1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
/ /[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------
Commission File NumberCOMMISSION FILE NUMBER 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact name of Registrant as specified in its charter)(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-1627032
(State or other jurisdiction(STATE OR OTHER JURISDICTION (IRS employer
of incorporation or organization) identification number)EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
660 Mason Ridge Center Drive
St. Louis, MissouriMASON RIDGE CENTER DRIVE
ST. LOUIS, MISSOURI 63141
(Address of principal executive offices)(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(314) 453-7439
(Registrant's telephone number, including area code)(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
--------------------
Indicate by check mark whether the registrantINDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) has filed all reports
required to be filed by SectionHAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 orOR 15(d) of the Securities Exchange Act ofOF THE SECURITIES EXCHANGE ACT OF
1934 during the precedingDURING THE PRECEDING 12 months (or for such shorter period that the
registrant was required to file such reports)MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), andAND (2) has been subject to
such filing requirements for the pastHAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 days.
YesDAYS.
YES X No
----- -----
Common stock outstandingNO
--- ---
VOTING COMMON STOCK OUTSTANDING ($.01 par value) as of April 30,PAR VALUE) AS OF JULY 31, 1998:
25,228,880
shares25,240,412 SHARES
NON-VOTING COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 31, 1998:
4,945,000 SHARES
2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
Item PageITEM PAGE
---- ----
PART I - FINANCIAL INFORMATION
------------------------------
1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
March 31,June 30, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income and Comprehensive
Income (Unaudited)
Three and six months ended March 31,June 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
ThreeSix months ended March 31,June 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-96-11
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-2012-29
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 2029
5 Other Information 30
6 Exhibits and Reports on Form 8-K 2030
Signatures 2131
Index to Exhibits 2232
2
3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
1998 1997
---------- -----------------------
(Dollars in thousands)
ASSETS
Fixed maturity securities
Available for sale-at fair value (amortized cost of $2,819,278$3,092,509 and
$2,416,308 at March 31,June 30, 1998, and December 31, 1997, respectively) $2,941,290$3,218,245 $2,528,290
Mortgage loans on real estate 185,370214,076 165,452
Policy loans 471,440477,595 480,234
Funds withheld at interest 167,807172,404 165,413
Short-term investments 186,437263,048 277,635
Other invested assets 21,26321,177 16,977
---------- ----------
Total investments 3,973,6074,366,545 3,634,001
Cash and cash equivalents 39,32726,714 37,395
Accrued investment income 50,88262,806 34,377
Premiums receivable 118,577149,798 119,554
Funds withheld 48,75886,667 33,957
Reinsurance ceded receivables 341,432323,456 316,156
Deferred policy acquisition costs 311,247326,411 289,842
Other reinsurance balances 137,589133,603 153,134
Other assets 53,43861,108 55,134
---------- ----------
Total assets $5,074,857$5,537,108 $4,673,550
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $1,332,156$1,368,972 $1,244,541
Interest sensitive contract liabilities 2,272,6092,452,584 1,969,270
Other policy claims and benefits 389,258384,350 344,848
Other reinsurance balances 215,428219,095 232,096
Deferred income taxes 124,802132,958 110,763
Other liabilities 104,300103,218 157,616
Long-term debt 106,991108,052 106,830
---------- ----------
Total liabilities 4,545,5444,769,229 4,165,964
Minority interest 8,2477,138 8,265
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; 50,000,00075,000,000 shares authorized,
26,049,375 shares issued) 261 261
Non-voting common stock (par value $.01 per share; 20,000,000 shares
authorized; 4,945,000 shares issued; no shares issued at December 31, 1997) 49 -
Additional paid in capital 265,021486,915 264,748
Retained earnings 211,080228,784 196,685
Accumulated other comprehensive income 65,77965,596 59,089
---------- ----------
Total stockholders' equity before treasury stock 542,141781,605 520,783
Less treasury shares held of 820,895808,963 and 844,535 at cost at
March 31,June 30, 1998, and December 31, 1997, respectively (21,075)(20,864) (21,462)
---------- ----------
Total stockholders' equity 521,066760,741 499,321
---------- ----------
Total liabilities and stockholders' equity $5,074,857$5,537,108 $4,673,550
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three months ended March 31,
------------------------------Six months ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(Dollars in thousands, except per share data)
Revenues:
REVENUES:
Net premiums $269,978 $205,372$276,535 $201,568 $546,513 $406,940
Investment income, net of related expenses 63,679 41,84972,225 45,995 135,904 87,844
Realized investment gains, net 922 3871,797 532 2,719 919
Other revenue 6,554 4,1554,101 4,836 10,655 8,991
-------- -------- -------- --------
Total revenues 341,133 251,763
Benefits and expenses:354,658 252,931 695,791 504,694
BENEFITS AND EXPENSES:
Claims and other policy benefits 217,296 158,760212,774 144,579 430,070 303,339
Interest credited 34,512 19,12237,845 22,404 72,357 41,526
Accident and health pool charge --- - - 18,000
Policy acquisition costs and other insurance expenses 46,934 40,46757,428 47,801 104,362 88,268
Other operating expenses 15,464 10,51914,089 12,210 29,553 22,729
Interest expense 2,025 1,9482,187 1,956 4,212 3,904
-------- -------- -------- --------
Total benefits and expenses 316,231 248,816324,323 228,950 640,554 477,766
-------- -------- -------- --------
Income before income taxes and minority interest 24,902 2,94730,335 23,981 55,237 26,928
Provision for income taxes 8,840 (1)10,957 8,757 19,797 8,756
-------- -------- -------- --------
Income before minority interest 16,062 2,94819,378 15,224 35,440 18,172
Minority interest in earnings of consolidated subsidiaries (153) (120)(160) (129) (313) (249)
-------- -------- -------- --------
Net income $ 15,90919,218 $ 2,82815,095 $ 35,127 $ 17,923
======== ======== ======== ========
Other comprehensive income, net of taxes 6,690 (18,754)
----- -------(184) 22,019 6,507 3,264
-------- -------- -------- --------
Comprehensive income $ 22,599 $(15,926)19,034 $ 37,114 $ 41,634 $ 21,187
======== ======== ======== ========
Basic earnings per share $ 0.630.72 $ 0.110.59 $ 1.35 $ 0.70
======== ======== ======== ========
Diluted earnings per share $ 0.620.71 $ 0.110.59 $ 1.34 $ 0.70
======== ======== ======== ========
Weighted average number of diluted shares outstanding
(in thousands) 25,505 25,62926,933 25,657 26,210 25,643
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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5
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
ThreeSix months ended
March 31,
-----------------------------June 30,
---------------------------
1998 1997
--------- ---------
(Dollars in thousands)
Operating Activities:OPERATING ACTIVITIES:
Net income $ 15,90935,127 $ 2,82817,923
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (16,496) (10,343)(28,460) (21,460)
Premiums receivable 1,078 (24,066)(30,846) (20,433)
Deferred policy acquisition costs (21,028) (12,432)(38,516) (26,732)
Funds withheld (14,798) (3,776)(52,208) (7,715)
Reinsurance ceded balances (24,235) (12,179)(10,082) (22,779)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 124,553 147,915246,929 190,207
Deferred income taxes 8,538 86818,003 5,316
Other assets and other liabilities (51,980) 5,694(59,696) 22,981
Amortization of goodwill and value of business acquired 316 299839 630
Amortization of net investment discounts (581) (2,509)(6,617) (5,875)
Realized investment gains, net (922) (387)(2,719) (919)
Other, net (458) (342)(936) (181)
--------- ---------
Net cash provided by operating activities 19,896 91,570
Investing Activities:70,818 130,963
INVESTING ACTIVITIES:
Sales of fixedinvestments:
Fixed maturity securities 110,752 42,166198,109 101,050
Mortgage loans - 25,716
Maturities of fixed maturity securites 19,176 46,13533,440 124,463
Purchases of fixed maturity securities (526,902) (297,361)(961,386) (498,727)
Cash invested in:
Mortgage loans (23,767) (1,486)(56,157) (41,238)
Policy loans (6,155) -
Funds withheld at interest (2,394) (26,191)(6,989) (28,038)
Principal payments on:
Mortgage loans 511 3894,076 790
Policy loans 8,794 1,7811,920
Change in short-term and other invested assets 85,735 16,7721,492 25,239
--------- ---------
Net cash used in investing activities (328,095) (217,795)
Financing activities:(784,776) (288,825)
FINANCING ACTIVITIES:
Dividends to stockholders (1,514) (1,358)(3,028) (2,717)
Proceeds from stock offering 221,837 -
Purchase of treasury stock - (3,097)
Reissuance of treasury stock 387 52598 450
Minority interest in earnings 153 120313 249
Excess deposits on universal life and other investment type
policies and contracts 310,998 126,016483,314 162,007
--------- ---------
Net cash provided by financing activities 310,024 124,830703,034 156,892
Effect of exchange rate changes 107 (84)243 (284)
--------- ---------
Change in cash and cash equivalents 1,932 (1,479)(10,681) (1,254)
Cash and cash equivalents, beginning of period 37,395 13,145
--------- ---------
Cash and cash equivalents, end of period $ 39,32726,714 $ 11,66611,891
========= =========
See accompanying notes to condensed consolidated financial statements.
5
6
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31,NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Unaudited)(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited, condensed, consolidated financial statements of
Reinsurance Group of America, Incorporated and Subsidiaries (the "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Operating
results for the threesix months ended March 31,June 30, 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report for the year ended
December 31, 1997.
The Company has reclassified the presentation of certain prior period
information to conform to the 1998 presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands except per share information):
Period Ending March 31THREE MONTHS ENDING SIX MONTHS ENDING
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Net income $15,909 $2,828$19,218 $15,095 $35,127 $17,923
Numerator for basic earningearnings per share--incomeshare--
income available to common stockholders 15,909 2,82819,218 15,095 35,127 17,923
Effect of dilutive securities -- --- - - -
------- ------------- ------- -------
Numerator for diluted earnings per share--
income available to common
stockholders after assumed conversions $15,909 $2,828$19,218 $15,095 $35,127 $17,923
======= ============= ======= =======
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7
Period Ending March 31THREE MONTHS ENDING SIX MONTHS ENDING
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
Denominator:
Denominator for basic earnings per
share--
weightedshare--weighted average shares 25,236 25,46726,632 25,459 25,925 25,463
Effect of dilutive securitiessecurities:
Employee stock options 269 162
--- ---plan 301 198 285 180
------ ------ ------ ------
Denominator for diluted earnings per
share--
adjustedshare--adjusted weighted average
shares and assumed conversions 25,505 25,62926,933 25,657 26,210 25,643
====== ====== ====== ======
Basic earnings per share $ 0.63 $ 0.11$0.72 $0.59 $1.35 $0.70
----- ----- ----- -----
Diluted earnings per share $ 0.62 $ 0.11$0.71 $0.59 $1.34 $0.70
----- ----- ----- -----
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," effective for years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The most significant items of
comprehensive income are net income, the change in unrealized gains and
losses on securities, and the change in foreign currency translation. Both
itemsthe change in unrealized gains and losses on securities and the change in
foreign currency translation historically have been reported as a component
of stockholders' equity. The adoption of SFAS No. 130 does not affect
results of operations or financial position, but affects their presentation
and disclosure. The Company has adopted SFAS No. 130 as of January 1, 1998,
and the following summaries present the components of the Company's
comprehensive income, other than net income, for the three and six month
periods ending March 31,June 30, 1998 and 1997 (dollars in thousands):
7
8
FOR THE THREE MONTH PERIOD ENDING MARCH 31,JUNE 30, 1998:
====================================================================================================
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount===============================================================================================
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
- ----------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------
Foreign currency translation adjustments $(2,287) $ (241) $ 84 $ (157)800 $(1,487)
Unrealized gains on securities:
Unrealized holding gains arising during period 13,181 (5,751) 7,4303,359 (915) 2,444
Less: reclassification adjustment for gains
realized in net income 922 (339) 583
--- ---- ---1,797 (656) 1,141
------- ----- -------
Net unrealized gains 12,259 (5,412) 6,847
------ ------1,562 (259) 1,303
------- ----- -------
Other comprehensive income $12,018 $(5,328) $6,690
====================================================================================================$ (725) $ 541 $ (184)
===============================================================================================
FOR THE THREESIX MONTH PERIOD ENDING MARCH 31, 1997:
====================================================================================================
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit AmountJUNE 30, 1998:
===============================================================================================
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
- ----------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------
Foreign currency translation adjustments $(2,528) $ (1,746) $ 611 $ (1,135)885 $(1,643)
Unrealized gains on securities:
Unrealized holding (losses)gains arising during period (27,338) 9,970 (17,368)16,540 (6,666) 9,874
Less: reclassification adjustment for gains
realized in net income 387 (136) 251
--- ---- ---2,719 (995) 1,724
------- ------- -------
Net unrealized (losses) (27,725) 10,106 (17,619)gains 13,821 (5,671) 8,150
------- ------------- -------
Other comprehensive income $(29,471) $10,717 $(18,754)
====================================================================================================$11,293 $(4,786) $ 6,507
===============================================================================================
8
9
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1997:
===============================================================================================
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
- - -----------------------------------------------------------------------------------------------
Foreign currency translation adjustments $(1,647) $ 577 $(1,070)
Unrealized gains on securities:
Unrealized holding gains arising during period 38,073 (14,646) 23,427
Less: reclassification adjustment for gains
realized in net income 532 (194) 338
------- -------- -------
Net unrealized gains 37,541 (14,452) 23,089
------- -------- -------
Other comprehensive income $35,894 $(13,875) $22,019
===============================================================================================
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1997:
===============================================================================================
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
- - -----------------------------------------------------------------------------------------------
Foreign currency translation adjustments $(3,394) $ 1,188 $(2,206)
Unrealized gains on securities:
Unrealized holding gains arising during period 10,734 (4,674) 6,060
Less: reclassification adjustment for gains
realized in net income 919 (329) 590
------- ------- -------
Net unrealized gains 9,815 (4,345) 5,470
------- ------- -------
Other comprehensive income $ 6,421 $(3,157) $ 3,264
===============================================================================================
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The following schedule reflects the change in accumulated other comprehensive
income for the period ending March 31,June 30, 1998 (dollars in thousands):
=====================================================================================================================================================================================================
ACCUMULATED
UNREALIZED OTHER
FOREIGN GAINS ON COMPREHENSIVE
CURRENCY ITEMS SECURITIES INCOME
- ----------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $(8,201) $67,290 $59,089
Current period change (157) 6,847 6,690
---- ----- -----(1,643) 8,150 6,507
------- ------- -------
Balance at March 31,June 30, 1998 $(8,358) $74,137 $65,779
====================================================================================================$(9,844) $75,440 $65,596
=================================================================================================
4. SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information,"
effective for years beginning after December 15, 1997. SFAS No. 131 requires
that a public company report financial and descriptive information about its
reportable operating segments pursuant to criteria that differ from current
accounting practice. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. The adoption of SFAS No.
131 will not affect the Company's results of operations or financial
position, but will affect the disclosure of segment information. The Company
plans to adopt SFAS No. 131 during 1998, however SFAS No. 131 need not be
applied to interim financial information in the initial year of its
application.
5. SECURITIES LENDINGSTOCK OFFERING
In June 1998, the Company completed a public offering in which it sold
4,945,000 shares of non-voting common stock traded on the New York Stock
Exchange under the symbol RGA.A. The offering was priced to the public at
$47.00 per share and provided net proceeds of approximately $221.8 million.
10
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6. DIVIDENDS AND OPTIONS
The Board of Directors of Reinsurance Group of America, Incorporated (RGA)
recently declared a cash dividend of $0.07 per share of common stock. The
dividend will be paid on August 28, 1998 to shareholders of record as of
August 7, 1998.
In July 1998, the Board of Directors of RGA approved an additional grant of
100,000 options to non-executive management. These options are for
non-voting common shares and will have similar vesting schedules as the most
recent grants under the RGA Flexible Stock Plan.
Also in July, the Board of Directors of RGA approved a stock repurchase
program to accumulate non-voting shares in anticipation of exercise of these
options.
7. NEW ACCOUNTING STANDARDS AND DISCLOSURE REQUIREMENTS
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," effective for fiscal years beginning after December 15, 1997.
SFAS No. 132 does not change the measurement or recognition of pension and
other postretirement benefit plans, but standardizes the disclosure
requirements. The adoption of this standard has no impact on the financial
results of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 1999 and is effective for interim
periods in the initial year of adoption. SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. It also requires that gains or losses resulting from changes in
the values of those derivatives be reported depending on the use of the
derivative and whether it qualifies for hedge accounting. The Company participates in a securities lending program. The amount on loan
at March 31, 1998 was $14.6 million. It ishas
not yet determined the Company's policy to require
collateral at 105%effect, if any, of the loan value.
9implementation of SFAS No. 133
on the results of operation, financial position, or liquidity.
11
1012
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following tables reflect the net income before income taxes and minority
interest for the Company's primary operational divisions (dollars in
thousands):
=====================- - ---------------
U.S. OPERATIONS
=====================- - ---------------
FOR THE THREE MONTH PERIOD ENDING MARCH 31,JUNE 30, 1998
==============================================================================================================
TRADITIONAL NON-TRADITIONALNON-TRADIITONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
==============================================================================================================
REVENUES:
Net premiums $180,375$174,162 $ --687 $ -- $180,375- $174,849
Investment income, net of related expenses 28,757 26,738 -- 55,49532,447 29,909 - 62,356
Realized investment gains, net 445 241 -- 686819 596 - 1,415
Other revenue 189 -- 4,027 4,216
--------------------------------------------------------(522) - 3,751 3,229
-----------------------------------------------------
Total revenues 209,766 26,979 4,027 240,772206,906 31,192 3,751 241,849
BENEFITS AND EXPENSES:
Claims and other policy benefits 144,468 22 -- 144,490128,620 2,277 - 130,897
Interest credited 10,623 23,614 -- 34,23711,974 25,606 - 37,580
Policy acquisition costs and other insurance
expenses 26,211 1,042 3,120 30,37334,304 1,567 2,826 38,697
Other operating expenses 6,382 -- -- 6,382
--------------------------------------------------------5,909 - - 5,909
-----------------------------------------------------
Total benefits and expenses 187,684 24,678 3,120 215,482180,807 29,450 2,826 213,083
Income before income taxes and minority
interest $ 22,08226,099 $ 2,3011,742 $ 907925 $ 25,290
========================================================
10
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================================
U.S. OPERATIONS (continued)
================================28,766
=====================================================
FOR THE THREE MONTH PERIOD ENDING MARCH 31,JUNE 30, 1997
===============================================================================================================
TRADITIONAL NON-TRADITIONALNON-TRADIITONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
===============================================================================================================
REVENUES:
Net premiums $145,963$135,086 $ --- $ -- $145,963- $135,086
Investment income, net of related expenses 24,662 9,676 -- 34,33825,671 10,705 - 36,376
Realized investment gains, net 100 244 -- 344245 213 - 458
Other revenue (131) -- 4,171 4,040
--------------------------------------------------------(24) - 4,416 4,392
------------------------------------------------------
Total revenues 170,594 9,920 4,171 184,685160,978 10,918 4,416 176,312
BENEFITS AND EXPENSES:
Claims and other policy benefits 111,010 781 -- 111,79193,267 194 - 93,461
Interest credited 10,498 8,267 -- 18,76512,136 9,922 - 22,058
Policy acquisition costs and other insurance
expenses 24,284 263 3,415 27,96228,124 309 3,590 32,023
Other operating expenses 4,590 -- -- 4,590
--------------------------------------------------------5,581 - - 5,581
------------------------------------------------------
Total benefits and expenses 150,382 9,311 3,415 163,108139,108 10,425 3,590 153,123
Income before income taxes and minority
interest $ 20,21221,870 $ 609493 $ 756826 $ 21,577
========================================================23,189
======================================================
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=========================- - -------------------
CANADIAN OPERATIONS
=========================- - -------------------
FOR THE THREE MONTH PERIOD ENDING MARCH 31,JUNE 30, 1998 1997
REVENUES:
Net premiums $25,026 $18,835$24,328 $17,495
Investment income, net of related expenses 5,158 3,7645,386 3,843
Realized investment gains, net 236 --381 110
Other revenue 272 71
-------------------------------98 (2)
--------------------
Total revenues 30,692 22,67030,193 21,446
BENEFITS AND EXPENSES:
Claims and other policy benefits 23,115 14,74221,216 13,609
Interest credited 245 342216 329
Policy acquisition costs and other insurance expenses 2,855 3,1692,639 3,360
Other operating expenses 1,803 1,423
-------------------------------1,597 1,474
--------------------
Total benefits and expenses 28,018 19,67625,668 18,772
Income before income taxes and minority interest $ 4,525 $ 2,674
$ 2,994
===================================================
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==========================- - -------------------
OTHER INTERNATIONAL
==========================- - -------------------
FOR THE THREE MONTH PERIOD ENDING MARCH 31,JUNE 30, 1998
=================================================================================================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS INTERNATIONAL
Direct Reinsurance
=================================================================================================================================
Revenues:REVENUES:
Net premiums $13,451 $13,366 $10,453$12,123 $12,057 $12,953 $ 406 $37,6761,638 $38,771
Investment income, net of related
expenses 1,582 488 420 37 2,5272,264 462 633 24 3,383
Realized investment gains, net - - 1 - 1
Other revenue 73 -- 1,535 54 1,662
---------------------------------------------------------------------(121) - 592 150 621
-----------------------------------------------------------
Total revenues 15,106 13,854 12,408 497 41,865
Benefits and expenses:14,266 12,519 14,179 1,812 42,776
BENEFITS AND EXPENSES:
Claims and other policy benefits 12,116 12,284 5,553 306 30,25911,407 11,634 9,603 1,183 33,827
Interest credited 30 -- -- -- 3049 - - - 49
Policy acquisition costs and other
insurance expenses 978 372 4,837 122 6,3091,009 586 2,790 484 4,869
Other operating expenses 1,628 966 1,758 1,051 5,4031,750 465 1,261 1,172 4,648
Interest expense -- -- 100 45 145
---------------------------------------------------------------------- - 121 38 159
-----------------------------------------------------------
Total benefits and expenses 14,752 13,622 12,248 1,524 42,14614,215 12,685 13,775 2,877 43,552
Income / (loss) before income
taxes and minority interest $ 35451 $ 232(166) $ 160 $(1,027)404 $(1,065) $ (281)
=====================================================================(776)
===========================================================
13
14
- - -------------------------------
OTHER INTERNATIONAL (continued)
- - -------------------------------
FOR THE THREE MONTH PERIOD ENDING MARCH 31,JUNE 30, 1997
================================================================================================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS INTERNATIONAL
Direct Reinsurance
================================================================================================================================
Revenues:REVENUES:
Net premiums $15,098 $2,668$13,366 $6,725 $ 6,2488,642 $ 63 $24,077173 $28,906
Investment income, net of related expenses 1,140 407 326 4 1,877
Realized investment gains, net -- -- 15 -- 152,906 417 601 57 3,981
Other revenue 14 -- -- -- 14
---------------------------------------------------------------------63 - - 9 72
-----------------------------------------------------------
Total revenues 16,252 3,075 6,589 67 25,983
Benefits and expenses:16,335 7,142 9,243 239 32,959
BENEFITS AND EXPENSES:
Claims and other policy benefits 13,883 2,108 3,916 176 20,08312,633 6,260 5,371 165 24,429
Interest credited 15 -- -- -- 1517 - - - 17
Policy acquisition costs and other insurance
expenses 1,099 74 2,360 40 3,5731,803 154 3,611 15 5,583
Other operating expenses 1,2252,306 (11) 1,469 531 1,480 410 3,6464,295
Interest expense -- -- 115 -- 115
---------------------------------------------------------------------- - 123 - 123
-----------------------------------------------------------
Total benefits and expenses 16,222 2,713 7,871 626 27,432
Income16,759 6,403 10,574 711 34,447
(Loss) / (loss)income before income taxes
and minority interest $ 30(424) $ 362 $(1,282) $(559) $(1,449)
=====================================================================739 $(1,331) $(472) $(1,488)
===========================================================
12
13
=========================- - -------------------
ACCIDENT AND HEALTH
=========================- - -------------------
FOR THE THREE MONTH PERIODS ENDING MARCH 31,JUNE 30, 1998 1997
Revenues:REVENUES:
Net premiums $26,901 $ 16,497$38,587 $20,081
Investment income, net of related expenses 433 281
Realized investment gains, net -- 3417 317
Other revenue 331 30
----------------------226 374
-----------------------------
Total revenues 27,665 16,811
Benefits and expenses:39,230 20,772
BENEFITS AND EXPENSES:
Claims and other policy benefits 19,432 12,144
Accident and health pool charge - 18,00026,834 13,080
Policy acquisition costs and other insurance expenses 7,397 5,76311,223 6,835
Other operating expenses 786 549
----------------------1,685 551
-----------------------------
Total benefits and expenses 27,615 36,456
Income39,742 20,466
(Loss) / (loss)income before income taxes and minority interest $ 50 $(19,645)
======================(512) $ 306
=============================
14
15
THREE MONTHS ENDED MARCH 31,JUNE 30, 1998 AND 1997
- ------------------------------------------- -----------------------------------------
RESULTS OF OPERATIONS
Income before Income Taxes and Minority Interest.
Consolidated income before income taxes and minority interest increased
$22.0$6.4 million in the firstsecond quarter of 1998, compared to the same period in
1997. After tax
dilutedDiluted earnings per share were $0.62$0.71 for the firstsecond quarter of 1998
compared with $0.11$0.59 for the same period in 1997. After tax consolidatedConsolidated net income
before realized capital gains and losses increased to $15.3$18.1 million in the
firstsecond quarter of 1998 from $2.6$14.8 million in the same period in 1997.
The increase in the U.S. operations income before income taxes and
minority interest in the firstsecond quarter of 1998 compared to the same period
in 1997 was due to increased earnings on asset-intensive business resulting from growth
in fixed maturity securities, and
continued growth in the traditional business, where premiums increased 23.6%29.0%.
The decreaseincrease in the Canadian operations income before income taxes and
minority interest in the first
quarter of 1998 compared to 1997 was primarily a result of an increase in
claims experience during the firstsecond quarter of 1998 compared to the same period
in 1997.1997 was a result of growth in premiums of 39.0% primarily for renewal
business related to blocks of business added in December 1997 and more
favorable mortality experience. The other international operations lost $0.3$0.8
million before income taxes and minority interest in the firstsecond quarter of
1998 compared to a $1.4$1.5 million loss in the same period in 1997. Strong growth in theThe Latin
AmericaAmerican and Asia Pacific business was offset byshowed continued revenue growth. However,
reserve strengthening in the Latin American business and costs associated
with the development of new business in several other international markets. Duringmarkets
contributed to the first quarter of 1997,overall international loss. The decrease in the Company recorded an accident
and health chargeoperations income before income taxes and minority interest in the
second quarter of $18.0 million, $10.4
million after-tax,1998 compared to increase reserves associated with run-off claims from
certainthe same period in 1997 was due primarily
to the write-off of the excess of purchase price over the fair value of net
assets acquired when put options for the minority interest in the accident
and health insurance pools in which it had formerly
participated. That action was a result of management's strategic decision to
exit all outside-managed accident and health pools. As of
13
14
December 31, 1997,subsidiaries were settled during the Company made a strategic decision to cease marketing
accident and health business and established reserves that it believes are
sufficient to handle the run-off.period.
Net Premiums. Consolidated net premiums increased $64.6$74.9 million, or
31.5%37.2%, to $270.0$276.5 million in the firstsecond quarter of 1998, compared to $205.4$201.6
million for the same period in 1997. Renewal premiums from the existing block
of business, along with new business premiums from facultative and automatic
treaties contributed to the premium increase. Business premium levels are
significantly influenced by large transactions and reporting practices of
ceding companies and therefore fluctuate from period to period.
The U.S. operations net premiums in the firstsecond quarter of 1998 increased
23.6%29.4% to $180.4$174.8 million from the same period in prior year,year. This was
attributed to premium growth on the existing block of business and combined
with strong new business premium for blocks of business added since the
firstsecond quarter of 1997.
Net premiums in the Canadian operations in the firstsecond quarter of 1998
increased 32.9%39.1% to $25.0$24.3 million in 1998. New business premiums decreased
$1.2increased
$0.2 million, while renewal premiums increased $7.4$6.6 million compared to the
firstsecond quarter of 1997. The first quarter typically includes a large amount
of renewal premium. Several of the treaties processedproduced in December 1997
related to closedin force blocks of calendar year new and renewal business with large renewal premiums
resulting from the strong production in December 1997. The first year
premium decline was primarily the result of strong new business production in
December 1996, which increased the first year premiums for the first quarter
of 1997.premiums.
15
16
The Company's other international operations reported premiums of $37.7$38.8
million for the firstsecond quarter of 1998 compared to $24.1$28.9 million for the same
period in 1997. The 1998 premiums represented approximately $26.8$24.2 million
from Latin America, of which approximately $13.5$12.1 million was direct premium
generated in Argentina and Chile. Latin American premiums grew 50.9%20.4%, which
resulted from continued growth in Chilean single premium annuities and
universal life businessreinsurance of privatized pensions in Argentina as
well as reinsurance on privatized
pensionsin direct universal life business in Argentina. Direct premiums from
Chilean single premium annuities decreased from prior year due to less
favorable market conditions in Chile during 1998. The Asia Pacific operations
and other markets generated $10.9$14.6 million of premiums, an increase of 49.9%
compared to the second quarter in the prior year, predominantly through the
Hong Kong contact office and Australia. Primarily as a result of the new business
generatedsubsidiary in Australia, the Asia Pacific premiums in the first quarter of
1998 grew 67.3% compared to the same period in the prior year.Australia.
Accident and health operations net premiums increased 63.1%92.2% to $26.9$38.6 million
in the firstsecond quarter of 1998. The increase resulted from premiums on new
contracts initiated and the renewal of existing contracts in the second half
of 1997. Although the decision was made to exit all outside-managed accident
and health pools and to cease marketing accident and health business and to
place the operation into run-off at the end of 1997, several new contracts
were previously executed with an effective date of January 1, 1998. It is
anticipated that accident and health premiums will decrease in each of the
next several years. The Company estimates that future1998 accident and health premiums
compared to 1997 premiums will remain levelincrease as a result of the contracts executed
immediately prior to the decision to exit the market. The Company currently
estimates reporting approximately $110.0 million of accident and health
premiums for the current year, with significantly lower levels in 1998. On an annual
basis, premiums are expected to decrease, compared to each preceding year, by
approximately 20%, 70%, 90%1999 and
100% during 1999, 2000, 2001 and 2002,
respectively.
14
15beyond.
Net Investment Income. Consolidated net investment income increased
52.2%57.0% to $63.7$72.2 million, in the firstsecond quarter of 1998 from the same period in
1997. The cost basis of fixed maturity securities increased $1.1$1.3 billion
from the firstsecond quarter of 1997. The increase in invested assets was a
result of an increase in operating cash flows, and reinsurance transactions
involving deposits for asset-intensive products from ceding companies,
primarily stable value product deposits.deposits, and the proceeds from the Company's
non-voting common stock offering. The Company's stable value reinsurance is
assumed from General American Life Insurance Company ("General American"),
which indirectly owns approximately 64% of the Company's voting common stock.
The amount of future reinsurance of the stable value product is dependent on
General American's claims-paying rating. The average earned yield on the
consolidated investment portfolio decreased to 7.06% for the first quarter of
1998 compared to 7.22% for the same period in 1997. This decrease in overall
yield reflected the increase in assets supporting the stable value
reinsurance product that are generally of a shorter duration and carry a
lower average yield and the overall decrease in interest rates. Earnings credited and paid to ceding
companies are included in interest credited.
Realized Investment Gains/(Losses),Gains, Net. Consolidated net realized investment
gains increased $0.5$1.3 million to $0.9$1.8 million in the firstsecond quarter of 1998
from $0.4$0.5 million for the same period in the prior year. Net realized
investment gains resulted from normal activity within the Company's
investment portfolios.
Other Revenue. Consolidated other revenue increased $2.4decreased $0.7 million in
the firstsecond quarter of 1998 to $6.6$4.1 million. Other revenue includes items
such as profit and risk fees associated with financial reinsurance, treaty
recapture fees as well as earnings in unconsolidated subsidiaries, management
fee income, and other miscellaneous income. During the second quarter of
1998, financial reinsurance treaties in the U.S. operations resulted in $3.4$3.1
million in financial reinsurance fees which were partially offset by $3.1$2.8
million of fees paid to retrocessionaires, which is included in policy
acquisition costs and other insurance expenses. During March 1998, the Asia Pacific operations
completed a financial reinsurance transaction that resulted in $1.3 million
in financial reinsurance fee revenue which was partially offset by fees paid
to retrocessionaires. The Company's strategy
involves the assumption and subsequent retrocession of most of these
financial
16
17
reinsurance treaties which resulted in amounts of $128.2$116.4 million and $132.2$120.4
million being included in other reinsurance assets and liabilities,
respectively, on the Company's consolidated balance sheets at March 31,June 30, 1998.
Other revenue also included $0.8$0.7 million and $0.3$0.4 million in earnings in
unconsolidated subsidiaries for the firstsecond quarter of 1998 and 1997,
respectively.
Claims and Other Policy Benefits. Consolidated claims and other policy
benefits increased 36.9%47.2% to $217.3$212.8 million, in the firstsecond quarter of 1998.
For the firstsecond quarter of 1998, total claims and other policy benefits
represented 80.5%76.9% of total net premiums compared to 77.3%71.7% for the same period
in 1997. This fluctuation was primarily a result of higher benefits and
reserves in the U.S. and Canadian operations in the firstsecond quarter of 1998
compared to the same period in 1997. The Company expects mortality to
fluctuate somewhat from period to period but believes it is fairly constant
over longer periods of time. The Company continues to monitor mortality
trends to determine the appropriateness of reserve levels.
15
16
U.S. operations claims and other policy benefits increased 29.3%40.1% in the
firstsecond quarter of 1998, primarily as a result of increases from new business
production and higher claims experience during such period compared to the
same period in 1997. Claims and other policy benefits for traditional
reinsurance, as a percentage of net premiums, increased to 80.1%73.9% in the
firstsecond quarter of 1998 from 76.6%69.0% in the same period in 1997. ThisThe current
quarter percentage of net premiums was comparable to the 73.6% of net
premiums for the entire year ended December 31, 1997. The quarter to quarter
fluctuation was primarily due to an increase in death claims
as well as reserves established for new and renewal
blocks of business.business as well as the timing of claims reported. Also, the
percentage is affected by the timing of premium receipts.
Canadian operations claims and other policy benefits increased 56.8%55.9% in the
firstsecond quarter of 1998. Claims and other policy benefits as a percentage of
net premiums increased to 92.4% to $23.1 million87.2% in the firstsecond quarter of 1998 from 78.3%77.8% in
the same period in 1997. The current quarter percentage was comparable to
the 89.7% for the entire year ended December 31, 1997. This increase as a
percent of premiums from the same quarter of prior year was primarily duerelated to reserves established forthe
1997 in force blocks of business as well as new and renewal business. The Company will
continue to monitor the appropriateness of reserve levels.
The claims and other policy benefits of the other international business in
the firstsecond quarter of 1998 increased $10.2 million38.5% from the same period in the prior
year. Claims and other policy benefits as a percentage of net premiums
increased to 87.3% from 84.5%. This increase was primarily the result of
reserve and policyholder benefit increases on business from Latin American
ventures and blocks of mortality risk reinsurance of $8.4$4.1 million. These reserve increases
resultedIn
addition, although direct premiums from new businessChilean annuities have decreased from
prior year, claims and theother policy benefits, specifically Chilean annuity
payments have continued growthto increase in the Latin American
single premium immediate annuity business in the first quarternormal course of 1998.business. The
Asia Pacific operations reflected an increase of $1.6$4.2 million resulting
primarily from new business written in Australia.Australia and Japan.
Accident and health operations claims and other policy benefits increased
60.0%$13.8 million in the firstsecond quarter of 1998. The claims and other policy benefits for1998 compared to the first quarter of 1997 do not include the $18.0 million, or $10.4 million
after-tax, accident and health pool charge taken during the first quarter of
1997, which is separately disclosed on the income statement.same period in
1997. As a percentage of net premiums,
17
18
claims and other policy benefits decreasedincreased to 72.2%69.5% in the firstsecond quarter of
1998 from 73.6%65.1% in the same period of 1997. The accident and health
operations claims and reserves are subject to volatility due to the nature of
risk covered, which is primarily accident risk. Reserves are calculated
based upon current information including industry estimates for certain
aviation accidents. In 1997, the Company made the decision to exit all
outside-managed accident and health pools and cease marketing accident and
health business and to place the operation into run-off.
Interest credited. Consolidated interest credited increased $15.4
million in the firstsecond quarter of 1998 to $34.5$37.8 million. Interest credited
represents amounts credited on the Company's asset-intensive and universal
life type products. Asset-intensive products include stable value
operations, bank-owned life insurance and annuity products. These products
are primarily written in the U.S. operations, while the Canadian operations
have a small annuity block of business and the Latin American operations have
a direct universal life product developing in Argentina. The increase in interest
credited was primarily a result of an increase of approximately $185.0 million$0.7 billion
in deposits related to asset-intensive reinsurance forsince the firstsecond quarter
of 1998 compared to the same period in 1997.
Policy Acquisition Costs and Other Insurance Expenses. Consolidated
policy acquisition costs and other insurance expenses, consisting primarily
of allowances, increased 16.0%20.1%, to $46.9$57.4 million in the firstsecond quarter of
1998. As a percentage of net premiums, consolidated policy 16
17
acquisition costs
and other insurance expenses decreased to 17.4%20.8% in the firstsecond quarter of 1998
from 19.7%23.7% during the same period in 1997. This resulted from a change in
business mix from coinsurance to yearly renewable term reinsurance and the
addition of larger blocks of Canadian business at the end of 1997 that do not have significant
commission costs associated with the business. Overall,allowances. Generally, policy acquisition costs and other insurance expenses continue to
fluctuate with business volume and changes in product mix from period to
period.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums for the U.S. operations decreased to 16.8% in the first quarter of
1998 from 19.2% during the same period in 1997.
Within the U.S. operations, policy acquisition costs and other insurance
expenses as a percentage of net premiums for traditional business decreased
to 14.5%19.7% in the firstsecond quarter of 1998 from 16.6%20.8% during the same period in
1997. This was due primarily to new business added during 1998 which was
primarily yearly renewable term products which doreinsurance that did not have a high level of
commissions associated with the premiums. The financial reinsurance business
within the U.S. operations reflects fees of approximately $3.1$2.8 million paid
to retrocessionaires during 1998, which representedrepresenting a partial offset to the fees
collected that wereand reflected as other revenues.
In the Canadian operations, policy acquisition costs and other insurance
expenses as a percentage of net premiums decreased to 11.4%10.8% in the firstsecond
quarter of 1998, from 16.8%19.2% during the same period in 1997. The decrease was
primarily due to the large blocks of business added at the end of 1997 that
do not have significant commission costs associated with the business. In
addition, there was more reinsurance of yearly renewable term products during
the second half of 1997 and first quartersix months of 1998 compared to the firstsecond
quarter of 1997. This shift in reinsurance method resulted in fewer
commissions as a percent of net premiums for the firstsecond quarter of 1998
compared to the firstsecond quarter of 1997.
18
19
Other international operations policy acquisition cost and other insurance
expenses as a percentage of net premiums decreased to 12.6% in the second
quarter of 1998 from 19.3% during the same period in 1997. These percentages
fluctuate due to the timing of client company reporting and variations in the
mixture of business being written within the Latin American and Asia Pacific
operations.
Accident and health operations policy acquisition costs and other insurance
expenses as a percentage of net premiums decreased to 29.1% in the second
quarter of 1998 from 34.0% during the same period in 1997 resulting from
changes in the mixture of business within the accident and health operations.
Other Operating Expenses. Consolidated other operating expenses
increased $1.9 million in the second quarter of 1998 from the same period in
1997. The overall increase in operating expenses was attributed to planned
increases associated with the ongoing growth of the Company.
Interest Expense. Consolidated interest expense during the second
quarter of 1998 related to the 7 1/4% Senior Notes issued in 1996, the
financing of a portion of the Company's Australian reinsurance operations,
RGA Australian Holdings Pty Limited ("Australian Holdings") and interest paid
on an operating line of credit. Interest cost for the second quarter of 1998
and the second quarter of 1997 was $2.2 million and $2.0 million,
respectively. Interest expense related to the 7 1/4% Senior Notes was $1.8
million in the second quarter of 1998 and 1997, respectively.
Provision for Income Taxes. Consolidated income tax expense increased
$2.2 million in the second quarter of 1998 as a result of higher pre-tax
income. Income tax expense from operations before net realized investment
gains represented approximately 36.3% and 36.7% of pre-tax income for the
second quarters of 1998 and 1997, respectively.
19
20
The following tables reflect the net income before income taxes and minority
interest for the Company's primary operational divisions (dollars in
thousands):
- - ---------------
U.S. OPERATIONS
- - ---------------
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1998
==================================================
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
==================================================
REVENUES:
Net premiums $354,537 $ 687 $ - $355,224
Investment income, net of related expenses 61,205 56,646 - 117,851
Realized investment gains, net 1,264 837 - 2,101
Other revenue (333) - 7,778 7,445
--------------------------------------------------
Total revenues 416,673 58,170 7,778 482,621
BENEFITS AND EXPENSES:
Claims and other policy benefits 273,087 2,300 - 275,387
Interest credited 22,597 49,220 - 71,817
Policy acquisition costs and other insurance
expenses 60,514 2,610 5,946 69,070
Other operating expenses 12,291 - - 12,291
--------------------------------------------------
Total benefits and expenses 368,489 54,130 5,946 428,565
Income before income taxes and minority
interest $ 48,184 $ 4,040 $1,832 $ 54,056
==================================================
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1997
==================================================
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
==================================================
REVENUES:
Net premiums $281,049 $ - $ - $281,049
Investment income, net of related expenses 50,333 20,381 - 70,714
Realized investment gains, net 346 456 - 802
Other revenue 376 - 8,056 8,432
--------------------------------------------------
Total revenues 332,104 20,837 8,056 360,997
BENEFITS AND EXPENSES:
Claims and other policy benefits 204,276 976 - 205,252
Interest credited 22,634 18,189 - 40,823
Policy acquisition costs and other insurance
expenses 52,407 573 7,005 59,985
Other operating expenses 10,171 - - 10,171
--------------------------------------------------
Total benefits and expenses 289,488 19,738 7,005 316,231
Income before income taxes and minority
interest $ 42,616 $ 1,099 $1,051 $ 44,766
==================================================
20
21
- - -------------------
CANADIAN OPERATIONS
- - -------------------
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1998 1997
REVENUES:
Net premiums $49,354 $36,330
Investment income, net of related expenses 10,544 7,607
Realized investment gains, net 617 110
Other revenue 370 69
-----------------------------
Total revenues 60,885 44,116
BENEFITS AND EXPENSES:
Claims and other policy benefits 44,331 28,351
Interest credited 461 671
Policy acquisition costs and other insurance expenses 5,494 6,529
Other operating expenses 3,400 2,897
-----------------------------
Total benefits and expenses 53,686 38,448
Income before income taxes and minority interest $ 7,199 $ 5,668
=============================
- - -------------------
OTHER INTERNATIONAL
- - -------------------
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1998
===========================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS INTERNATIONAL
Direct Reinsurance
===========================================================
REVENUES:
Net premiums $25,574 $25,423 $23,406 $ 2,044 $76,447
Investment income, net of related expenses 3,847 949 1,053 61 5,910
Realized investment gains, net - - 1 - 1
Other revenue (48) - 2,127 204 2,283
-----------------------------------------------------------
Total revenues 29,373 26,372 26,587 2,309 84,641
BENEFITS AND EXPENSES:
Claims and other policy benefits 23,523 23,918 15,156 1,489 64,086
Interest credited 79 - - - 79
Policy acquisition costs and other insurance
expenses 1,988 957 7,627 606 11,178
Other operating expenses 3,378 1,431 3,019 2,223 10,051
Interest expense - - 221 83 304
-----------------------------------------------------------
Total benefits and expenses 28,968 26,306 26,023 4,401 85,698
Income / (loss) before income taxes and
minority interest $ 405 $ 66 $ 564 $(2,092) $(1,057)
===========================================================
21
22
- - -------------------------------
OTHER INTERNATIONAL (continued)
- - -------------------------------
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1997
===========================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS INTERNATIONAL
Direct Reinsurance
===========================================================
Revenues:
Net premiums $28,465 $ 9,392 $14,890 $ 236 $52,983
Investment income, net of related expenses 4,046 824 927 61 5,858
Realized investment gains, net - - 15 - 15
Other revenue 77 - - 9 86
-----------------------------------------------------------
Total revenues 32,588 10,216 15,832 306 58,942
BENEFITS AND EXPENSES:
Claims and other policy benefits 26,516 8,368 9,287 341 44,512
Interest credited 32 - - - 32
Policy acquisition costs and other insurance
expenses 2,903 227 5,971 55 9,156
Other operating expenses 3,531 520 2,949 941 7,941
Interest expense - - 238 - 238
-----------------------------------------------------------
Total benefits and expenses 32,982 9,115 18,445 1,337 61,879
(Loss) / income before income taxes and
minority interest $ (394) $ 1,101 $(2,613) $(1,031) $(2,937)
===========================================================
- - -------------------
ACCIDENT AND HEALTH
- - -------------------
FOR THE SIX MONTH PERIODS ENDING JUNE 30, 1998 1997
REVENUES:
Net premiums $65,488 $ 36,578
Investment income, net of related expenses 850 598
Realized investment gains, net - 3
Other revenue 557 404
-----------------------------
Total revenues 66,895 37,583
BENEFITS AND EXPENSES:
Claims and other policy benefits 46,266 25,224
Accident and health pool charge - 18,000
Policy acquisition costs and other insurance expenses 18,620 12,598
Other operating expenses 2,471 1,100
-----------------------------
Total benefits and expenses 67,357 56,922
(Loss) before income taxes and minority interest $ (462) $(19,339)
=============================
22
23
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- - ---------------------------------------
RESULTS OF OPERATIONS
Consolidated income before income taxes and minority interest increased
$28.3 million in the first six months of 1998, compared to the same period in
1997. Diluted earnings per share were $1.34 for the first six months of 1998
compared with $0.70 for the same period in 1997. Consolidated net income
before realized capital gains and losses increased to 16.7%$33.4 million in the
first six months of 1998 from $17.3 million in the same period in 1997.
The increase in the U.S. operations income before income taxes and
minority interest in the first six months of 1998 compared to the same period
in 1997 was due to increased earnings from asset-intensive business and
financial reinsurance business, combined with continued growth in the
traditional reinsurance business, where premiums increased 26.1%. The
increase in the Canadian operations income before income taxes and minority
interest in the first six months of 1998 compared to the same period in 1997
was a result of growth in premiums of 39.1%, primarily for renewal business
related to blocks of business added in December 1997 and more favorable
mortality experience. The other international operations lost $1.1 million
before income taxes and minority interest in the first six months of 1998
compared to a $2.9 million loss in 1997. Total revenues in the other
international operations increased by 43.6% for the first six months of 1998
compared to the same period in 1997. This growth was offset by costs
associated with the development of new business in several international
markets. The accident and health operations reported a net loss of $0.5
million for the first six months of 1998 compared to a loss of $19.3 million
for the same period in 1997. During the first quarter of 1997, the Company
recorded an accident and health charge of $18.0 million, $10.4 million
after-tax, to increase reserves associated with run-off claims from certain
accident and health insurance pools in which it had formerly participated.
That action was a result of management's strategic decision to exit all
outside-managed accident and health pools. As of December 31, 1997, the
Company made a strategic decision to cease marketing accident and health
business and established reserves that it believes are sufficient to handle
the run-off.
Net Premiums. Consolidated net premiums increased $139.6 million, or
34.3%, to $546.5 million in the first six months of 1998, compared to $406.9
million for the same period in 1997. Renewal premiums from the existing block
of business, along with new business premiums from facultative and automatic
treaties contributed to the premium increase. Business premium levels are
significantly influenced by large transactions and reporting practices of
ceding companies and therefore fluctuate from period to period.
The U.S. operations net premiums in the first six months of 1998 increased
26.4% to $355.2 million from the same period in prior year. This was
attributed to premium growth on the existing block of business combined with
strong new business premium for blocks of business added since the second
quarter of 1997.
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24
Net premiums in the Canadian operations in the first six months of 1998
increased 35.8% to $49.4 million in 1998. New business premiums decreased
$1.2 million, while renewal premiums increased $14.2 million compared to the
first six months of 1997. Several of the treaties produced in December 1997
related to in force blocks of business with large renewal premiums. The
first year premium decline was primarily the result of unusually strong new
business production in December 1996, which increased the first year premiums
for the first six months of 1997.
The Company's other international operations reported premiums of $76.4
million for the first six months of 1998 compared to $53.0 million for the
same period in 1997. The 1998 premiums represented approximately $51.0
million from Latin America, of which approximately $25.6 million was direct
premium generated in Argentina and Chile. Latin American premiums grew
34.7%, which resulted from continued growth in direct universal life business
in Argentina as well as reinsurance on privatized pensions in Argentina.
Direct premiums from Chilean single premium annuities decreased from prior
year due to less favorable market conditions in Chile during 1998. The Asia
Pacific operations and other markets generated $25.5 million of premiums, an
increase of 57.2% compared to the first six months of 1997, predominantly
from the Hong Kong contact office and subsidiary in Australia.
Accident and health operations net premiums increased 79.0% to $65.5 million
in the first six months of 1998. The increase resulted from premiums on new
contracts initiated and the renewal of existing contracts in the second half
of 1997. The Company estimates that 1998 accident and health premiums
compared to 1997 premiums may increase in 1998 as a result of the contracts
executed immediately prior to the decision to exit the market.
Net Investment Income. Consolidated net investment income increased
54.7% to $135.9 million, in the first six months of 1998 from 14.8%the same period
in 1997. The cost basis of fixed maturity securities increased $1.3 billion
from June 30, 1997. The increase in invested assets was a result of an
increase in operating cash flows, reinsurance transactions involving deposits
for asset-intensive products from ceding companies, primarily stable value
product deposits, and the proceeds from the Company's issuance of non-voting
common shares. The average earned yield on the consolidated investment
portfolio decreased to 7.03% for the six months ending June 30, 1998 compared
to 7.26% for the same period in 1997. This decrease in overall yield
reflected the increase in assets supporting the stable value reinsurance
product that are generally of a shorter duration and carry a lower average
yield. This decrease in yield was also impacted by the overall decrease in
interest rates. Earnings credited and paid to ceding companies are included
in interest credited.
Realized Investment Gains, Net. Consolidated net realized investment
gains increased $1.8 million to $2.7 million in the first six months of 1998
from $0.9 million for the same period in the prior year. Net realized
investment gains resulted from normal activity within the Company's
investment portfolios.
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Other Revenue. Consolidated other revenue increased $1.7 million in
the first six months of 1998 to $10.7 million. Other revenue includes items
such as profit and risk fees associated with financial reinsurance, treaty
recapture fees as well as earnings in unconsolidated subsidiaries, management
fee income, and other miscellaneous income. During 1998, financial
reinsurance treaties in the U.S. operations resulted in $6.5 million in
financial reinsurance fees which were partially offset by $5.9 million of
fees paid to retrocessionaires, included in policy acquisition costs and
other insurance expenses. The Asia Pacific operations completed a financial
reinsurance transaction that resulted in $1.8 million in financial
reinsurance fee revenue through the first six months of 1998 that was
partially offset by fees paid to retrocessionaires. Other revenue also
included $1.2 million and $0.7 million in earnings in unconsolidated
subsidiaries for the first six months of 1998 and 1997, respectively.
Claims and Other Policy Benefits. Consolidated claims and other policy
benefits increased 41.8% to $430.1 million, in the first six months of 1998.
For the first six months of 1998, total claims and other policy benefits
represented 78.7% of total net premiums compared to 74.5% for the same period
in 1997. The Company expects mortality to fluctuate somewhat from period to
period but believes it is fairly constant over longer periods of time. The
Company continues to monitor mortality trends to determine the
appropriateness of reserve levels.
U.S. operations claims and other policy benefits increased 34.2% in the first
six months of 1998, primarily as a result of increases from new business
production and higher claims experience compared to the same period in 1997.
Claims and other policy benefits as a percentage of net premiums for
traditional reinsurance increased to 77.0% in the first six months of 1998
from 72.7% in the same period in 1997. This fluctuation was primarily due to
reserves established for new and renewal blocks of business as well as the
timing of claims reported. Also, the percentage is affected by the timing of
premium receipts.
Canadian operations claims and other policy benefits increased 56.4% in the
first six months of 1998. Claims and other policy benefits as a percentage
of net premiums increased to 89.8%, or $44.3 million, in the first six months
of 1998 from 78.0% in the same period in 1997. The increase as a percent of
premiums was primarily due to the in force blocks added at the end of 1997.
The claims and other policy benefits of the other international business in
the first six months of 1998 increased 44.0% from the same period in the
prior year. Claims and other policy benefits as a percentage of net premiums
was 83.8% for the first six months of 1998 and was comparable to the same
period in 1997.
Accident and health operations claims and other policy benefits increased
83.4% in the first six months of 1998 from the same period in the prior year.
The claims and other policy benefits for the first six months of 1997 do not
include the $18.0 million, or $10.4 million after-tax, accident and health
pool charge taken during the first quarter of 1997, which is separately
disclosed on the income statement. As a percentage of net premiums, claims
and other policy benefits increased to 70.6% in the first six months of 1998
from 69.0% in the same period of 1997. The accident
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and health operations reserves are subject to volatility due to the nature of
risk covered which is primarily accident risk. Reserves are calculated based
upon current information including industry estimates for certain aviation
accidents.
Interest credited. Consolidated interest credited increased $30.8
million in the first six months of 1998 to $72.4 million. Interest credited
represents amounts credited on the Company's asset-intensive and universal
life type products, including stable value operations, bank-owned life
insurance and annuity products. The increase in interest credited was
primarily a result of an increase of approximately $0.7 billion in deposits
related to asset-intensive reinsurance since June 30, 1997.
Policy Acquisition Costs and Other Insurance Expenses. Consolidated
policy acquisition costs and other insurance expenses, consisting primarily
of allowances, increased 18.2%, to $104.4 million in the first six months of
1998. As a percentage of net premiums, consolidated policy acquisition costs
and other insurance expenses decreased to 19.1% in the first six months of
1998 from 21.7% during the same period in 1997. This resulted from a change
in business mix from coinsurance to yearly renewable term reinsurance and the
addition of larger blocks of business that do not have significant allowances
associated with the business. Generally, policy acquisition costs and other
insurance expenses fluctuate with business volume and changes in product mix
from period to period.
Within the U.S. operations, policy acquisition costs and other insurance
expenses as a percentage of net premiums for traditional business decreased
to 17.1% in the first six months of 1998 from 18.6% during the same period in
1997. This was due primarily to new business added during 1998 which was
primarily yearly renewable term reinsurance that did not have a high level of
commissions associated with the premiums. The financial reinsurance business
within the U.S. operations reflects fees of approximately $5.9 million paid
to retrocessionaires during 1998, which represented a partial offset to the
fees collected that were reflected as other revenues.
In the Canadian operations, policy acquisition costs and other insurance
expenses as a percentage of net premiums decreased to 11.1% in the first six
months of 1998, from 18.0% during the same period in 1997. The decrease was
primarily due to the decrease in commission costs associated with large
blocks of business added at the end of 1997 as well as the shift in
reinsurance method to yearly renewable term business.
Other international operations policy acquisition cost and other insurance
expenses as a percentage of net premiums decreased to 14.6% in the first six
months of 1998 from 17.3% during the same period in 1997. These percentages
fluctuate due to the timing of client company reporting and variations in the
mixture of business being written within the Latin American and Asia Pacific
operations. In addition, the financial reinsurance business within the Asia
Pacific operations reflects fees of approximately $0.6$0.9 million paid to
retrocessionaires during the first quartersix months of 1998, which represented a
partial offset to the fees collected that were reflected as other revenues.
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27
Accident and health segment policy acquisition costs and other insurance
expenses as a percentage of net premiums decreased to 27.5%28.4% in the first quartersix
months of 1998 from 34.9%34.4% during the same period in 1997. The decrease will
fluctuate1997, resulting from
changes in the mixture of business within the accident and health operations.
Other Operating Expenses. Consolidated other operating expenses
increased $4.9$6.8 million infor the first quartersix months of 1998.1998 compared to the same
period in 1997. The overall increase in operating expenses was attributed to
planned increases associated with the ongoing growth of the Company, of which other
17
18
international operations operating expenses comprised $1.8 million of the
increase in the first quarter of 1998.Company.
Interest Expense. Consolidated interest expense duringfor the first quartersix
months of 1998 and 1997 was $4.2 million and $3.9 million, respectively.
Interest related to the 7 1/4% Senior Notes issued in 1996 and the
financing of a portion of the Company's Australian reinsurance operations,
RGA Australian Holdings Pty Limited ("Australian Holdings") and interest paid
on an operating line of credit. Interest cost for the first quarter of 1998
and the first quarter of 1997 was $2.0 million and $1.9 million,
respectively. Interest related to the Senior Notes was $1.9$3.7 million in the first quartersix
months of 1998 and $1.8 million in the first quarter of 1997.1997, respectively.
Provision for Income Taxes. Consolidated income tax expense increased
$8.8$11.0 million in the first quartersix months of 1998 as a result of higher pre-tax
income. Income tax expense from operations before net realized investment
gains/(losses)gains and accident and health pool charge represented approximately 35.7%36.0% and
36.3%36.5% of pre-tax income for the first quarterssix months of 1998 and 1997,
respectively. The Company calculated a tax benefit of $7.6 million on the
$18.0 million accident and health reserve adjustment recorded in the first
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first quartersix months of 1998, the Company generated $19.9cash of
$70.8 million
in cash from operating activities, $221.8 million from the non-voting
common stock offering in June 1998, and $311.0$483.3 million from deposits related
to asset-intensive business. These increases were offset by cash used for
investing of $328.1$784.8 million and dividends to stockholders of $1.5$3.0 million.
The sources of funds of RGA'sthe operating subsidiaries of Reinsurance Group of
America, Incorporated (RGA) consist of premiums received from ceding
insurers, investment income, and proceeds from sales and redemption of
investments. Premiums are generally received in advance of related claim
payments. Funds are primarily applied to policy claims and benefits,
operating expenses, income taxes, and investment purchases.
As RGA continues its expansion efforts, management continually analyzes
capital adequacy issues. RGA filed a registration statement with the
Securities and Exchange CommissionAt RGA's annual stockholders' meeting on May 4,27,
1998, to facilitate an
underwritten public offering of a new class of non-voting common stock to
raise gross proceeds ofwas authorized. In June, the
Company completed a public offering in which it raised approximately $275 million (exclusive of a 15%
over-allotment option).$221.8
million. The new class of non-voting common stock is
anticipated to be authorized at RGA's annual stockholders' meeting on May 27,
1998. The Company's intention is toCompany will use the net proceeds for general corporate
purposes.
Any such offering would be made only by means of a prospectus, and
would be subject toIn addition, the registration statement becoming effective, compliance
with applicable state securities laws and favorable market conditions. This
report does not constitute an offer to sell, or a solicitation of an offer to
buy any shares of non-voting common stock.
The Company has access to a $25.0 million line of credit.
During the first quartersix months of 1998, $10.0$15.0 million was drawn upon that line.
This liability is included in other liabilities on the balance sheet at March 31,June
30, 1998. The ability of RGA and Australian Holdings to make principal and
interest payments, and to continue to pay dividends to stockholders, is
ultimately dependent on the earnings and surplus of RGA's subsidiaries, the
investment earnings on
27
28
the undeployed debt
18
19
proceeds,funds at RGA, and the Company's ability to raise additional
capital. The transfer of funds from the subsidiaries to RGA is subject to
applicable insurance laws and regulations. Any future increases in liquidity
needs due to relatively large policy loans or unanticipated material claim
levels would be met first by operating cash flows and then by selling
fixed-income securities or short-term investments.
INVESTMENTS
Invested assets increased 9.3%22.2%, to $4.0$4.4 billion at March 31,June 30, 1998,
compared to $3.6 billion at December 31, 1997. The increase resulted from
cash deposits for stable valueasset-intensive products of $0.2$0.5 billion for the first quartersix
months of 1998, proceeds from the issuance of non-voting common shares of
$221.8 million, and positive operating cash flows. These increases were
enhanced by an increase in the fair value adjustment of fixed maturities
available for sale of $10.0$13.8 million. The Company has historically generated
positive cash flows from operations, and expects this to do socontinue in the
future.
At March 31,June 30, 1998, the Company's portfolio of fixed maturity securities
available for sale had net unrealized gains before tax of $122.0$125.7 million.
YEAR 2000
Many of the Company's data processing systems require modifications to
enable them to process dates including the year 2000 and beyond. The Company
has established a plan to address the Year 2000 issue and that work is
progressing on schedule. The Company also relies on information from
external parties such as ceding companies and retrocessionaires. The Company
could be adversely affected by those companies' compliance efforts, if any,
with the Year 2000 issue over which the Company has no direct control. The
Company is currently working with its clients to identify their Year 2000
compliance positions and will follow-up with clients on potential interface
problems. It is anticipated that testing and resolution will be completed
according to the Company's plan. During the years of 1998 and 1999, the
Company expects to direct certain internal and external resources to the Year
2000 effort. The Company does not believe the net effect of these efforts
will materially affect the Company's consolidated financial statements during
the 1998 and 1999 period.
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CAUTIONARY STATEMENT
Certain statements contained in this filing are or may be deemed to be
"forward-looking statements" under the Private Securities Litigation Reform
Act of 1995. Such statements include, but are not limited to, statements
relating to the Company's financial position, growth prospects and targets,
industry trends, trends in or expectations regarding operations and capital
commitments, the sufficiency of claims reserves, and estimated premium declineslevels in
the accident and health operations.operations, and Year 2000 compliance. Because such
statements are based on management's current views and assumptions, they are
subject to risks and uncertainties.
Numerous factors could cause actual results and events to differ
materially from those expressed or implied by forward-looking statements (the
"Cautionary Statements"), including, without limitation, (i) general economic
conditions affecting the demand for insurance and reinsurance in the
Company's current and planned markets, (ii) material changes in mortality and
claims experience, (iii) competitive factors and competitors' responses to
the Company's initiatives, (iv) successful execution of the Company's entry
into new markets, (v) successful development and introduction of new
products, (vi) the stability of governments and economies in foreign markets,
(vii) fluctuations in U.S. and foreign interest rates and securities and real
estate markets, (viii) the success of the Company's clients, including
General American and its affiliates, and (ix) changes in laws, regulations,
and accounting standards applicable to the Company and its subsidiaries.
Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the Cautionary
Statements. 19
20
Readers are therefore cautioned not to place undue reliance on
such forward-looking statements.
PART II - OTHER INFORMATION
- - ---------------------------
ITEM 1 - ------
LEGAL PROCEEDINGS
- -----------------
From time to time, the Company is subject to litigation and arbitration
related to its reinsurance business and to employment-related matters in the
normal course of its business. Management does not believe that the Company
is a party to any such pending litigation or arbitration that would have a
material adverse effect on its future operations.
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ITEM 5 OTHER INFORMATION
The Securities Exchange Act Rule 14a-8 permits shareholders to submit
proposals to be included in the Company's proxy statement for the annual
meeting of the shareholders. The Company must consider including a proposal
in the proxy statement if the Company receives notice of the proposal at
least 120 days prior to the corresponding date of the Company's proxy
statement for the previous year's annual meeting. Shareholder proposals
submitted outside the processes of Rule 14a-8 must be submitted to the
Company by March 15, 1999.
ITEM 6
- ------ EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------
(a) See index to exhibits.
(b) No reports on Form 8-K were filed during the three months ended MarchJune
30, 1998.
30
31 1998.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Reinsurance Group of America, Incorporated
By: /s/ A. Greig Woodring 5/6/8/11/98
------------------------------------
A. Greig Woodring
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Jack B. Lay 5/6/8/11/98
------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
21(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
- - ------- -----------
3.1 Restated Articles of Incorporation of RGA incorporated by reference to
Exhibit 3.1 to Registration Statement on Form S-1
(No. 33-58960) filed on March 2, 1993
3.2 Bylaws of RGA incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (No. 33-58960) filed on March 2, 1993
3.3 Form of Certificate of Designations for Series A Junior Participating
Preferred Stock incorporated by reference to Exhibit 3.3 to Amendment
No. 1 to Registration Statement on Form S-1 (No. 33-58960) filed on
April 14, 1993
27.1 Financial Data Schedule
2232