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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2004
[ ] 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,
2004, as reported on the New York Stock Exchange was approximately $1.2 billion.
As of January 31, 2005, Registrant had outstanding 62,497,915 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2005
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, 2004, 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, 2004
INDEX
ITEM PAGE
NUMBER OF THIS FORM
- ------ ------------
PART I
1. BUSINESS.................................................................. 4
2. PROPERTIES................................................................ 17
3. LEGAL PROCEEDINGS......................................................... 17
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 18
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES...................... 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................ 51
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 51
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................. 87
9A. CONTROLS AND PROCEDURES................................................... 87
9B. OTHER INFORMATION......................................................... 89
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................ 89
11. EXECUTIVE COMPENSATION.................................................... 92
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............................. 93
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 97
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.................................... 98
PART IV
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES................................ 99
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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, 2004, General
American Life Insurance Company ("General American"), a Missouri life insurance
company, directly owned approximately 51.6% of the outstanding shares of common
stock of RGA. General American is a wholly-owned subsidiary of MetLife, Inc., a
New York-based insurance and financial services holding company. See Note 21 to
the Consolidated Financial Statements, "Subsequent Event" for more information
regarding MetLife's ownership of RGA common stock.
The consolidated financial statements herein 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,
critical illness and financial reinsurance. RGA and its predecessor, the
Reinsurance Division of General American, have been engaged in the business of
life reinsurance since 1973. The Company's more established operations in the
U.S. and Canada contributed approximately 74% of its consolidated net premiums
during 2004. 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. RGA 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, 2004, the Company had approximately $1.5 trillion of
life reinsurance in force and $14.0 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. Critical illness reinsurance pays on the earlier of death or
diagnosis of a pre-defined critical illness. Financial reinsurance primarily
involves assisting ceding companies in meeting applicable regulatory
requirements while enhancing the ceding companies' financial strength and
regulatory surplus position. Financial reinsurance transactions do not qualify
as reinsurance for U.S. Generally Accepted Accounting Principles ("GAAP")
accounting. 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.
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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
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. 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.
Reinsurers, at their discretion, may place assets in trust to satisfy
collateral requirements for certain treaties. As of December 31, 2004, the
Company held securities in trust for this purpose with amortized costs of $808.2
million and $1,608.1 million for the benefit of certain subsidiaries and
third-party reinsurance treaties, respectively. Under certain conditions, RGA
may be obligated to move reinsurance from one RGA subsidiary company to another
RGA subsidiary or make payments under a given treaty. These conditions include
change in control of the subsidiary, insolvency, nonperformance under a treaty,
or loss of the reinsurance license of such subsidiary. If RGA were ever required
to perform under these obligations, the risk to the consolidated company under
the reinsurance treaties would 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.
Some treaties give the ceding company the right to force the reinsurer to
place assets in trust for the ceding company's benefit to support reserve
credits, in the event of a downgrade of the reinsurer's ratings to specified
levels, generally non-investment grade levels. As of December 31, 2004, the
Company had approximately $326.8 million in reserves associated with these types
of treaties. Assets placed in trust continue to be owned by the Company, but
their use is restricted based on the terms of the trust agreement.
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
Barbados, 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 stockholder 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. RGA Barbados and RGA
Americas were formed and capitalized in 1995 and 1998, respectively, to provide
reinsurance for a portion of certain business assumed by various RGA operating
subsidiaries and to assume reinsurance directly from clients.
5
The Company has five main operational segments: U.S., Canada, Europe &
South Africa, Asia Pacific and Corporate and Other. These operating segments
write reinsurance business that is wholly or partially retained in one or more
of the Company's reinsurance subsidiaries. See "Segments" for more information
concerning the Company's operating segments.
Intercorporate Relationships
The Company has arms-length direct policies and reinsurance agreements
with MetLife and certain of its subsidiaries. As of December 31, 2004, the
Company had reinsurance-related assets and liabilities from these agreements
totaling $143.2 million and $173.3 million, respectively. Prior-year comparable
assets and liabilities were $175.0 million and $169.6 million, respectively.
Additionally, the Company reflected net premiums from these agreements of
approximately $164.4 million, $157.9 million, and $172.8 million in 2004, 2003,
and 2002, 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 $36.5 million, $19.4 million, and $23.3 million in 2004, 2003, and
2002, respectively.
Ratings
Insurer financial strength ratings represent the opinions of rating
agencies regarding the financial ability of an insurance company to meet its
obligations under an insurance policy. Credit ratings represent the opinions of
rating agencies regarding an entity's ability to repay its indebtedness. The
Company's insurer financial strength ratings and credit ratings as of the date
of this filing are listed in the table below for each rating agency that meets
with the Company's management on a regular basis:
A.M. Best Moody's Investors Standard &
Insurer Financial Strength Ratings Company (1) Service (2) Poor's (3)
- ----------------------------------------------- ----------- ------------------ ----------
RGA Reinsurance Company A+ A1 AA-
RGA Life Reinsurance Company of Canada A+ n/a AA-
RGA International Reinsurance Company n/a n/a AA-
Credit Ratings
Reinsurance Group of America, Incorporated
(Senior Unsecured) a- Baa1 A-
RGA Capital Trust I (Preferred Securities) bbb+ Baa2 BBB
(1) An A.M. Best Company ("A.M. Best") insurer financial strength rating of
"A+ (superior)" is the second highest out of fifteen possible ratings and
is assigned to companies that have, in A.M. Best's opinion, a superior
ability to meet their ongoing obligations to policyholders. Financial
strength ratings range from "A++ (superior)" to "F (in liquidation)."
A credit rating of "a-" is in the "strong" category and is the seventh
highest rating out of twenty-two possible ratings. A rating of "bbb+" is
in the "adequate" category and is the eighth highest rating.
(2) A Moody's Investors Service ("Moody's") insurer financial strength rating
of "A1 (good)" is the fifth highest rating out of twenty-one possible
ratings and indicates that Moody's believes the insurance company offers
good financial security; however, elements may be present which suggest a
susceptibility to impairment sometime in the future.
Moody's credit ratings of "Baa1" and "Baa2" are in the "medium-grade"
category and represent the eighth and ninth highest ratings, respectively,
out of twenty-two possible ratings. According to Moody's, these ratings
are subject to moderate credit risk.
(3) A Standard & Poor's ("S&P") insurer financial strength rating of "AA-
(very strong)" is the fourth highest rating out of twenty-one possible
ratings. According to S&P's rating scale, a rating of "AA-" means that, in
S&P's opinion, the insurer has very strong financial security
characteristics.
S&P credit ratings of "A-" and "BBB" are in the "strong" and "good"
categories, respectively, and represent the seventh and ninth highest
ratings, respectively, out of twenty-two possible ratings. According to
S&P, a rating of "A-" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment of the obligation is still strong.
The ability of RGA Reinsurance to write reinsurance partially depends on
its financial condition and its insurer financial strength ratings. These
ratings are based on an insurance company's ability to pay policyholder
obligations and are
6
not directed toward the protection of investors. Each of the Company's credit
ratings is considered investment grade. RGA's ability to raise capital for its
business and the cost of this capital is influenced by its credit ratings. 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.
On January 31, 2005, MetLife announced an agreement to purchase Travelers
Life & Annuity and substantially all of Citigroup's international insurance
business. To help finance that transaction, MetLife indicated that it would
consider select asset sales, including its holdings of RGA's common stock. In
response to MetLife's announcement, Moody's placed the Company's ratings on
review with direction uncertain and S&P placed the Company's ratings on credit
watch with negative implications.
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
International; RGA South Africa; and RGA UK are regulated by authorities in
Missouri, Canada, Argentina, Barbados, Australia, Ireland, South Africa, and the
United Kingdom, respectively. RGA Reinsurance is also 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. Additionally,
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 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. To date,
none of the regulator's reports related to the Company's periodic examinations
have contained 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.
The Valuation of Life Insurance Policies Model Regulation, commonly
referred to as Regulation XXX, was implemented in the U.S. for various types of
life insurance business beginning January 1, 2000. Regulation XXX significantly
increased the level of reserves that U.S. life insurance and life reinsurance
companies must hold on their statutory financial statements for various types of
life insurance business, primarily certain level term life products. The reserve
levels required under Regulation XXX increase over time and are normally in
excess of reserves required under generally accepted accounting principles. In
situations where primary insurers have reinsured business to reinsurers that are
unlicensed and unaccredited in the U.S., the reinsurer must provide collateral
equal to its reinsurance reserves in order for the ceding company to receive
statutory financial statement credit. Reinsurers have historically utilized
letters of credit for the benefit of the ceding company, or have placed assets
in trust for the benefit of the ceding company as the primary forms of
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collateral. The increasing nature of the statutory reserves under Regulation XXX
will likely require increased levels of collateral from reinsurers in the future
to the extent the reinsurer remains unlicensed and unaccredited in the U.S.
In order to reduce the impact of Regulation XXX, RGA Re has retroceded
Regulation XXX reserves to unaffiliated and affiliated unlicensed reinsurers.
RGA Re's statutory capital may be significantly reduced if the unaffiliated or
affiliated reinsurer is unable to provide the required collateral to support RGA
Re's statutory reserve credits and RGA Re cannot find an alternative source for
collateral.
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
Risk-Based Capital ("RBC") guidelines promulgated by the NAIC became
effective for U.S. insurance companies in 1993. These guidelines, applicable to
RGA Reinsurance and RCM, identify minimum capital requirements based upon
business levels and asset mix. RCM and RGA Reinsurance maintain capital levels
in excess of the amounts required by the applicable guidelines. Regulations in
international 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 jurisdictions. The Company cannot predict the effect that any
proposed or future legislation or rule making in the countries in which it
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.
In addition to RGA, the Company owns several international holding
companies. 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 2005 are
approximately $43.7 million and $88.6 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. 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 and RGA Reinsurance, RGA has an interest in licensed
insurance subsidiaries in Canada, Australia, Argentina, Barbados, Ireland,
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 framework, directed by the Corporate
Actuarial Department, which reports to the chief operating officer. A primary
responsibility of this department is managing, measuring and monitoring risks,
including establishing appropriate corporate risk tolerance levels. In addition,
the Corporate Actuary provides quarterly updates to the board of directors on
significant risks.
Mortality Risk Management
The Company's reinsurance contracts expose it to mortality risk, which is
the risk that the level of death claims may differ from that which is assumed in
the pricing of life, critical illness and annuity reinsurance contracts. Some of
the reinsurance contracts expose the Company to morbidity risk, which is the
risk that an insured person will become critically ill. The Company's risk
analysis and underwriting processes are designed with the objective of
controlling the quality of the business and establishing appropriate pricing for
the risks assumed. Among other things, these processes rely heavily on
underwriting, analysis of mortality and morbidity trends and lapse rates, and
understanding of medical impairments and their impact on mortality or morbidity.
The Company also relies on original underwriting decisions made by, and
information provided to it from, insurance company customers.
The Company expects mortality and morbidity experience to fluctuate
somewhat from period to period, but believes experience should remain fairly
constant over the long term. Mortality or morbidity experience that is less
favorable than the mortality or morbidity rates used in pricing a reinsurance
agreement will negatively affect net income because the premiums
9
received for the risks assumed may not be sufficient to cover claims.
Furthermore, even if the total benefits paid over the life of the contract do
not exceed the expected amount, unexpected increases in the incidence of deaths
or illness can result in more benefits in a given reporting period than
expected, adversely affecting net income in any particular quarter or year.
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, 2004, all retrocession pool members in this
excess retention pool reviewed by the A.M. Best Company were rated "B++", the
fifth highest rating out of fifteen possible ratings, 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 two catastrophe insurance programs that renew on
August 13th of each year. The current programs began August 13, 2004. The
primary program covers all of its business worldwide and provides protection for
losses incurred during any event involving 10 or more insured deaths. Under this
program, the Company retains the first $50 million in claims, the catastrophe
program covers the next $30 million in claims, and the Company retains all
claims in excess of $80 million. This program covers catastrophic losses from
covered events, including natural disasters and terrorism-related losses due to
nuclear, chemical or biological events. Under the second program, which covers
events involving 5 or more insured deaths, the Company retains the first $25
million in claims, the catastrophe program covers the next $25 million in
claims, and the Company retains all claims in excess of $50 million. It covers
only losses under U.S. guaranteed issue (e.g. company- and bank-owned life
insurance) reinsurance and includes losses due to acts of terrorism but excludes
terrorism losses due to nuclear, chemical and/or biological events. Both
programs are insured by several insurance companies and Lloyds Syndicates with
no single entity providing more than $13 million of coverage.
Investment Risk Management
The Company structures its investment portfolio to match its anticipated
liabilities under reinsurance treaties to the extent necessary. The majority of
the Company's investments are investment-grade fixed maturity securities which
are subject to various risks including interest rate, credit and liquidity. The
Company maintains investment guidelines intended to balance quality,
diversification, asset liability matching, liquidity and investment return. The
Company provides for the various investment risks when analyzing and pricing
treaties.
Foreign Currency Risk
The Company has foreign currency risk on business denominated and
investments in foreign currencies to the extent that the exchange rates of the
foreign currencies are subject to adverse change over time. Approximately 35% of
revenues and 27% of fixed maturity securities available for sale were
denominated in currencies other than the U.S. dollar as of and for the year
ended December 31, 2004. Fluctuations in exchange rates can negatively or
positively impact premiums and earnings. We hold fixed-maturity investments
denominated in foreign currencies as a natural hedge against liabilities based
in those currencies. We generally do not hedge the foreign currency exposure
associated with our net investments in foreign subsidiaries due to the long-term
nature of these investments. We cannot predict whether exchange rate
fluctuations will significantly harm our operations or financial results in the
future.
10
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. Many 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 the Company employs six medical directors 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.
Operations
Generally, the Company's life business has been 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 in detail to find
potential mistakes such as claims ceded to the wrong reinsurer and claims
submitted for improper amounts.
Competition
Reinsurers compete on the basis of many factors, including financial
strength, pricing and other terms and conditions of reinsurance agreements,
reputation, service, and experience in the types of business underwritten. The
U.S. and Canadian life reinsurance markets are served by numerous international
and domestic reinsurance companies. The Company believes that its primary
competitors in the U.S. life reinsurance market are currently Transamerica
Occidental Life Insurance Company, a subsidiary of Aegon N.V., Swiss Re Life of
America, 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 international life
reinsurance markets are Swiss Re Life and Health Ltd., General Re, Munich
Reinsurance Company, and Hannover Reinsurance.
11
Employees
As of December 31, 2004, the Company had 778 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 RGA and 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 various subsidiaries, has
provided reinsurance and, to a lesser extent, direct 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,
------------------------------------------------------------------------
2004 2003 2002
---- ---- ----
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
GROSS PREMIUMS:
U.S. $2,421.8 66.3 $2,013.4 68.9 $1,671.7 71.7
Canada 284.3 7.8 238.8 8.2 210.2 9.0
Europe & South Africa 506.0 13.9 385.7 13.2 272.0 11.7
Asia Pacific 434.2 11.9 281.0 9.6 175.4 7.5
Corporate and Other 3.1 0.1 3.5 0.1 1.1 0.1
-------- ----- -------- ----- -------- -----
Total $3,649.4 100.0 $2,922.4 100.0 $2,330.4 100.0
======== ===== ======== ===== ======== =====
NET PREMIUMS:
U.S. $2,212.6 66.1 $1,801.8 68.2 $1,411.5 71.3
Canada 253.9 7.6 214.7 8.1 181.2 9.1
Europe & South Africa 478.6 14.3 364.2 13.8 226.9 11.5
Asia Pacific 399.1 11.9 259.0 9.8 160.2 8.1
Corporate and Other 3.2 0.1 3.5 0.1 0.9 -
-------- ----- -------- ----- -------- -----
Total $3,347.4 100.0 $2,643.2 100.0 $1,980.7 100.0
======== ===== ======== ===== ======== =====
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 in
2003.
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,
-----------------------------------------------------------
2004 2003 2002
---- ---- ----
Amount % Amount % Amount %
-------- ----- -------- ----- ------ -----
U.S. $ 996.7 68.3 $ 896.8 71.6 $544.7 71.8
Canada 105.2 7.2 84.0 6.7 64.5 8.5
Europe & South Africa 247.3 17.0 153.4 12.3 92.7 12.2
Asia Pacific 109.7 7.5 118.0 9.4 57.0 7.5
-------- ----- -------- ----- ------ -----
Total $1,458.9 100.0 $1,252.2 100.0 $758.9 100.0
======== ===== ======== ===== ====== =====
12
The coinsurance agreement with Allianz Life provided $278.0 billion in
reinsurance in force 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 $112.3 billion, $89.9 billion,
and $91.3 billion were released in 2004, 2003, and 2002, 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,
-----------------------------------------------------
2004 2003 2002
--------------- -------------- ---------------
Amount % Amount % Amount %
------- ----- ------- ----- -------- -----
U.S. $ 168.8 60.5 $ 423.4 77.8 $ 150.3 65.3
Canada 19.6 7.0 11.0 2.0 11.3 4.9
Europe & South Africa 68.9 24.7 65.3 12.0 56.3 24.5
Asia Pacific 21.8 7.8 44.7 8.2 12.1 5.3
------- ----- ------- ----- ------- -----
Total $ 279.1 100.0 $ 544.4 100.0 $ 230.0 100.0
======= ===== ======= ===== ======= =====
The U.S. agreement with Allianz Life increased new business volume by
$287.2 billion during 2003.
Additional information regarding the operations of the Company's segments
and geographic operations is contained in Note 16 to the Consolidated Financial
Statements.
U.S. OPERATIONS
The U.S. operations represented 66.1%, 68.2% and 71.3% of the Company's
net premiums in 2004, 2003 and 2002, 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 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 2004,
13
2003, and 2002, approximately 20.9%, 21.1%, and 21.6%, 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 ultimately result in
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. 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, 2004, reinsurance of such
policies was reflected in interest-sensitive contract reserves of approximately
$1.0 billion and policy loans of $957.6 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,
2004, reinsurance of such business was reflected in interest-sensitive contract
liabilities of approximately $3.8 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.
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 regulatory 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 regulatory 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 regulatory surplus created by this business.
Customer Base
The U.S. reinsurance operation markets life reinsurance primarily to the
largest U.S. life insurance companies. The Company estimates that over 75% of
the top 100 U.S. life insurance companies, based on premiums, are clients. These
14
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 2004,
48 non-affiliated clients generated annual gross premiums of $5.0 million or
more and the aggregate gross premiums from these clients represented
approximately 86.1% of U.S. life gross premiums. For the purpose of this
disclosure, companies that are within the same holding company structure are
combined.
MetLife and its affiliates (excluding the Company) generated approximately
$241.0 million or 10.0% of U.S. operations gross premiums in 2004.
CANADA OPERATIONS
The Canada operations represented 7.6%, 8.1%, and 9.1% of the Company's
net premiums in 2004, 2003, and 2002, respectively. In 2004, the Canadian life
operations assumed $19.6 billion in new business, all of which resulted from
recurring new business. Approximately 89% of the 2004 recurring new business was
written on an automatic basis.
The Company operates in Canada primarily through RGA Canada, a
wholly-owned subsidiary. 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, as well as
group reinsurance and non-guaranteed critical illness products. Approximately
92% of RGA Canada's premium income is derived from life reinsurance products.
Clients include most of the life insurers in Canada, although the number
of life insurers is much smaller compared to the U.S. During 2004, the two
largest clients represented $130.3 million, or 45.8%, of gross premiums. Three
other clients individually represented more than 5% of Canada's gross premiums.
Together, these three clients represented 20.3% 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.
As of December 31, 2004, RGA Canada had two offices and maintained a staff
of eighty-three people at the Montreal office and fifteen 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 14.3%, 13.8%, and 11.5%
of the Company's net premiums in 2004, 2003, and 2002, 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 types of business have 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. Premiums earned from accelerated
critical illness coverage represented 35.1% of the total gross premiums for this
segment in 2004. The segment's three largest clients, all part of the Company's
U.K. operations, generated approximately $349.5 million, or 69.1%, of the
segment gross premiums in 2004.
During 2000, RGA UK began operating in the United Kingdom, where an
increasing number of insurers are ceding the mortality and accelerated critical
illness risks of individual life products on a quota share basis, creating what
we believe are 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
companies covering both individual and group life business. In 2002, RGA opened
a representative office in India marketing life reinsurance support on
individual and group business.
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 these markets. In total as of December 31, 2004, this segment
employed twenty-
15
seven people in Toronto, thirty-seven people in the United Kingdom, forty-three
people in South Africa, seven people in Spain and five people in India.
ASIA PACIFIC OPERATIONS
The Asia Pacific operations represented 11.9%, 9.8%, and 8.1% of the
Company's net premiums in 2004, 2003, and 2002, respectively. The Company has a
presence in the Asia Pacific region with licensed branch offices in Hong Kong,
Japan, and New Zealand, representative offices in China, Taiwan and South Korea,
and a regional office in Sydney. In January 2005, the Company received approval
to open a representative office in China. The Company also established a
reinsurance subsidiary in Australia in January 1996. During 2004, the two
largest clients, both in Australia, generated approximately $65.9 million, or
15.2% of the total gross premiums for the Asia Pacific operations.
Within the Asia Pacific segment as of December 31, 2004, eight people were
on staff in the Hong Kong office, twenty-one people were on staff in the Japan
office, six people were on staff in the Taiwan office, eight people were on
staff in the South Korean Office, eight people were on staff in the Sydney
regional office, ten were on staff at the St. Louis office, and RGA Australian
Holdings maintained a staff of thirty-eight people. The Hong Kong, Japan,
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.
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.
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, Inc. ("RTP"), a wholly-owned subsidiary that develops and markets
technology solutions for the insurance industry, the Company's Argentine
privatized pension business ("AFJP"), 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 claims experience on the
business. See Item 3, "Legal Proceedings." for additional AFJP information.
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 division may be found in Note 20 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 16 to the Consolidated Financial Statements. Although
there are risks inherent to foreign operations, such as currency fluctuations
and restrictions on the movement of funds, the Company's financial position and
results of operations have not been materially adversely affected thereby to
date.
E. AVAILABLE INFORMATION
Copies of the Company's Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are
available free of charge through the Company's website (www.rgare.com) as soon
as reasonably practicable after the Company electronically files such reports
with the Securities and Exchange Commission.
16
Item 2. PROPERTIES
U.S. 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 $2,600,000 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 2005, at an annual rent of
approximately $39,000. RGA Reinsurance also leases approximately 2,000 square
feet of office space in Mexico at an annual rent of approximately $62,000. GA
Argentina, part of the Corporate and Other operations, conducts business from
approximately 6,600 square feet of office space in Buenos Aires. These premises
are leased through July 2007, at annual rents of approximately $30,000.
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 $474,000 to $545,000.
These rents are net of expected sublease income ranging from approximately
$390,000 to $411,000 annually through 2010.
Europe & South Africa operations
RGA Reinsurance also conducts business from a total of approximately 4,100
square feet of office space in Madrid and Mumbai. These premises are leased
through November 2007, at annual rents of approximately $79,000. RGA
International, which also provides support functions for the Asia Pacific
operations, conducts business from approximately 9,300 square feet of office
space in Toronto. These premises are leased through August 2007, at annual rents
of approximately $416,000. These rents are net of approximately $31,000 received
from a sublease through 2005. 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 $807,000. RGA South Africa conducts
business from approximately 12,800 square feet of office space in Cape Town and
Johannesburg. These premises are leased through June 2009, at annual rents of
approximately $185,000.
Asia Pacific operations
RGA Reinsurance also conducts business from a total of approximately
23,000 square feet of office space in Hong Kong, Tokyo, Taipei and Seoul. These
premises are leased through April 2008, at annual rents of approximately
$1,239,000. RGA Australia conducts business from approximately 8,400 square feet
of office space in Sydney. These premises are leased through January 2010, at
annual rents of approximately $229,000.
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 an arbitration that involves personal
accident business (including London market excess of loss business) written
through its discontinued accident and health business. In addition, the Company
is currently a party to litigation that involves the claim of a broker to
commissions on a medical reinsurance arrangement. As of January 31, 2005, the
companies involved in these disputes have raised claims, or established reserves
that may result in claims, in the amount of $4.4 million, which is $3.7 million
in excess of the amounts held in reserve by the Company. In these disputes, the
Company generally has little information regarding any reserves established by
ceding companies, and must rely on management estimates to establish policy
claim liabilities. 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 in the amount of $24.9 million, which is $24.5 million in excess of
the amounts held in reserve by the Company. These claims appear to relate to
personal accident business (including London market excess of loss business) and
workers' compensation carve out business. Depending upon the audit findings in
these
17
cases, they could result in litigation or arbitrations in the future. See Note
20 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. However,
it is possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in
particular quarterly or annual periods.
In addition, as explained in greater detail in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," AFJP
claims payments are linked to AFJP fund unit values, which we believe are
artificially inflated because of the regulatory intervention of the Argentine
government. In view of this fact, coupled with the acceleration of permanent
disability payments, during the third quarter of 2004, the Company formally
notified the AFJP ceding companies that it will no longer make artificially
inflated claim payments, as it has been doing for some time under a reservation
of rights, but rather will pay claims only on the basis of the market value of
the AFJP fund units. This formal notification could result in litigation or
arbitrations in the future. While it is not feasible to predict or determine the
ultimate outcome of any such future litigations 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. However,
it is possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in
particular quarterly or annual periods.
In addition, the Company is currently in negotiations with some of the
AFJP ceding companies regarding commutation of their contracts. In the fourth
quarter of 2004, the Company increased the amount of liabilities associated with
the AFJP business by $10.0 million, so that the overall amount of the
liabilities reflects the Company's current estimate of the value of its
obligations, and reflects the uncertainty regarding the amount and timing of
claims payments and the outcome of any negotiated settlements.
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 2004.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
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 1 under the caption "Restrictions on Dividends and Distributions."
See Item 12 for information regarding securities authorized for issuance
under equity compensation plans.
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, 2004, have been prepared in
accordance with accounting principles 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, 2004 2003 2002 2001 2000
INCOME STATEMENT DATA
Revenues:
Net premiums $ 3,347.4 $ 2,643.2 $ 1,980.7 $ 1,661.8 $ 1,404.1
Investment income, net of related expenses 580.5 465.6 374.5 340.6 326.5
Realized investment gains (losses), net 29.5 5.3 (14.6) (68.4) (28.7)
Change in value of embedded derivatives 26.1 43.6 - - -
Other revenues 55.4 47.3 41.4 34.3 23.8
--------- --------- --------- --------- ---------
Total revenues 4,038.9 3,205.0 2,382.0 1,968.3 1,725.7
Benefits and expenses:
Claims and other policy benefits 2,678.5 2,108.4 1,539.5 1,376.8 1,103.6
Interest credited 198.9 179.7 126.7 111.7 104.8
Policy acquisition costs and other insurance expenses 591.0 458.2 391.5 304.2 243.5
Change in deferred acquisition costs associated with
change in value of embedded derivatives 22.9 30.7 - - -
Other operating expenses 140.0 119.6 94.8 91.3 81.2
Interest expense 38.4 36.8 35.5 18.1 17.6
--------- --------- --------- --------- ---------
Total benefits and expenses 3,669.7 2,933.4 2,188.0 1,902.1 1,550.7
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes 369.2 271.6 194.0 66.2 175.0
Provision for income taxes 123.9 93.3 65.5 26.3 69.2
--------- --------- --------- --------- ---------
Income from continuing operations 245.3 178.3 128.5 39.9 105.8
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (23.0) (5.7) (5.7) (6.9) (28.1)
Cumulative effect of change in accounting principle,
net of income taxes (0.4) 0.5 - - -
--------- --------- --------- --------- ---------
Net income $ 221.9 $ 173.1 $ 122.8 $ 33.0 $ 77.7
========= ========= ========= ========= =========
BASIC EARNINGS PER SHARE
Continuing operations $ 3.94 $ 3.47 $ 2.60 $ 0.81 $ 2.14
Discontinued operations (0.37) (0.11) (0.11) (0.14) (0.57)
Accounting change (0.01) 0.01 - - -
--------- --------- --------- --------- ---------
Net income $ 3.56 $ 3.37 $ 2.49 $ 0.67 $ 1.57
DILUTED EARNINGS PER SHARE
Continuing operations $ 3.90 $ 3.46 $ 2.59 $ 0.80 $ 2.12
Discontinued operations (0.37) (0.11) (0.12) (0.14) (0.56)
Accounting change (0.01) 0.01 - - -
--------- --------- --------- --------- ---------
Net income $ 3.52 $ 3.36 $ 2.47 $ 0.66 $ 1.56
Weighted average diluted shares, in thousands 62,964 51,598 49,648 49,905 49,920
Dividends per share on common stock $ 0.27 $ 0.24 $ 0.24 $ 0.24 $ 0.24
BALANCE SHEET DATA
Total investments $10,564.2 $ 8,883.4 $ 6,650.2 $ 5,088.4 $ 4,560.2
Total assets 14,048.1 12,113.4 8,892.6 7,016.1 6,090.0
Policy liabilities 10,314.5 8,811.8 6,603.7 5,077.1 4,617.7
Long-term debt 349.7 398.1 327.8 323.4 272.3
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Company 158.4 158.3 158.2 158.1 -
Total stockholders' equity 2,279.0 1,947.7 1,222.5 1,005.6 862.9
Total stockholders' equity per share $ 36.50 $ 31.33 $ 24.72 $ 20.30 $ 17.51
OPERATING DATA (IN BILLIONS)
Assumed ordinary life reinsurance in force $ 1,458.9 $ 1,252.2 $ 758.9 $ 616.0 $ 545.9
Assumed new business production 279.1 544.4 230.0 171.1 161.1
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 strategies, earnings, revenues, income
or loss, ratios, 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) risks inherent in our risk
management and investment strategy, including 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 adequacy
of reserves relating to settlements, awards and terminated and discontinued
lines of business, (9) the stability of governments and economies in the markets
in which we operate, (10) competitive factors and competitors' responses to our
initiatives, (11) the success of our clients, (12) successful execution of our
entry into new markets, (13) successful development and introduction of new
products, (14) our ability to successfully integrate and operate reinsurance
business that we acquire, (15) regulatory action that may be taken by state
Departments of Insurance with respect to us, MetLife, or its subsidiaries, (16)
our dependence on third parties, including those insurance companies and
reinsurers to which we cede some reinsurance, third-party investment managers
and others, (17) changes in laws, regulations, and accounting standards
applicable to us, our subsidiaries, or our business, and (18) 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. These forward-looking statements 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."
SUBSEQUENT EVENT
On January 31, 2005, MetLife announced an agreement to purchase Travelers Life &
Annuity and substantially all of Citigroup's international insurance business.
To help finance that transaction, MetLife indicated that it would consider
select asset sales, including its holdings of RGA's common stock.
OVERVIEW
RGA is an insurance holding company that was formed on December 31, 1992.
As of December 31, 2004, General American, a Missouri life insurance company,
directly owned approximately 51.6% of the outstanding shares of common stock of
RGA. General American is a wholly-owned subsidiary of MetLife, Inc., a New
York-based insurance and financial services holding company.
20
The consolidated financial statements include the assets, liabilities, and
results of operations of RGA, RGA Reinsurance, RGA Barbados, RGA Canada, RGA
Americas, RGA Australia and RGA UK as well as several other subsidiaries subject
to an ownership position of greater than fifty percent (collectively, the
"Company").
We are primarily engaged in traditional individual life, asset-intensive,
critical illness and financial reinsurance. RGA and its predecessor, the
Reinsurance Division of General American, have been engaged in the business of
life reinsurance since 1973. Approximately 73.7% of our 2004 net premiums were
from our more established operations in North America, which include our U.S.
and Canada segments.
We believe we are one of the leading life reinsurers in North America
based on premiums and the amount of life insurance in force. We believe, based
on an industry survey prepared by Munich American at the request of the Society
of Actuaries Reinsurance Section ("SOA survey"), that we have the second largest
market share in North America as measured by life insurance in force. 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.
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. Based on Standard & Poor's Global Reinsurance Highlights, 2004
Edition, we believe we are the fourth largest life reinsurer in the world based
on 2003 gross premiums. While RGA believes information published by Standard &
Poor's is generally reliable, RGA has not independently verified the data.
Standard & Poor's does not guarantee the accuracy and completeness of the
information. We conduct business with the majority of the largest U.S. and
international life insurance companies, with no single non-affiliated client
representing more than 10% of 2004 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.
INDUSTRY TRENDS
We believe that the following trends in the life insurance industry will
continue to create demand for life reinsurance.
Outsourcing of Mortality. The SOA survey indicates that U.S. life
reinsurance in force has grown from $2.6 trillion in 1998 to $5.8 trillion
at year-end 2003. 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 in force,
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 reserves and 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.
Consolidation and Reorganization Within the Life Reinsurance and Life
Insurance Industry. As a result of consolidations in recent years within
the life reinsurance industry, there are fewer competitors. According to
the SOA survey, as of December 31, 2003, the top five companies held over
70% of the market share in North America based on life reinsurance in
force, whereas in 1995, the top five companies held less than 50% of the
market share. As a consequence, we believe the life reinsurance pricing
environment may reflect higher prices in the future.
The SOA surveys indicate that the authors obtained information from
participating or responding companies and do not guarantee the accuracy
and completeness of their information. Additionally, the surveys do not
survey all
21
reinsurance companies, but RGA believes most of its principal competitors
are included. While RGA believes these surveys to be generally reliable,
RGA has not independently verified their data.
Additionally, 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. Based on discussions with our clients and
informal knowledge about the industry, we believe we are a leader in
facultative underwriting in North America. We intend to maintain
that status by emphasizing our underwriting standards, prompt
response on quotes, competitive pricing, capacity and flexibility in
meeting customer needs. We believe our facultative business has
allowed us to develop close, long-standing client relationships and
generate additional business opportunities with our facultative
clients.
- 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.
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:
- 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. Since 1994, we have entered twelve markets internationally,
including, in the mid-to-late 1990's, Australia, Hong Kong, Japan,
Malaysia, New Zealand, South Africa, Spain, Taiwan and the U.K., and
in the last three years, China, India and South Korea. During
January 2005, we received approval to open a representative office
in China. Before entering new markets, we evaluate several factors
including:
- the size of the insured population,
- competition,
- the level of reinsurance penetration,
- regulation,
- existing clients with a presence in the market, and
- the economic, social and political environment.
We generally start new operations in these markets from the ground
up as opposed to acquiring existing operations, and we often enter
these markets to support our North American clients as they expand
internationally. Many of the markets that we have entered since
1994, or may enter in the future, are not utilizing life
reinsurance, including facultative life reinsurance, at the same
levels as the North American market, and therefore, we believe
represent opportunities for increasing reinsurance penetration.
22
Additionally, we believe that in certain markets, ceding companies
may want to reduce counterparty exposure to their existing life
reinsurers, creating opportunities for us.
- Asset-intensive and Other Products. 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
products and product distribution, are expected to enhance existing
opportunities for asset-intensive and other products.
Financial Objectives
We set various consolidated financial and operating goals for the
intermediate period (next three to five years) including:
- Achieving a return on stockholders' equity of 12% to 14%;
- Achieving annual earnings per share growth of 12% to 13%; and
- Maintaining a debt to capital ratio of 20% to 25%.
Additionally, we establish various financial growth objectives for our
operational segments for the intermediate period (next three to five years). For
our U.S. and Canada operations, we are targeting premium and income before
income taxes growth of 10% to 12%. Our newer international operations, which
include Europe & South Africa, and Asia Pacific, are smaller and their annual
financial results are subject to more volatility. However, over the intermediate
term (next three to five years), we are targeting premium and income before
income taxes growth of 20% to 25%.
These targets are aspirational and you should not rely on them. We can give
no assurance that we will be able to approach or meet any of these objectives,
and we may fall short of any or all of them. See "Forward-Looking and Cautionary
Statements."
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.
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. 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 did not include any
accident and health risk, annuities or related guaranteed minimum death benefits
or guaranteed minimum income benefits. This transaction added additional scale
to our U.S. traditional business, but did not significantly add to our client
base because most of the underlying ceding companies were already our clients.
As of December 31, 2004, approximately 96.2% of the underlying ceding companies,
representing approximately 95.7% of the business in force, had novated their
treaties from Allianz Life to RGA Reinsurance during 2004. 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 from $1.3 trillion to
$1.5 trillion for the year ended December 31, 2004. Assumed new business
production for 2004 totaled $279.1 billion compared to $544.4 billion in 2003
and $230.0 billion in 2002. The transaction with Allianz Life contributed $287.2
billion of the 2003 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.
23
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 two catastrophe insurance programs that renew on August 13th
of each year. The current programs began August 13, 2004. The primary program
covers all of our business worldwide and provides protection for losses incurred
during any event involving 10 or more insured deaths. Under this program, we
retain the first $50 million in claims, the catastrophe program covers the next
$30 million in claims, and we retain all claims in excess of $80 million. This
program covers catastrophic losses from covered events, including natural
disasters and terrorism-related losses due to nuclear, chemical or biological
events. Under the second program, which covers events involving 5 or more
insured deaths, we retain the first $25 million in claims, the catastrophe
program covers the next $25 million in claims, and we retain all claims in
excess of $50 million. It covers only losses under U.S. guaranteed issue (e.g.
company- and bank-owned life insurance) reinsurance and includes losses due to
acts of terrorism but excludes terrorism losses due to nuclear, chemical and/or
biological events. Both programs are insured by several insurance companies and
Lloyds Syndicates, with no single entity providing more than $13 million of
coverage.
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 2004, the accident and
health division reported a net loss of $23.0 million due to claim payments in
excess of established reserves, an arbitration settlement and legal fees. See
Note 20 to the Consolidated Financial Statements. The increase in 2004 is due
primarily to a negotiated settlement of all disputed claims associated with the
Company's largest identified accident and health exposure.
The Company has five main operational segments, each of which is a
distinct reportable segment: U.S., Canada, Europe & South Africa, Asia Pacific
and Corporate and Other. 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, critical illness and, to a
lesser extent, financial reinsurance. Europe & South Africa operations include
traditional life reinsurance and critical illness business from Europe & 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 37.6% in 2004 to
$245.3 million and increased 38.8% in 2003 to $178.3 million. Diluted earnings
per share from continuing operations were $3.90 for 2004 compared to $3.46 for
2003 and $2.59 for 2002. A majority of our earnings during these years were
attributed primarily to traditional reinsurance results in the U.S. Claims and
other policy benefits as a percentage of net premiums during 2004 and 2003 were
80.0% and 79.8%, respectively, and within our range of expectations.
Additionally, 2004 and 2003 income from continuing operations for our U.S.
Traditional operations benefited from the Allianz Life transaction as twelve
months and six months of financial results were included, respectively.
Our results in 2004 were adversely affected by the Indian Ocean tsunami on
December 26, 2004. At December 31, 2004, we recorded $7.5 million in policy
claims and benefits, including an estimate for incurred but not reported claims.
As of February 17, 2005, we had received 14 death claims totaling approximately
$2.2 million due to this tragedy. Our estimate is based on the limited
information received to date and is subject to change.
Consolidated investment income increased 24.7% and 24.3% during 2004 and
2003, respectively. These increases related to a growing invested asset base due
to positive cash flows from our mortality 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 $1.5 billion, or 17.7%, in 2004 and increased
$2.1 billion, or 32.3%, in 2003. In excess of $400 million of the increase in
the cost basis of invested assets during 2003 was due to the Company's
24
common equity offering in which 12,075,000 new shares were issued. The average
yield earned on investments, excluding funds withheld, was 5.91% in 2004,
compared with 6.39% in 2003 and 6.51% in 2002. We expect the average yield to
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 and realized investment gains and losses are
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 33.6%, 34.3%, and 33.8% of pre-tax income for 2004,
2003, and 2002, respectively. Absent unusual items, we expect the consolidated
effective tax rate to be between 34% and 35%. The effective tax rates for 2004
and 2002 include the effect of $1.9 million and $2.0 million reductions in tax
liabilities, respectively, resulting from the favorable resolution of a tax
position and the settlements of Internal Revenue Service ("IRS") audit issues.
The Company calculated tax benefits related to its discontinued operations of
$12.4 million for 2004, and $3.1 million for 2003 and 2002. The effective tax
rate on the discontinued operations was approximately 35% 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 ("DAC"), 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 sheets. 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. DAC amounts
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 establish that DAC remains
recoverable, and if experience significantly deteriorates to the point where a
premium deficiency exists, a cumulative charge to current operations will be
recorded. No such adjustments were made during 2004, 2003 or 2002. As of
December 31, 2004, the Company estimates that approximately 52% 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.
Liabilities for future policy benefits under long-term life insurance
policies (policy reserves) are computed based upon expected investment yields,
mortality and withdrawal (lapse) rates, and other assumptions, including a
provision for adverse deviation from expected claim levels. The Company
primarily relies on its own valuation and administration systems to establish
policy reserves. The policy reserves established by the Company may differ from
those established by its ceding companies (clients) due to the use of different
mortality and other assumptions. However, the Company relies on its clients to
provide accurate data, including policy-level information, premiums and claims,
which is the primary information used to establish reserves. RGA's
administration departments work directly with clients to help ensure information
is submitted by them in accordance with the reinsurance contracts. Additionally,
the Company performs periodic audits of the information provided by ceding
companies. RGA establishes reserves for processing backlogs with a goal of
clearing all backlogs within a ninety-day period. The backlogs are usually due
to data errors we discover or computer file compatibility issues, since much of
the data reported to the Company is in electronic format and is uploaded to our
computer systems.
The Company periodically reviews actual historical experience and relative
anticipated experience compared to the assumptions used to establish policy
reserves. Further, the Company determines whether actual and anticipated
experience indicates that existing policy reserves together with the present
value of future gross premiums are sufficient to cover the
25
present value of future benefits, settlement and maintenance costs and to
recover unamortized acquisition costs. This loss recognition testing is
performed at the segment level and, if necessary, net liabilities are increased
along with a charge to income. Because of the many assumptions and estimates
used in establishing reserves and the long-term nature of reinsurance contracts,
the reserving process, while based on actuarial science, is inherently
uncertain.
Claims payable for incurred but not reported claims 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. 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, 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. However, it is possible that an adverse outcome could, from
time to time, have a material adverse effect on the Company's consolidated net
income or cash flows in particular quarterly or annual periods. See Note 20 to
the Consolidated Financial Statements.
Further discussion and analysis of the results for 2004 compared to 2003
and 2002 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.
NON-TRADITIONAL
FOR THE YEAR ENDED DECEMBER 31, 2004 ASSET- FINANCIAL TOTAL
(in thousands) TRADITIONAL INTENSIVE REINSURANCE U.S.
- -------------- ----------- --------- ----------- -----
REVENUES:
Net premiums $ 2,207,817 $ 4,833 $ - $ 2,212,650
Investment income, net of related expenses 220,080 215,862 173 436,115
Realized investment gains (losses), net 9,738 (7,196) - 2,542
Change in value of embedded derivatives - 26,104 - 26,104
Other revenues 4,157 9,735 27,419 41,311
---------------- ----------- -------------- -------------
Total revenues 2,441,792 249,338 27,592 2,718,722
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,758,452 9,751 2 1,768,205
Interest credited 50,290 146,480 - 196,770
Policy acquisition costs and other
insurance expenses 329,006 48,243 9,521 386,770
Change in DAC associated with change in
value of embedded derivatives - 22,896 - 22,896
Other operating expenses 43,977 4,714 5,466 54,157
---------------- ----------- -------------- -------------
Total benefits and expenses 2,181,725 232,084 14,989 2,428,798
Income before income taxes $ 260,067 $ 17,254 $ 12,603 $ 289,924
================ =========== ============== =============
26
Non-Traditional
FOR THE YEAR ENDED DECEMBER 31, 2003 Asset- Financial Total
(in thousands) 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 - 43,596 - 43,596
Other revenues 3,920 6,524 27,302 37,746
-------------- ----------- -------------- -------------
Total revenues 1,977,580 216,888 27,407 2,221,875
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 241,877 34,422 9,900 286,199
Change in DAC associated with change in value of embedded
derivatives - 30,665 - 30,665
Other operating expenses 41,186 3,809 5,128 50,123
-------------- ----------- -------------- -------------
Total benefits and expenses 1,799,266 191,493 15,028 2,005,787
Income before income taxes $ 178,314 $ 25,395 $ 12,379 $ 216,088
============== =========== ============== =============
Non-Traditional
Asset- Financial Total
FOR THE YEAR ENDED DECEMBER 31, 2002 Traditional Intensive Reinsurance U.S.
(in thousands) ----------- --------- ----------- ----
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 gains (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
=============== ============ ============ ============
Income before income taxes for the U.S. operations totaled $289.9 million
in 2004, compared to $216.1 million for 2003 and $175.8 million in 2002. The
increase in revenue from a larger portfolio of mortality risk in the Traditional
sub-segment is the primary reason for the growth in earnings for the current
year. The Allianz Life acquisition is the major factor for the growth in revenue
in 2004 compared to the prior periods. Revenue growth in the traditional
sub-segment, including the Allianz Life business, and the change in fair value
of embedded derivatives in the Asset Intensive sub-segment contributed to the
increase in income before income taxes in 2003 compared to 2002.
27
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 2004, production
totaled $168.8 billion of face amount of new business, compared to $423.4
billion in 2003 and $150.3 billion in 2002. 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.
Income before income taxes for U.S. traditional reinsurance increased
45.8% in 2004 and 17.1% in 2003. Contributing to the increase for 2004 and 2003
is the Allianz Life business, which generated a full year of premium and income
in 2004 and 6 months of premium and income in 2003.
Net premiums for U.S. traditional reinsurance increased $410.3 million in
2004, or 22.8%. Similarly, net premiums increased $389.7 million in 2003, or
27.7%, primarily due to the $246.1 million in net premiums from the Allianz Life
transaction. During 2004, the Allianz Life business was fully integrated into
the U.S. traditional sub-segment. The increased premium is driven by the growth
of total U.S. business in force, which increased to $996.7 billion in 2004, an
increase of 11.1% over prior year. Total in force at year-end 2003 was $896.8
billion. This included $278.0 billion of in force from the Allianz Life
acquisition. 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 $38.2 million, or 21.0%, and $20.0
million, or 12.4%, in 2004 and 2003, respectively. The increase in both years is
due to growth in the invested asset base, primarily due to the Allianz Life
transaction as well as increased operating cash flows on traditional
reinsurance. 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.
Claims and other policy benefits, as a percentage of net premiums (loss
ratios), were 79.6%, 81.1%, and 78.0% in 2004, 2003, and 2002, respectively.
Over the past 3 years, the mortality experience in this sub-segment has
fluctuated. This is somewhat expected as death claims are reasonably predictable
over a period of many years, but are less predictable over shorter periods and
are subject to significant fluctuation. In 2004, overall mortality experience
was slightly favorable. Conversely, in 2003, mortality experience in this
business was slightly higher than anticipated, while the 2002 ratio reflects
favorable mortality experience.
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. Interest credited expense in 2004 totaled $50.3 million
compared to $58.3 million at year-end 2003. This decrease relates primarily to
one treaty in which the credited loan rate dropped from 6.9% in 2003 to 5.1% in
2004.
The amount of policy acquisition costs and other insurance expenses, as a
percentage of net premiums, was 14.9%, 13.5%, and 16.3% in 2004, 2003 and 2002,
respectively. Overall, 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 2.0%, 2.3%
and 2.2% in 2004, 2003 and 2002, respectively. The slight increase in 2003 can
be attributed to the $2.7 million of expenses associated with the Allianz Life
transaction that were not capitalized. Operating expenses for 2004 increased
6.8% primarily due to technology related costs; however, growth in premium has
more than offset this increase, resulting in a reduction in this ratio to 2.0%.
Asset-Intensive Reinsurance
The U.S. Asset-Intensive sub-segment 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.
28
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").
The Company recorded a change in value of embedded derivatives during 2004 and
2003 of $26.1 million and $43.6 million within revenues and $22.9 million and
$30.7 million of related deferred acquisition costs, respectively (see Note 2 -
"New Accounting Pronouncements" in Notes to Consolidated Financial Statements
for further discussion).
Income before income taxes decreased in 2004 to $17.3 million compared to
$25.4 million and $14.3 million in 2003 and 2002, respectively. This decrease is
primarily due to the change in the fair value of embedded derivatives, which
resulted in a $3.2 million net gain for 2004 compared to a net gain of $12.9
million in 2003. The fair value of the derivatives is tied primarily to
movements in credit spreads; therefore, the value is expected to fluctuate
significantly over time. In addition, a $2.0 million loss on the conversion of a
coinsurance-funds withheld annuity treaty to a coinsurance treaty in the third
quarter of 2004 contributed to the decrease in income before income taxes. The
conversion resulted in $11.7 million of additional investment income offset by
$13.7 million in amortization of policy acquisition costs. Higher realized
investment losses also contributed to the decrease in income for 2004. Somewhat
offsetting the losses was increased investment income due to the higher invested
asset base. Results for 2003 were also affected by higher than expected credit
losses within the funds withheld portfolios.
Total revenues, which are comprised primarily of investment income,
increased 15.0% and 85.5% in 2004 and 2003, respectively. The increase in 2004
is primarily attributed to continued growth in the asset base for this segment
coupled with the $11.7 million increase in investment income due to the
aforementioned converted annuity treaty. Contributing to the increase in 2003
was the implementation of Issue B36, which resulted in additional revenue of
$43.6 million. This, along with the continued growth in the asset base, is the
primary reason for the significant growth in 2003. The average invested asset
balance was $3.3 billion, $2.7 billion and $1.9 billion for 2004, 2003 and 2002,
respectively. Invested assets outstanding as of December 31, 2004 and 2003 were
$3.7 billion and $3.1 billion, of which $1.9 billion and $2.0 billion were funds
withheld at interest, respectively.
Total expenses, which is comprised primarily of interest credited, policy
benefits, and acquisition costs increased 21.2% and 86.5% in 2004 and 2003,
respectively. Contributing to the increase in 2004 are policy acquisition costs,
which increased $13.7 million due to the conversion of the funds withheld treaty
previously discussed and interest credited, which increased $26.9 million, or
22.5%, primarily due to the 22.2% increase in the average invested asset base
discussed above. The decrease in the deferred acquisition costs associated with
the change in value of the embedded derivatives from $30.7 million in 2003 to
$22.9 million in 2004 somewhat offset the increased expenses. The increase in
expenses for 2003 compared to 2002 is attributable to the implementation of
Issue B36 and growth in business for the comparable periods.
Financial Reinsurance
The U.S. financial reinsurance sub-segment income consists primarily of
net fees earned on financial reinsurance transactions. Included in the results
is net income from RGA Financial Group L.L.C. ("RGA Financial Group"), a
wholly-owned subsidiary. The majority of the financial reinsurance transactions
assumed by the Company are retroceded to other insurance companies. 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. RGA Financial Group earns
fees from brokered business that is placed with third parties and does not
participate in the assumption of the financial reinsurance. This income is
reflected in other revenues.
Income before income taxes increased 1.8% and 33.3% in 2004 and 2003,
respectively. Income in 2004 remained somewhat flat as the growth in capital
provided was mostly offset by reduced spreads earned on the business. The
increase for 2003 can be attributed to lower operating expenses allocated to
this sub-segment in 2003 compared to 2002. Prior to 2003, all expenses
associated with Non-Traditional Reinsurance business were allocated to Financial
Reinsurance. In 2003, these expenses were divided proportionately between
Asset-Intensive and Financial Reinsurance business.
At December 31, 2004, 2003 and 2002, the amount of reinsurance assumed
from client companies, as measured by pre-tax statutory surplus, was $1.5
billion, $1.1 billion and $1.2 billion, respectively. The pre-tax statutory
surplus includes all business assumed by the Company. Fees resulting from this
business can be affected by large transactions and the timing of completion of
new deals and therefore can fluctuate from period to period.
29
CANADA OPERATIONS
The Company conducts reinsurance business in Canada through RGA Life
Reinsurance Company of Canada ("RGA Canada"), a wholly-owned subsidiary. RGA
Canada assists clients with capital management activity and mortality risk
management, and is primarily engaged in traditional individual life reinsurance,
as well as group reinsurance and non-guaranteed critical illness products.
FOR THE YEAR ENDED DECEMBER 31,
(in thousands) 2004 2003 2002
---- ---- ----
REVENUES:
Net premiums $ 253,852 $ 214,738 $ 181,224
Investment income, net of related expenses 100,141 87,212 70,518
Realized investment gains (losses), net 11,508 13,423 (163)
Other revenues (losses) 32 (212) 136
------------- ------------- -------------
Total revenues 365,533 315,161 251,715
BENEFITS AND EXPENSES:
Claims and other policy benefits 250,542 223,375 186,398
Interest credited 1,840 1,488 1,070
Policy acquisition costs and other insurance
expenses 28,505 20,293 16,136
Other operating expenses 11,161 10,441 9,480
------------- ------------- -------------
Total benefits and expenses 292,048 255,597 213,084
Income before income taxes $ 73,485 $ 59,564 $ 38,631
============= ============= =============
RGA Canada's reinsurance in force totaled approximately $105.2 billion and
$84.0 billion at December 31, 2004 and 2003, respectively. RGA Canada includes
most of the life insurance companies in Canada as clients.
Income before income taxes increased 23.4% and 54.2% in 2004 and 2003,
respectively. The increase in 2004 was primarily the result of more favorable
mortality experience in the current year, offset by a decrease in realized
investment gains of $1.9 million, or 3.2%. Additionally, the Canadian dollar
strengthened against the U.S. dollar during 2004 relative to 2003, and
contributed $4.4 million, or 7.4%, to income before income taxes in 2004. The
increase in 2003 was the result of an increase of $13.6 million or 35.2% in
realized investment gains as well as favorable mortality experience.
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.
Net premiums increased by 18.2%, to $253.9 million in 2004, and increased by
18.5%, to $214.7 million in 2003, primarily due to new business from new and
existing treaties. Additionally, a stronger Canadian dollar contributed $17.6
million, or 8.2%, and $24.1 million, or 13.3%, to net premiums reported in 2004
and in 2003, respectively. Premium levels are significantly influenced by large
transactions, mix of business and reporting practices of ceding companies and
therefore can fluctuate from period to period.
Net investment income increased by 14.8% and 23.7% during 2004 and 2003,
respectively. Investment performance varies with the composition of investments.
In 2004, the increase in investment income was mainly the result of a stronger
Canadian dollar during 2004 compared to 2003 which contributed $6.6 million, or
7.6%, an increase in the invested asset base due to operating cash flows on
traditional reinsurance which contributed $2.9 million, or 3.3%, and interest on
an increasing amount of funds withheld at interest related to one treaty which
contributed $2.2 million, or 2.5%. In 2003, the increase in investment income
was mainly the result of a stronger Canadian dollar during 2003 compared to 2002
which contributed $9.0 million, or 12.8%, an increase in the invested asset base
due to operating cash flows on traditional reinsurance which contributed $3.1
million, or 4.4%, and interest on an increasing amount of funds withheld at
interest related to one treaty which contributed $2.1 million, or 3.0%.
Investment income also includes an allocation to the segments based upon average
assets and related capital levels deemed appropriate to support business
volumes. The amount of investment income allocated to the Canadian operations
was $4.8 million and $5.8 million in 2004 and 2003, respectively.
Loss ratios for this segment were 98.7% in 2004, 104.0% in 2003 and 102.9% in
2002. The current year loss ratio
30
includes the effect of approximately $1.6 million in policy liabilities for the
December 26, 2004 Indian Ocean tsunami. The lower loss ratio for the current
period is primarily due to better mortality experience compared to the prior
year. Historically, the increase in percentages is primarily the result of
several large permanent level premium in-force blocks assumed in 1998 and 1997.
These blocks are mature blocks of permanent level premium business in which
mortality as a percentage of premiums is expected to be higher than the
historical ratios. The nature of level premium permanent policies requires the
Company to set up actuarial liabilities and invest the amounts received in
excess of early-year mortality costs to fund claims in the later years when
premiums, by design, continue to be level as compared to expected increasing
mortality or claim costs. Claims and other policy benefits, as a percentage of
net premiums and investment income, were 70.8% during 2004 compared to 74.0% in
2003 and 74.0% in 2002. 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 11.2% in 2004, 9.5% in 2003 and 8.9% in 2002. Policy
acquisition costs and other insurance expenses as a percentage of net premiums
vary from period to period primarily due to the mix of the business in the
segment.
Other operating expenses increased $0.7 million in 2004 and $1.0 million in
2003 compared to their respective prior-year periods. The increases in 2004 and
in 2003 are primarily 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,
(in thousands) 2004 2003 2002
---- ---- ----
REVENUES:
Net premiums $ 478,580 $ 364,203 $ 226,846
Investment income, net of related expenses 5,125 3,869 1,009
Realized investment gains, net 5,080 3,999 894
Other revenues 1,541 1,067 2,064
------------ ------------ ------------
Total revenues 490,326 373,138 230,813
BENEFITS AND EXPENSES:
Claims and other policy benefits 314,128 230,895 130,975
Policy acquisition costs and other insurance
Expenses 121,708 105,062 82,700
Other operating expenses 21,472 15,866 13,049
Interest expense 1,336 1,043 680
------------ ------------ ------------
Total benefits and expenses 458,644 352,866 227,404
Income before income taxes $ 31,682 $ 20,272 $ 3,409
============ ============ ============
Europe & South Africa net premiums grew 31.4% during 2004 and 60.6% in
2003. Future net premium growth is not expected to continue at these levels. The
growth was primarily the result of new business from both existing treaties and
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 2004 and 2003. The effect of the
strengthening of the local currencies was an increase in 2004 and 2003 premiums
of $49.1 million and $41.7 million, respectively. Also, a significant portion of
the growth of premiums was due to reinsurance of accelerated critical illness,
primarily in the U.K. 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 $177.4 million, $145.7 million and $103.5 million in 2004, 2003
and 2002, respectively. Premium levels are significantly influenced by large
transactions and reporting practices of ceding companies and therefore can
fluctuate from period to period.
Investment income increased $1.3 million and $2.9 million in 2004 and
2003, respectively. These increases were primarily due to growth in the 2004
invested assets in the U.K. and South Africa of $10.7 million and $7.6 million,
respectively. Investment performance varies with the composition of investments
and the relative allocation of capital to the
31
operating segments.
Loss ratios were 65.6%, 63.4% and 57.7% for 2004, 2003 and 2002,
respectively. The loss ratio for 2004 includes the effect of approximately $1.9
million in policy liabilities related to the December 26, 2004 Indian Ocean
tsunami. 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 25.4%, 28.8% and 36.5% for 2004, 2003 and
2002, 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 change in the mixture
of business during 2004 caused the loss ratio to slightly increase and caused
the policy acquisition costs and other insurance expenses as a percentage of net
premiums to slightly decrease.
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 12 percent increase in anticipated mortality and
morbidity experience would have no impact while a 15 percent or 18 percent
increase would result in pre-tax income statement charges of approximately $47.8
million and $112.3 million, respectively.
Other operating expenses increased 35.3% during 2004 and 21.6% for 2003.
Increases in other operating expenses were due to higher costs associated with
maintaining and supporting the significant increase in business over the past
two years. As a percentage of premiums, other operating expenses were 4.5%, 4.4%
and 5.8% in 2004, 2003 and 2002, 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 in an effort to best meet the needs of the local client
companies.
FOR THE YEAR ENDED DECEMBER 31,
(in thousands) 2004 2003 2002
---- ---- ----
REVENUES:
Net premiums $ 399,122 $ 259,010 $ 160,197
Investment income, net of related expenses 16,113 10,692 7,059
Realized investment gains (losses), net 670 (761) (268)
Other revenues 5,121 1,191 2,363
------------ ------------ -----------
Total revenues 421,026 270,132 169,351
BENEFITS AND EXPENSES:
Claims and other policy benefits 330,144 185,358 110,806
Policy acquisition costs and other insurance
Expenses 52,300 47,513 36,660
Other operating expenses 24,363 16,903 14,727
Interest expense 1,614 1,096 842
------------ ------------ -----------
Total benefits and expenses 408,421 250,870 163,035
Income before income taxes $ 12,605 $ 19,262 $ 6,316
============ ============ ===========
32
Asia Pacific income before income taxes decreased 34.6% during 2004 and
grew 205.0% during 2003. The decrease in income before income taxes for 2004 was
primarily the result of increases in the volume of claims and other policy
benefits in relation to net premiums. Offices in which increases in claim
activity were most evident were Australia and New Zealand. Additionally, various
adjustments related to enhancements of the business administration process in
the Australia and New Zealand operations reduced income before income taxes by
approximately $2.0 million. The enhancements were a reaction to the increasing
levels of business within those operations and to improve the reliability of the
administration functions. The growth in income before income taxes during 2003
was primarily the result of additional premium volume and lower acquisition
costs relative to net premiums. As the segment grows, although acquisition costs
and operating expenses increase as well, we expect the growth in premium volume
generally to cover these costs, creating favorable economies of scale.
Asia Pacific net premiums grew 54.1% during 2004 and 61.7% during 2003.
The growth in 2004 was primarily the result of organic growth in Australia,
Japan and South Korea, along with favorable exchange rates in multiple
countries. In terms of growth of premium dollars during 2004, the larger markets
of Australia, Japan and Korea were the primary contributors, adding
approximately $88.2 million, $21.9 million and $27.9 million in premium volume
compared to 2003. Growth in Australia was driven primarily by continued success
in the group market. Given the maturing nature of the Australian market, and
increased competition for group business, it is unlikely that future growth
rates will continue at the levels of 2003 and 2004 in this market, but some
level of additional growth is anticipated. Premium growth in the Japan market
during 2004 was driven primarily by growth in a single client relationship. Of
the $21.9 million in additional premium volume in Japan compared to 2003,
approximately $13.0 million of the growth came from this client. In Korea,
2004 premium growth was driven by a $12.3 million dollar increase in premium
volume from one existing client relationship, along with approximately $10.0
million dollars of premium from two new clients. Premium levels are
significantly influenced by large transactions and reporting practices of ceding
companies and therefore can fluctuate from period to period.
During 2003, growth in terms of premium volume was also driven by the
larger markets of Australia, Japan and South Korea, which added approximately
$69.2 million, $16.6 million and $17.2 million, respectively, in premium volume
compared to 2002. Australia's growth was driven primarily by capturing a
significant share of the group market. 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 formation of the
Japanese branch in December 2003 helped strengthen the Company's presence in the
Japanese market and is expected to continue 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 large new critical illness treaty.
Several foreign currencies, particularly the Korean won and the Australian
dollar, continued to strengthen against the U.S. dollar in 2004. The overall
effect of the strengthening of local Asia Pacific segment currencies was an
increase in 2004 premiums of $32.0 million over 2003, and $27.3 million for 2003
over 2002.
A portion of the growth of premiums for the segment in each year presented
is due to reinsurance of accelerated critical illness, primarily in Australia.
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 $39.1,
$31.2 million and $15.0 million in 2004, 2003 and 2002, respectively.
Net investment income increased $5.4 million in 2004, as compared to an
increase of $3.6 million in 2003. The increase in both years was primarily due
to growth in the invested assets in Australia and favorable exchange rates,
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.
Other revenue during 2004 primarily represented profit and fees associated
with financial reinsurance in Japan, Korea and Taiwan of approximately $2.1
million, and fees associated with the recapture provisions for two client
treaties of approximately $0.9 million. Other revenue during 2003 and 2002
primarily represented profit and fees associated with financial reinsurance in
Taiwan and South Korea.
Loss ratios as a percentage of net premiums were 82.7%, 71.6% and 69.2%
for 2004, 2003 and 2002, 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. Death claims are reasonably
predictable over a period of many years, but are less predictable over shorter
periods and are subject to significant fluctuation. While loss ratios were
relatively stable between 2002 and 2003, the overall segment loss ratio
increased 11.1% from 2003 to 2004. The increase in this percentage was
33
attributable primarily to loss experience in Australia and New Zealand.
Australia's loss ratio increased from 65.8% in 2003 to 87.7% in 2004, primarily
due to additional reserves on disability income business of approximately $22.8
million and a reserve of approximately $3.4 million related to the Indian Ocean
tsunami in December 2004. New Zealand's loss experience is primarily due to the
unfavorable performance of five significant treaties. These five treaties
combined reflect an increase of approximately $17.7 million in claims and other
policy benefits over 2003.
Policy acquisition costs and other insurance expenses as a percentage of
net premiums decreased by 5.2% to 13.1% during 2004 and by 4.6% to 18.3% during
2003. The ratio of policy acquisition costs and other insurance expenses as a
percentage of net premiums will generally decline as the business matures. The
percentages also fluctuate periodically due to timing of client company
reporting and variations in the mixture of business being reinsured. During
2004, the percentage declined, in part, due to the addition of a significant
block of yearly renewable term business with no allowance included within the
treaty terms. Policy acquisition costs are capitalized and charged to expense in
proportion to premium revenue recognized.
Other operating expenses decreased to 6.1% of net premiums in 2004, from
6.5% in 2003 and 9.2% in 2002. The Company believes that sustained growth in
premiums should lessen the burden of start-up expenses and expansion costs over
time. The timing of the entrance into and development of new markets in the
growing Asia Pacific segment may cause other operating expenses as a percentage
of premiums to be somewhat volatile over periods of 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, Inc., 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.
FOR THE YEAR ENDED DECEMBER 31, 2004 2003 2002
(in thousands) ---- ---- ----
REVENUES:
Net premiums $ 3,244 $ 3,419 $ 862
Investment income, net of related expenses 23,034 17,677 23,847
Realized investment gains (losses), net 9,673 (3,912) (4,785)
Other revenues 7,361 7,508 208
-------- -------- --------
Total revenues 43,312 24,692 20,132
BENEFITS AND EXPENSES:
Claims and other policy benefits 15,518 7,941 (4,089)
Interest credited 321 276 3,466
Policy acquisition costs and other insurance
Expenses 1,746 (902) 452
Other operating expenses 28,743 26,303 16,488
Interest expense 35,487 34,650 33,994
-------- -------- --------
Total benefits and expenses 81,815 68,268 50,311
Loss before income taxes $(38,503) $(43,576) $(30,179)
======== ======== ========
Loss before income taxes decreased $5.1 million, or 11.6%, during 2004
compared to 2003, primarily due to an increase in unallocated realized
investment gains and investment income of $13.6 million and $5.4 million,
respectively. These increases in revenue were partially offset by an increase in
AFJP reserves of $10.0 million during the fourth quarter of 2004 and a $2.4
million increase in unallocated general corporate expenses.
34
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.
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 with respect to this business, as several aspects of the
pension fund claims flow did not develop as was contemplated when the
reinsurance programs were initially priced, as discussed in this section.
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, we believe AFJP fund unit values are still artificially high,
inflating AFJP yields. These AFJP fund unit values adversely affect reinsurers
like RGA Reinsurance by inflating the cost 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 previous delay in paying disability
claims, coupled with the high AFJP fund unit values, has the effect of inflating
the disability claims payments that will ultimately have to be made by
reinsurers. The passage of regulations in 2004 by the Argentine government has
accelerated payment of these deferred disability claims at the inflated AFJP
fund unit values.
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 filed 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"). The request for arbitration was
officially registered in November of 2004.
In addition, because of an Argentine regulatory action that has
accelerated payment of the deferred disability claims, during the third quarter
of 2004, the Company formally notified the AFJP ceding companies that it will no
longer make artificially inflated claim payments, as it has been doing for some
time under a reservation of rights, but rather will pay claims only on the basis
of the market value of the AFJP fund units. This formal notification could
result in litigation or arbitrations in the future. In the fourth quarter of
2004, the Company increased the amount of liabilities associated with the AFJP
business by $10.0 million, so that the overall amount of the liabilities
reflects the Company's current estimate of the value of its obligations, and
reflects the uncertainty regarding the amount and timing of claims payments and
the outcome of any negotiated settlements. While it is not feasible to predict
or determine the ultimate outcome of the ICSID Arbitration, or litigation or
arbitrations that may occur in Argentina in the future, 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. However, it is possible
that an adverse outcome could, from time to time, have a material adverse effect
on the Company's consolidated net income or cash flows in particular quarterly
or annual periods.
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
35
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 an arbitration that
involves 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 and other defenses. 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 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. However,
it is possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in
particular quarterly or annual periods.
The Company is currently a party to an arbitration that involves personal
accident business. In addition, the Company is currently a party to litigation
that involves the claim of a broker to commissions on a medical reinsurance
arrangement. As of January 31, 2005, the companies involved in these litigation
actions have raised claims, or established reserves that may result in claims,
that are $3.7 million in excess of the amounts held in reserve by the Company.
The Company generally has little information regarding any reserves established
by ceding companies, and must rely on management estimates to establish policy
claim liabilities. 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 $24.5
million in excess of the amounts held in reserve by the Company. These claims
appear to be related to personal accident business (including LMX business) and
workers' compensation carve-out business. 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. However, it is possible that an adverse
outcome could, from time to time, have a material adverse effect on the
Company's consolidated net income or cash flows in particular quarterly or
annual periods.
The loss from discontinued accident and health operations, net of income
taxes, increased to $23.0 million in 2004 from $5.7 million in 2003 and 2002.
The increase in 2004 is due primarily to a negotiated settlement of all disputed
claims
36
associated with the Company's largest identified accident and health exposure.
As a result of this settlement, the Company's discontinued accident and health
operation recorded a $24.0 million pre-tax charge during the third quarter of
2004.
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 net reserve
balance as of December 31, 2004 and 2003 was $57.4 million and $54.5 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 $1.4 million, $4.8
million and $3.3 million for 2004, 2003 and 2002, respectively.
DEFERRED ACQUISITION COSTS
DAC 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. DAC is 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 periodically reviews the EGP valuation model and assumptions
so that the assumptions reflect a view of the future believed to be reasonable.
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, as a percentage
of current deferred policy acquisition costs related to asset-intensive products
($325.2 million as of December 31, 2004), are changed as illustrated:
ONE-TIME INCREASE ONE-TIME DECREASE
----------------- -----------------
IN DAC IN DAC
------ ------
QUANTITATIVE CHANGE IN SIGNIFICANT ASSUMPTIONS:
Estimated interest spread increasing (decreasing) 25 basis 1.6% (1.8)%
points from the current spread
Estimated policy lapse rates decreasing (increasing) 20% on a 0.3% (0.2)%
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.
37
The following table displays DAC balances for asset-intensive business and
non-asset-intensive business by segment as of December 31, 2004:
ASSET-INTENSIVE NON-ASSET-INTENSIVE TOTAL
--------------- ------------------- -----
(IN THOUSANDS) DAC DAC DAC
-------------- --- --- ---
U.S. $ 325,209 $ 934,554 $ 1,259,763
Canada - 181,689 181,689
Asia Pacific - 228,399 228,399
Europe & South Africa - 552,422 552,422
Corporate and Other - 3,701 3,701
--------------- ------------------- ----------------
Total $ 325,209 $ 1,900,765 $ 2,225,974
=============== =================== ================
As of December 31, 2004, the Company estimates that approximately 52% 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 Note 15, "Long-Term
Debt" 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 upon these sources of liquidity.
The Company believes that it has sufficient liquidity to fund its cash
needs under various scenarios that include the potential risk of the early
recapture of a reinsurance treaty by the ceding company and significantly higher
than expected death claims. Historically, the Company has generated positive net
cash flows from operations. However, in the event of significant unanticipated
cash requirements beyond normal liquidity, the Company has multiple liquidity
alternatives available based on market conditions and the amount and timing of
the liquidity need. These options include borrowings under committed credit
facilities, secured borrowings, the ability to issue long-term debt, capital
securities or common equity and, if necessary, the sale of invested assets
subject to market conditions.
As part of its normal review of risk management and retention levels, the
Company increased its retention limit from $4.0 million to $6.0 million per life
for business written after July 1, 2003. The higher retention limit will
naturally lead to larger death claim payments for certain policies, but these
larger payments will be partially offset by smaller premium outflows to the
Company's retrocessionaires. The Company believes its sources of liquidity are
sufficient to cover the potential increase in claims payments on both a
short-term and long-term basis.
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 uses the proceeds for general corporate
purposes, including funding its reinsurance operations. Pending such use, RGA
invested 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 2004 or 2003 and currently does not anticipate making any purchases
during 2005.
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
38
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, 2005, RCM and RGA Reinsurance could pay maximum
dividends, without prior approval, equal to their unassigned surplus,
approximately $43.7 million and $88.6 million, respectively. 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.
VALUATION OF LIFE INSURANCE POLICIES MODEL REGULATION (REGULATION XXX)
The Valuation of Life Insurance Policies Model Regulation, commonly
referred to as Regulation XXX, was implemented in the U.S. for various types of
life insurance business beginning January 1, 2000. Regulation XXX significantly
increased the level of reserves that U.S. life insurance and life reinsurance
companies must hold on their statutory financial statements for various types of
life insurance business, primarily certain level term life products. The reserve
levels required under Regulation XXX increase over time and are normally in
excess of reserves required under generally accepted accounting principles. In
situations where primary insurers have reinsured business to reinsurers that are
unlicensed and unaccredited in the U.S., the reinsurer must provide collateral
equal to its reinsurance reserves in order for the ceding company to receive
statutory financial statement credit. Reinsurers have historically utilized
letters of credit for the benefit of the ceding company, or have placed assets
in trust for the benefit of the ceding company as the primary forms of
collateral. The increasing nature of the statutory reserves under Regulation XXX
will likely require increased levels of collateral from reinsurers in the future
to the extent the reinsurer remains unlicensed and unaccredited in the U.S.
In order to reduce the impact of Regulation XXX, RGA Re has retroceded
Regulation XXX reserves to unaffiliated and affiliated unlicensed reinsurers.
RGA Re's statutory capital may be significantly reduced if the unaffiliated or
affiliated reinsurer is unable to provide the required collateral to support RGA
Re's statutory reserve credits and RGA Re cannot find an alternative source for
collateral.
SHAREHOLDER DIVIDENDS
Historically, RGA has paid quarterly dividends ranging from $0.027 per
share in 1993 to $0.09 per share in 2004. 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, change in control provisions, 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, 2004, the Company had $405.8 million in outstanding borrowings
under its debt agreements and was in compliance with all covenants under those
agreements. The ability of the Company to make debt principal and interest
payments depends primarily on the earnings and surplus of 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," of the Notes to
Consolidated Financial Statements for additional information on the terms of the
PIERS units. As of December 31, 2004, the average interest rate on long-term and
short-term debt outstanding, excluding the PIERS, was 6.10% compared to 6.02% at
the end of 2003. The average interest rate on the Company's U.S. credit
facility, which expires in May 2006 and has a capacity of $175.0 million, was
3.0% and 1.7% as of December 31, 2004
39
and 2003, respectively. As of December 31, 2004 and 2003, the Company's
outstanding balance was $50.0 million under this facility. The Company has two
foreign credit facilities with a combined balance of $56.1 million as of
December 31, 2004, which expire in 2005; they are reflected as short-term debt
on the Company's consolidated balance sheet. RGA may consider renewing these
facilities or converting them to fixed-rate debt when they expire.
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.
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, 2004, these treaties had approximately $326.8 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 $808.2 million were held in trust for the benefit of certain
subsidiaries of the Company to satisfy collateral requirements for reinsurance
business at December 31, 2004. Additionally, securities with an amortized cost
of $1,608.1 million, as of December 31, 2004, 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 include change in control of the subsidiary, 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 would 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 $285.4 million and $188.3 million as of
December 31, 2004 and 2003, respectively, 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, 2004, RGA's exposure related to
credit facility guarantees was $56.1 million, the maximum potential guarantee,
and is reflected on the consolidated balance sheet in short-term debt. RGA has
issued a guarantee on behalf of a subsidiary in the event the subsidiary fails
to make payment under its office lease obligation, the exposure of which was
insignificant as of December 31, 2004.
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.
40
OFF BALANCE SHEET ARRANGEMENTS
The Company has no obligations, assets or liabilities other than those
reflected in the consolidated 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.
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 $125.0 million as of
December 31, 2004.
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, 2004, 2003 and 2002, were $714.5 million, $571.6
million and $159.7 million, respectively. Cash flows from operating activities
are affected by the timing of premiums received, claims paid and working capital
changes. The increases in operating cash flows during 2004 and 2003 were
primarily a result of cash inflows related to premiums and investment income
increasing more than cash outflows related to claims, reserve movements and
operating expenses. Operating cash increased $142.9 million during 2004 as cash
from premiums and investment income increased $921.5 million and $116.8 million,
respectively, and was largely offset by higher operating net cash outlays of
$895.4 million. During 2003, cash from premiums and investment income increased
$591.6 million and $84.5 million, respectively, and was partially offset by
higher operating net cash outlays of $264.2 million. 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 believes it
maintains a high-quality fixed maturity portfolio with positive liquidity
characteristics. These securities are available for sale and could be sold if
necessary to meet the Company's short- and long-term obligations, subject to
market conditions.
Net cash used in investing activities was $771.6 million, $1,285.2 million
and $582.5 million in 2004, 2003 and 2002, respectively. Changes in cash used in
investing activities primarily relate to the management of the Company's
investment portfolios and the investment of excess cash generated by operating
and financing activities. Net cash used in investing activities was relatively
high in 2003 as a result of the investment of approximately $426.7 million
related to the Company's stock offering.
Net cash provided by financing activities was $120.9 million, $704.1
million and $287.7 million in 2004, 2003 and 2002, respectively. The Company's
stock offering contributed to the amount of cash provided by financing
activities during 2003. 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.
41
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
-------- --------- ----------- ----------- -------------
Short - term debt $ 56.1 $ 56.1 $ - $ - $ -
Long - term debt 349.7 - 149.8 - 199.9
Fixed-rate interest on senior notes 105.4 20.8 30.6 27.0 27.0
Fixed-rate interest on trust preferred
securities(1) 598.4 12.9 25.9 25.9 533.7
Life claims payable(2) 627.3 627.3 - - -
Operating leases 29.1 6.2 11.3 8.0 3.6
Limited partnerships 26.2 - 8.9 15.0 2.3
Structured investment contracts 43.9 21.9 6.8 15.2 -
Mortgage purchase commitments 16.8 16.8 - - -
-------- --------- ----------- ----------- -------------
Total $1,852.9 $ 762.0 $ 233.3 $ 91.1 $ 766.5
======== ========= =========== =========== =============
(1) Assumes that all securities will be held until the stated maturity date of
March 18, 2051. For additional information on these securities, see
"Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Company" in Note 2 to
the Consolidated Financial Statements, "Summary of Significant Accounting
Policies."
(2) Included in the "Other policy claims and benefits" line item in the
consolidated balance sheet.
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.
Life claims payable include benefit and claim liabilities for which the
Company believes the amount and timing of the payment is essentially fixed and
determinable. Such amounts generally relate to incurred and reported death and
critical illness claims. As of December 31, 2004, liabilities for future policy
benefits of approximately $4,097.7 million related primarily to reinsurance of
traditional life insurance and related policies and approximately $4,900.6
million of interest sensitive contract liabilities, primarily deferred
annuities, have been excluded from this table. Amounts excluded from the table
are generally comprised of policies or contracts where (i) the Company is not
currently making payments and will not make payments in the future until the
occurrence of an insurable event, such as death or disability or (ii) the
occurrence of a payment triggering event, such as a surrender of a policy or
contract, is outside of the control of the Company. The timing of payment on
these liabilities is not reasonably fixed and determinable since the insurable
event or payment triggering event has not yet occurred, and the Company has no
control over the timing of such occurrence. In addition to timing of payments,
significant uncertainties relating to these liabilities include mortality,
morbidity and persistency. On a consolidated basis, the Company has historically
generated positive cash flows from operations; however, it must factor these
uncertainties regarding its insurance obligations into its asset/liability
management program. See "Asset / Liability Management" for additional
discussion.
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. Certain of these letters of credit contain financial covenant
restrictions similar to those described in the Debt and Preferred Securities
discussion above. At December
42
31, 2004, there were approximately $32.6 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, 2004, $370.5 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 under
Regulation XXX 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 directly impact the Company's consolidated shareholders' equity under
Generally Accepted Accounting Principles; however, it could effect the Company's
ability to write new business and retain existing business. 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.
ASSET / LIABILITY MANAGEMENT
The Company actively manages its assets using an approach that is intended
to balance quality, diversification, asset/liability matching, liquidity and
investment return. The goals of the investment process are to optimize
after-tax, risk-adjusted investment income and after-tax, risk-adjusted total
return while managing the assets and liabilities on a cash flow and duration
basis.
The Company has established target asset portfolios for each major
insurance product, which represent the investment strategies intended to
profitably fund its liabilities within acceptable risk parameters. These
strategies include objectives for effective duration, yield curve sensitivity
and convexity, liquidity, asset sector concentration and credit quality.
The Company's liquidity position (cash and cash equivalents and short-term
investments) was $184.1 million and $113.5 million at December 31, 2004 and
December 31, 2003, respectively. Liquidity needs are determined from valuation
analyses conducted by operational units and are driven by product portfolios.
Annual evaluations of demand liabilities and short-term liquid assets are
designed to adjust specific portfolios, as well as their durations and
maturities, in response to anticipated liquidity needs.
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.
INVESTMENTS
The Company had total cash and invested assets of $10.7 billion and $9.0
billion at December 31, 2004 and 2003, respectively. All investments held by RGA
and its subsidiaries are monitored for conformance 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 duration of the
Canadian portfolio exceeds twenty years. The Company's earned yield on invested
assets was 5.91% in 2004, compared with 6.39% in 2003, and 6.51% in 2002. See
Note 5 - "Investments" in the Notes to Consolidated Financial Statements for
additional information regarding the Company's investments.
Fixed maturity securities and equity securities available-for-sale
The Company's fixed maturity securities are invested primarily in
commercial and industrial bonds, mortgage- and asset-backed securities, public
utilities, and Canadian government securities. As of December 31, 2004,
approximately
43
97.9% 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
commercial and industrial bonds, which represented approximately 28.2% of fixed
maturity securities as of December 31, 2004, an increase from 26.4% as of
December 31, 2003. 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, 2004. The Company owns floating rate securities that represent approximately
0.3% of fixed maturity securities at December 31, 2004, compared to 1.6% at
December 31, 2003. 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 $1,403.8 million in mortgage-backed securities at December 31,
2004, that include agency-issued pass-through securities, collateralized
mortgage obligations guaranteed or otherwise supported by the Federal Home Loan
Mortgage Corporation, Federal National Mortgage Association, or the Government
National Mortgage Association, and commercial mortgage-backed securities. All of
these securities were investment-grade. The principal risks inherent in holding
residential mortgage-backed securities are prepayment and extension risks, which
will affect the timing of when cash will be received and are dependent on the
level of mortgage interest rates. Prepayment risk is the unexpected increase in
principal payments, primarily as a result of homeowner refinancing. Extension
risk relates to the unexpected slowdown in principal payments. The Company
monitors its residential mortgage-backed securities to mitigate exposure to the
cash flow uncertainties associated with these risks.
Within the fixed maturity security portfolio, the Company holds
approximately $136.2 million in asset-backed securities at December 31, 2004,
which include credit card and automobile receivables, home equity loans and
collateralized bond obligations. The Company's asset-backed securities are
diversified by issuer and contain both floating and fixed-rate securities.
Approximately 1.8% of asset-backed securities, or $2.5 million are
collateralized bond obligations. In addition to the risks associated with
floating rate securities, principal risks in holding asset-backed securities are
structural, credit and capital market risks. Structural risks include the
securities' priority in the issuer's capital structure, the adequacy of and
ability to realize proceeds from collateral, and the potential for prepayments.
Credit risks include consumer or corporate credits such as credit card 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 investment securities to determine impairments in
value. 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, 2004, the Company held
fixed maturities with a cost basis of $15.7 million and a market value of $19.0
million, representing 0.3% of fixed maturities at December 31, 2004, 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 $8.5 million, $20.1 million and $33.9 million in 2004,
2003 and 2002, respectively. The circumstances that gave rise to these
impairments were bankruptcy proceedings or deterioration in collateral value
supporting certain asset-backed securities. During 2004 and 2003, the Company
sold fixed maturity securities with fair values of $394.0 million and $460.3
million at losses of $20.6 million and $25.2 million, respectively, or at 95.0%
and 94.8% of book value, respectively.
The following table presents the total gross unrealized losses for 403
fixed maturity securities and equity securities as of December 31, 2004, where
the estimated fair value had declined and remained below amortized cost by the
indicated amount (in thousands):
At December 31, 2004
---------------------------------
Gross Unrealized
Losses % of Total
----------- ----------
Less than 20% $16,350 100%
20% or more for less than six months - -
20% or more for six months or greater - -
------- ------
Total $16,350 100%
======= ======
44
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, primarily an increase in the interest rate environment.
The following tables present the estimated fair values and gross
unrealized losses for the 403 fixed maturity securities and equity securities
that have estimated fair values below amortized cost as of December 31, 2004.
These investments are presented by class and grade of security. The length of
time the related market value has remained below amortized cost is provided for
fixed maturity securities as of December 31, 2004.
AS OF DECEMBER 31, 2004
-------------------------------------------------------------------------------------
EQUAL TO OR GREATER THAN
LESS THAN 12 MONTHS 12 MONTHS TOTAL
------------------- --------- -----
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
(in thousands) ---------- ---- ---------- ---- ---------- ----
INVESTMENT GRADE SECURITIES:
COMMERCIAL AND INDUSTRIAL $ 268,633 $ 3,591 $ 48,727 $ 1,735 $ 317,360 $ 5,326
PUBLIC UTILITIES 83,473 1,201 5,714 229 89,187 1,430
ASSET-BACKED SECURITIES 38,568 388 - - 38,568 388
CANADIAN AND CANADIAN PROVINCIAL
GOVERNMENTS 21,497 173 - - 21,497 173
MORTGAGE-BACKED SECURITIES 264,617 4,314 - - 264,617 4,314
FINANCE 180,990 2,632 22,210 649 203,200 3,281
U.S. GOVERNMENT AND AGENCIES 30,199 280 - - 30,199 280
FOREIGN GOVERNMENTS 56,142 451 - - 56,142 451
---------- ---------- ---------- ---------- ---------- ----------
INVESTMENT GRADE SECURITIES 944,119 13,030 76,651 2,613 1,020,770 15,643
---------- ---------- ---------- ---------- ---------- ----------
NON-INVESTMENT GRADE SECURITIES:
COMMERCIAL AND INDUSTRIAL 20,667 233 - - 20,667 233
PUBLIC UTILITIES 3,417 20 - - 3,417 20
FINANCE 204 1 - - 204 1
---------- ---------- ---------- ---------- ---------- ----------
NON-INVESTMENT GRADE SECURITIES 24,288 254 - - 24,288 254
---------- ---------- ---------- ---------- ---------- ----------
TOTAL FIXED MATURITY
SECURITIES $ 968,407 $ 13,284 $ 76,651 $ 2,613 $1,045,058 $ 15,897
========== ========== ========== ========== ========== ==========
EQUITY SECURITIES $ 36,619 $ 453 $ - $ - $ 36,619 $ 453
========== ========== ========== ========== ========== ==========
The Company believes that the analysis of each security whose price has
been below market for greater than twelve months indicated that the financial
strength, liquidity, leverage, future outlook and/or recent management actions
support the view that the security was not other-than-temporarily impaired as of
December 31, 2004. The unrealized losses did not exceed 10.0% on an individual
security basis and are primarily a result of rising interest rates, changes in
credit spreads and the long-dated maturities of the securities. Additionally,
all of the gross unrealized losses are associated with investment grade
securities.
Mortgage loans on real estate
Mortgage loans represented approximately 5.8% and 5.4% of the Company's
investments as of December 31, 2004 and 2003, respectively. As of December 31,
2004, all mortgages were U.S.-based. The Company invests primarily in mortgages
on commercial offices, industrial properties and retail locations. The Company's
mortgage loans generally range in size from $0.3 million to $11.2 million, with
the average mortgage loan investment as of December 31, 2004 totaling
approximately $4.7 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,
2004 or 2003.
45
Policy loans
Policy loans comprised approximately 9.1% and 10.2% of the Company's
investments as of December 31, 2004 and 2003, 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
Substantially all of the Company's funds withheld at interest receivable
balance is associated with its reinsurance of annuity contracts. The funds
withheld receivable balance totaled $2.7 billion at December 31, 2004 and 2003,
of which $1.9 billion and $2.0 billion, respectively, were subject to the
provisions of Issue B36 (see Note 2 - "New Accounting Pronouncements" in Notes
to Consolidated Financial Statements for further discussion).
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.
Funds withheld at interest comprised approximately 25.9% and 30.6% of the
Company's investments as of December 31, 2004 and 2003, 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, 2004, funds
withheld at interest were approximately (in thousands):
At December 31, 2004
% of Total
Underlying Security Type: Book Value Market Value Market Value
- ------------------------- ---------- ------------ ------------
Investment grade U.S. corporate securities $ 803,035 $ 828,226 43.9%
Below investment grade U.S. corporate securities 71,442 74,313 3.9%
Structured securities 608,964 623,649 33.1%
Foreign corporate securities 127,178 130,659 6.9%
Unrated securities 3,185 3,213 0.2%
Other 219,490 226,816 12.0%
---------- ------------ --------
Total segregated portfolios 1,833,294 1,886,876 100.0%
---------- ------------ --------
Funds withheld at interest associated with
non-segregated portfolios 858,534 858,534
Embedded derivatives 42,827 42,827
---------- ------------
Total funds withheld at interest $2,734,655 $ 2,788,237
46
Based on data provided by the ceding companies as of December 31, 2004,
the maturity distribution of the segregated portfolio portion of funds withheld
at interest was approximately (in thousands):
At December 31, 2004
--------------------
% of Total
Maturity: Book Value Market Value Market Value
- --------- ---------- ------------ ------------
Within one year $ 87,427 $ 92,338 4.3%
More than one, less than five years 200,592 204,287 9.4%
More than five, less than ten years 420,349 436,298 20.1%
Ten years or more 1,408,977 1,438,003 66.2%
---------- ------------ --------
Subtotal 2,117,345 2,170,926 100.0%
Less: Reverse repurchase agreements (284,051) (284,050)
---------- ------------
Total all years $1,833,294 $ 1,886,876
========== ============
Other Invested Assets
Other invested assets represented approximately 2.0% of the Company's
investments as of December 31, 2004 and 2003. 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 $1.2 million as of December
31, 2004 and consisted of customized over-the-counter call options based upon
the S&P 500 index.
MARKET RISK
Market risk is the risk of loss that may occur when fluctuation in
interest and currency exchange rates and equity and commodity prices change the
value of a financial instrument. Both derivative and nonderivative financial
instruments have market risk so the Company's risk management extends beyond
derivatives to encompass all financial instruments held that are sensitive to
market risk. RGA is primarily exposed to interest rate risk and foreign currency
risk.
Interest Rate Risk
This risk arises from many of the Company's primary activities, as the
Company invests substantial funds in interest-sensitive assets and also has
certain interest-sensitive contract liabilities. The Company manages interest
rate risk and credit risk to maximize the return on the Company's capital
effectively and to preserve the value created by its business operations. As
such, certain management monitoring processes are designed to minimize the
impact of sudden and sustained changes in interest rates on fair value, cash
flows, and net interest income. The Company manages its exposure to interest
rates principally by matching floating rate liabilities with corresponding
floating rate assets and by matching fixed rate liabilities with corresponding
fixed rate assets. On a limited basis, the Company uses equity options to
minimize its exposure to movements in equity markets that have a direct
correlation with certain of its reinsurance products.
The Company's exposure to interest rate price risk and interest rate cash
flow risk is reviewed on a quarterly basis. Interest rate price risk exposure is
measured using interest rate sensitivity analysis to determine the change in
fair value of the Company's financial instruments in the event of a hypothetical
change in interest rates. Interest rate cash flow risk exposure is measured
using interest rate sensitivity analysis to determine the Company's variability
in cash flows in the event of a hypothetical change in interest rates. If
estimated changes in fair value, net interest income, and cash flows are not
within the limits established, management may adjust its asset and liability mix
to bring interest rate risk within board-approved limits.
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
47
value of financial instruments in the event of a 10% unfavorable change in
market interest rates at its fiscal years ended December 31, 2004 and 2003 was
$207.6 million and $159.1 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, 2004, 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, 2004 and 2003 was $0.3 million and $0.1
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,
2004, 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
stockholders' equity on the consolidated balance sheets. 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
British pounds.
Currently, the Company believes its foreign currency transaction exposure,
with the possible exception of its Argentine peso exposure, to be immaterial to
the consolidated results of operations. In an effort to reduce its exposure to
the Argentine peso, 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 business. Those net contract
liabilities totaled approximately 14.8 million Argentine pesos as of December
31, 2004. A net unrealized foreign currency gain of $6.6 million related to
these contracts is reflected in accumulated other comprehensive income on the
consolidated balance sheet as of December 31, 2004. 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
48
currency after an investment decision has been made will affect the value of the
investment when translated to U.S. dollars for financial reporting purposes.
INFLATION
The primary, direct effect on the Company of inflation is the increase in
operating expenses. A large portion of the Company's operating expenses consists
of salaries, which are subject to wage increases at least partly affected by the
rate of inflation. The rate of inflation also has an indirect effect on the
Company. To the extent that a government's policies to control the level of
inflation result in changes in interest rates, the Company's investment income
is affected.
NEW ACCOUNTING STANDARDS
In December 2004, FASB revised SFAS No. 123 Accounting for Stock Based
Compensation ("SFAS 123") to Share-Based Payment ("SFAS 123(r)"). SFAS 123(r)
provides more guidance on determining whether certain financial instruments
awarded in share-based payment transactions are liabilities. SFAS 123(r) also
requires that the cost of all share-based transactions should be recorded in the
financial statements. The revised pronouncement must be adopted by the Company
by July 1, 2005. The Company expects SFAS 123(r) will increase compensation
expense by $1.8 million in 2005 and $1.5 million in 2006.
In March 2004, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached further consensus on Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-1"). EITF 03-1 provides accounting guidance regarding the
determination of when an impairment of debt and marketable equity securities and
investments accounted for under the cost method should be considered
other-than-temporary and recognized in income. An EITF 03-1 consensus reached in
November 2003 also requires certain quantitative and qualitative disclosures for
debt and marketable equity securities classified as available-for-sale or
held-to-maturity under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities, that are impaired at the balance sheet date but for which
an other-than-temporary impairment has not been recognized." The Company has
complied with the disclosure requirements of EITF 03-1 which were effective
December 31, 2003. The accounting guidance of EITF 03-1 relating to the
recognition of investment impairment which was to be effective in the third
quarter of 2004 has been delayed pending the development of additional guidance.
The Company is actively monitoring the deliberations relating to this issue at
the FASB and currently is unable to determine the impact of EITF 03-1 on its
consolidated financial statements. In conformity with existing generally
accepted accounting principles, the Company's gross unrealized losses totaling
$15.9 million at December 31, 2004 are reflected as a component of other
comprehensive income on the consolidated balance sheet. Depending on the
ultimate guidance issued by the FASB, including guidance regarding management's
assertion about intent and ability to hold available-for-sale investment
securities, the Company could be required to report these unrealized losses in a
different manner, including possibly reflecting these unrealized losses in the
consolidated income statement as other-than-temporary impairments, even if the
unrealized losses are attributable solely to interest rate movements.
In March 2004, the EITF reached consensus on Issue No. 03-6,
"Participating Securities and the Two-Class Method under FASB Statement No. 128"
("EITF 03-6"). EITF 03-6 provides guidance in determining whether a security
should be considered a participating security for purposes of computing earnings
per share and how earnings should be allocated to the participating security.
EITF 03-6, which was effective for the Company in the second quarter of 2004,
did not have an impact on the Company's earnings per share calculations.
In March 2004, the EITF reached consensus on Issue No. 03-16, "Accounting
for Investments in Limited Liability Companies" ("EITF 03-16"). EITF 03-16
provides guidance regarding whether a limited liability company should be viewed
as similar to a corporation or similar to a partnership for purposes of
determining whether a noncontrolling investment should be accounted for using
the cost method or the equity method of accounting. EITF 03-16, did not have a
material impact on the Company's consolidated financial statements.
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement 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 benefit cost of defined benefit
pension plans and other defined postretirement plans. SFAS 132(r) was 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 revised disclosure requirements.
49
Effective July 1, 2004, the Company adopted FASB Staff Position ("FSP")
No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP 106-2"),
which provides accounting guidance to a sponsor of a post-retirement health care
plan that provides prescription drug benefits. The impact of the Company's
application of FSP 106-2 was immaterial.
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. The Company adopted the
provisions of SOP 03-1 on January 1, 2004, recording a charge of $0.4 million as
a cumulative effect of change in accounting principle.
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 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. The Company adopted the provisions
of Issue B36 during the fourth quarter of 2003 and recorded a net gain of $0.5
million as a cumulative effect of change in accounting principle.
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, 2004 and 2003, of which
$1.9 billion and $2.0 billion, respectively, 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. At December 31, 2004 and 2003,
the fair value of the embedded derivative totaled $42.8 million and $42.7
million, respectively, and is included in the funds withheld at interest line
item on the consolidated balance sheet. Subsequent to the initial adoption of
Issue B36, the change in the market value of the underlying is recorded in the
consolidated statement of income as change in value of embedded derivatives.
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 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 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 extended the effective date of FIN 46 to
the period ending March 31, 2004. The Company adopted the provisions of FIN 46
as of March 31, 2004 and is not required to consolidate any material interests
in variable interest entities.
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, 2004 and 2003, the Company
50
recorded pre-tax stock-based compensation expense of approximately $3.9 million
and $1.7 million, respectively. See Note 17 -- "Stock Options" for pro forma
information.
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
51
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2004 2003
-------------------- ---------------------
(Dollars in thousands)
ASSETS
Fixed maturity securities available-for-sale, at fair value $ 6,023,696 $ 4,575,735
Mortgage loans on real estate 609,292 479,312
Policy loans 957,564 902,857
Funds withheld at interest 2,734,655 2,717,278
Short-term investments 31,964 28,917
Other invested assets 207,054 179,320
------------------- ------------------
Total investments 10,564,225 8,883,419
Cash and cash equivalents 152,095 84,586
Accrued investment income 58,076 47,961
Premiums receivable 376,298 412,413
Reinsurance ceded receivables 434,264 463,557
Deferred policy acquisition costs 2,225,974 1,757,096
Other reinsurance balances 159,440 387,108
Other assets 77,757 77,234
------------------- ------------------
Total assets $ 14,048,129 $ 12,113,374
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 4,097,722 $ 3,550,156
Interest sensitive contract liabilities 4,900,600 4,170,591
Other policy claims and benefits 1,316,225 1,091,038
Other reinsurance balances 247,164 267,706
Deferred income taxes 561,985 438,973
Other liabilities 81,209 90,749
Short-term debt 56,078 -
Long-term debt 349,704 398,146
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company 158,417 158,292
------------------- ------------------
Total liabilities 11,769,104 10,165,651
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; 140,000,000 and 75,000,000
shares authorized, respectively; 63,128,273 shares issued at
December 31, 2004 and December 31, 2003) 631 631
Warrants 66,915 66,915
Additional paid-in-capital 1,046,515 1,042,444
Retained earnings 846,572 641,502
Accumulated other comprehensive income:
Accumulated currency translation adjustment, net of income taxes 93,691 53,601
Unrealized appreciation of securities, net 244,675 170,658
------------------- ------------------
Total stockholders' equity before treasury stock 2,298,999 1,975,751
Less treasury shares held of 683,245 and 967,927 at cost at
December 31, 2004 and December 31, 2003, respectively (19,974) (28,028)
------------------- ------------------
Total stockholders' equity 2,279,025 1,947,723
------------------- ------------------
Total liabilities and stockholders' equity $ 14,048,129 $ 12,113,374
=================== ==================
See accompanying notes to consolidated financial statements.
52
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Twelve months ended December 31,
---------------------------------------------------
2004 2003 2002
-------------- ------------- --------------
(Dollars in thousands, except per share data)
REVENUES:
Net premiums $ 3,347,448 $ 2,643,163 $ 1,980,666
Investment income, net of related expenses 580,528 465,579 374,512
Realized investment gains (losses), net 29,473 5,360 (14,651)
Change in value of embedded derivatives 26,104 43,596 -
Other revenues 55,366 47,300 41,436
------------- ------------ -------------
Total revenues 4,038,919 3,204,998 2,381,963
BENEFITS AND EXPENSES:
Claims and other policy benefits 2,678,537 2,108,431 1,539,464
Interest credited 198,931 179,702 126,715
Policy acquisition costs and other insurance expenses 591,029 458,165 391,504
Change in deferred acquisition costs associated with
change in value of embedded derivatives 22,896 30,665 -
Other operating expenses 139,896 119,636 94,786
Interest expense 38,437 36,789 35,516
------------- ------------ -------------
Total benefits and expenses 3,669,726 2,933,388 2,187,985
Income from continuing operations before
income taxes 369,193 271,610 193,978
Provision for income taxes 123,893 93,291 65,515
------------- -------------- --------------
Income from continuing operations 245,300 178,319 128,463
DISCONTINUED OPERATIONS:
Loss from discontinued accident and health
operations, net of income taxes (23,048) (5,723) (5,657)
------------- ------------ -------------
Income before cumulative effect of change in
accounting principle 222,252 172,596 122,806
Cumulative effect of change in accounting principle,
net of income taxes (361) 545 -
------------- ------------ -------------
Net income $ 221,891 $ 173,141 $ 122,806
============= ============ =============
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 3.94 $ 3.47 $ 2.60
Discontinued operations (0.37) (0.11) (0.11)
Cumulative effect of change in accounting principle (0.01) 0.01 -
------------- ------------ -------------
Net income $ 3.56 $ 3.37 $ 2.49
============= ============ =============
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 3.90 $ 3.46 2.59
Discontinued operations (0.37) (0.11) (0.12)
Cumulative effect of change in accounting principle (0.01) 0.01 -
------------- ------------ -------------
Net income $ 3.52 $ 3.36 $ 2.47
============= ============ =============
DIVIDENDS DECLARED PER SHARE $ 0.27 $ 0.24 $ 0.24
============= ============ =============
See accompanying notes to consolidated financial statements.
53
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, 2002 $ - $ 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
Comprehensive income:
Net income 221,891 $221,891
Other comprehensive income, net of income tax
Currency translation adjustments 40,090
Unrealized investment gains, net of related
offsets and reclassification adjustment 74,017
--------
Other comprehensive income 114,107
--------
Comprehensive income $335,998
========
Dividends to stockholders (16,821)
Reissuance of treasury stock 4,071
---------- ------- -------- ---------- --------
Balance, December 31, 2004 $ - $ 631 $ 66,915 $1,046,515 $846,572
========== ======= ======== ========== ========
Accumulated
Other
Comprehensive Treasury
Income Stock Total
------------- --------- ------------
Balance, January 1, 2002 $ (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
Comprehensive income:
Net income 221,891
Other comprehensive income, net of income tax
Currency translation adjustments 40,090
Unrealized investment gains, net of related
offsets and reclassification adjustment 74,017
Other comprehensive income 114,107
Comprehensive income
Dividends to stockholders (16,821)
Reissuance of treasury stock 8,054 12,125
----------- -------- -----------
Balance, December 31, 2004 $ 338,366 $(19,974) $ 2,279,025
=========== ======== ===========
See accompanying notes to consolidated financial statements.
54
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve months ended
December 31,
-----------------------------------------
2004 2003 2002
------------- ------------ ------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 221,891 $ 173,141 $ 122,806
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (9,666) (11,480) (4,958)
Premiums receivable 50,356 (166,868) (95,989)
Deferred policy acquisition costs (416,017) (596,482) (274,033)
Reinsurance ceded balances 29,293 (38,170) (41,273)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 823,621 1,164,871 460,601
Deferred income taxes 92,638 63,895 73,793
Other assets and other liabilities, net (9,982) 23,469 (74,576)
Amortization of net investment discounts and other (32,580) (40,227) (35,902)
Realized investment (gains) losses, net (29,473) (5,360) 14,651
Other, net (5,602) 4,779 14,572
------------ ----------- -----------
Net cash provided by operating activities 714,479 571,568 159,692
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturity securities - available for sale 1,298,647 1,768,107 2,204,813
Maturities of fixed maturity securities - available for sale 53,469 27,623 22,863
Purchases of fixed maturity securities - available for sale (1,906,949) (2,536,847) (2,749,069)
Sales of mortgage loans 13,927 - -
Cash invested in mortgage loans on real estate (166,747) (264,205) (78,605)
Cash invested in policy loans (64,205) (67,727) (70,240)
Cash provided by (invested in) funds withheld at interest 16,411 (137,125) (41,828)
Principal payments on mortgage loans on real estate 24,710 12,812 15,069
Principal payments on policy loans 9,499 5,991 3,780
Change in short-term investments and other invested assets (50,382) (93,857) 110,717
------------ ----------- -----------
Net cash used in investing activities (771,620) (1,285,228) (582,500)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (16,821) (11,940) (11,854)
Borrowings under credit agreements 4,600 64,662 1,610
Proceeds from offering of common stock, net - 426,701 -
Purchases of treasury stock - - (6,594)
Exercise of stock options 7,162 14,467 3,782
Excess deposits on universal life and other
investment type policies and contracts 125,922 210,160 300,761
------------ ----------- -----------
Net cash provided by financing activities 120,863 704,050 287,705
Effect of exchange rate changes 3,787 6,095 (3,466)
------------ ----------- -----------
Change in cash and cash equivalents 67,509 (3,515) (138,569)
Cash and cash equivalents, beginning of period 84,586 88,101 226,670
------------ ----------- -----------
Cash and cash equivalents, end of period $ 152,095 $ 84,586 $ 88,101
============ =========== ===========
Supplementary information:
Cash paid for interest $ 37,883 $ 35,873 $ 34,687
Cash paid for income taxes $ 28,638 $ 8,043 $ 17,403
Non-cash transfer from funds withheld at interest to fixed maturity
securities $ 606,040 $ - $ -
See accompanying notes to consolidated financial statements.
55
REINSURANCE GROUP OF AMERICA, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
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, 2004, General
American Life Insurance Company ("General American"), a Missouri life insurance
company, directly owned approximately 51.6% of the outstanding shares of common
stock of RGA. General American 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. 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 consolidated financial statements include 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. 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
56
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.
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 sheets.
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 sheets 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 upon the adoption of 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."
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. Upon sale, exercise, expiration or
termination, gains or losses on derivatives accounted for as cash flow hedges
are reclassified from accumulated other comprehensive income into earnings in
the same period or periods during which the hedged transaction affects earnings.
As of December 31, 2004 and 2003, the Company did not hold any derivatives
accounted for as cash flow hedges. At December 31, 2004, the Company held
customized over-the-counter derivatives with a notional amount of $6.4 million,
which are carried at a fair value of $1.2 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.
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.
57
Premiums Receivable. Premiums are accrued when due and in accordance with
information received from the ceding company. When a ceding company fails to
report information on a timely basis, the Company reflects accruals based on the
terms of the reinsurance treaty as well as historical experience. Other
management estimates include adjustments for lapsed premiums given historical
experience, the financial health of specific ceding companies, collateral value
and the legal right of offset on related amounts (i.e. allowances and claims)
owed to the ceding company. Under the legal right of offset provisions in its
reinsurance treaties, the Company can withhold payments for allowances and
claims for unpaid premiums. Based on its review of these factors and historical
experience, the Company did not believe a provision for doubtful accounts was
necessary as of December 31, 2004 or 2003.
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 establish that DAC remains recoverable, and if financial
performance significantly deteriorates to the point where a premium deficiency
exists, a cumulative charge to current operations will be recorded. No such
adjustments were made during 2004, 2003 or 2002. 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. 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. From 2002 through 2004, there were no changes to goodwill as a
result of acquisitions or disposals. Goodwill as of December 31, 2004 and 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. 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 $4.5 million and $5.8
million, including accumulated amortization of $8.9 million and $7.6 million, as
of December 31, 2004 and 2003, respectively. The value of business acquired
amortization expense for the years ended December 31, 2004, 2003, and 2002 was
$1.3 million, $1.7 million, and $2.2 million, respectively. These amortized
balances are included in other assets on the consolidated balance sheets.
Amortization of the value of business acquired is estimated to be $1.0 million,
$0.8 million, $0.6 million, $0.4 million and $0.4 million during 2005, 2006,
2007, 2008 and 2009, 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, 2004 and 2003, the Company had unamortized
computer software costs of approximately $20.3 million and $19.0 million,
respectively. During 2004, 2003 and 2002, the Company amortized computer
software costs of $2.2 million, $0.5 million, and $0.3 million, respectively.
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
58
characteristics of the plan of insurance, year of issue, age of insured, and
other appropriate factors. Interest rates range from 2.5% to 7.2%. The mortality
and withdrawal assumptions are based on the Company's experience as well as
industry experience and standards. Liabilities for future benefits on
interest-sensitive life and investment-type contract liabilities are carried at
the accumulated contract holder values without reduction for potential surrender
or withdrawal charges.
The Company periodically reviews actual and anticipated experience compared to
the assumptions used to establish policy benefits. The Company establishes
premium deficiency reserves if actual and anticipated experience indicates that
existing policy liabilities together with the present value of future gross
premiums will not be sufficient to cover the present value of future benefits,
settlement and maintenance costs and to recover unamortized acquisition costs.
The premium deficiency reserve is established by a charge to income, as well as
a reduction in 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. The time lag from the date of the claim or death to when the ceding
company reports the claim to the Company can vary significantly by ceding
company and business segment, but generally averages around 2.5 months on a
consolidated basis. The Company updates its analysis of incurred but not
reported, including lag studies, on a quarterly basis and adjusts its claim
liabilities accordingly. The adjustments in a given period are generally not
significant relative to the overall policy liabilities and may result in an
increase or decrease in liabilities.
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 sheets. 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, 2004 and 2003, 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 Americas
Reinsurance Company, Ltd., RGA Reinsurance, RGA Barbados, RGA Technology
Partners, Inc., RCM and Fairfield Management Group, Inc. ("Fairfield"). Due to
rules that affect the ability of an entity to join in a consolidated tax return,
RGA Sigma Reinsurance SPC files a separate tax return, even though it is
considered a U.S. taxpayer. The Company's Argentine, Australian, Canadian,
Malaysian, South African, Irish and United Kingdom subsidiaries are taxed under
applicable local statutes. The Company's branch operations are taxable under
U.S. tax law and 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 ("Preferred Securities") 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
Securities on the date issued ($158.1 million) was recorded in liabilities on
the consolidated balance sheets under the caption "Company-obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely junior
subordinated debentures." The coupon rate of the Preferred Securities is 5.75%
on a face amount of $225.0 million.
59
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 sheets under the caption "Warrants." In the aggregate as of December 31,
2004, 4.5 million warrants to purchase approximately 5.6 million shares of
Company common stock at a price per share of $39.98 were outstanding. 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.
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 applicable deferred income taxes, resulting from such
translation are included in accumulated currency translation adjustments, in
accumulated other comprehensive income on the consolidated balance sheet.
Retrocession Arrangements and Reinsurance Ceded Receivables. The Company
generally reports retrocession activity on a gross basis. Amounts paid or deemed
to have been paid for reinsurance are reflected in reinsurance ceded
receivables. The cost of reinsurance related to long-duration contracts is
recognized over the terms of the reinsured policies on a basis consistent with
the reporting of those policies.
In the normal course of business, the Company seeks to limit its exposure to
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, 2004, 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.
For certain reinsurance transactions involving in force blocks of business, the
ceding company pays a premium equal to the initial required reserve (future
policy benefit). In such transactions, for income statement presentation, the
Company nets the expense associated with the establishment of the reserve on the
consolidated balance sheet against the premiums from the transaction.
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 4.5%, 4.7% and
4.2%, during 2004, 2003 and 2002, respectively. Interest crediting rates for
U.S. dollar-denominated investment-type
60
contracts ranged from 2.8% to 5.9% during 2004, 4.0% to 9.5% during 2003 and
2.8% to 6.8% during 2002. Weighted average interest crediting rates for Mexican
peso-denominated investment-type contracts were 5.0%, 21.8% and 15.9% for 2004,
2003 and 2002, respectively.
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.
Net Earnings Per Share. Basic earnings per share exclude any dilutive effects of
options and warrants. Diluted earnings per share include the dilutive effects
assuming outstanding stock options and warrants were exercised.
New Accounting Pronouncements. In December 2004, FASB revised SFAS No. 123
Accounting for Stock Based Compensation ("SFAS 123") to Share-Based Payment
("SFAS 123(r)"). SFAS 123(r) provides more guidance on determining whether
certain financial instruments awarded in share-based payment transactions are
liabilities. SFAS 123(r) also requires that the cost of all share-based
transactions should be recorded in the financial statements. The revised
pronouncement must be adopted by the Company by July 1, 2005. The Company
expects SFAS 123(r) will increase compensation expense by $1.8 million in 2005
and $1.5 million in 2006.
In March 2004, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board ("FASB") reached further consensus on Issue No. 03-1,
"The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-1"). EITF 03-1 provides accounting guidance regarding the
determination of when an impairment of debt and marketable equity securities and
investments accounted for under the cost method should be considered
other-than-temporary and recognized in income. An EITF 03-1 consensus reached in
November 2003 also requires certain quantitative and qualitative disclosures for
debt and marketable equity securities classified as available-for-sale or
held-to-maturity under SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities, that are impaired at the balance sheet date but for which
an other-than-temporary impairment has not been recognized." The Company has
complied with the disclosure requirements of EITF 03-1 which were effective
December 31, 2003. The accounting guidance of EITF 03-1 relating to the
recognition of investment impairment which was to be effective in the third
quarter of 2004 has been delayed pending the development of additional guidance.
The Company is actively monitoring the deliberations relating to this issue at
the FASB and currently is unable to determine the impact of EITF 03-1 on its
consolidated financial statements. In conformity with existing generally
accepted accounting principles, the Company's gross unrealized losses totaling
$15.9 million at December 31, 2004 are reflected as a component of other
comprehensive income on the consolidated balance sheet. Depending on the
ultimate guidance issued by the FASB, including guidance regarding management's
assertion about intent and ability to hold available-for-sale investment
securities, the Company could be required to report these unrealized losses in a
different manner, including possibly reflecting these unrealized losses in the
consolidated income statement as other-than-temporary impairments, even if the
unrealized losses are attributable solely to interest rate movements.
In March 2004, the EITF reached consensus on Issue No. 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128" ("EITF 03-6").
EITF 03-6 provides guidance in determining whether a security should be
considered a participating security for purposes of computing earnings per share
and how earnings should be allocated to the participating security. EITF 03-6,
which was effective for the Company in the second quarter of 2004, did not
have an impact on the Company's earnings per share calculations.
In March 2004, the EITF reached consensus on Issue No. 03-16, "Accounting for
Investments in Limited Liability Companies" ("EITF 03-16"). EITF 03-16 provides
guidance regarding whether a limited liability company should be viewed as
similar to a corporation or similar to a partnership for purposes of determining
whether a noncontrolling investment should be accounted for using the cost
method or the equity method of accounting. EITF 03-16, did not have a material
impact on the Company's consolidated financial statements.
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement 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 benefit cost of defined benefit pension
plans and other defined postretirement plans. SFAS 132(r) was 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 revised disclosure requirements.
Effective July 1, 2004 the Company adopted FASB Staff Position ("FSP") No.
106-2, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP 106-2"),
61
which provides accounting guidance to a sponsor of a post-retirement health care
plan that provides prescription drug benefits. The impact of the Company's
application of FSP 106-2 was immaterial.
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. The Company adopted the provisions of SOP
03-1 on January 1, 2004, recording a charge of $0.4 million as a cumulative
effect of change in accounting principle.
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. The Company adopted the
provisions of Issue B36 during the fourth quarter of 2003 and recorded a net
gain of $0.5 million as a cumulative effect of change in accounting principle.
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, 2004 and 2003, of which
$1.9 billion and $2.0 billion, respectively, 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. At December 31, 2004 and 2003,
the fair value of the embedded derivative totaled $42.8 million and $42.7
million, respectively, and is included in the funds withheld at interest line
item on the consolidated balance sheet. Subsequent to the initial adoption of
Issue B36, the change in the market value of the underlying is recorded in the
consolidated statement of income as change in value of embedded derivatives.
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 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 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 extended the effective date of FIN 46 to
the period ending March 31, 2004. The Company adopted the provisions of FIN 46
as of March 31, 2004 and is not required to consolidate any material interests
in variable interest entities.
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, 2004 and 2003, the Company recorded pre-tax stock-based
compensation expense of approximately $3.9 million and $1.7 million,
respectively. See Note 17 -- "Stock Options" for pro forma information.
62
Reclassification. The Company has reclassified the presentation of certain prior
period information to conform to the 2004 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 of these newly issued shares.
On January 23, 2002, the Board of Directors approved a stock repurchase program
authorizing the Company to purchase up to $50 million of its shares of stock, as
conditions warrant. The Board's action allows management, at its discretion, to
purchase shares on the open market. As of December 31, 2004, the Company
purchased 225,500 shares under this program at an aggregate cost of $6.6
million. Purchased shares are held as treasury stock. 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 the Company's
U.S. traditional business, but does not significantly add to the Company's
client base since most of the underlying ceding companies are already our
clients. The Company agreed to use commercially reasonable efforts to novate the
underlying treaties from Allianz Life to RGA Reinsurance and as of December 31,
2004, approximately 96.2% of the client companies, representing approximately
95.7% of the business in force, had novated. Novation results in the underlying
client companies reinsuring the business directly to RGA Reinsurance versus
passing through Allianz Life. Once novated, it becomes more difficult for the
Company to distinguish the performance of the novated treaties from the rest of
the Company's traditional life reinsurance business.
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.
Note 5 INVESTMENTS
Major categories of net investment income consist of the following (in
thousands):
Years Ended December 31, 2004 2003 2002
- ------------------------ -------- -------- --------
Fixed maturity securities available-for-sale $288,528 $228,260 $203,534
Mortgage loans on real estate 34,045 23,599 14,385
Policy loans 54,309 59,883 59,058
Funds withheld at interest 199,094 144,975 89,831
Short-term investments 1,314 2,501 3,393
Other invested assets 12,988 12,820 7,290
-------- -------- --------
Investment revenue 590,278 472,038 377,491
Investment expense 9,750 6,459 2,979
-------- -------- --------
Net investment income $580,528 $465,579 $374,512
======== ======== ========
63
The amortized cost, gross unrealized gains and losses, and estimated fair values
of investments in fixed maturity securities and equity securities at December
31, 2004 and 2003 are as follows (in thousands):
Amortized Unrealized Unrealized Fair
2004 Cost Gains Losses Value
-------------- ------------- ------------- ---------------
Available-for-sale:
Commercial and industrial $ 1,629,094 $ 76,927 $ 5,559 $ 1,700,462
Public utilities 844,099 140,163 1,450 982,812
Asset-backed securities 132,417 4,167 388 136,196
Canadian and Canadian provincial
governments 561,041 116,257 174 677,124
Mortgage-backed securities 1,381,185 27,047 4,409 1,403,823
Finance 873,249 37,052 3,282 907,019
U.S. government and agencies 44,585 338 184 44,739
Other foreign government
securities 169,087 2,885 451 171,521
-------------- ------------- ------------- ---------------
Total fixed maturity securities $ 5,634,757 $ 404,836 $ 15,897 $ 6,023,696
-------------- ------------- ------------- ---------------
Equity securities $ 171,430 $ 6,597 $ 453 $ 177,574
============== ============= ============= ===============
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 950,120 23,776 4,253 969,643
Finance 694,579 38,574 2,733 730,420
U.S. government and agencies 173,002 1,170 317 173,855
Other foreign government
securities 140,359 766 1,303 139,822
-------------- ------------- ------------- ---------------
Total fixed maturity securities $ 4,298,597 $ 297,481 $ 20,343 $ 4,575,735
-------------- ------------- ------------- ---------------
Equity securities $ 142,486 $ 5,689 $ 194 $ 147,981
============== ============= ============= ===============
As of December 31, 2004, the Company held securities with a market value of
$535.7 million issued by the Federal Home Loan Mortgage Corporation, $290.5
million issued by the Federal National Mortgage Corporation, $318.4 million in
one entity that were guaranteed by a Canadian province and $260.2 million that
were issued by a Canadian province, all of which exceeded 10% of consolidated
stockholders' equity. As of December 31, 2003, the Company held securities with
a market value of $339.7 million issued by the Federal Home Loan Mortgage
Corporation, $221.9 million issued by the Federal National Mortgage Corporation,
and $269.6 million in one entity that was guaranteed by a Canadian province, all
of which exceeded 10% of consolidated stockholders' equity.
Common and non-redeemable preferred equity investments and derivative financial
instruments are included in other invested assets in the Company's consolidated
balance sheet. Derivative financial instruments are carried at market value,
approximately $1.2 million and $6.7 million at December 31, 2004 and 2003,
respectively.
The amortized cost and estimated fair value of fixed maturity securities
available-for-sale at December 31, 2004 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.
64
At December 31, 2004, 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 $ 94,271 $ 94,806
Due after one year through five years 696,064 716,847
Due after five years through ten years 1,561,028 1,624,963
Due after ten years 1,769,792 2,047,061
Asset and mortgage-backed securities 1,513,602 1,540,019
---------- ----------
$5,634,757 $6,023,696
========== ==========
Net realized investment gains (losses) consist of the following (in thousands):
Years Ended December 31 2004 2003 2002
----------------------- -------- -------- --------
Fixed maturities and equity securities
available-for-sale:
Realized gains $ 48,306 $ 52,602 $ 64,060
Realized losses (21,038) (45,742) (79,005)
Other, net 2,205 (1,500) 294
-------- -------- --------
Net gains (losses) $ 29,473 $ 5,360 $(14,651)
======== ======== ========
The Company monitors its investment securities to determine impairments in
value. 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. Based on management's judgment, securities
with an other-than-temporary impairment in value are written down to
management's estimate of fair value. Included in net realized losses are
other-than-temporary write-downs of fixed maturity securities of approximately
$8.5 million, $20.1 million, and $33.9 million in 2004, 2003 and 2002,
respectively. The circumstances that gave rise to these impairments were
bankruptcy proceedings or deterioration in collateral value supporting certain
asset-backed securities. Realized losses included other-than-temporary
impairment in value of collateralized bond obligations of $9.7 million and $24.2
million during 2003 and 2002, respectively.
At December 31, 2004, fixed maturity securities held by the Company that were
below investment grade had a book value and estimated fair value of
approximately $130.5 million and $140.4 million, respectively. At December 31,
2004, the Company owned non-income producing securities with an amortized cost
of $15.7 million and market value of $19.0 million. During 2004, 2003, and 2002
the Company sold fixed maturity securities with fair values of $394.0 million,
$460.3 million, and $466.1 million at losses of $20.6 million, $25.2 million and
$44.4 million, respectively.
The following table presents the total gross unrealized losses for 403 and 450
fixed maturity securities and equity securities as of December 31, 2004 and
2003, respectively, where the estimated fair value had declined and remained
below amortized cost by the indicated amount (in thousands):
At December 31, 2004 At December 31, 2003
------------------------------- -------------------------------
Gross Unrealized Gross Unrealized
Losses % of Total Losses % of Total
---------------- ---------- ---------------- ----------
Less than 20% $ 16,350 100% $20,537 100%
20% or more for less than six months - - - -
20% or more for six months or greater - - - -
-------- --- ------- ---
Total $ 16,350 100% $20,537 100%
======== === ======= ===
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, primarily an increase in the interest rate environment.
The following tables present the estimated fair values and gross unrealized
losses for the 403 and 450 fixed maturity securities and equity securities that
have estimated fair values below amortized cost as of December 31, 2004 and
2003, respectively. These investments are presented by class and grade of
security. The length of time the related market value has remained below
amortized cost is provided for fixed maturity securities as of December 31,
2004. As of December 31, 2003, all gross unrealized losses were outstanding less
than 12 months.
65
AS OF DECEMBER 31, 2004
------------------------------------------------------------------------------------------
EQUAL TO OR GREATER THAN
LESS THAN 12 MONTHS 12 MONTHS TOTAL
------------------------- -------------------------- --------------------------
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Unrealized
(in thousands) Fair Value Loss Fair Value Loss Fair Value Loss
---------- ---------- ---------- ---------- ---------- ----------
INVESTMENT GRADE SECURITIES:
COMMERCIAL AND INDUSTRIAL $268,633 $ 3,591 $ 48,727 $1,735 $ 317,360 $ 5,326
PUBLIC UTILITIES 83,473 1,201 5,714 229 89,187 1,430
ASSET-BACKED SECURITIES 38,568 388 - - 38,568 388
CANADIAN AND CANADIAN PROVINCIAL
GOVERNMENTS 21,497 173 - - 21,497 173
MORTGAGE-BACKED SECURITIES 264,617 4,314 - - 264,617 4,314
FINANCE 180,990 2,632 22,210 649 203,200 3,281
U.S. GOVERNMENT AND AGENCIES 30,199 280 - - 30,199 280
FOREIGN GOVERNMENTS 56,142 451 - - 56,142 451
-------- ------- -------- ------ ---------- -------
INVESTMENT GRADE SECURITIES $944,119 $13,030 $ 76,651 $2,613 $1,020,770 $15,643
-------- ------- -------- ------ ---------- -------
NON-INVESTMENT GRADE SECURITIES:
COMMERCIAL AND INDUSTRIAL 20,667 233 - - 20,667 233
PUBLIC UTILITIES 3,417 20 - - 3,417 20
FINANCE 204 1 - - 204 1
-------- ------- -------- ------ ---------- -------
NON-INVESTMENT GRADE SECURITIES 24,288 254 - - 24,288 254
-------- ------- -------- ------ ---------- -------
TOTAL FIXED MATURITY SECURITIES $968,407 $13,284 $ 76,651 $2,613 $1,045,058 $15,897
-------- ------- -------- ------ ---------- -------
EQUITY SECURITIES $ 36,619 $ 453 $ - $ - $ 36,619 $ 453
======== ======= ==-===== ====== ========== =======
Less than 12 months
---------------------------
Unrealized
As of December 31, 2003 (in thousands) 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 79,549 1,303
Mortgage-backed securities 299,907 4,253
Finance 144,263 2,733
U.S. government and agencies 34,015 317
---------- ----------
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 fixed maturity securities $1,109,182 $ 20,343
========== ==========
Equity securities $ 12,703 $ 194
========== ==========
The Company believes that the analysis of each security whose price has been
below market for greater than twelve months indicated that the financial
strength, liquidity, leverage, future outlook, and the Company's ability and
intent to hold the security until recovery support the view that the security
was not other-than-temporarily impaired as of December 31, 2004.
66
The unrealized losses did not exceed 10.0% on an individual security basis and
are primarily a result of rising interest rates, changes in credit spreads and
the long-dated maturities of the securities. Additionally, all of the gross
unrealized losses are associated with investment grade securities.
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 as of December 31, 2004 (in thousands):
2004 2003
----------------------------- ---------------------------
Carrying Percentage Carrying Percentage
Property type: Value of Total Value of Total
------------ ---------- ---------- ----------
Apartment $ 58,298 9.57% $ 56,581 11.80%
Retail 133,654 21.94% 98,597 20.57%
Office building 209,737 34.42% 171,142 35.71%
Industrial 190,518 31.27% 147,617 30.80%
Other commercial 17,085 2.80% 5,375 1.12%
------------ ------ ---------- ------
Total $ 609,292 100.00% $ 479,312 100.00%
============ ====== ========== ======
All of the Company's mortgage loans are amortizing loans. As of December 31,
2004 and 2003, the Company's mortgage loans were distributed as follows (in
thousands):
2004 2003
------------------------------ ---------------------------
Carrying Percentage Carrying Percentage
United States: Value of Total Value of Total
------------ ---------- ------------ ----------
Alabama $ 9,700 1.59% $ - -
Arizona 29,193 4.79% 26,030 5.43%
California 137,153 22.51% 102,296 21.33%
Colorado 21,527 3.53% 20,643 4.31%
Connecticut 2,021 0.33% - -
Florida 50,252 8.25% 45,100 9.41%
Georgia 39,458 6.48% 31,882 6.65%
Illinois 52,478 8.61% 28,595 5.97%
Indiana 11,094 1.82% 11,438 2.39%
Kansas 21,372 3.51% 13,633 2.84%
Louisiana 5,139 0.84% 5,269 1.10%
Maine 9,752 1.60% 4,980 1.04%
Maryland 10,822 1.78% 6,949 1.45%
Massachusetts 12,174 2.00% - -
Missouri 12,923 2.12% 14,199 2.96%
Nevada 9,819 1.61% 11,155 2.33%
New Hampshire 2,330 0.38% 2,377 0.50%
New Jersey 20,810 3.42% 16,159 3.37%
New Mexico 3,832 0.63% 3,900 0.81%
New York 6,771 1.11% 3,605 0.75%
North Carolina 20,669 3.39% 22,958 4.79%
Ohio 3,828 0.63% - -
Oregon 5,735 0.94% 5,849 1.22%
Pennsylvania - - 5,451 1.14%
Rhode Island 5,547 0.91% 5,266 1.10%
South Dakota 7,221 1.19% 7,365 1.54%
Texas 23,080 3.79% 20,943 4.37%
Virginia 38,326 6.29% 31,883 6.65%
Washington 28,512 4.68% 23,017 4.80%
Wisconsin 7,754 1.27% 8,370 1.75%
------------ ------ ------------ ------
Total $ 609,292 100.00% $ 479,312 100.00%
============ ====== ============ ======
67
All mortgage loans are performing and no valuation allowance had been
established as of December 31, 2004 and 2003.
The maturities of the mortgage loans are as follows (in thousands):
2004 2003
---------------- -----------------
Due one year through five years $ 97,880 $ 105,179
Due after five years 388,744 297,321
Due after ten years 122,668 76,812
---------------- -----------------
Total $ 609,292 $ 479,312
================ =================
Policy loans comprised approximately 9.1% and 10.2% of the Company's investments
as of December 31, 2004 and 2003, 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 25.9% and 30.6% of the
Company's investments as of December 31, 2004 and 2003, 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, 2004 and 2003. SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," as amended, 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):
2004 2003
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------- -------------- --------------- --------------
Assets:
Fixed maturity securities $ 6,023,696 $ 6,023,696 $ 4,575,735 $ 4,575,735
Mortgage loans on real estate 609,292 631,970 479,312 499,102
Policy loans 957,564 957,564 902,857 902,857
Funds withheld at interest 2,734,655 2,788,237 2,717,278 2,799,062
Short-term investments 31,964 31,964 28,917 28,917
Other invested assets 207,054 201,829 179,320 174,646
Liabilities:
Interest-sensitive contract $ 4,900,600 $ 4,438,784 $ 4,170,591 $ 3,900,244
liabilities
Long-term and short-term debt 405,782 431,388 398,146 421,735
Company-obligated mandatorily
redeemable preferred securities 158,417 223,451 158,292 194,490
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, 2004 and 2003 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.
68
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 established for amounts deemed uncollectible. At December
31, 2004 and 2003, 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, 2004 2003 2002
- ------------------------ ----------- ----------- -----------
Direct $ 4,930 $ 3,966 $ 4,986
Reinsurance assumed 3,644,472 2,918,488 2,325,512
Reinsurance ceded (301,954) (279,291) (349,832)
----------- ----------- -----------
Net premiums and amounts earned $ 3,347,448 $ 2,643,163 $ 1,980,666
=========== =========== ===========
The effect of reinsurance on policyholder claims and other policy benefits is as
follows (in thousands):
Years Ended December 31, 2004 2003 2002
- ------------------------ ----------- ----------- -----------
Direct $ 4,299 $ 8,272 $ 3,330
Reinsurance assumed 2,945,413 2,350,135 1,744,630
Reinsurance ceded (271,175) (249,976) (208,496)
----------- ----------- -----------
Net policyholder claims and benefits $ 2,678,537 $ 2,108,431 $ 1,539,464
=========== =========== ===========
At December 31, 2004 and 2003, 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, 2004 $ 76 $1,458,827 $ 161,978 $1,296,925 112.48%
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%
At December 31, 2004, the Company has provided approximately $1.5 billion 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, 2004, these treaties had approximately $326.8 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 $808.2 million were held in trust to satisfy
collateral requirements for reinsurance business for the benefit of certain
subsidiaries of the Company at December 31, 2004. Additionally, securities with
an amortized cost of $1,608.1 million, as of December 31, 2004, were held in
trust to satisfy collateral requirements
69
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 include
change in control of the subsidiary, insolvency, nonperformance under a treaty,
or loss of reinsurance license of such subsidiary.
Note 8 DEFERRED POLICY ACQUISITION COSTS
The following reflects the amounts of policy acquisition costs deferred and
amortized (in thousands):
Years Ended December 31, 2004 2003 2002
- ------------------------ -------------- ------------------ --------------
Deferred policy acquisition costs:
Assumed $ 2,321,731 $ 1,835,923 $ 1,162,256
Retroceded (95,757) (78,827) (77,320)
-------------- ------------------ --------------
Net $ 2,225,974 $ 1,757,096 $ 1,084,936
============== ================== ==============
Years Ended December 31, 2004 2003 2002
- ------------------------ ----------- ----------- -----------
Beginning of year $ 1,757,096 $ 1,084,936 $ 800,319
Capitalized
Assumed 915,071 1,045,932 615,431
Retroceded (15,296) (23,772) (23,001)
Amortized
Assumed (406,367) (343,368) (314,146)
Allocated to change in value of embedded
derivatives (22,896) (28,897) -
Retroceded (1,634) 22,265 6,333
----------- ----------- -----------
End of year $ 2,225,974 $ 1,757,096 $ 1,084,936
=========== =========== ===========
Some reinsurance agreements involve reimbursing the ceding company for
allowances and commissions in excess of first-year premiums. These amounts
represent acquisition costs 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, 2004 2003 2002
- ------------------------ -------- -------- --------
Current income tax expense (benefit) $ 22,351 $ 27,347 $(14,412)
Deferred income tax expense 80,764 46,313 57,221
Foreign current tax expense 8,904 2,048 6,134
Foreign deferred tax expense 11,874 17,583 16,572
-------- -------- --------
Provision for income taxes $123,893 $ 93,291 $ 65,515
======== ======== ========
70
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):
2004 2003 2002
---- ---- ----
Years Ended December 31,
Tax provision at U.S. statutory rate $ 129,217 $ 95,064 $ 67,892
Increase (decrease) in income taxes resulting from:
Foreign tax rate differing from U.S. tax rate (1,063) (2,227) (124)
Amounts related to audit resolution (1,900) - (2,000)
Travel and entertainment 241 2 129
Intangible amortization - - 199
Deferred tax valuation allowance (2,602) 556 (211)
Other, net - (104) (370)
--------- --------- ---------
Total provision for income taxes $ 123,893 $ 93,291 $ 65,515
========= ========= =========
Total income taxes were as follows (in thousands):
2004 2003 2002
---- ---- ----
Years Ended December 31,
Income taxes from continuing operations $ 123,893 $ 93,291 $ 65,515
Tax benefit on discontinued operations (12,410) (3,082) (3,066)
Tax effect on cumulative change in accounting (195) 293 -
principle
Income tax from stockholders' equity:
Net unrealized holding gain on debt and equity
securities recognized for financial
reporting purposes 39,855 36,637 51,591
Exercise of stock options (1,329) (2,919) (1,943)
Foreign currency translation (15,455) 28,477 (3,664)
--------- --------- ---------
Total income taxes provided $ 134,359 $ 152,697 $ 108,433
========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at December 31, 2004 and 2003,
are presented in the following tables (in thousands):
2004 2003
---- ----
Years Ended December 31,
Deferred income tax assets:
Nondeductible accruals $ 31,877 $ 23,744
Reserve for policies and investment income
differences 186,454 140,049
Deferred acquisition costs capitalized for tax 30,163 40,711
Net operating loss carryforward 169,453 183,340
Foreign tax and AMT credit carryforward - 12,394
Capital loss carryforward 6,969 -
--------- ---------
Subtotal 424,916 400,238
Valuation allowance (9,466) (12,988)
--------- ---------
Total deferred income tax assets 415,450 387,250
Deferred income tax liabilities:
Deferred acquisition costs capitalized for 773,055 617,492
financial reporting
Differences between tax and financial reporting
amounts concerning certain reinsurance
transactions 23,579 35,474
Differences in foreign currency translation 13,407 28,862
Differences in the tax basis of cash and invested
assets 167,394 144,395
--------- ---------
Total deferred income tax liabilities 977,435 826,223
--------- ---------
Net deferred income tax liabilities $ 561,985 $ 438,973
========= =========
71
As of December 31, 2004 and 2003, a valuation allowance for deferred tax assets
of approximately $9.5 million and $13.0 million, respectively, was provided on
the foreign tax credits and net operating and capital losses of RGA Reinsurance,
GA Argentina, RGA South Africa, and RGA UK. The Company utilizes valuation
allowances when it realizes, based on the weight of the available evidence, that
it is more likely than not that the deferred income taxes will not be realized.
Except for RGA International Reinsurance Company Ltd., the Company has not
recognized a deferred tax liability for the undistributed earnings of its wholly
owned foreign subsidiaries because the Company considers these earnings to be
permanently reinvested and does not expect these earnings to be repatriated in
the foreseeable future.
During 2004, 2003, and 2002, the Company received federal income tax refunds of
approximately $1.4 million, $1.6 million, and $5.2 million, respectively. The
Company made cash income tax payments of approximately $29.9 million, $8.0
million, and $17.4 million in 2004, 2003 and 2002, respectively. At December 31,
2004 and 2003, the Company recognized gross deferred tax assets associated with
net operating losses of approximately $458.9 million and $487.2 million,
respectively, that will expire between 2011 and 2019. However, these net
operating losses are expected to be utilized in the normal course of business
during the period allowed for carryforwards and in any event, will not be lost
due to the application of tax planning strategies that management would utilize.
The Company's tax returns have been audited by the relevant taxing authorities
for all years through 2000. The Company believes established tax reserves are
adequate in relation to the potential for additional assessments. Once
established, reserves are adjusted as information becomes available or when an
event requiring a change to the reserve occurs. The resolution of tax matters
could have an impact on the Company's effective tax rate.
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 $22.8 million and $18.7
million as of December 31, 2004 and 2003, 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 $2.2 million, $1.9 million, and $1.2 million in 2004, 2003 and
2002, 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 for 2004 and 2003, and
$0.6 million for 2002, related to these postretirement plans. The projected
obligation was approximately $8.6 million and $5.3 million as of December 31,
2004 and 2003, respectively.
December 31,
---------------------------------------------
Pension Benefits Other Benefits
--------------------- ---------------------
(in thousands) 2004 2003 2004 2003
-------- -------- --------- ---------
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Projected benefit obligation at beginning of year $ 18,652 $ 16,137 $ 5,331 $ 4,508
Service cost 1,827 1,473 342 314
Interest cost 1,274 1,052 331 303
Participant contributions - - 15 11
Actuarial losses 1,395 280 2,664 265
Benefits paid (303) (290) (100) (70)
-------- -------- --------- ---------
Projected benefit obligation at end of year $ 22,845 $ 18,652 $ 8,583 $ 5,331
======== ======== ========= =========
CHANGE IN PLAN ASSETS:
Contract value of plan assets at beginning
of year $ 9,839 $ 7,725 $ - $ -
Actual return on plan assets 1,319 1,857 - -
Employer and participant contributions 3,028 564 100 70
Benefits paid (311) (307) (100) (70)
-------- -------- --------- ---------
Contract value of plan assets at end of year $ 13,875 $ 9,839 $ - $ -
======== ======== ========= =========
72
December 31,
---------------------------------------------
Pension Benefits Other Benefits
--------------------- ---------------------
(in thousands) 2004 2003 2004 2003
-------- -------- --------- ---------
Under funded $ (8,970) $ (8,813) $ (8,583) $ (5,331)
Unrecognized net actuarial losses 2,711 1,760 4,234 1,629
Unrecognized prior service cost 247 276 - -
-------- -------- --------- ---------
Accrued benefit cost $ (6,012) $ (6,777) $ (4,349) $ (3,702)
======== ======== ========= =========
Qualified plan accrued pension cost $ (1,121) $ (2,445) - -
Non-qualified plan accrued pension cost (5,116) (4,482) - -
Intangible assets 108 117 - -
Accumulated other comprehensive income 117 33 - -
-------- -------- --------- ---------
Accrued benefit cost $ (6,012) $ (6,777) - -
======== ======== ========= =========
The aggregate projected benefit obligation and aggregate contract value of plan
assets for the pension plans were as follows (in thousands):
2004 2003
------------------------ -----------------------
Qualified Non-Qualified Qualified Non-Qualified
Plan Plan Plan Plan
-------- ------- -------- -------
Aggregate projected benefit obligation $(17,881) $(4,964) $(14,182) $(4,470)
Aggregate contract value of plan assets 13,875 - 9,839 -
-------- ------- -------- -------
Underfunded $ (4,006) $(4,964) $ (4,343) $(4,470)
======== ======= ======== =======
Accumulated benefit obligation $ 14,344 $ 4,070 $ 11,290 $ 3,349
======== ======= ======== =======
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
---------------- --------------
2004 2003 2004 2003
---- ---- ---- ----
Discount rate 6.00% 6.50% 6.00% 6.50%
Expected rate of return on plan assets 8.50% 8.75% - -
Rate of compensation increase 4.25% 4.95% - -
The assumed health care cost trend rates used in measuring the accumulated
non-pension post-retirement benefit obligation were as follows:
December 31,
-----------------------------------------------
2004 2003
---------------------- ---------------------
Pre-Medicare eligible claims 12% down to 5% in 2012 10% down to 5% in 2008
Medicare eligible claims 12% down to 5% in 2012 10% 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 One Percent
Increase Decrease
----------- -----------
Effect on total of service and interest cost components $ 180 $ (135)
Effect on accumulated postretirement benefit obligation $ 1,782 $ (1,477)
73
The components of net periodic benefit cost were as follows (in thousands):
Pension Benefits Other Benefits
----------------------------- --------------------
2004 2003 2002 2004 2003 2002
------ ------- ------- ---- ---- ----
Service cost 1,827 $ 1,473 $ 1,218 342 $314 $264
Interest cost 1,274 1,052 972 331 303 261
Expected return on plan assets (1,000) (643) (751) - - -
Amortization of prior actuarial
losses 133 141 7 58 60 41
Amortization of prior service cost 30 30 30 - - -
------ ------- ------- ---- ---- ----
Net periodic benefit cost 2,264 $ 2,053 $ 1,476 $731 $677 $566
====== ======= ======= ==== ==== ====
The Company expects to contribute $1.8 million in pension benefits and $0.1
million in other benefits during 2005.
The following benefit payments, which reflect expected future service as
appropriate, are expected to be paid (in thousands):
Pension Other
Benefits Benefits
-------- --------
2005 $ 1,503 $ 115
2006 2,385 128
2007 1,989 151
2008 2,459 183
2009 2,291 216
2010-2014 13,393 1,608
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:
ASSET CATEGORY: 2004 2003
---- ----
Equity securities 76% 73%
Debt securities 24% 27%
--- ---
Total 100% 100%
2005 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, 2004, 2003 and 2002 was approximately $1.0 million, $1.0 million
and $1.2 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. The Company recorded revenue under the
agreement for the years ended December 31, 2004, 2003 and 2002 of approximately
$3.5 million, $3.2 million and $0.4 million, respectively.
74
The Company also has arms-length direct policies and reinsurance agreements with
MetLife and certain of its subsidiaries. As of December 31, 2004, the Company
had reinsurance related assets and liabilities from these agreements totaling
$143.2 million and $173.3 million, respectively. Prior-year comparable assets
and liabilities were $175.0 million and $169.6 million, respectively.
Additionally, the Company reflected net premiums of approximately $164.4
million, $157.9 million and $172.8 million in 2004, 2003 and 2002, 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 $36.5
million, $19.4 million and $23.3 million in 2004, 2003 and 2002, respectively.
Note 12 LEASE COMMITMENTS
The Company leases office space and furniture and equipment under non-cancelable
operating lease agreements, which expire at various dates. Future minimum office
space annual rentals under non-cancelable operating leases at December 31, 2004
are as follows:
2005 $6.2 million
2006 6.3 million
2007 5.0 million
2008 4.5 million
2009 3.5 million
Thereafter 3.6 million
The amounts above are net of expected sublease income of approximately $0.4
million annually through 2010. Rent expenses amounted to approximately $8.0
million, $6.8 million and $6.0 million for the years ended December 31, 2004,
2003 and 2002, 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 or for the years ended
December 31, 2004 , 2003, and 2002 (in thousands):
Statutory Statutory
Capital & Surplus Net Income (Loss)
-------------------- --------------------------------
2004 2003 2004 2003 2002
-------- -------- -------- -------- -------
RCM $887,694 $839,731 $ 6,768 $ 3,883 $ 1,922
RGA Reinsurance $869,443 $828,922 $117,378 $(73,285) $13,640
RGA Canada $276,863 $245,911 $ 10,637 $ 18,231 $ 177
RGA Barbados $138,864 $121,413 $ 16,203 $ 19,380 $17,481
RGA Americas $200,683 $155,421 $ 40,012 $ 43,796 $14,611
Other reinsurance
subsidiaries $136,956 $ 98,661 $ 5,057 $(21,326) $ 557
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, 2005, RCM and RGA Reinsurance
could pay maximum dividends, without prior approval, equal to their unassigned
surplus, approximately $43.7 million and $88.6 million, respectively. Dividend
payments from other subsidiaries are subject to regulations in the country of
domicile.
75
Note 14 COMMITMENTS AND CONTINGENT LIABILITIES
The Company is currently a party to an arbitration that involves its
discontinued accident and health business, including personal accident business
(including London market excess of loss business). In addition, the Company is
currently a party to litigation that involves the claim of a broker to
commissions on a medical reinsurance arrangement. As of January 31, 2005, the
companies involved in these litigation actions raised claims, or established
reserves that may result in claims, in the amount of $4.4 million, which is $3.7
million in excess of the amounts held in reserve by the Company. The Company
generally has little information regarding any reserves established by ceding
companies, and must rely on management estimates to establish policy claim
liabilities. 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 that have indicated that they
anticipate asserting claims in the future against the Company in the amount of
$24.9 million, which is $24.5 million in excess of the amounts held in reserve
by the Company as of December 31, 2004. These claims appear to relate to
personal accident business (including London market excess of loss business) and
workers' compensation carve-out business. Depending upon the audit findings in
these cases, they could result in litigation or arbitrations in the future. See
Note 20, "Discontinued Operations" for more information. During the third
quarter of 2004, the Company's discontinued accident and health operations
recorded a $24.0 million pre-tax charge related to the negotiated settlement of
all disputed claims associated with its largest identified accident and health
exposure. 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. However, it is possible that an adverse outcome
could, from time to time, have a material adverse effect on the Company's
consolidated net income or cash flows in particular quarterly or annual periods.
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 filed 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"). The request for arbitration was officially registered in November
of 2004.
In addition, because of the regulatory action that has accelerated payment of
the deferred disability claims, during the third quarter of 2004, the Company
formally notified the AFJP ceding companies that it will no longer make claim
payments it believes to be artificially inflated, as it has been doing for some
time under a reservation of rights, but rather will pay claims only on the basis
of the market value of the AFJP fund units. This formal notification could
result in litigation or arbitrations in the future. While it is not feasible to
predict or determine the ultimate outcome of the contemplated ICSID Arbitration,
or litigation or arbitrations that may occur in Argentine in the future, 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. However, it is possible
that an adverse outcome could, from time to time, have a material adverse effect
on the Company's consolidated net income or cash flows in particular quarterly
or annual periods.
In the fourth quarter of 2004, the Company increased the amount of liabilities
associated with the AFJP business by $10.0 million, so that the overall amount
of the liabilities reflects the Company's current estimate of the value of its
obligations, and reflects the uncertainty regarding the amount and timing of
claims payments and the outcome of any negotiated settlements.
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, 2004 and 2003, there were approximately
$32.6 million and $38.7 million, respectively, 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, 2004
and 2003, $370.5 million and $396.3
76
million, respectively, 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 $285.4 million and $188.3 million as of
December 31, 2004 and 2003, respectively, 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, 2004, RGA's exposure related to
credit facility guarantees was $56.1 million, the maximum potential guarantee,
and is reflected on the consolidated balance sheet in short-term debt. RGA has
issued a guarantee on behalf of a subsidiary in the event the subsidiary fails
to make payment under its office lease obligation, the exposure of which was
insignificant as of December 31, 2004.
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.
Note 15 LONG-TERM DEBT AND PREFERRED SECURITIES
The Company's long-term debt consists of the following (in millions):
2004 2003
------- -------
$200 million 6.75% Senior Notes due 2011 $ 199.9 $ 199.9
$100 million 7.25% Senior Notes due 2006 99.8 99.6
Revolving Credit Facilities 106.1 98.6
------- -------
Total Debt $ 405.8 $ 398.1
Less portion due in less than one year (56.1) -
------- -------
Long-term debt $ 349.7 $ 398.1
======= =======
$225.0 million 5.75% Preferred Securities due 2051 $ 158.4 $ 158.3
======= =======
The Company has revolving credit facilities in the United States, the United
Kingdom, and Australia, under which it may borrow up to approximately $231.1
million. As of December 31, 2004, the Company had drawn approximately $106.1
million under these facilities at interest rates ranging from 1.63% to 6.38%
during the year. 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, 2004, the Company
had $50.0 million outstanding under this facility. Terminations of revolving
credit facilities and maturities of senior notes over the next five years total
$56.1 million in 2005 and $150.0 million in 2006.
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, change of control provisions, 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, 2004, the Company had $405.8 million in
outstanding borrowings under its debt agreements and was in compliance with all
covenants under those agreements. The ability of the Company to make debt
principal and interest payments depends on the earnings and surplus of
subsidiaries, investment earnings on undeployed capital proceeds, and the
Company's ability to raise additional funds.
77
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,
2004 was $56.1 million and is reflected on the Company's consolidated balance
sheet under short-term debt.
In December 2001, RGA, through its wholly-owned trust, RGA Capital Trust I,
issued $225.0 million face amount in Preferred Securities due 2051 at a
discounted value of $158.1 million. RGA fully and unconditionally guarantees, on
a subordinated basis, the obligations of the Trust under the Preferred
Securities.
Note 16 SEGMENT INFORMATION
The Company has five main operational segments, each of which is a distinct
reportable segment: U.S., Canada, Europe & South Africa, Asia Pacific and
Corporate and Other. 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, critical
illness 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 and 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.
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, Latin America results relating to the Argentine privatized
pension business as well as direct insurance operations in Argentina are
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.
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, 2004 2003 2002
- -------------------------------- ---------- ---------- ----------
Revenues:
U.S. $2,718,722 $2,221,875 $1,709,952
Canada 365,533 315,161 251,715
Europe & South Africa 490,326 373,138 230,813
Asia Pacific 421,026 270,132 169,351
Corporate and Other 43,312 24,692 20,132
---------- ---------- ----------
Total from continuing operations $4,038,919 $3,204,998 $2,381,963
========== ========== ==========
For the Years ended December 31, 2004 2003 2002
- -------------------------------- ---------- ---------- ----------
Income (loss) from continuing operations before income taxes:
U.S. $ 289,924 $ 216,088 $ 175,801
Canada 73,485 59,564 38,631
Europe & South Africa 31,682 20,272 3,409
Asia Pacific 12,605 19,262 6,316
Corporate and Other (38,503) (43,576) (30,179)
---------- ---------- ----------
Total from continuing operations $ 369,193 $ 271,610 $ 193,978
========== ========== ==========
78
For the Years ended December 31, 2004 2003 2002
- -------------------------------- ---------- ---------- ----------
Interest expense:
Europe & South Africa $ 1,336 $ 1,043 $ 680
Asia Pacific 1,614 1,096 842
Corporate and Other 35,487 34,650 33,994
---------- ---------- ----------
Total from continuing operations $ 38,437 $ 36,789 $ 35,516
========== ========== ==========
For the Years ended December 31, 2004 2003 2002
- -------------------------------- ---------- ---------- ----------
Depreciation and amortization:
U.S. $ 374,470 $ 310,548 $ 267,341
Canada 24,824 9,315 22,537
Europe & South Africa 114,112 85,657 33,251
Asia Pacific 54,653 39,723 25,542
Corporate and Other 3,381 1,981 12,186
---------- ---------- ----------
Total from continuing operations $ 571,440 $ 447,224 $ 360,857
========== ========== ==========
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, 2004 2003
- ------------------ ----------- -----------
Assets:
U.S. $ 9,535,297 $ 8,474,954
Canada 2,459,845 1,935,604
Europe & South Africa 706,643 483,876
Asia Pacific 696,613 413,628
Corporate and Other and discontinued 649,731 805,312
operations
----------- -----------
Total assets $14,048,129 $12,113,374
=========== ===========
Companies 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 2004, two clients accounted for $130.3 million or 45.8% of gross premiums
for the Canada operations. Three clients of the Company's United Kingdom
operations generated approximately $349.5 million, or 69.1% of the total gross
premiums for the Europe & South Africa operations. Two clients, both in
Australia, generated approximately $65.9 million, or 15.2% of the total gross
premiums for the Asia Pacific operations.
Note 17 EQUITY BASED COMPENSATION
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. As of December 31, 2004, shares authorized for the granting of
Benefits under the Plan and the Directors Plan totaled 6,260,077 and 212,500,
respectively.
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. 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.
79
2004 2003 2002
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise price Options Exercise price Options Exercise price
--------- -------------- --------- -------------- --------- --------------
Balance at beginning of year 2,694,653 $ 28.34 2,700,333 $ 26.36 2,326,808 $ 24.42
Granted 309,398 $ 39.61 735,654 $ 27.29 554,233 $ 31.90
Exercised (274,179) $ 25.32 (627,822) $ 18.51 (147,927) $ 15.59
Forfeited (68,195) $ 31.18 (113,512) $ 29.10 (32,781) $ 29.63
--------- --------- --------- --------- --------- ---------
Balance at end of year 2,661,677 $ 29.89 2,694,653 $ 28.34 2,700,333 $ 26.36
========= ========= ========= ========= ========= =========
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Weighted- Weighted- Weighted-
Outstanding Average Average Exercisable Average
Range of as of Remaining Exercise as of Exercise
Exercise Prices 12/31/2004 Contractual Life Price 12/31/2004 Price
- --------------- ----------- ---------------- -------- ----------- ---------
$15.00 - $19.99 12,144 1.0 $15.61 12,144 $15.61
$20.00 - $24.99 412,015 4.2 $22.47 341,661 $22.33
$25.00 - $29.99 1,196,237 6.8 $28.09 499,740 $28.34
$30.00 - $34.99 493,907 6.9 $31.90 208,746 $31.88
$35.00 - $39.99 547,374 6.7 $37.90 246,393 $35.82
--------- --- ------ --------- ------
Totals 2,661,677 6.4 $29.89 1,308,684 $28.63
========= === ====== ========= ======
The per share weighted-average fair value of stock options granted during 2004,
2003 and 2002 was $12.81, $9.51 and $11.71 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 2004-expected dividend yield of 0.61%, risk-free interest rate of
3.30%, expected life of 6.0 years, and an expected rate of volatility of the
stock of 28.7% over the expected life of the options; 2003-expected dividend
yield of 0.95%, 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; and 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.
In general, restrictions lapse on restricted stock awards at the end of a three-
or ten-year vesting period. Restricted stock awarded under the plan generally
has no strike price and is included in the Company's shares outstanding. During
2004, the Company awarded 5,500 shares of restricted stock that vests over a
three-year holding period.
During 2004, the Company issued a combination of stock options and performance
contingent units ("PCUs") to key employees. The stock option portion is included
in the preceding table. The Company also issued 128,693 PCUs. Each PCU
represents the right to receive from zero to two shares of Company common stock
depending on the results of certain performance measures over a three-year
period.
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. For grants during 2003 and 2004,
the Company determined compensation cost based on the fair value at the grant
date for its stock options using the "prospective" approach under FASB Statement
No. 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure, an amendment of FASB Statement No. 123." Beginning
July 1, 2005, the Company is required to use the "modified prospective" method
for recording compensation expense. The modified prospective approach will
require compensation cost on all unvested options to be recorded in the income
statement over its remaining vesting period, regardless of when the options were
granted. Had the Company realized compensation expense based on the fair value
at the grant date for all stock grants, 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. 148 may not be representative of the effects on
reported net income for future years.
80
(in thousands, except per share amounts) 2004 2003 2002
----------- ---------- -----------
Net income as reported $ 221,891 $ 173,141 $ 122,806
Add: Stock-based employee compensation expense included in reported net
income, net of related tax effects 2,534 1,087 --
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related
tax effects 4,454 3,040 2,982
----------- ---------- -----------
Pro forma net income $ 219,971 $ 171,188 $ 119,824
=========== ========== ===========
(in whole dollars) 2004 2003 2002
----------- ---------- -----------
Net income per share:
Basic - as reported $ 3.56 $ 3.37 $ 2.49
Basic - pro forma $ 3.53 $ 3.34 $ 2.43
Diluted - as reported $ 3.52 $ 3.36 $ 2.47
Diluted - pro forma $ 3.49 $ 3.32 $ 2.41
In January 2005, the Board approved an incentive compensation package including
289,310 incentive stock options at $47.47 per share, 124,753 PCUs, and 4,800
shares of restricted stock under the Company's Stock Plans.
Note 18 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):
2004 2003 2002
----------- ---------- -----------
Earnings:
Income from continuing operations (numerator for
basic and diluted calculations) $ 245,300 $ 178,319 $ 128,463
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 62,309 51,318 49,381
Equivalent shares from outstanding stock options and warrants 655 280 267
----------- ---------- -----------
Diluted shares (denominator for diluted calculation) 62,964 51,598 49,648
Earnings per share from continuing operations:
Basic $ 3.94 $ 3.47 $ 2.60
Diluted $ 3.90 $ 3.46 $ 2.59
=========== ========== ===========
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. All
outstanding options were included in the calculation during 2004, while
approximately 0.3 million and 1.4 million outstanding stock options were not
included in the calculation of common equivalent shares during 2003 and 2002,
respectively. Diluted earnings per share also exclude the antidilutive effect in
2003 and 2002 of 5.6 million shares that would be issued upon exercise of the
outstanding warrants associated with the PIERS units, as the Company could
repurchase more shares than it issues with the exercise proceeds.
81
Note 19 COMPREHENSIVE INCOME
The following table presents the components of the Company's accumulated other
comprehensive income for the years ended December 31, 2004, 2003 and 2002 (in
thousands):
FOR THE YEAR ENDED DECEMBER 31, 2004:
TAX (EXPENSE)
BEFORE-TAX AMOUNT BENEFIT AFTER-TAX AMOUNT
----------------- ------------- ----------------
Foreign currency translation adjustments:
Change arising during year $ 24,635 $ 15,455 $ 40,090
Unrealized gains on securities:
Unrealized net holding gains arising during the year 143,280 (47,219) 96,061
Less: Reclassification adjustment for net gains
realized in net income 29,473 (7,429) 22,044
----------------- ------------- ----------------
Net unrealized gains 113,807 (39,790) 74,017
----------------- ------------- ----------------
Other comprehensive income $ 138,442 $ (24,335) $ 114,107
================= ============= ================
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 losses
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
================= ============= ================
A summary of the components of net unrealized appreciation of balances carried
at fair value is as follows (in thousands):
YEARS ENDED DECEMBER 31, 2004 2003 2002
----------------- ------------- ----------------
Change in net unrealized appreciation on:
Fixed maturity securities available for sale $ 112,419 $ 105,562 $ 168,732
Other investments 31 5,715 (541)
Effect of unrealized appreciation on:
Deferred policy acquisition costs 1,373 (6,750) (13,739)
Other (16) - (6)
----------------- ------------- ----------------
Net unrealized appreciation $ 113,807 $ 104,527 $ 154,446
----------------- ------------- ----------------
82
Note 20 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 an arbitration that
involves 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 and other defenses. 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 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. However,
it is possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in
particular quarterly or annual periods.
The Company is currently a party to an arbitration that involves personal
accident business. In addition, the Company is currently a party to litigation
that involves the claim of a broker to commissions on a medical reinsurance
arrangement. As of January 31, 2005, the companies involved in these litigation
actions have raised claims, or established reserves that may result in claims,
that are $3.7 million in excess of the amounts held in reserve by the Company.
The Company generally has little information regarding any reserves established
by ceding companies, and must rely on management estimates to establish policy
claim liabilities. 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 $24.5
million in excess of the amounts held in reserve by the Company. These claims
appear to relate to personal accident business (including LMX business) and
workers' compensation carve-out business. 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. However, it is possible that an adverse
outcome could, from time to time, have a material adverse effect on the
Company's consolidated net income or cash flows in particular quarterly or
annual periods.
83
The loss from discontinued accident and health operations, net of income taxes,
increased to $23.0 million in 2004 from $5.7 million in 2003 and 2002. The
increase in 2004 is due primarily to a negotiated settlement of all disputed
claims associated with the Company's largest identified accident and health
exposure. As a result of this settlement, the Company's discontinued accident
and health operation recorded a $24.0 million pre-tax charge during the third
quarter of 2004.
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 net reserve
balance as of December 31, 2004 and 2003 was $57.4 million and $54.5 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 $1.4 million, $4.8
million, and $3.3 million for 2004, 2003, and 2002, respectively.
Note 21 SUBSEQUENT EVENT
On January 31, 2005, MetLife announced an agreement to purchase Travelers Life &
Annuity and substantially all of Citigroup's international insurance business.
To help finance that transaction, MetLife indicated that it would consider
select asset sales, including its holdings of RGA's common stock.
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Reinsurance Group of America, Incorporated
St. Louis, Missouri
We have audited the accompanying consolidated balance sheets of
Reinsurance Group of America, Incorporated and subsidiaries (the "Company") as
of December 31, 2004 and 2003, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2004, 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 a all
material respects the information set forth therein.
As discussed in Note 2, the Company changed its method of accounting for
certain non-traditional long duration contracts and separate accounts, and for
embedded derivatives in certain insurance products as required by new accounting
guidance which became effective on January 1, 2004 and October 1, 2003,
respectively, and recorded the impact as cumulative effects of changes in
accounting principles.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 2, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
March 2, 2005
85
Quarterly Data (Unaudited)
Years Ended December 31,
(in thousands, except per share data)
2004 First Second Third Fourth
--------- --------- --------- -----------
Revenues from continuing operations (1) $ 979,222 $ 976,415 $ 959,464 $ 1,123,818
Revenues from discontinued operations $ 1,310 $ 341 $ (690) $ 481
Income from continuing operations before income taxes $ 94,815 $ 105,393 $ 89,106 $ 79,879
Income from continuing operations $ 62,994 $ 68,390 $ 57,999 $ 55,917
Loss from discontinued accident and health operations, net of income taxes (894) (3,053) (18,604) (497)
Cumulative effect of change in accounting principle, net of income taxes (361) - - -
--------- --------- --------- -----------
Net income $ 61,739 $ 65,337 $ 39,395 $ 55,420
Total outstanding common shares - end of period 62,246 62,314 62,361 62,445
BASIC EARNINGS PER SHARE
Continuing operations $ 1.01 $ 1.10 $ 0.93 $ 0.90
Discontinued operations (0.01) (0.05) (0.30) (0.01)
Cumulative effect of change in accounting principle (0.01) - - -
--------- --------- --------- -----------
Net income $ 0.99 $ 1.05 $ 0.63 $ 0.89
DILUTED EARNINGS PER SHARE
Continuing operations $ 1.00 $ 1.09 $ 0.92 $ 0.88
Discontinued operations (0.01) (0.05) (0.29) (0.01)
Cumulative effect of change in accounting principle (0.01) - - -
--------- --------- --------- -----------
Net income $ 0.98 $ 1.04 $ 0.63 $ 0.87
Dividends declared per share $ 0.06 $ 0.06 $ 0.06 $ 0.09
Market price of common stock
Quarter end $ 40.97 $ 40.65 $ 41.20 $ 48.45
Common stock price, high 41.30 42.27 41.68 48.65
Common stock price, low 37.65 36.40 39.28 40.17
(1) Revenues for the first and second quarters of 2004 differ from amounts
included in the Company's respective Quarterly Reports on Form 10-Q due to a
change in presentation related to Issue B36. Approximately $4,200 and $13,293 of
DAC offsets were netted against "Change in value of embedded derivatives" within
revenues in the first and second quarters, respectively, but were reclassed to
"Change in deferred acquisition costs associated with change in value of
embedded derivatives" within expenses beginning in the third quarter.
2003 First Second Third Fourth
--------- --------- --------- -----------
Revenues from continuing operations (2) $ 653,549 $ 714,376 $ 712,500 $ 1,124,573
Revenues from discontinued operations $ 1,592 $ 814 $ 1,002 $ 1,395
Income from continuing operations before income taxes (2) $ 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 principle, 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 principle - - - 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 principle - - - 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
(2) The fourth quarter of 2003 contains six-months of results due to the
coinsurance agreement with Allianz Life. See Note 4, "Significant Transactions"
in Notes to Consolidated Financial Statements.
Reinsurance Group of America, Incorporated common stock is traded on the New
York Stock Exchange (NYSE) under the symbol "RGA". There were 86 stockholders of
record of RGA's common stock on January 31, 2005.
86
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer have evaluated
the effectiveness of the design and operation of the Company's disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that these
disclosure controls and procedures were effective.
There was no change in the Company's internal control over financial
reporting as defined in Exchange Act Rule 13a-15(f) during the quarter ended
December 31, 2004, that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Reinsurance Group of America, Incorporated and subsidiaries
(collectively, the "Company") is responsible for establishing and maintaining
adequate internal control over financial reporting. In fulfilling this
responsibility, estimates and judgments by management are required to assess the
expected benefits and related costs of control procedures. The objectives of
internal control include providing management with reasonable, but not absolute,
assurance that assets are safeguarded against loss from unauthorized use or
disposition, and that transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America.
Financial management has documented and evaluated the effectiveness of the
internal control of the Company as of December 31, 2004 pertaining to financial
reporting in accordance with the criteria established in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
In the opinion of management, the Company maintained effective internal
control over financial reporting as of December 31, 2004.
Deloitte & Touche LLP, an independent registered public accounting firm,
has audited the consolidated financial statements and financial statement
schedules included in the Annual Report on Form 10-K for the year ended December
31, 2004. The Report of the Independent Registered Public Accounting Firm on
their audit of the consolidated financial statements and financial statement
schedules is included in Item 8. The Report, of the Independent Registered
Public Accounting Firm on their audit of management's assessment of the
Company's internal control over financial reporting and their audit on the
effectiveness of the Company's internal control over financial reporting is
included below.
87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Reinsurance Group of America, Incorporated
St. Louis, Missouri
We have audited management's assessment, included in management's annual
report on internal control over financial reporting, that Reinsurance Group of
America, Incorporated and subsidiaries (the "Company") maintained effective
internal control over financial reporting as of December 31, 2004, based on
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedules as of and for the year ended
December 31, 2004 of the Company and our report dated March 2, 2005 expressed an
unqualified opinion on those consolidated financial statements and financial
statement schedules and included an explanatory paragraph regarding the
Company's change of its accounting method for certain non-traditional long
duration contracts and separate accounts as required by new accounting guidance
which became effective on January 1, 2004.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
March 2, 2005
88
Item 9B. OTHER INFORMATION
On February 25, 2005, in response to MetLife's January 31, 2005
announcement, the Company amended its $175 million U.S. credit facility with 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. The amendment, among other things, modifies the definition
of "change of control" for purposes of the credit facility and clarifies
negative covenants.
As amended, the following events would constitute a "change of control":
any person or group, other than MetLife and its subsidiaries, beneficially owns
more than 20% of our common stock, any group has the direct or indirect power to
elect a majority of the Company's board of directors, or there is a change in
the composition of a majority of the members of its board of directors, unless
new directors are approved or nominated by the members of the current board
following the date of the agreement.
The amendment also clarifies the restrictions on the Company's ability to
transact with affiliates under the credit facility. Following the amendment,
certain transactions permitted under the credit facility will not result in a
default merely because they involve an affiliate, provided that terms are no
less favorable than could be obtainable for a comparable arms-length
transaction.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors is divided into three classes, each of which
generally consists of either two or three directors, with terms of office ending
in successive years. Currently, the Board has eight directors, with two
vacancies. Certain information with respect to the directors is included below.
Each of the directors has served in his or her principal occupation for the last
five fiscal years, unless otherwise noted.
SERVED AS
DIRECTOR
SINCE
DIRECTORS ---------
CURRENT TERM ENDS IN 2005:
J. Cliff Eason, 57 1993
Retired President of Southwestern Bell Telephone, SBC Communications, Inc.
("SBC"), a position he held from September 2000 through January 2001.
He served as President, Network Services, SBC from October 1999 through
September 2000; President, SBC International of SBC, from March 1998 until
October 1999; President and CEO of Southwestern Bell Telephone Company
("SWBTC") from February 1996 until March 1998; President and CEO of
Southwestern Bell Communications, Inc. from July 1995 through February
1996; President of Network Services of SWBTC from July 1993 through June
1995; and President of Southwestern Bell Telephone Company of the Midwest
from 1992 to 1993. He held various other positions with Southwestern Bell
Communications, Inc. and its subsidiaries prior to 1992, including
President of Metromedia Paging from 1991 to 1992. Mr. Eason was a director
of Williams Communications Group, Inc. until his retirement in January
2001.
Joseph A. Reali, 52 2002
Senior Vice President and Tax Director of Metropolitan Life since 1999.
Mr. Reali has served as the MetLife liaison with RGA since July 2002. Mr.
Reali joined MetLife in 1977 as an attorney in the Law Department, and in
1985 he became a Vice President in the Tax Department. In 1993 he was
appointed Vice President and Corporate Secretary, and in 1997 he became a
Senior Vice President. Mr. Reali
89
received a J.D. degree, cum laude, from Fordham University School of Law
and an LL.M degree in taxation from New York University Law School. Mr.
Reali serves as Counsel and Secretary of the Metropolitan Life Foundation.
CURRENT TERM ENDS IN 2007:
William J. Bartlett, 55 2004
Retired partner, Ernst & Young Australia. Mr. Bartlett was an accountant
and consultant with Ernst & Young for over 35 years and advised numerous
clients in the global insurance industry. Mr. Bartlett was appointed a
partner of Ernst & Young in Sydney, Australia in July 1980, a position he
held until his retirement in June 2003. He served as chairman of the
firm's global insurance practice from 1991 to 2000, and was chairman of
the Australian insurance practice group from 1989 to 1998. He holds
several professional memberships in Australia (ACPA and FCA), South Africa
(CASA), and the United Kingdom (FCMA). Mr. Bartlett is a member of the
Australian Life Insurance Actuarial Standards Board and is a consultant to
the Australian Financial Reporting Council on Auditor Independence.
Alan C. Henderson, 59 2002
Retired President and Chief Executive Officer of RehabCare Group, Inc.
from June 1998 until June 2003. Prior to becoming President and Chief
Executive Officer, Mr. Henderson was Executive Vice President, Chief
Financial Officer and Secretary of RehabCare from 1991 through May 1998.
Mr. Henderson was a director of RehabCare Group, Inc. from June 1998 to
December 2003, Angelica Corporation from March 2001 to June 2003, and
General American Capital Corp., a registered investment company, from
October 1989 to April 2003.
A. Greig Woodring, 53 1993
President and Chief Executive Officer of the Company since 1993. 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.
CURRENT TERM ENDS IN 2006:
Stuart I. Greenbaum, 68 1997
Dean of the John M. Olin School of Business at Washington University since
July 1995. Prior to his current position, he spent 20 years at the Kellogg
Graduate School of Management at Northwestern University where he was
Director of the Banking Research Center and Norman Strunk Distinguished
Professor of Financial Institutions. Mr. Greenbaum has served on the
Federal Savings and Loan Advisory Council and the Illinois Task Force on
Financial Services, and has been a consultant for the American Bankers
Association, the Bank Administration Institute, the Comptroller of the
Currency, the Federal Reserve System, and the Federal Home Loan Bank
System, among others. He is also a director of First Oak Brook Bancshares,
Inc. and Noble International, Ltd.
Leland C. Launer Jr., 49 2003
Executive Vice President and Chief Investment Officer of MetLife and
Metropolitan Life since July 2003, prior to which he was a Senior Vice
President of Metropolitan Life for more than five years.
90
Lisa M. Weber, 42 2003
President, Individual Business of Metropolitan Life since June 2004. Ms.
Weber was Senior Executive Vice President and Chief Administrative Officer
of MetLife and Metropolitan Life from June 2001 to June 2004. She was
Executive Vice President of MetLife and Metropolitan Life from December
1999 to June 2001 and was head of Human Resources of Metropolitan Life
from March 1998 to December 2003. Ms. Weber was a Senior Vice President of
MetLife from September 1999 to November 1999 and Senior Vice President of
Metropolitan Life from March 1998 to November 1999. Previously, she was
Senior Vice President of Human Resources of PaineWebber Group
Incorporated, where she was employed for ten years.
EXECUTIVE OFFICERS
The following is certain additional information concerning each executive
officer of the Company who is not also a director. With the exception of Messrs.
Schuster and Watson, each individual holds the same position at RGA, RCM and RGA
Reinsurance.
David B. Atkinson, 51, became President and Chief Executive Officer of RGA
Reinsurance Company in January 1998. Mr. Atkinson has served as Executive Vice
President and Chief Operating Officer of RGA since January 1997. He served as
Executive Vice President and Chief Operating Officer, U.S. operations from 1994
to 1996, and Executive Vice President and Chief Financial Officer from 1993 to
1994. Prior to the formation of RGA, Mr. Atkinson served as Reinsurance
Operations Vice President of General American. Mr. Atkinson joined General
American in 1987 as Second Vice President and was promoted to Vice President
later the same year. Prior to joining General American, he served as Vice
President and Actuary of Atlas Life Insurance Company from 1981 to 1987, as
Chief Actuarial Consultant at Cybertek Computer Products from 1979 to 1981, and
in a variety of actuarial positions with Occidental Life Insurance Company of
California from 1975 to 1979. Mr. Atkinson also serves as a director and officer
of several RGA subsidiaries.
Todd C. Larson, 41, is Senior Vice President, Controller and Treasurer.
Prior to joining the Company in 1995, Mr. Larson was Assistant Controller at
Northwestern Mutual Life Insurance Company from 1994 through 1995 and prior to
that position was an accountant for KPMG LLP. Mr. Larson also serves as a
director and officer of several RGA subsidiaries.
Jack B. Lay, 50, 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, 50, 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, 51, is Executive Vice President, General Counsel and
Secretary of the Company. Prior to joining the Company in 2001, Mr. Sherman
served as Associate General Counsel of General American Life Insurance Company
from 1995 until 2000. Mr. Sherman also serves as an officer of several RGA
subsidiaries.
Graham S. Watson, 55, 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, 53, 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.
91
CORPORATE GOVERNANCE
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 is
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 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 Board of Directors has determined, in its judgment, that all of the
members of the Audit Committee are independent within the meaning of SEC
regulations and the listing standards of the New York Stock Exchange ("NYSE").
The Board of Directors has determined, in its judgment, that Messrs. Greenbaum
and Henderson are qualified as audit committee financial experts within the
meaning of SEC regulations and the Board has determined that each of them has
accounting and related financial management expertise within the meaning of the
listing standards of the NYSE. The Audit Committee Charter provides that
members of the Audit Committee may not simultaneously serve on the audit
committee of more than two other public companies.
Additional information with respect to Directors and Executive Officers of
the Company is incorporated by reference to the Proxy Statement under the
captions "Nominees and Continuing Directors", "Committees and Meetings of the
Board of 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.
Item 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Directors who also serve as officers of the Company, MetLife or any
subsidiaries of such companies, do not receive any additional compensation for
serving the Company as members of the Board of Directors or any of its
committees. At various times during 2004, this group of directors consisted of
Messrs. Nagler, Reali, Launer, and Woodring, and Ms. Weber. Directors who are
not employees of the Company, MetLife or any subsidiaries of such companies
("Non-Employee Directors") are paid an annual retainer fee of $24,000 (except
the chair of the Audit Committee, who receives an annual retainer fee of
$32,000), and are paid $1,200 for each Board meeting attended in person, $600
for each telephonic Board meeting attended, $750 for each committee meeting
attended in person (except the committee chairman, who is paid $1,200 for each
committee meeting attended) and $375 for each telephonic committee meeting
attended (except the committee chairman, who is paid $600 for each committee
meeting attended). During 2004, the group of Non-Employee Directors consisted of
Messrs. Bartlett, Eason, Greenbaum, Henderson and Peck. The Company also
reimburses directors for out-of-pocket expenses incurred in connection with
attending Board and committee meetings.
Of the $24,000 annual retainer paid to Non-Employee Directors ($32,000 for
the chair of the Audit Committee), $12,000 is paid in shares of the Company's
Common Stock on the date of the regular Board meeting in January of each year,
and the balance of $12,000 ($20,000 for the chair of the Audit Committee) is
paid in cash. Also on the date of the regular Board meeting in January, each
Non-Employee Director (other than the Chairman) is granted 1,200 shares of
restricted stock, which vest one-third per year for three years. On January 28,
2004, each of Messrs. Eason, Greenbaum, and Henderson were granted 1,200 shares
of restricted stock. On that same date, Dr. Peck was granted a pro-rated award
of 500 shares of restricted stock. Upon his election to the Board on May 26,
2004, Mr. Bartlett was granted a pro-rated award of 700 shares of restricted
stock. The grants made on January 28, 2004 will fully vest on January 28, 2007.
92
The Chairman of the Board (if qualified as a Non-Employee Director)
receives an annual retainer of $32,000, which consists of $16,000 paid in shares
of the Company's Common Stock on the date of the regular Board meeting in
January, with the balance paid in cash. The Chairman (if qualified as a
Non-Employee Director) is granted 1,600 shares of restricted stock.
Non-Employee Directors may elect to receive phantom shares in lieu of
their annual retainer (including the stock portion) and meeting fees. A phantom
share is a hypothetical share of Common Stock of the Company based upon the fair
market value of the Common Stock at the time of the grant. Phantom shares are
not transferable and are subject to forfeiture unless held until the director
ceases to be a director by reason of retirement, death, or disability. Upon such
an event, the Company will issue cash or shares of Common Stock in an amount
equal to the value of the phantom shares.
All such stock and options are issued pursuant to the Flexible Stock Plan
for Directors, which was adopted effective January 1, 1997. At the annual
meeting held May 28, 2003, the shareholders approved the Amended and Restated
Flexible Stock Plan for Directors. Phantom shares are granted under the Phantom
Stock Plan for Directors, which was adopted April 13, 1994. At the annual
meeting held May 28, 2003, the shareholders approved an amendment to the Phantom
Stock Plan for Directors.
PERFORMANCE SHARE PAYOUTS
A portion of the Management Incentive Plan award for executive officers is
paid in the form of performance shares pursuant to the Executive Performance
Share Plan. Each performance share represents the equivalent of one share of
Common Stock, and the value of each performance share is determined by the
current fair market value of a share of the Company's Common Stock. In the U.S.
plan, performance shares vested in one-third increments on the last day of each
of the three calendar years following the year in which they are awarded.
Performance shares in the Canadian plan vested 100% on December 15 of the third
calendar year following the year in which they were awarded.
The following table sets forth payments made under the Management
Incentive Plan during 2004 with respect to all prior grants of performance
shares, vested and unvested, to each named executive officer of the Company
(which officers were determined by reference to the Company's Proxy Statement,
dated April 12, 2004):
NAME AND TITLE OF NAMED EXECUTIVE OFFICER PAYMENT
- -------------------------------------------------------------------- ------------
A. Greig Woodring $ 669,621
President and Chief Executive Officer
David B.Atkinson 288,504
Executive Vice President and Chief Operating Officer
Jack B. Lay 225,653
Executive Vice President and Chief Financial Officer
Paul A. Shuster 341,770
Executive Vice President, U.S. Operations
Graham Watson 82,633
Executive Vice President, International
Additional information on this subject is found in the Proxy Statement
under the captions "Executive Compensation", "Director Compensation", and
"Compensation Committee Interlocks and Insider Participation" 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
OWNERSHIP OF SHARES OF RGA
The following table sets forth, as of February 1, 2005, certain
information with respect to: (1) each person known by the Company to be the
beneficial owner of 5% or more of the Company's outstanding Common Stock, and
(2) the ownership of Common Stock by (i) each director and nominee for director
of the Company, (ii) each named executive officer of the Company (which officers
were determined by reference to the Company's Proxy Statement dated April 12,
2004), and (iii) all directors, nominees, and executive officers as a group.
93
AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER (2) BENEFICIAL OWNERSHIP (1) CLASS (2)
- ---------------------------------------------------------------------- ------------------------ -----------
SIGNIFICANT SHAREHOLDERS:
MetLife, Inc. 32,243,539 (3) 51.6%
One Madison Avenue
New York, New York 10010
Wellington Management Company, LLP 5,274,034 (4) 8.5%
75 State Street
Boston, Massachusetts 02109
Kayne Anderson Rudnick Investment Management, LLC 4,340,067 (5) 6.9%
1800 Avenue of the Stars, Second Floor
Los Angeles, California 90067
Neuberger Berman, LLC. 3,314,960 (6) 5.3%
605 Third Ave.
New York, New York 10158
DIRECTORS, NOMINEES AND NAMED EXECUTIVE OFFICERS:
A. Greig Woodring, Director, President and Chief Executive Officer (3) 316,486 (7) *
William J. Bartlett, Director 1,900 (8) *
J. Cliff Eason, Director 15,150 (9) *
Stuart Greenbaum, Director 21,033(10) *
Alan C. Henderson, Director 9,396(11) *
Leland C. Launer, Jr., Director (3) -- **
Joseph A. Reali, Director (3) -- **
Lisa M. Weber, Director (3) -- **
David B. Atkinson, Executive Vice President and Chief Operating 135,519(12) *
Officer
Jack B. Lay, Executive Vice President and Chief Financial Officer 95,720(13) *
Paul A. Schuster, Executive Vice President, U.S. Operations 89,088(14) *
Graham Watson, Executive Vice President and Chief Marketing Officer 74,311(15) *
All directors and executive officers 807,489(16) 1.28%
as a group (14 persons)
- --------------------
* Less than one percent.
** Not applicable.
(1) Unless otherwise indicated, each named person has sole voting and
investment power over the shares listed as beneficially owned.
(2) For purposes of this table, "beneficial ownership" is determined in
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), pursuant to which a person or group of persons
is deemed to have "beneficial ownership" of any shares of common stock
that such person has the right to acquire within 60 days. For computing
the percentage of the class of securities held by each person or group of
persons named above, any shares which such person or persons has the right
to acquire within 60 days (as well as the shares of common stock
underlying fully vested stock options) are deemed to be outstanding for
the purposes of computing the percentage
94
ownership of such person or group but are not deemed to be outstanding for
the purposes of computing the percentage ownership of any other person or
group.
(3) The amount in the table reflects the total beneficial ownership of MetLife
and certain of its affiliates, as reported on a Schedule 13D/A filed
February 11, 2005. Mr. Woodring is an executive officer of General
American Life Insurance Company. Mr. Launer and Ms. Weber are executive
officers of MetLife, and Mr. Reali is a senior officer of MetLife. These
individuals disclaim beneficial ownership of the shares beneficially owned
by MetLife and its subsidiaries.
(4) As reported on a Schedule 13G/A filed February 14, 2005. Wellington
Management Company, LLP ("WMC") is an investment adviser. Shares are owned
of record by clients of WMC, none of which is known to have beneficial
ownership of more than five percent of the Company's outstanding shares.
WMC has shared voting power of 4,223,973 shares and shared dispositive
power of 5,244,634 shares.
(5) As reported on a Schedule 13G filed February 4, 2005. Kayne Anderson
Rudnick Investment Management, LLC ("KAR"), is an investment advisor.
Shares are owned by several accounts managed, with discretion to purchase
or sell securities, by KAR, none of which has beneficial ownership of more
than five percent of the Company's outstanding shares. KAR has sole voting
and dispositive power for all of the shares reported.
(6) As reported on a Schedule 13G/A filed February 16, 2005. Neuberger Berman,
LLC, is an investment advisor and broker/dealer ("NB LLC"). NB LLC has
sole voting power of 2,377,310 shares, and shared dispositive power over
3,314,960 shares. NB LLC is deemed to be a beneficial owner because it has
shared power to make decisions whether to retain or dispose, and in some
cases the sole power to vote, the beneficially owned shares.
(7) Includes 272,369 shares of Common Stock subject to stock options that are
exercisable within 60 days. Also includes 15,000 shares of restricted
Common Stock that are subject to forfeiture in accordance with the terms
of the specific grant, as to which Mr. Woodring has no investment power.
(8) Includes 1,900 restricted shares of Common Stock that are subject to
forfeiture in accordance with the terms of the specific grant, as to which
Mr. Bartlett has no investment power.
(9) Includes 10,500 shares of Common Stock subject to stock options that are
exercisable within 60 days. Also includes 2,400 restricted shares of
Common Stock that are subject to forfeiture in accordance with the terms
of the specific grant, as to which Mr. Eason has no investment power.
(10) Includes 17,933 shares of Common Stock subject to stock options that are
exercisable within 60 days. Also includes 2,400 restricted shares of
Common Stock that are subject to forfeiture in accordance with the terms
of the specific grant, as to which Mr. Greenbaum has no investment power.
(11) Includes 6,000 shares of common stock subject to stock options that
are exercisable within 60 days. Also includes 2,400 restricted shares of
Common Stock that are subject to forfeiture in accordance with the terms
of the specific grant, as to which Mr. Henderson has no investment power.
(12) Includes 98,971 shares of Common Stock subject to stock options that are
exercisable within 60 days. Also includes 6,548 restricted shares of
Common Stock that are subject to forfeiture in accordance with the terms
of the specific grant, as to which Mr. Atkinson has no investment power.
(13) Includes 84,175 shares of Common Stock subject to stock options that are
exercisable within 60 days and 4,997 shares for which Mr. Lay shares
voting and investment power with his spouse. Also includes 6,548
restricted shares of Common Stock that are subject to forfeiture in
accordance with the terms of the specific grant, as to which Mr. Lay has
no investment power.
(14) Includes 71,464 shares of Common Stock subject to stock options that are
exercisable within 60 days, and 17,624 shares for which Mr. Schuster
shares voting and investment power with his spouse.
(15) Includes 39,459 shares of Common Stock subject to stock options that are
exercisable within 60 days and 6,187 shares owned by Intercedent Limited,
a Canadian corporation of which Mr. Watson has a majority ownership
interest.
(16) Includes a total of 647,196 shares of Common Stock subject to stock
options that are exercisable within 60 days; and 37,196 shares of
restricted Common Stock that are subject to forfeiture in accordance with
the terms of the specific grant, as to which the holder has no investment
power.
95
OWNERSHIP OF SHARES OF METLIFE
The following table sets forth, as of February 1, 2005, certain
information with respect to the following individuals to the extent they own
shares of common stock of MetLife, the Company's parent: (i) each director and
nominee for director of the Company; (ii) each named executive officer of the
Company (which officers were determined by reference to the Company's Proxy
Statement dated April 12, 2004); and (iii) all directors, nominees, and
executive officers as a group.
PERCENT OF
BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1) CLASS
- ----------------------------------------------- ---------------------------------------------- ----------
Direct Indirect (2)
----------- ------------
Leland C. Launer, Jr., Director 102,462 (3) 48 (4) *
Joseph A. Reali, Director 86,363 (5) 170 (6) *
Lisa M. Weber, Director 258,909 (7) 1,782 (8) *
A. Greig Woodring, Director, President & CEO 90 -- *
David B. Atkinson, EVP and COO 200 (9) --
Jack B. Lay, EVP and CFO 200 (9) --
Paul A. Schuster, EVP 200 (9) --
All directors and executive officers as a group 448,824 (10) 2,000 *
(14 persons)
*Less than one percent.
(1) Unless otherwise indicated, each named person has sole voting and
investment power over the shares listed as beneficially owned.
(2) Unless otherwise noted, represents shares held through the MetLife
Policyholder Trust, which has sole voting power over such shares.
(3) Includes 87,543 shares of MetLife common stock subject to stock
options that are exercisable within 60 days and 14,919 deferred
share units payable in shares of MetLife common stock under
MetLife's Deferred Compensation Plan for Officers.
(4) Includes 38 shares beneficially owned by Mr. Launer and 10 shares
beneficially owned by his spouse.
(5) Includes 72,491 shares of MetLife common stock subject to stock
options that are exercisable within 60 days, and 10,872 deferred
share units payable in shares of MetLife common stock under
MetLife's Deferred Compensation Plan for Officers.
(6) Includes 10 shares jointly held with Mr. Reali's spouse, with whom
Mr. Reali shares investment power.
(7) Includes 231,643 shares of MetLife common stock subject to stock
options that are exercisable within 60 days and 27,266 deferred
share units payable in shares of MetLife common stock under
MetLife's Deferred Compensation Plan for Officers.
(8) Includes 1,772 shares held in MetLife's Savings and Investment Plan,
which may vote the shares if no voting instruction is provided to
the plan trustee.
(9) Includes 200 shares of MetLife common stock subject to stock options
that are exercisable within 60 days.
(10) Includes a total of 392,677 shares of MetLife common stock subject
to stock options that are exercisable within 60 days and 53,057
deferred share units payable in shares of MetLife common stock under
MetLife's Deferred Compensation Plan for Officers.
96
EQUITY COMPENSATION PLAN
The following table summarizes information regarding securities authorized
for issuance under equity compensation plans:
Number of securities to be Number of securities
issued upon exercise of Weighted-average exercise remaining available for
outstanding options, warrants price of outstanding future issuance under equity
Plan category and rights options, warrants and rights compensation plans
- ------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans 2,808,578 (1) $29.89 (2) (3) 1,904,740 (4)
approved by security
holders
Equity compensation plans
not approved by security
holders -- -- --
--------- ------ ---------
Total 2,808,578 $29.89 1,904,740
--------- ------ ---------
(1) Includes the number of securities to be issued upon exercises under the
following plans: Flexible Stock Plan - 2,721,519; Flexible Stock Plan for
Directors - 65,299; and Phantom Stock Plan for Directors - 21,760
(2) Does not include 128,693 performance contingent units to be issued under
the Flexible Stock Plan or 21,760 phantom units to be issued under the
Phantom Stock Plan for Directors because those securities do not have an
exercise price (i.e. a unit is a hypothetical share of Company common stock
with a value equal to the fair market value of the common stock).
(3) Reflects the blended weighted-average exercise price of outstanding
options under the Flexible Stock Plan ($29.86) and Flexible Stock Plan for
Directors ($31.00).
(4) Includes the number of securities remaining available for future issuance
under the following plans: Flexible Stock Plan - 1,746,500; Flexible Stock
Plan for Directors - 113,959; and Phantom Stock Plan for Directors - 44,281.
Additional information on this subject is found in the Proxy Statement
under the captions "Security Ownership of Directors, Management and Certain
Beneficial Owners" and "Equity Compensation Plan Information" 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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MetLife and its subsidiaries, including General American, are the
beneficial owners of approximately 52% of the Company's outstanding stock. Mr.
Launer and Ms. Weber are executive officers of MetLife. General American and
MetLife have historically provided RGA and RGA Re with certain limited
administrative services, such as corporate travel services. The cost of these
services in 2004 was approximately $1.0 million.
The Company has direct policies and reinsurance agreements with MetLife
and certain of its subsidiaries. The Company reflected net premiums pursuant to
these agreements of approximately $164.4 million in 2004. The net premiums
reflect the net of business assumed from and ceded to MetLife and its
subsidiaries.
RGA Re 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 this agreement from MetLife in 2004
were approximately $3.5 million.
Effective January 1, 1997, General American entered into an Administrative
Services Agreement with RGA Re whereby General American provides services
necessary to handle the policy and treaty administration functions for certain
bank owned life insurance (BOLI) policies. RGA Re paid General American $385,000
under the agreement in 2004.
On November 13, 2003, MetLife and certain of its affiliates completed the
purchase of 3,000,000 shares of Common Stock having a total purchase price of
$109,950,000 in connection with an underwritten public offering of 12,075,000
shares
97
of Common Stock by the Company at a public offering price of $36.65 per share.
The Company received gross proceeds of $427,575,000, net of underwriting
discounts but excluding other offering expenses.
On November 24, 2003, the Company, MetLife, Metropolitan Life, General
American and Equity Intermediary Company entered into a registration rights
agreement, which superseded then existing agreements with General American and
Equity Intermediary Company. Under the terms of this agreement, until such time
as MetLife and its affiliates (other than directors and officers of MetLife and
its affiliates and certain fiduciary accounts) and their permitted transferees
no longer own in excess of 5% of the Company's outstanding shares of common
stock, if the Company proposes to register any of its securities under the
Securities Act of 1933, as amended (the "Securities Act"), for its own account
or the account of any of its shareholders, then MetLife and its affiliates
(other than directors and officers of MetLife and its affiliates and certain
fiduciary accounts), or their respective transferees, are entitled, subject to
certain limitations and conditions, to notice of such registration and are
entitled, subject to certain conditions and limitations, to include registrable
shares therein, including shares currently owned by them and shares acquired by
them in the future. The underwriters of any such offering have the right to
limit the number of shares to be included in such registration and, to the
extent that it does not exercise its "piggyback" rights in connection with a
future public offering of the Company's common stock, or of securities
convertible into or exchangeable or exercisable for such common stock, MetLife
has agreed to enter into customary lock-up agreements for a period from the two
days prior to and 180 days following the effective date of such registration,
upon the reasonable request of the managing underwriters of such offering and
subject to certain exceptions.
In addition, until such time as MetLife, its affiliates (other than directors
and officers of MetLife and its affiliates) and its permitted transferees no
longer own 10% of the Company's common stock and can sell all of their shares
pursuant to an available exemption from registration, the Company may be
required, at its expense, to prepare and file a registration statement under the
Securities Act if it is requested to do so by MetLife within 30 days of such
request. The Company is required to use its reasonable best efforts to cause
such registration to become effective and to keep such registration statement
effective until the shares included in such registration have been sold, subject
to certain conditions and limitations. The Company may suspend a registration
for up to 30 days once, or may request that MetLife similarly suspend its sales
under an effective shelf registration up to two times in any two-year period,
under certain conditions. The Company has agreed not to sell any shares of its
common stock, or any securities convertible into or exchangeable or exercisable
for its common stock, from the two days prior to and 180 days following the
effective date of any such underwritten demand registration, subject to the
discretion of the managing underwriter of such future offering. The Company is
not obligated to effect more than six such demand registrations. 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 Accounting Firm 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.
98
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The following consolidated statements are included within Item 8 under the
following captions:
Index Page
- ----- ----
Consolidated Balance Sheets 52
Consolidated Statements of Income 53
Consolidated Statements of Stockholders' Equity 54
Consolidated Statements of Cash Flows 55
Notes to Consolidated Financial Statements 56-84
Report of Independent Registered Public Accounting Firm 85
Quarterly Data (unaudited) 86
2. Schedules, Reinsurance Group of America, Incorporated and Subsidiaries
Schedule Page
- -------- ----
I Summary of Investments 100
II Condensed Financial Information of the Registrant 101
III Supplementary Insurance Information 102-103
IV Reinsurance 104
V Valuation and Qualifying Accounts 105
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 107.
99
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2004
(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 $ 45 $ 45 $ 45
Foreign governments (2) 730 849 849
Public utilities (2) 844 983 983
All other corporate bonds 4,016 4,147 4,147
------- ------ -------
Total fixed maturities $ 5,635 $6,024 $ 6,024
Equity securities 25 27 27
Preferred stock 146 151 151
Mortgage loans on real estate 609 XXXX 609
Policy loans 958 XXXX 958
Funds withheld at interest 2,692 XXXX 2,735
Short-term investments 32 XXXX 32
Other invested assets 29 XXXX 28
------- -------
Total investments $10,126 XXXX $10,564
======= =======
(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 $0.832016/C$1.00
South African rand $0.176523/1.0 rand
Australian dollar $0.7802/$1.00 Aus
Great British pound $1.918101/Pound Sterling 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.
100
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(IN THOUSANDS)
2004 2003 2002
---- ---- ----
CONDENSED BALANCE SHEETS
Assets:
Fixed maturity securities (available for sale) $ 97,567 $ 154,868
Cash and cash equivalents 117 590
Investment in subsidiaries 2,444,987 2,075,528
Other assets 262,135 262,457
--------- ----------
Total assets $2,804,806 $2,493,443
========== ==========
Liabilities and stockholders' equity:
Long-term debt $ 514,631 $514,477
Other liabilities 11,150 31,243
Stockholders' equity 2,279,025 1,947,723
--------- ----------
Total liabilities and stockholders' equity $2,804,806 $2,493,443
========== ==========
CONDENSED STATEMENTS OF INCOME
Interest income $ 22,708 $ 17,949 $ 20,412
Realized investments gains, net 987 677 2,942
Operating expenses (5,054) (3,849) (3,107)
Interest expense (35,789) (35,189) (34,685)
---------- ---------- ---------
Loss before income tax and undistributed earnings of (17,148) (20,412) (14,438)
subsidiaries
Income tax expense (benefit) (8,478) (10,614) (7,471)
---------- ---------- ---------
Net loss before undistributed earnings of subsidiaries (8,670) (9,798) (6,967)
Equity in undistributed earnings of subsidiaries 230,561 182,939 129,773
---------- ---------- ---------
Net income $ 221,891 $ 173,141 $ 122,806
========== ========== =========
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 221,891 $ 173,141 $ 122,806
Equity in earnings of subsidiaries (230,561) (182,939) (129,773)
Other, net (23,572) (46,964) 6,272
---------- ---------- ---------
Net cash provided by (used in) operating activities (32,242) (56,762) (695)
---------- ---------- ---------
Investing activities:
Sales of fixed maturity securities available for sale 102,237 141,149 278,744
Purchases of fixed maturity securities available for sale (43,975) (287,408) (283,759)
Change in short-term investments - - 10,502
Principal payment from subsidiary debt 30,465 - -
Capital contributions to subsidiaries (47,299) (286,336) (115,761)
---------- ---------- ---------
Net cash provided by (used in) investing activities 41,428 (432,595) (110,274)
---------- ---------- ---------
Financing activities:
Dividends to stockholders (16,821) (11,940) (11,854)
Reissuance (acquisition) of treasury stock, net 7,162 14,467 (2,812)
Proceeds from long-term debt borrowings, net - 50,000 -
Proceeds from stock offering, net - 426,701 -
---------- ---------- ---------
Net cash provided by (used in) financing activities (9,659) 479,228 (14,666)
---------- ---------- ---------
Net change in cash and cash equivalents (473) (10,129) (125,635)
Cash and cash equivalents at beginning of year 590 10,719 136,354
---------- ---------- ---------
Cash and cash equivalents at end of year $ 117 $ 590 $ 10,719
========== ========== =========
101
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
As of December 31,
------------------------------------------------------------------------------------
Future Policy Benefits and
Deferred Policy Interest-Sensitive Other Policy Claims and
Acquisition Costs Contract Liabilities Benefits Payable
----------------- -------------------------- ----------------------
Assumed Ceded Assumed Ceded Assumed Ceded
------------- ------------- --------------- ------------ ------------- -----------
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)
========== ======== ========== ========= ========== =========
2004
U.S. operations $1,300,901 $(41,138) $7,061,193 $(144,567) $666,311 $ (41,484)
Canada operations 182,859 (1,170) 1,344,416 (118,550) 63,875 (9,009)
Europe & South Africa operations
594,954 (42,532) 298,166 (23,404) 259,747 (20,541)
Asia Pacific operations 239,316 (10,917) 257,823 (44,825) 238,979 (12,522)
Corporate and Other 3,701 - 7,972 - 57,081 (766)
Discontinued operations - - 28,752 (777) 30,232 (830)
---------- -------- ---------- --------- ---------- ---------
Total $2,321,731 $(95,757) $8,998,322 $(332,123) $1,316,225 $(85,152)
========== ======== ========== ========= ========== =========
102
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
---------- ---------- ------------- ------------ -----------
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)
========== ========== ============ =========== ==========
2004
U.S. operations $2,212,650 $ 436,115 $ (1,964,975) $ (293,667) $ (170,156)
Canada operations 253,852 100,141 (252,382) (14,236) (25,430)
Europe & South Africa
operations 478,580 5,125 (314,128) (82,201) (62,315)
Asia Pacific operations 399,122 16,113 (330,144) (40,735) (37,542)
Corporate and Other 3,244 23,034 (15,839) (1,430) (64,546)
---------- ---------- ------------ ----------- ----------
Total $3,347,448 $ 580,528 $ (2,877,468) $ (432,269) $ (359,989)
========== ========== ============ =========== ==========
103
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
------ ----------- -------------- -------------- ----------
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%
====== =========== ============= ============== =========
2004
Life insurance in force $ 76 $ 161,978 $ 1,458,827 $ 1,296,925 112.48%
Premiums
U.S. operations $ 2.1 $ 209.2 $ 2,419.7 $ 2,212.6 109.36%
Canada operations - 30.4 284.3 253.9 111.97%
Europe & South Africa
operations - 27.4 506.0 478.6 105.73%
Asia Pacific operations - 35.1 434.2 399.1 108.79%
Corporate and Other 2.8 (0.1) 0.3 3.2 9.38%
------ ----------- ------------- -------------- ---------
Total $ 4.9 $ 302.0 $ 3,644.5 $ 3,347.4 108.88%
====== =========== ============= ============== =========
104
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31,
(in millions)
Balance at Charges to
Beginning of Costs and Charged to Other Balance at End
Description Period Expenses Accounts Deductions (1) of Period
- ------------------- ------------ ---------- ---------------- -------------- --------------
2002
Allowance on income
taxes $ 13.7 - - 1.2 $ 12.5
2003
Allowance on income
taxes $ 12.5 0.5 - - $ 13.0
2004
Allowance on income
taxes $ 13.0 - - 3.5 $ 9.5
(1) Deductions represent normal activity associated with the Company's release
of income tax valuation allowances.
105
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: February 25, 2005
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 February 25, 2005.
Signatures Title
/s/ Leland C. Launer, Jr. February 25, 2005 * Chairman of the Board and Director
- --------------------------------------------
Leland C. Launer, Jr.
/s/ A. Greig Woodring February 25, 2005 President, Chief Executive Officer,
- --------------------------------------------
A. Greig Woodring and Director
(Principal Executive Officer)
/s/ William J. Bartlett February 25, 2005 * Director
- --------------------------------------------
William J. Bartlett
/s/ J. Cliff Eason February 25, 2005 * Director
- --------------------------------------------
J. Cliff Eason
/s/ Stuart I. Greenbaum February 25, 2005 * Director
- --------------------------------------------
Stuart I. Greenbaum
/s/ Alan C. Henderson February 25, 2005 * Director
- --------------------------------------------
Alan C. Henderson
/s/ Joseph A. Reali February 25, 2005 * Director
- --------------------------------------------
Joseph A. Reali
/s/ Lisa M. Weber February 25, 2005 * Director
- ----------------------------------------------
Lisa M. Weber
/s/ Jack B. Lay February 25, 2005
- -------------------------------------------- Executive Vice President and Chief
Jack B. Lay Financial Officer (Principal Financial
and Accounting Officer)
* By: /s/ Jack B. Lay February 25, 2005
- ----------------------------------------------
Jack B. Lay Attorney-in-fact
106
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 Exhibit 2.1 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-58960), filed on
April 14, 1993
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 Exhibit 2.2 Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-58960), filed on
April 14, 1993
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 Exhibit 2.3 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993
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 Restated Articles of Incorporation, incorporated by reference to
Exhibit 3.1 of Current Report on Form 8-K filed June 30, 2004
3.2 Bylaws of RGA, as amended, incorporated by reference to Exhibit 3.2
of Quarterly Report on Form 10-Q filed August 6, 2004
4.1 Form of Specimen Certificate for Common Stock of RGA, incorporated
by reference to Exhibit 4.1 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993
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 (File 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 (File 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 (File 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")
107
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 (File 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
(File 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
(File 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
(File 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 (File No. 1-11848),
filed December 18, 2001
10.1 Marketing Agreement dated as of January 1, 1993 between RGA
Reinsurance and General American, incorporated by reference to
Exhibit 10.1 to Amendment No. 2 to Registration Statement Form S-1
(File No. 33-58960), filed on April 29, 1993
10.2 Administrative Services Agreement dated as of January 1, 1993
between RGA and General American, incorporated by reference to
Exhibit 10.5 to Amendment No. 2 to Registration Statement Form S-1
(File No. 33-58960), filed on April 29, 1993
10.3 Management Agreement dated as of January 1, 1993 between RGA Canada
and General American, incorporated by reference to Exhibit 10.7 to
Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-58960), filed on April 14, 1993 *
10.4 Standard Form of General American Automatic Agreement, incorporated
by reference to Exhibit 10.11 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993
10.5 Standard Form of General American Facultative Agreement,
incorporated by reference to Exhibit 10.12 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-58960), filed on
April 14, 1993
10.6 Standard Form of General American Automatic and Facultative YRT
Agreement, incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to Registration Statement on Form S-1 (File No. 33-58960),
filed on April 14, 1993
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*
10.8 RGA Reinsurance Management Deferred Compensation Plan (ended January
1, 1995), incorporated by reference to Exhibit 10.18 to Amendment
No. 1 to Registration Statement on Form S-1 (File No. 33-58960),
filed on April 14, 1993 *
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10.9 RGA Reinsurance Executive Deferred Compensation Plan (ended January
1, 1995), incorporated by reference to Exhibit 10.19 to Amendment
No. 1 to Registration Statement on Form S-1 (File No. 33-58960),
filed on April 14, 1993 *
10.10 RGA Reinsurance Executive Supplemental Retirement Plan (ended
January 1, 1995), incorporated by reference to Exhibit 10.20 to
Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-58960), filed on April 14, 1993 *
10.11 RGA Reinsurance Augmented Benefit Plan (ended January 1, 1995),
incorporated by reference to Exhibit 10.21 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-58960), filed on
April 14, 1993 *
10.12 RGA Flexible Stock Plan as amended and restated effective July 1,
1998, incorporated by reference to Form 10-K for the period ended
December 31, 2003 (File No. 1-11848), filed on March 12, 2004, at
the corresponding exhibit*
10.13 Amendment effective as of May 24, 2000 to the RGA Flexible Stock
Plan, as amended and restated July 1, 1998, incorporated by
reference to Exhibit 10.13 to Form 10-K for the period ended
December 31, 2003 (File No. 1-11848), filed on March 12, 2004 *
10.14 Second Amendment effective as of May 28, 2003 to the RGA Flexible
Stock Plan, as amended and restated July 1, 1998, incorporated by
reference to Exhibit 10.14 to Form 10-K for the period ended
December 31, 2003 (File No. 1-11848), filed on March 12, 2004 *
10.15 Third Amendment effective as of May 26, 2004 to the RGA Flexible
Stock Plan as amended and restated July 1, 1998, incorporated by
reference to Exhibit 10.1 to Form 10-Q for the period ended June 30,
2004 (File No. 1-11848), filed on August 6, 2004
10.16 Form of Directors' Indemnification Agreement, incorporated by
reference to Exhibit 10.23 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993 *
10.17 RGA Executive Performance Share Plan as amended and restated
effective November 1, 1996, incorporated by reference to Exhibit
10.17 to Form 10-K for the year ended December 31, 1996 (File No.
1-11848) filed on March 24, 1997 *
10.18 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*
10.19 RGA Flexible Stock Plan for Directors, as amended 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*
10.20 Restricted Stock Award to A. Greig Woodring dated January 28, 1998,
incorporated by reference to Exhibit 10.27 to Form 10-Q/A Amendment
No. 1 for the quarter ended March 31, 1998 (File No. 1-11848) filed
on May 14, 1998 *
10.21 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),
filed June 2, 2003
10.22 Amendment No. 1 dated as of October 10, 2003 to 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
109
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
10.23 Amendment No. 2 dated as of February 25, 2005 to 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
10.24 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
10.25 Form of Reinsurance Group of America, Incorporated Flexible Stock
Plan Non-Qualified Stock Option Agreement, incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K dated September 10,
2004 (File No. 1-11848), filed September 10, 2004*
10.26 Form of Reinsurance Group of America, Incorporated Flexible Stock
Plan Performance Contingent Restricted Stock Agreement, incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated
September 10, 2004 (File No. 1-11848), filed September 10, 2004*
10.27 Registration Rights agreement dated as of November 24, 2003 between
RGA, MetLife Inc., Metropolitan Life Insurance Company, Equity
Intermediary Company, and General American, incorporated by
reference to Exhibit 10.1 to Form 8-K dated November 24, 2003 (File
No. 1-11848), filed December 3, 2003
10.28 Directors' Compensation Summary Sheet*
10.29 Summary of the salaries for the named executive officers of the
Registrant*
21.1 Subsidiaries of RGA
23.1 Consent of Deloitte & Touche LLP
24.1 Powers of Attorney for Ms. Weber and Messrs. Bartlett, Eason,
Greenbaum, Henderson, Launer, and Reali
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.
110