), filed on September 6, 2001
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
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
4.6 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")
94
Exhibit
Number Description
- -------- ------------------------------------------------------------------
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 November 4, 2003
between RGA, MetLife Inc., Metropolitan Life Insurance Company,
Equity Intermediary Company, and General American
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 January 1, 2003 incorporated by reference to
Proxy Statement on Schedule 14A for the annual meeting of
shareholders on May 28, 2003, filed on April 10, 2003*
95
Exhibit
Number Description
- -------- ------------------------------------------------------------------
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 *
10.12 RGA Flexible Stock Plan as amended and restated effective July 1,
1998*
10.13 Amendment effective as of May 24, 2000 to the RGA Flexible Stock
Plan, as amended and restated July 1, 1998*
10.14 Second Amendment effective as of May 28, 2003 to the RGA Flexible
Stock Plan, as amended and restated July 1, 1998*
10.15 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
10.16 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 *
10.17 RGA Flexible Stock Plan for Directors, as amended and restated
effective May 28, 2003, incorporated by reference to Proxy
Statement on Schedule 14A for the annual meeting of shareholders
on May 28, 2003, filed on April 10, 2003*
10.18 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 *
10.19 First Amended and Restated Credit Agreement dated as of May 23,
2003 between RGA, as borrower, the financial institutions listed
on the signature pages thereof, The Bank of New York, as
Administrative Agent, Bank of America, N.A. and Fleet National
Bank, as Co-Syndication Agents, and Key Bank National
Association, as Documentation Agent, incorporated by reference to
Exhibit 10.1 to Current Report on Form 8-K dated May 23, 2003
(File No. 1-11848)
10.20 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. Weber and Messrs. Eason, Greenbaum,
Henderson, Launer, Nagler, Peck, and Reali
96
Exhibit
Number Description
- -------- ------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
32.1 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
32.2 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.
97