UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON,Washington, D.C. 20549

                                    FORM 10-Q

        (MARK ONE)(Mark One)

           [X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934

                 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001For the quarterly period ended March 31, 2002

                                       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)

                         1370 TIMBERLAKE MANOR PARKWAY
                          CHESTERFIELD, MISSOURITimberlake Manor Parkway
                          Chesterfield, Missouri 63017
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(Address of principal executive offices)
                                 (636) 736-7439
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


     INDICATE BY CHECK MARK WHETHER THE REGISTRANT(Registrant's telephone number, including area code)


     Indicate 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.
                           YES  X             NO
                              -----          -----

COMMON STOCK OUTSTANDINGdays.

                                   Yes [X] No


Common stock outstanding ($.01 PAR VALUE) AS OF OCTOBER 31, 2001:
49,474,993 SHARES.par value) as of April 30, 2002: 49,302,043
shares







           REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES


                                TABLE OF CONTENTS

ITEM PAGE ---- ---- PART I - FINANCIAL INFORMATION 1 Financial Statements Condensed Consolidated Balance Sheets (Unaudited) September 30, 2001 and December 31, 2000 3 Condensed Consolidated Statements of Income (Unaudited) Three and nine months ended September 30, 2001 and 2000 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Nine months ended September 30, 2001 and 2000 5 Notes to Unaudited Condensed Consolidated Financial Statements (Unaudited) 6 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 3 Qualitative and Quantitative Disclosures About Market Risk 21 PART II - OTHER INFORMATION 1 Legal Proceedings 22 6 Exhibits and Reports on Form 8-K 22 Signatures 23 Index to Exhibits 24
Item Page - ---- ---- PART I - FINANCIAL INFORMATION 1 Financial Statements Condensed Consolidated Balance Sheets (Unaudited) March 31, 2002 and December 31, 2001 3 Condensed Consolidated Statements of Income (Unaudited) Three months ended March 31, 2002 and 2001 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2002 and 2001 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6-8 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-17 3 Quantitative and Qualitative Disclosures About Market Risk 17 PART II - OTHER INFORMATION 1 Legal Proceedings 18 6 Exhibits and Reports on Form 8-K 18 Signatures 19 Index to Exhibits 20-21 2 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) September 30,March 31, December 31, 2002 2001 2000 ----------------- -------------------------- ------------ (Dollars in thousands) ASSETS Fixed maturity securities: Available-for-sale at fair value (amortized cost of $2,711,742$3,048,224 and $2,753,521$2,765,422 at September 30, 2001March 31, 2002 and December 31, 2000,2001, respectively) $ 2,677,812 $ 2,692,840$2,978,803 $2,768,285 Mortgage loans on real estate 155,676 128,111172,941 163,948 Policy loans 716,041 706,877774,658 774,660 Funds withheld at interest 1,078,084 938,3621,390,874 1,142,643 Short-term investments 54,495 68,73516,750 140,573 Other invested assets 65,524 25,233 ------------- ------------108,452 98,315 ---------- ---------- Total investments 4,747,632 4,560,1585,442,478 5,088,424 Cash and cash equivalents 183,515 70,797115,399 226,670 Accrued investment income 72,792 37,55551,666 30,454 Premiums receivable 185,422 226,365157,456 161,436 Reinsurance ceded receivables 344,966 296,368449,186 410,947 Deferred policy acquisition costs 758,313 621,475863,852 800,319 Other reinsurance balances 177,323 202,158115,029 146,427 Other assets 35,461 46,984 ------------- ------------31,202 29,668 ---------- ---------- Total assets $ 6,505,424 $ 6,061,860 ============= ============$7,226,268 $6,894,345 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Future policy benefits $ 2,043,808 $ 1,933,508$2,206,689 $2,101,777 Interest sensitive contract liabilities 2,258,269 2,128,7432,585,208 2,325,264 Other policy claims and benefits 660,320 555,423656,466 650,082 Other reinsurance balances 57,227 69,34346,444 47,687 Deferred income taxes 179,097 170,905162,586 162,092 Other liabilities 69,940 68,75892,507 120,374 Long-term debt 318,246 272,257 ------------- ------------323,686 323,396 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of the Company 158,096 158,085 ---------- ---------- Total liabilities 5,586,907 5,198,9376,231,682 5,888,757 Commitments and contingent liabilities - - Stockholders' Equity: Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no shares issued or outstanding) - - Common stock (par value $.01 per share; 75,000,000 shares authorized, 51,053,273 shares issued at September 30, 2001March 31, 2002 and December 31, 2000,2001, respectively) 511 511 Warrants 66,915 66,915 Additional paid-in capital 612,807 611,349611,832 611,806 Retained earnings 400,412 348,158394,158 369,349 Accumulated other comprehensive income:income (loss): Accumulated currency translation adjustment, net of income taxes (29,622) (15,867)10,447 (6,088) Unrealized depreciation of securities, net of income taxes (28,258) (42,004) ------------- ------------(45,875) (87) ---------- ---------- Total stockholders' equity before treasury stock 955,850 902,1471,037,988 1,042,406 Less treasury shares held of 1,578,2801,751,230 and 1,759,7151,526,730 at cost at September 30, 2001March 31, 2002 and December 31, 2000,2001, respectively (37,333) (39,224) ------------- ------------(43,402) (36,818) ---------- ---------- Total stockholders' equity 918,517 862,923 ------------- ------------994,586 1,005,588 ---------- ---------- Total liabilities and stockholders' equity $ 6,505,424 $ 6,061,860 ============= ============$7,226,268 $6,894,345 ========== ==========
See accompanying notes to unaudited condensed consolidated financial statements. 3 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended Nine months ended September 30, September 30, ----------------------------- --------------------------------March 31, -------------------- 2002 2001 2000 2001 2000 ------------- ------------- --------------- -------------- -------- -------- (Dollars in thousands, except per share data) REVENUES: Net premiums $ 387,825 $ 316,116 $ 1,179,746 $ 991,059$469,105 $404,585 Investment income, net of related expenses 90,693 82,118 251,058 238,42088,013 84,089 Realized investment losses, net (26,324) (2,821) (35,356) (18,345)(3,591) (1,506) Other revenues 5,922 6,949 21,850 12,637 ----------- ----------- ------------- ------------6,685 6,487 -------- -------- Total revenues 458,116 402,362 1,417,298 1,223,771560,212 493,655 BENEFITS AND EXPENSES: Claims and other policy benefits 314,882 242,921 954,652 776,326387,726 337,566 Interest credited 32,639 26,087 79,590 74,56227,725 27,404 Policy acquisition costs and other insurance expenses 70,672 57,595 203,947 171,25771,499 65,833 Other operating expenses 22,802 20,270 66,880 59,78219,517 22,259 Interest expense 4,431 5,108 13,719 12,417 ----------- ----------- ------------- ------------8,554 4,911 -------- -------- Total benefits and expenses 445,426 351,981 1,318,788 1,094,344 ----------- ----------- ------------- ------------515,021 457,973 -------- -------- Income from continuing operations before income taxes 12,690 50,381 98,510 129,42745,191 35,682 Provision for income taxes 3,705 19,011 37,369 52,743 ----------- ----------- ------------- ------------16,155 14,040 -------- -------- Income from continuing operations 8,985 31,370 61,141 76,68429,036 21,642 Discontinued operations: Loss from discontinued accident and health operationoperations, net of income taxes (1,256) - (2,261) - (8,249) ----------- ----------- ------------- -------------------- -------- Net income $ 8,98527,780 $ 29,109 $ 61,141 $ 68,435 =========== =========== ============= ============21,642 ======== ======== Earnings per share from continuing operations: Basic earnings per share $ 0.180.59 $ 0.64 $ 1.24 $ 1.55 =========== =========== ============= ============0.44 ======== ======== Diluted earnings per share $ 0.180.58 $ 0.63 $ 1.22 $ 1.53 =========== =========== ============= ============0.43 ======== ======== Earnings per share from net income: $ Basic earnings per share 0.18 $ 0.590.56 $ 1.24 $ 1.38 =========== =========== ============= ============0.44 ======== ======== Diluted earnings per share $ 0.180.56 $ 0.59 $ 1.22 $ 1.37 =========== =========== ============= ============0.43 ======== ========
See accompanying notes to unaudited condensed consolidated financial statements. 4 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NineThree months ended September 30, ------------------------------March 31, ----------------------- 2002 2001 2000 -------------- ----------------------- --------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 61,14127,780 $ 68,43521,642 Adjustments to reconcile net income to net cash provided by operating activities: Change in: Accrued investment income (35,237) (36,522)(21,212) (12,765) Premiums receivable 40,943 64,1133,980 29,667 Deferred policy acquisition costs (147,144) (115,859)(64,460) (35,064) Reinsurance ceded balances (48,598) (17,688)(38,239) (40,599) Future policy benefits, other policy claims and benefits, and other reinsurance balances 229,621 119,321165,751 70,608 Deferred income taxes 14,815 31,09119,938 490 Other assets and other liabilities 8,301 (140)(29,399) 8,840 Amortization of net investment discounts, goodwill and other (26,991) (22,340)(9,351) (658) Realized investment losses, net 35,356 18,3453,591 1,506 Other, net 10,103 (11,454) ----------- ------------841 (927) --------- --------- Net cash provided by operating activities 142,310 97,30259,220 42,740 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of subsidiaries - 26,509 Sales of investments: Fixed maturity securities - Available for sale 958,151 439,148 Mortgage loans on real estate - 1,745 Maturities of fixed maturity securities --- Available for sale - 13,784249,115 313,929 Purchases of fixed maturity securities --- Available for sale (951,577) (1,106,216)(526,071) (331,866) Cash invested in: Mortgagein mortgage loans on real estate (37,875) (21,951) Policy loans (9,164) (7,995) Funds(14,900) (1,022) Cash invested in funds withheld at interest (180,693) (127,086)(20,038) (15,792) Principal payments on mortgage loans on real estate 10,316 4,3215,909 (351) Change in short-term investments and other invested assets (28,672) 137,870 ----------- ------------112,303 46,701 --------- --------- Net cash used inprovided by (used in) investing activities (239,514) (639,871)(193,682) 11,599 CASH FLOWS FROM FINANCING ACTIVITIES: Dividends to stockholders (8,887) (8,944)(2,971) (2,958) Borrowings under credit agreements 45,989 78,119 Reissuance (purchase)- 9,530 Purchase of treasury stock 1,891 (19,881)(6,594) - Exercise of stock options 10 1,123 Excess deposits (withdrawals) on universal life and other investment type policies and contracts 170,496 592,520 ----------- ------------31,750 (10,271) --------- --------- Net cash provided by (used in) financing activities 209,489 641,81422,195 (2,576) Effect of exchange rate changes 433 559 ----------- ------------996 703 --------- --------- Change in cash and cash equivalents 112,718 99,804(111,271) 52,466 Cash and cash equivalents, beginning of period 226,670 70,797 24,316 ----------- --------------------- --------- Cash and cash equivalents, end of period $ 183,515115,399 $ 124,120 =========== ============123,263 ========= ========= Supplementary disclosure of cash flow information: Amount of interest paid $ 3,403 $ 4,130 Amount of income taxes paid $ 16,855 $ 2,619
See accompanying notes to unaudited condensed consolidated financial statements. 5 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Reinsurance Group of America, Incorporated ("RGA") and Subsidiaries (collectively, the "Company") have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine-month periodsmonth period ended September 30, 2001March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.2002. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 20002001 ("Annual Report"). The accompanying unaudited condensed consolidated financial statements include the accounts of Reinsurance Group of America, Incorporated and its Subsidiaries. All material intercompany accounts and transactions have been eliminated. The Company has reclassified the presentation of certain prior period information to conform to the 20012002 presentation. 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share on income from continuing operations (dollars in(in thousands except per share information):
---------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30,MARCH 31, MARCH 31, 2002 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------- Earnings: Income from continuing operations (numerator for basic and diluted calculations) $8,985 $31,370 $61,141 $76,684$29,036 $21,642 Shares: Weighted average outstanding shares (denominator for basic calculation) 49,446 49,286 49,396 49,62549,420 49,338 Equivalent shares from outstanding stock options 524 434 526 336 -----------------------------------------------------------------------(denominator for diluted calculation) 330 548 ----------------------- Denominator for diluted calculation 49,970 49,720 49,922 49,96149,750 49,886 Earnings per share: Basic $0.18 $0.64 $1.24 $1.55$ 0.59 $ 0.44 Diluted $0.18 $0.63 $1.22 $1.53 -----------------------------------------------------------------------$ 0.58 $ 0.43 -----------------------
The calculation of equivalent shares from outstanding stock options does not include the impact of options having a strike price that exceeds the average stock price for the earnings period, as the result would be antidilutive. For the three and nine monththree-month periods ended September 30,March 31, 2002 and 2001, substantially all outstanding stock options were included in the calculation of common equivalent shares. For the three and nine months ended September 30, 2000, approximately 0.30.9 million and 0.40.2 million, respectively, in outstanding stock options were not included in the calculation of common equivalent shares. These options were outstanding at the end of their respective periods. Additionally, outstanding warrants to purchase Company common stock under certain circumstances were antidilutive to the calculation of earnings per share. 6 3. COMPREHENSIVE INCOME (LOSS) The following tableschedule reflects the change in accumulated other comprehensive income (loss) for the three and nine-monththree-month periods ended September 30,March 31, 2002 and 2001 and 2000 (dollars in thousands):
---------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, MARCH 31, 2002 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------- Net income $8,985 $29,109 $ 61,141 $68,43527,780 $ 21,642 Accumulated other comprehensive income (expense):, net of tax: Unrealized gains on securities 32,097 31,068 13,746 64,418(losses) (45,788) 10,695 Foreign currency items (8,789) (4,633) (13,755) (7,386) -----------------------------------------------------------------------16,535 (13,933) ----------------------- Comprehensive income $32,293 $55,544(loss) $ 61,132 $125,467 -----------------------------------------------------------------------(1,473) $ 18,404 -----------------------
4. SEGMENT INFORMATION The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2 of the Annual Report. The Asia Pacific, Latin America and Other Markets operatingEurope & South Africa operational segments have been condensed intoare presented herein as one reportable segment, Other International, as allowed by applicable accounting pronouncements.International. The Company measures segment performance based on profit or loss from operations before income taxes. There are no intersegment transactions and the Company does not have any material long-lived assets. Investment income is allocated to the segments based upon average assets and related capital levels deemed appropriate to support the segment business volumes. The Company's reportable segments are strategic business units that are segregated by geographic region. Information related to total revenues and income (loss)from continuing operations before income taxes of the Company's continuing operations are summarized below (dollars in thousands).
-----------------------------------------------------------------------INCOME FROM CONTINUING TOTAL REVENUES OPERATIONS BEFORE INCOME TAXES ---------------------------- ------------------------------ THREE MONTHS ENDED NINEMARCH 31, THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,MARCH 31, 2002 2001 20002002 2001 2000 --------------------------------------------------------------------------- ---- ---- ---- REVENUES U.S. $345,462 $294,044 $1,047,792 $897,820$410,707 $367,128 $38,773 $30,272 Canada 57,010 55,287 183,622 172,22462,028 64,073 8,845 17,149 Other International 55,682 50,340 184,765 149,31981,946 61,274 2,345 (4,641) Corporate (38) 2,691 1,119 4,408 -----------------------------------------------------------------------5,531 1,180 (4,772) (7,098) ---------------------------- ------------------------------ Total from continuing operations $458,116 $402,362 $1,417,298 $1,223,771 ----------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES U.S. $30,445 $50,198 $104,574 $129,075 Canada 8,301 4,961 40,444 26,491 Other International (19,016) 489 (24,982) (8,855) Corporate (7,040) (5,267) (21,526) (17,284) ----------------------------------------------------------------------- Total from continuing operations $12,690 $50,381 $98,510 $129,427 -----------------------------------------------------------------------$560,212 $493,655 $45,191 $35,682 ---------------------------- ------------------------------
7 SegmentThere have been no material changes in reportable segment assets for Other International increased over 30% from the amounts disclosed in Note 1718 of the 2000 Annual Report. Growth in the Asia Pacific and Other Markets sub-segments drove the increase. Segment assets of the other reportable segments have not materially changed. 5.6. DIVIDENDS The Board of Directors declared a dividend of six cents per share of common stock on July 25, 2001.January 23, 2002. This dividend was paid on August 28, 2001February 26, 2002 to shareholders of record as of AugustFebruary 5, 2002. 7 2001. 6. 7. STOCK TRANSACTIONS Under a plan approved by the board of directors, the Company may purchase up to $50 million of its shares of stock on the open market as conditions warrant. During the three months ended March 31, 2002, the Company purchased 225,500 shares of treasury stock at an aggregate cost of $6.6 million. The Company generally uses treasury shares to support the future exercise of options granted under its stock option plan. 8. COMMITMENTS AND CONTINGENT LIABILITIES The Company is currently a party to several arbitrations underway primarily involving its groupthat involve three separate medical reinsurance coverages. The Company expects thosearrangements, three arbitrations to be completed during 2001 and 2002. Reserves are established on treaties based upon estimates of the expected findings of the related arbitration panels. There are no arbitrations underway as of September 30, 2001, relative to the Company's portfolio of personal accident business, although such arbitrations could commence at some pointone lawsuit seeking to enforce an arbitration award relating to a medical reinsurance arrangement, and one lawsuit involving aviation bodily injury carve-out reinsurance coverage. As of March 31, 2002, the ceding companies involved in these disputes have raised claims that are $35.4 million in excess of the amounts held in reserve by the Company. The Company believes it has substantial defenses upon which to contest these claims, including but not limited to misrepresentation and breach of contract by direct and indirect ceding companies. See Note 22 of the Annual Report 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 future. Itnormal course of its business. While it is management'snot feasible to predict or determine the ultimate outcome of the pending arbitration or legal proceedings or provide reasonable ranges of potential losses, it is the opinion of Management that future developments, if any, will not materially adversely affecttheir 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. 7.The Company has obtained letters of credit in favor of various affiliated and unaffiliated insurance companies from which the Company assumes business. This allows the ceding company to take statutory reserve credits. The letters of credit issued by banks represent a guarantee of performance under the reinsurance agreements. Additionally, the Company utilizes letters of credit to secure reserve credits when it retrocedes business to its offshore subsidiaries. As of March 31, 2002, outstanding letters of credit totaled $350.2 million. 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. 9. NEW ACCOUNTING STANDARDS In July 2001, the Securities Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 102 - Selected Loan Loss Allowance Methodology and Documentation Issues ("SAB 102"), expressing certain of the staff's views on the development, documentation, and application of a systematic methodology as required by Financial Reporting Release No. 28 for determining allowances for loan and lease losses in accordance with generally accepted accounting principles. In particular, the guidance focuses on the documentation the staff normally would expect registrants to prepare and maintain in support of their allowances for loan losses. The Company is currently in the process of evaluating the impact, if any, of SAB 102 on its mortgage loan loss allowance policies and procedures. Also in July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a nonamortizationnon-amortization approach to account for purchased goodwill and certain intangibles. Under a nonamortizationnon-amortization approach, goodwill and certain intangibles willare not be amortized into results of operations, but instead would beare reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. During the first quarter of 2002, the company completed the transitional impairment test of goodwill. The provisionsresults of each statement, which apply to goodwill and intangible assets acquired prior to June 30, 2001, will be adopted by the Company on January 1, 2002. The Company doesimpairment test did not currently expect the adoption of these accounting standards to have a material impact onto the Company's results of operations; however, impairment reviews subsequentoperations. During the three months ended March 31, 2002, there were no material changes to the initial adoption date may result in future write-downs. In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an Amendment of FASB Statement No. 133". This Statement addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS 133. 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 adopted SFAS No. 138 as of January 1, 2001, resulting in an after-tax loss included in the first quarter of 2001 of $0.5 million, substantially all of which related to embedded derivatives on a specific market value annuity product. 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 portfoliogoodwill as a result of interest rate changesacquisitions or disposals. Goodwill as of March 31, 2002 totaled $6.8 million and to manage the portfolio's effective yield, maturity, and duration. The Company does not invest in derivatives for speculative purposes. The Company may use 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. 8 In March 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles ("Codification"), which was effective on January 1, 2001. The purpose of Codification is to establish a uniform set of accounting rules and regulations (Statements of Statutory Accounting Principles, "SSAP") for use by insurance companies in financial report preparation in connection with financial reporting to regulatory authorities. As of September 30, 2001, the State of Missouri has not amended its laws and rules to closely mirror SSAP, but the Missouri Department of Insurance has instructed its domestic insurers to conformrelated to the new codified SSAPCompany's purchase of RGA Financial Group in anticipation of changes to applicable Missouri laws and rules. The Company adopted Codification pursuant2000. Goodwill amortization in the comparable prior-year period was not material to the new codified SSAP on January 1, 2001, resulting in an increase in the statutory surplusCompany's results of RGA Reinsurance Company and its parent, Reinsurance Company of Missouri, of approximately $2.0 million. 8. STOCK REPURCHASE PROGRAM On September 18, 2001, the Company announced that its board of directors had approved a repurchase program authorizing the Company to purchase up to $25 million of its shares of stock, as conditions warrant. To date, the Company has not repurchased any shares under the program. 9. TERRORIST ATTACKS OF SEPTEMBER 11, 2001 The Company's third quarter results include an estimate for its ultimate net exposure to the terrorist attacks in the United States on September 11, 2001. The Company believes its only exposure is for individual life claims covered under various reinsurance contracts with ceding companies. 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 the benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. In addition, the Company maintains catastrophe insurance coverage which provides benefits of up to $100 million per occurrence for claims involving three or more deaths in a single event. The coverage requires the Company to pay a $1.5 million deductible in addition to retaining 20 percent of the first $30 million in claims, per occurrence. As of September 30, 2001, the Company recorded approximately $16 million, pre-tax, in individual life claims, net of approximately $10 million in reinsurance recoverables. The Company believes its reinsurance programs, including its catastrophe coverage, will limit its net losses to the amount reflected as of September 30, 2001. However, the Company believes it will take several more months before all claims are reported. The catastrophe coverage is placed with highly rated carriers and the Company does not believe that there are any recoverability issues associated with the claims submitted to reinsurers. However, no assurance can be given as to the extent of future claims development or recoverability of any such claims, particularly in light of the magnitude and unprecedented nature of the terrorist attacks of September 11, 2001. 10. SUBSEQUENT EVENTS Effective July 1, 2001, the Company stopped renewing any remaining reinsurance treaties for the privatized pension program in Argentina ("AFJP business"). The Company is currently evaluating the reserve adequacy on these treaties, however, it anticipates additional reserves in the range of $25 million to $35 million may be necessary to absorb additional claims development associated with the run-off of the treaties. The Company expects to complete its analysis during the fourth quarter of 2001, at which time it will record any necessary reserve changes. The Company is no longer writing AFJP business. Subsequent to the end of the third quarter, the Company also sold substantially all remaining Argentine-based bond investments in the Argentine investment portfolio backing the AFJP business, resulting in a $4.2 million pre-tax capital loss that was recorded in the fourth quarter of 2001. 9operations. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has five main operational segments segregated primarily by geographic region: U.S., Canada, Latin America, Asia Pacific, and Other Markets, which includes Europe and& South Africa.Africa operations. The Asia Pacific, Latin America, and Other MarketsEurope & South Africa operational segments are presented herein as one reportable segment, Other International, as allowed by applicable accounting pronouncements.International. The U.S. operations provide traditional life, asset-intensive, and non-traditional lifefinancial reinsurance to domestic clients. Non-traditional business includes asset-intensive and financial reinsurance. Asset-intensive products primarily include reinsurance of corporate-owned and bank-owned life insurance and annuities. The CanadianCanada operations provide insurers with traditional reinsurance as well as assistance with capital management activity. Other Internationalcreditor and critical illness products. The Latin America operations include traditional reinsurance, reinsurance of privatized pension products primarily in Argentina, which the Company ceased writing during 2001, and direct life insurance through a subsidiary in Argentina. Asia Pacific operations provide primarily traditional life and critical illness reinsurance and, to a lesser extent, financial reinsurance. Europe & South Africa operations include traditional and non-traditional life reinsurance, privatized pension plan reinsurance and reinsurance of critical illness risksbusiness from Europe and South Africa, in Asia Pacific, Latin America, andaddition to other markets being developed by the Company. The operational segment results do not include the corporate investment activity, general corporate expenses, interest expense of RGA, orand the provision for income tax expense (benefit). In addition, the Company's discontinued accident and health operations are not reflected in the continuing operations of the Company. The Company measures segment performance based on profit or loss from operations before income taxes. Consolidated income from continuing operations before income taxes for the thirdfirst quarter and first nine months of 2001 decreased $37.72002 increased $9.5 million and $30.9 million, respectively, as compared to the prior year.prior-year period. After tax diluted earnings per share from continuing operations were $0.18$0.58 and $1.22$0.43 for the thirdfirst quarter of 2002 and 2001, respectively. Consolidated investment income from continuing operations increased 4.7% during the first nine monthsquarter of 2001, respectively, compared to $0.63 and $1.53 for the prior-year periods.2002. The decrease in pre-tax earnings for the third quarter and first nine monthsincrease was primarily attributable to $26.3 milliona larger invested asset base due to funds received from the issuance of PIERS units in 2001 and $35.4 million in realized investment losses, respectively,normal cash flows from operations offset slightly by a lower yield. The average yield earned on investments was 6.64% and higher death claims of approximately $16.1 million related to7.25% for the terrorist attacks of September 11, 2001. The first ninethree months of 2002 and 2001, were also affected by higher than expected death claimsrespectively. The decrease in the first quarter.overall yield reflected declining interest rates, an increase in short-term holdings and a rise in defaults in securitized holdings. Investment income and realized investment gains and losses areis allocated to the various operating segments based onupon average assets and related capital levels deemed appropriate to support the segment business volumes. Investment performance varies withConsolidated other expenses include general corporate expenses that are not allocated to the compositionoperational segments. The consolidated provision for income taxes on continuing operations increased 15.1% for the first quarter of investments2002, primarily a result of higher pre-tax income for the quarter. The effective tax rate was 35.7% and 39.3% for the relative allocationfirst three months of capital2002 and 2001, respectively. The decrease in the effective tax rate was primarily due to operating segments.earnings in certain foreign subsidiaries, which resulted in a release of valuation allowances in those entities, and a reduction of the Canadian income tax rate. Further discussion and analysis of the results for 2001the first quarter of 2002 compared to 2000the first quarter of 2001 are presented by segment. 109 U.S. OPERATIONS (dollars in thousands) FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2001MARCH 31, 2002
--------------------------------------------------------------------------------------------------------------- TRADITIONAL NON-TRADITIONAL TOTAL ASSET- FINANCIAL U.S. INTENSIVE REINSURANCE --------------------------------------------------------------------------------------------------------------- REVENUES: Net premiums $344,142 $ 279,239 $ 739868 $ - $ 279,978$345,010 Investment income, net of related expenses 38,251 27,990 68 66,30936,826 23,718 103 60,647 Realized investment gains (losses), net (6,113) 956(2,027) 564 - (5,157)(1,463) Other revenues 283 350 3,699 4,332 -----------------------------------------------------------------101 261 6,151 6,513 ---------------------------------------------- Total revenues 311,660 30,035 3,767 345,462379,042 25,411 6,254 410,707 BENEFITS AND EXPENSES: Claims and other policy benefits 227,643 227286,003 6,001 - 227,870292,004 Interest credited 12,632 19,51113,780 13,693 - 32,14327,473 Policy acquisition costs and other insurance expenses 38,820 5,464 479 44,76340,802 1,845 1,900 44,547 Other operating expenses 7,922 284 2,035 10,241 -----------------------------------------------------------------5,778 200 1,932 7,910 ---------------------------------------------- Total benefits and expenses 287,017 25,486 2,514 315,017346,363 21,739 3,832 371,934 Income before income taxes $ 24,64332,679 $ 4,5493,672 $2,422 $ 1,253 $ 30,445 -----------------------------------------------------------------38,773 ==============================================
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 2000ENDED MARCH 31, 2001
--------------------------------------------------------------------------------------------------------------- TRADITIONAL NON-TRADITIONAL TOTAL ASSET- FINANCIAL U.S. INTENSIVE REINSURANCE --------------------------------------------------------------------------------------------------------------- REVENUES: Net premiums $305,489 $ 230,921 $ 522298 $ - $ 231,443$305,787 Investment income, net of related expenses 31,832 27,602 60 59,49436,701 23,159 199 60,059 Realized investment gains (losses), net (1,304) (579)(4,568) 234 - (1,883)(4,334) Other revenues 698 (198) 4,490 4,990 -----------------------------------------------------------------118 (718) 6,216 5,616 ---------------------------------------------- Total revenues 262,147 27,347 4,550 294,044337,740 22,973 6,415 367,128 BENEFITS AND EXPENSES: Claims and other policy benefits 166,564 2,176249,430 3,081 - 168,740252,511 Interest credited 11,898 14,69612,616 14,388 - 26,59427,004 Policy acquisition costs and other insurance expenses 32,183 6,966 1,539 40,68842,496 3,102 2,854 48,452 Other operating expenses 6,489 237 1,098 7,824 -----------------------------------------------------------------6,692 129 2,068 8,889 ---------------------------------------------- Total benefits and expenses 217,134 24,075 2,637 243,846311,234 20,700 4,922 336,856 Income before income taxes $ 45,01326,506 $ 3,2722,273 $1,493 $ 1,913 $ 50,198 -----------------------------------------------------------------30,272 ==============================================
11 FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
-------------------------------------------------------------------- TRADITIONAL NON-TRADITIONAL TOTAL ASSET- FINANCIAL U.S. INTENSIVE REINSURANCE -------------------------------------------------------------------- REVENUES: Net premiums $ 864,105 $ 2,127 $ - $ 866,232 Investment income, net of related expenses 112,334 64,698 462 177,494 Realized investment gains (losses), net (16,460) 1,802 - (14,658) Other revenues 787 1,720 16,217 18,724 -------------------------------------------------------------------- Total revenues 960,766 70,347 16,679 1,047,792 BENEFITS AND EXPENSES: Claims and other policy benefits 691,184 4,095 - 695,279 Interest credited 37,890 40,256 - 78,146 Policy acquisition costs and other insurance expenses 121,971 13,486 5,744 141,201 Other operating expenses 21,826 567 6,199 28,592 -------------------------------------------------------------------- Total benefits and expenses 872,871 58,404 11,943 943,218 Income before income taxes $ 87,895 $ 11,943 $ 4,736 $ 104,574 --------------------------------------------------------------------
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 2000
-------------------------------------------------------------------- TRADITIONAL NON-TRADITIONAL TOTAL ASSET- FINANCIAL U.S. INTENSIVE REINSURANCE -------------------------------------------------------------------- REVENUES: Net premiums $ 727,449 $ 1,566 $ - $ 729,015 Investment income, net of related expenses 102,273 64,302 60 166,635 Realized investment gains (losses), net (5,718) (664) - (6,382) Other revenues 621 201 7,730 8,552 -------------------------------------------------------------------- Total revenues 824,625 65,405 7,790 897,820 BENEFITS AND EXPENSES: Claims and other policy benefits 549,921 2,918 - 552,839 Interest credited 34,803 37,760 - 72,563 Policy acquisition costs and other insurance expenses 102,498 16,765 3,500 122,763 Other operating expenses 18,931 514 1,135 20,580 -------------------------------------------------------------------- Total benefits and expenses 706,153 57,957 4,635 768,745 Income before income taxes $ 118,472 $ 7,448 $ 3,155 $ 129,075 --------------------------------------------------------------------
During the third quarter and first nine months of 2001, income before income taxes for the U.S. operations segment totaled $30.4$38.8 million and $104.6 million, respectively,for the first quarter of 2002, a 39.4% and 19.0% decrease28.1% increase from the comparable prior periods.prior-year period. The decreaseincrease in income for the first nine months of 2001 can primarily be attributed to poor claim experience incurredpremium growth somewhat offset by higher than expected death claims on certain inforce blocks of business, and a $2.9 million decrease in realized losses on securities transactions compared to the first quarter of 2001 and the claims arising from the terrorist attacks of September 11, 2001. The traditional reinsurance sub-segment was primarily affected by these events.same period last year. The level of death claims may fluctuate from period to period, but is expected to remain fairly constantexhibits less volatility over the long term. We do not believe the first-quarter claim results indicated a systemic pricing or profitability problem on our underlying business. The decrease in income before income taxes during the third quarter of 2001 compared to the prior-year period is due to lower than expected death claims in the traditional sub-segment in the prior-year coupled with death claims associated with the terrorist attacks of September 11 in the current period. The Company believes its reinsurance programs, including its 12 catastrophe coverage will limit its net losses to the amount reflected as of September 30, 2001. However, the Company believes it will take several more months before all claims are reported. The Company's catastrophe coverage is placed with highly rated carriers and management does not believe there are any recoverability issues associated with the claims submitted to reinsurers. However, no assurance can be given as to the extent of future claims development or recoverability of any such claims, particularly in light of the magnitude and unprecedented nature of the terrorist attacks of September 11, 2001. Net premium growth continued for the U.S. operations segment remained strong with a 21.0% and 18.8%12.8% increase forin the thirdfirst quarter and first nine months of 20012002 compared to the same periodsperiod last year. The increase is attributed to the continued growth of the Company'score traditional business.block. Traditional Reinsurance The U.S. traditional reinsurance sub-segment is the oldest and largest sub-segment of the Company. This sub-segment provides life reinsurance to domestic clients for a variety of life products through yearly renewable term agreements, 10 coinsurance, and modified coinsurance arrangements. These reinsurance arrangements may be either facultative or automatic agreements. During the first nine monthsquarter of 2001,2002, production totaled $71.4$36.5 billion compared to $82.6$17.7 billion for the same period in 2000. Production levels are significantly influenced by large transactions2001. Continued strong production on new and reporting practices of ceding companies and, therefore, can fluctuate from periodexisting treaties contributed to period.the growth in production. Management believes industry consolidation, demutualizations, and the trend towards reinsuring mortality risks should continue to provide reinsurance opportunities, although the timing and level of future production is uncertain. Income before income taxes for U.S. traditional reinsurance decreased 45.3% and 25.8%increased 23.3% in the first quarter of 2002. The increase in income for the third quarter and nine months ended 2001, respectively. The decrease in income was primarily due to higher than expectedpremium growth somewhat offset by death claims during the first quarter, the terrorist attacks of September 11, 2001, and a decrease in realized investment losses of $6.1 million and $16.5 million associated with investment security sales and investment write-downs during the third quarter and first nine months of 2001, respectively.$2.5 million. Net premiums for U.S. traditional reinsurance increased 20.9% and 18.8%12.7% in the thirdfirst quarter and first nine months of 2001, respectively.2002. New premiums from facultative and automatic treaties and renewal premiumspremium on existing blocks of business all contributed to continued growth. Net investment income increased 20.2% and 9.8% inremained at approximately the third quarter andsame level for the first nine months of 2001, respectively. The increase was due tocomparable periods. Net investment income remained flat as the growth in the invested asset base primarily due to increased operating cash flows on traditional reinsurance, which was partiallymostly offset by the lower yields as a result ofearned on the general decline in interest rates.portfolio. The amount of claims and other policy benefits increased 36.7% and 25.7%14.7% in the thirdfirst quarter and first nine months of 2001, respectively.2002. Claims and other policy benefits, as a percentage of net premiums, were 81.5%83.1% and 80.0%81.6%, in the third quarter and first nine months of 2001, respectively, compared to 72.1% and 75.6% in prior-year periods. The loss ratio when adjusted for the claims related to the terrorist attacks of September 11, 2001 is reduced to 75.8% and 78.1% for the third quarter and first nine months of 2001, respectively. Prior-year percentages reflected a lower level of claims than expected for the third quarter. Mortality results (death claims) during the first quarter of 2002 and 2001, exceeded management expectations, primarily relatedrespectively. The increase in claims as a percentage of premiums for the period can be attributed to several treaties that have beenhigher claims on the books for several years. Mortalitycertain inforce blocks of business. The level of death claims may fluctuate somewhat from period to period, but is expected to remain fairly constantexhibits less volitility over the long term. Interest credited relates to amounts credited on the Company's cash value products in this sub-segment, which have a significant mortality component. The increase in the third quarter and first nine months of 2001 as compared to 2000 was primarily due to increased deposits. This amount fluctuates with the changes in deposit levels, cash surrender values and interest crediting rates.investment performance. As a percentage of net premiums, policy acquisition costs and other insurance expenses were 13.9%11.9% and 14.1%13.9% for the thirdfirst quarter of 2002 and first nine months of 2001, respectively, comparedrespectively. This percentage fluctuates due to 13.9% and 14.1%variations in the prior-year periods. The percentages may fluctuate from period to period due to changes in the mixmixture of business. 13 Other operating expenses for the third quarter and first nine months of 2001 remained relatively constant as a percentage of net premiums.business being written. Asset-Intensive Reinsurance The U.S. asset-intensive reinsurance sub-segment includes the reinsurance of annuities and corporate-owned and bank-owned life insurance. Most of these agreements are coinsurance or modified coinsurance of non-mortality risks such that the Company recognizes profit or losses primarily from the spread between the investment earnings and interest credited on the underlying deposit liabilities. Income before income taxes increased infor the thirdfirst quarter and first nine months of 2001 to $4.52002 was $3.7 million, and $11.9 million, respectively, a 39.0% and 60.4%61.5% increase compared to the same periodsperiod last year. Contributing to this growth was the execution of new single premium deferred annuity coinsurance treaties during the third quarter of 2001 and the first quarter of 2002. Total revenues, which isare comprised primarily of investment income, and realized investment gains (losses) increased 9.8% and 7.6% for the third quarter and10.6% in the first nine monthsquarter of 2001, respectively. Contributing to this growth was a new coinsurance agreement of single premium deferred annuities, executed during the third quarter, with assets of approximately $150 million as of September 30, 2001.2002. The growth in revenue is offset, in part, bycan be attributed to a higher asset base for comparable periods, which can be attributed to the new annuity treaties. The growth in claims and other policy benefits,2002 was somewhat offset by lower investment income related to one specific annuity treaty. However, this reduction in investment income was mostly offset by a corresponding decrease in interest credited, and policy acquisition costs and other insurance expenses. Net premiums reported in this sub-segment relate to a yearly renewable term treaty that reinsures the mortality risk of a corporate-owned life insurance product. Policy acquisition costs and other insurance expenses relate primarily to the commission payments and premium taxes (if applicable) on deposits received.credited. Financial Reinsurance The U.S. financial reinsurance sub-segment includes net fees earned on financial reinsurance agreements and the Company's investment in RGA Financial Group L.L.C. ("RGA Financial Group"). Effective July 1, 2000, the Company increased its ownership of RGA Financial Group from 40% to 80%. The Company acquired the remaining 20% interest during the fourth quarter of 2000. The majority of the financial reinsurance transactions assumed by the Company are retroceded to other insurance companies. Financial reinsurance agreements represent low mortality risk mortality business that the Company assumes and generally subsequently retrocedes with a net fee earned on the transaction. The fees earned from the assumption of the financial reinsurance contracts are reflected in 11 other revenues, and the fees paid to retrocessionaires are reflected in policy acquisition costs and other insurance expenses. Income before income taxes in the third quarter andincreased to $2.4 million in the first nine monthsquarter of 2001 was $1.3 million and $4.7 million, respectively,2002, as compared to $1.9$1.5 million and $3.2 million forin the prior-year periods. The decrease in income for the quarter isperiod. These results can be attributed to an increase inhigher amounts of financial reinsurance outstanding during the amortization of intangibles associated with the acquisition of RGA Financial Group. The increase in income for the first nine months of 2001 is attributed to the increased ownership position in RGA Financial Group. 14 respective periods. CANADA OPERATIONS (dollars in thousands)
----------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ----------------------------------------------------------------------- REVENUES: Net premiums $39,975 $39,683 $126,689 $126,856 Investment income, net of related expenses 17,442 15,325 48,739 45,609------------------------------- THREE MONTHS ENDED MARCH 31, 2002 MARCH 31, 2001 ------------------------------- REVENUES: Net premiums $46,533 $42,566 Investment income, net of related expenses 15,605 15,646 Realized investment gains (losses), net (501) (163) 8,015 (810) Other revenues 94 442 179 569 ----------------------------------------------------------------------- Total revenues 57,010 55,287 183,622 172,224 BENEFITS AND EXPENSES: Claims and other policy benefits 43,164 44,822 126,259 124,787 Interest credited 69 141 248 635 Policy acquisition costs and other insurance expenses 3,309 3,316 10,163 14,096 Other operating expenses 2,167 2,047 6,508 6,215 ----------------------------------------------------------------------- Total benefits and expenses 48,709 50,326 143,178 145,733 Income before income taxes $8,301 $4,961 $40,444 $26,491 -----------------------------------------------------------------------
Income before income taxes increased 67.3% and 52.7% in the third quarter and first nine months of 2001, respectively. Excluding realized investment gains (losses), income before income taxes increased 71.8% and 18.8% in the third quarter and first nine months of 2001, respectively. The increase in the third quarter and first nine months of 2001 is in line with management expectations and is primarily the result of unfavorable mortality in the prior-year, offset by the effects of changes in the foreign exchange rates during 2001 compared to 2000. Weakness in the Canadian dollar during 2001 adversely affected the reported income before income taxes by $0.2 million, or 2.6%, and $1.6 million, or 3.9%, in the third quarter and the first nine months, respectively. Net premiums remained relatively flat in the third quarter and first nine months of 2001. In local currency, premiums increased 4.5% and 4.2% in the third quarter and the first nine months of 2001, respectively. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and therefore can fluctuate from period to period. In addition, the decline in the strength of the Canadian dollar had an adverse effect on the amount of net premiums reported of $1.7 million or 4.0% and $5.8 million or 4.3% in the third quarter and the first nine months, respectively. Net investment income increased 13.8% and 6.9% in the third quarter and first nine months of 2001, respectively, due to an increase in the invested asset base, offset by the effects of the change in the foreign exchange rate of $0.6 million or 3.4% and $2.0 million or 3.9% in the respective periods. The invested asset base growth is due to operating cash flows on traditional reinsurance, proceeds from capital contributions made to the segment, and interest on the growth of funds withheld at interest.(81) 5,614 Other revenues (29) 247 ------------------------------- Total revenues 62,028 64,073 BENEFITS AND EXPENSES: Claims and other policy benefits as a percentage of net premiums were 108.0% and 99.7% in the third quarter and first nine months of 2001, respectively, compared to 113.0% and 98.4% in the prior-year periods. These percentages for the third quarter and first nine months of 2001 are in line with management's expectations in light of the premium level. For the first nine months of 2001, mortality was consistent with management expectations. Mortality may fluctuate somewhat from period to period, but is expected to remain fairly constant over the long term.45,723 41,207 Interest credited - 107 Policy acquisition costs and other insurance expenses as a percentage of net premiums totaled 8.3%5,217 3,486 Other operating expenses 2,243 2,124 ------------------------------- Total benefits and 8.0%expenses 53,183 46,924 Income before income taxes $ 8,845 $ 17,149 ------------------------------- Income before income taxes decreased by 48.4% to $8.8 million in the thirdfirst quarter and first nine months of 2001, respectively,2002. Excluding realized investment gains, income before income taxes was $8.9 million compared to 8.4% and 11.1%$11.5 million in the prior-year periods. 15 prior year. The decrease in the first nine months of 2001 is primarily due to the mix of business processed as the general mix of business shifted towards yearly renewable term from coinsurance agreements. These yearly renewable term agreements tend to have lower commission costs than coinsurance agreements. OTHER INTERNATIONAL OPERATIONS (dollars in thousands) FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2001
------------------------------------------------------------- TOTAL LATIN OTHER OTHER ASIA PACIFIC AMERICA MARKETS INTERNATIONAL ------------------------------------------------------------- REVENUES: Net premiums $30,953 $ 9,072 $27,847 $ 67,872 Investment income, net of related expenses 998 3,256 (141) 4,113 Realized investment gains (losses), net (67) (17,700) (31) (17,798) Other revenues 892 118 485 1,495 ------------------------------------------------------------- Total revenues 32,776 (5,254) 28,160 55,682 BENEFITS AND EXPENSES: Claims and other policy benefits 17,489 10,639 15,720 43,848 Interest credited - 427 - 427 Policy acquisition costs and other insurance expenses 11,473 2,671 8,455 22,599 Other operating expenses 2,821 2,120 2,483 7,424 Interest expense 219 - 181 400 ------------------------------------------------------------- Total benefits and expenses 32,002 15,857 26,839 74,698 Income (loss) before income taxes $ 774 $(21,111) $ 1,321 $(19,016) -------------------------------------------------------------
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------- TOTAL LATIN OTHER OTHER ASIA PACIFIC AMERICA MARKETS INTERNATIONAL -------------------------------------------------------------- REVENUES: Net premiums $25,181 $11,623 $ 8,186 $44,990 Investment income, net of related expenses 1,422 1,881 619 3,922 Realized investment gains (losses), net (25) (42) 121 54 Other revenues 518 162 694 1,374 -------------------------------------------------------------- Total revenues 27,096 13,624 9,620 50,340 BENEFITS AND EXPENSES: Claims and other policy benefits 13,313 10,572 5,474 29,359 Interest credited - (648) - (648) Policy acquisition costs and other insurance expenses 9,532 856 3,203 13,591 Other operating expenses 2,356 2,317 2,315 6,988 Interest expense 255 - 306 561 -------------------------------------------------------------- Total benefits and expenses 25,456 13,097 11,298 49,851 Income (loss) before income taxes $ 1,640 $ 527 $(1,678) $489 --------------------------------------------------------------
16 FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
-------------------------------------------------------------- TOTAL LATIN OTHER OTHER ASIA PACIFIC AMERICA MARKETS INTERNATIONAL -------------------------------------------------------------- REVENUES: Net premiums $85,774 $41,567 $59,484 $186,825 Investment income, net of related expenses 3,279 10,992 1,110 15,381 Realized investment gains (losses), net 76 (20,568) (61) (20,553) Other revenues 2,234 297 581 3,112 -------------------------------------------------------------- Total revenues 91,363 32,288 61,114 184,765 BENEFITS AND EXPENSES: Claims and other policy benefits 54,252 42,760 36,102 133,114 Interest credited - 1,196 - 1,196 Policy acquisition costs and other insurance expenses 26,350 8,777 17,455 52,582 Other operating expenses 7,989 6,341 7,371 21,701 Interest expense 683 - 471 1,154 -------------------------------------------------------------- Total benefits and expenses 89,274 59,074 61,399 209,747 Income (loss) before income taxes $ 2,089 $(26,786) $(285) $ (24,982) --------------------------------------------------------------
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------- TOTAL LATIN OTHER OTHER ASIA PACIFIC AMERICA MARKETS INTERNATIONAL -------------------------------------------------------------- REVENUES: Net premiums $66,384 $49,885 $18,919 $135,188 Investment income, net of related expenses 3,473 14,505 1,310 19,288 Realized investment gains (losses), net (6) (8,960) 439 (8,527) Other revenues 1,259 315 1,796 3,370 -------------------------------------------------------------- Total revenues 71,110 55,745 22,464 149,319 BENEFITS AND EXPENSES: Claims and other policy benefits 37,951 47,646 13,103 98,700 Interest credited - 1,364 - 1,364 Policy acquisition costs and other insurance expenses 24,200 4,721 5,477 34,398 Other operating expenses 7,110 8,652 7,092 22,854 Interest expense 552 - 306 858 -------------------------------------------------------------- Total benefits and expenses 69,813 62,383 25,978 158,174 Income (loss) before income taxes $1,297 $(6,638) $(3,514) $(8,855) --------------------------------------------------------------
Loss beforepre-tax income taxes for the other international segment totaled $19.0 millionexcluding realized investment gains and $25.0 million for the third quarter and first nine months of 2001, respectively, compared to income of $0.5 million and loss of $8.9 million for the comparable prior-year periods. The results for the third quarter and first nine months of 2001 are primarily attributable to poor performance in Argentina, part of the Latin America sub-segment. The poor performance relates to higher than expected claims for privatized pension reinsurancelosses reflects favorable mortality in the first and third quarters. 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 indexed to the underlying pension fund performance at the point at which they are filed. As such, ultimate amounts of claims paid by the reinsurer under the program vary with the 17 underlying fund performance of the related pension fund over the period in which the claims are adjudicated. In addition, the reinsurer is subject to the mortality and morbidity risks associated with the underlying plan participants. The Company also experienced realized investment losses related to investment security sales in the Argentine investment portfolio. During the third quarter, a significant amount of Argentine based bond investments were sold to reduce the Company's exposure to the volatile Argentine economy. Those sales resulted in a $17.7 million pre-tax realized investment loss. Subsequent to September 30, 2001, the Company sold substantially all remaining Argentine based bond investments supporting the privatized pension reinsurance, resulting in a pre-tax realized investment loss of $4.2 million. During 2000, the Latin America results included activity for the Chilean subsidiaries that were sold during the second quarter of 2000 (the "Chilean Sale").previous year. Net premiums increased 50.9% and 38.2%9.3% to $46.5 million during the thirdfirst quarter and first nine months of 2001, respectively.2002. The increase wasis primarily the result of renewal premiums from existing blocks of business, new business premiums from facultative and automatic treaties, and premium flows from larger blocks of business in the Other Markets and Asia Pacific sub-segments. Other Markets also experienced an increase in premiums associated with the reinsurance of critical illness coverage, primarily in the UK. This coverage provides a benefit in the event of a death from or the diagnosis of a defined critical illness. Premiums associated with this coverage totaled $9.6 million and $18.1 million, respectively, for the three months and nine months ended September 30, 2001, compared with $0.3 million and $1.0 million for the same periods in 2000. The Asia Pacific sub-segment also provides reinsurance of critical illness coverages. Asia Pacific premiums associated with this coverage totaled $2.2 million and $6.7 million, respectively, for the three months and nine months ended September 30, 2001, compared with $2.5 million and $7.9 million for the same periods in 2000. The increases were partially offset by a decrease in privatized pension business in Argentina and the decrease in premiums related to the Chilean Sale.normal production. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and therefore can fluctuate from period to period. Net investment income increased 4.9% and decreased 20.3%slightly in the thirdfirst quarter of 2002 due to higher cash on hand and a weakened Canadian dollar. Claims and other policy benefits increased by 11.0% during the first nine monthsquarter of 2001, respectively,2002. Claims and other policy benefits as a percentage of net premiums were 98.3% in the first quarter of 2002 compared to 96.8% in 2001, a reflection of favorable mortality in the prior-year periods.quarter. The level of death claims may fluctuate from period to period, but exhibits less volitility over the long term. Policy acquisition costs and other insurance expenses as a percentage of net premiums totaled 11.2% for the first quarter of 2002 compared to 8.2% in the prior-year period. The increase during the third quarter wasis primarily due to higher creditingthe mix of business in the segment, which varies from period to period, primarily due to new production. 12 OTHER INTERNATIONAL OPERATIONS (dollars in thousands) FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2002
-------------------------------------------------- TOTAL ASIA LATIN EUROPE & OTHER PACIFIC AMERICA SOUTH AFRICA INTERNATIONAL -------------------------------------------------- REVENUES: Net premiums $33,152 $ 4,197 $40,213 $77,562 Investment income, net of related expenses 1,369 2,557 231 4,157 Realized investment losses, net (50) (155) (295) (500) Other revenues 696 25 6 727 -------------------------------------------------- Total revenues 35,167 6,624 40,155 81,946 BENEFITS AND EXPENSES: Claims and other policy benefits 22,568 2,241 25,190 49,999 Interest credited - 252 - 252 Policy acquisition costs and other insurance expenses 8,224 1,555 11,948 21,727 Other operating expenses 2,731 2,154 2,487 7,372 Interest expense 173 - 78 251 -------------------------------------------------- Total benefits and expenses 33,696 6,202 39,703 79,601 Income before income taxes $ 1,471 $ 422 $ 452 $ 2,345 --------------------------------------------------
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2001
-------------------------------------------------- TOTAL ASIA LATIN EUROPE & OTHER PACIFIC AMERICA SOUTH AFRICA INTERNATIONAL -------------------------------------------------- REVENUES: Net premiums $28,887 $14,098 $13,247 $56,232 Investment income, net of related expenses 1,035 2,879 655 4,569 Realized investment gains (losses), net 85 (388) (36) (339) Other revenues 725 91 (4) 812 -------------------------------------------------- Total revenues 30,732 16,680 13,862 61,274 BENEFITS AND EXPENSES: Claims and other policy benefits 19,502 14,336 10,010 43,848 Interest credited - 293 - 293 Policy acquisition costs and other insurance expenses 8,312 2,274 3,309 13,895 Other operating expenses 2,858 2,126 2,480 7,464 Interest expense 270 - 145 415 -------------------------------------------------- Total benefits and expenses 30,942 19,029 15,944 65,915 Loss before income taxes $ (210) $(2,349) $(2,082) $(4,641) --------------------------------------------------
Income before income taxes for the Other International segment totaled $2.3 million for the first quarter of 2002 compared to a loss of $4.6 million for the comparable prior-year period. Each sub-segment reported gains with the Asia Pacific operations providing a majority of the gain in 2002. The Latin America operations reported income due primarily to gains from settlement of reinsurance claims at favorable currency exchange rates onfor the underlying Argentineprivatized pension business in Argentina and continuing growth in Mexico. New business production for Latin America was 13 adversely affected by the economic uncertainties in Argentina. Future opportunities for growth in that country remain limited. Net premiums increased 37.9% to $77.6 million for the first quarter of 2002. The increase was primarily the result of renewal premiums from existing blocks of business, new business premiums from facultative and automatic treaties, and several blocks of business, and premiums associated with accelerated critical illness coverage in Asia Pacific and Europe & South Africa. Accelerated critical illness coverage provides a benefit in the event of a death from or the diagnosis of a defined critical illness. Premiums earned during the first quarter of 2002 from this coverage totaled $19.5 million compared to $4.5 million in the prior-year period. The overall increase was partially offset by the exit from the privatized pension business and declining sales of direct insurance in Argentina. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and therefore can fluctuate from period to period. Net investment portfolio, substantially all of which has been sold. The decreaseincome decreased 9.0% in the first nine months wasquarter of 2002 primarily due to a decrease in allocated assets required to support the Latin America invested asset base fromArgentine pension business as a result of the Chilean Sale.devaluation of the Argentine peso. Investment income and realized investment gains and losses are allocated to the various operating segments based on the basis of average assetsnet capital and related capital levels deemed appropriate to support the segment business volumes. Investmentinvestment performance varies with the composition of investments and the relative allocation of capital to operating segments.units. The amount of claims and other policy benefits increased 49.4% and 34.9%14.0% in the thirdfirst quarter and first nine months of 2001, respectively,2002 due primarily to overall increased business volume.volume for the segment. Claims and other policy benefits, as a percentage of net premiums, were 64.6%64.5% and 71.3%78.0%, in the thirdfirst quarter of 2002 and first nine months2001, respectively. For the Latin America subsegment, the amount of 2001, respectively, compared to 65.3% and 73.0% in the comparable prior-year periods. The decrease as a percentage of premiums is primarily due to the Other Markets sub-segment, whose year-to-year comparisons of premiums and claims and other policy benefits are not considered meaningfuldecreased 84.4% in the first quarter of 2002 due primarily to decreased business volume. During 2001, the start-up nature of this sub-segment. Mortality may fluctuate somewhat from period to period, but is expected to remain fairly constant over the long term. The Company monitors mortality trends to evaluate the appropriateness of reserve levels and adjusts the reserve levels on a periodic basis. The Company ceased renewal of reinsurance treaties associated with privatized pension contracts in Argentina because of adverse experience on this business, as several aspects of the pension fund claims flow aredid not developingdevelop as was contemplated when the reinsurance programs were initially priced, and in order to focus on other traditional reinsurance opportunities in the region. Although premiums will continue to decline, it is estimated that claims for the privatized pension business will continue to be paid over the next several years. The Company increased its reserves for the privatized pension business in Argentina during the fourth quarter of 2001. It is currently evaluating the reserve adequacy onexpected that these treaties, however, it anticipates additional reserves in the range of $25 million to $35 million may beare necessary to absorb additional claims development associated with the run-off of the treaties. As the underlying reserves for the privatized pension business are in Argentine pesos, the functional currency of this sub-segment, the devaluation of the peso during 2002 is not expected to have an impact on earnings until actual claims settlement or adjustment to the underlying peso-denominated reserves occur. The impact of fluctuating exchange rates will continue to be closely monitored by the Company's management and is expected to be volatile over the near term. Claims and other policy benefits include claims paid, claims in the course of payment and establishment of additional reserves to provide for unreported claims. The level of death claims may fluctuate from period to period, but exhibits less volitility over the long term. The Company expectsmonitors mortality trends to complete its analysis duringevaluate the fourth quarterappropriateness of 2001, at which time it will record any necessary reserve changes.levels and adjusts the reserve levels on a periodic basis. Policy acquisition costs and other insurance expenses as a percentage of net premiums were 33.3% and 28.1%28.0% in the thirdfirst quarter and first nine months of 2001, respectively,2002 compared to 30.2% and 25.4%24.7% in the prior-year periods.2001. These percentages fluctuate due to the timing of client company reporting and variations in the mixture of business being written. Other operating expenses forremained fairly constant between periods. As a percentage of premiums, other operating expenses decreased to 9.5% in the thirdfirst quarter and 18 first nine months of 2001 increased $0.4 million and decreased $1.2 million, respectively.2002 from 13.3% in the comparable prior-year period. The Company believes that sustained growth in premiums should lessen the burden of start-up expenses and expansion costs over time. CORPORATE AND OTHER SELECTED CONSOLIDATED INFORMATION Corporate activity generally represents investment income on theinvested assets not allocated to support segment operations, undeployed proceeds from the Company's capital raising efforts, and corporate investment income allocation,unallocated realized capital gains or losses, corporate expenses that include unallocated overhead and executive costs, as well asand interest expense related to debt and the interest on corporate debt. In addition,$225.0 million, 5.75% mandatorily redeemable trust preferred securities issued by a wholly-owned subsidiary in 2001 ("Preferred Securities"). 14 Corporate revenues increased $4.4 million in the provision for income taxes is generally calculated based onfirst quarter of 2002 compared to the overall operationscomparable prior-year period, primarily a result of the Company. Consolidatedunallocated investment income from continuing operations increased 10.4%associated with an increase in invested assets not allocated to support segment operations. Corporate unallocated other operating expenses were less than one percent of consolidated premiums in the first quarter of 2002 and 5.3% for2001. Corporate interest expense was $8.3 million and $4.5 million in the thirdfirst quarter of 2002 and first nine months of 2001, respectively. The increase in investment incomewas primarily relates to an increase in deposits on Asset Intensive reinsurance and positive operating cash flows. The average yield earned on investments was 7.12% and 7.29% for the third quarters of 2001 and 2000, respectively. The decrease in overall yield reflected a general decrease in interest rates. Investment income and realized investment gains and losses are allocateddue to the various operating segments based on average assets and related capital levels deemed appropriate to supportissuance of the segment business volumes. Consolidated other expenses represent general corporate expenses that are not allocated to the operational segments. The consolidated effective tax rate for income taxes for continuing operations was 29.2% and 37.9% for the third quarter and first nine months of 2001, compared to 37.7% and 40.8% in the comparable prior-year periods. Excluding realized capital gains and losses, the effective rate on operating earnings was 34.6% and 37.2% for the third quarter and first nine months of 2001, compared to 38.5% and 38.0% in the comparable prior-year periods. The decrease in the effective tax rate for both the third quarter and first nine months of 2001 is primarily a result of a decrease in Canadian statutory income tax rates.Preferred Securities. DISCONTINUED OPERATIONS At December 31, 1998, the Company formally reported its accident and health division as a discontinued operation for financial reporting purposes. The accident and health division was placed into run-off with all treaties (contracts) being terminated at the earliest possible date. This discontinued segment reported break-evena loss of $1.3 million for 2002 compared to breakeven results for the thirdfirst quarter and first nine months of 2001, compared to an after tax loss2001. The calculation of $2.3 million and $8.2 millionthe claim reserve liability for the comparable prior-year periods. Theentire portfolio of accident and health business requires management to make estimates and assumptions that affect the reported claim reserve levels. Management must make estimates and assumptions based on historical loss experience, changes in the nature of the underlying risksbusiness, anticipated outcomes of claim disputes and claims for rescission, and projected future premium run-off, all of which may affect the level of the claim reserve liability. Due to the significant uncertainty associated with the run-off of this business, net income in future periods could be affected positively or negatively. It is suchManagement's opinion that the claims may take yearscurrent reserve levels are adequate to reach the reinsurers involved. Thus, the Company expects to pay claims out of existing reserves over a number of years. The experience on this block of business will continue to be monitored as the business runs off.cover future anticipated losses. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 2001, the Company generated $142.3 million inThe Company's net cash flows from operating activities used $239.5for the periods ended March 31, 2002 and 2001 were $59.2 million and $42.7 million, respectively. Cash flows from operating activities are affected by the timing of premiums received, claims paid, and working capital changes. The Company believes the short-term cash inrequirements of its business operations will be sufficiently met by the positive cash flows generated. Additionally, the Company maintains a very high quality fixed maturity portfolio with good liquidity characteristics. These securities are available for sale and can be easily sold to meet the Company's obligations, if necessary. Net cash (used in) provided by investing activities was $(193.7) million and generated $209.5$11.6 million in 2002 and 2001, respectively. Changes in cash fromprovided by investing activities primarily relate to the management of the Company's investment portfolios and the investment of excess capital generated by operating and financing activities. Net cash provided by (used in) financing activities was $22.1 million and $(2.6) million in 2002 and 2001, respectively. Changes in cash provided by financing activities primarily relate to the issuance of equity or debt securities, borrowings or payments under the Company's existing credit agreements, treasury stock activity, and excess deposits or withdrawals under investment type contracts. RGA is a holding company whose primary uses of liquidity include, but are not limited to, the immediate capital needs of its operating companies associated with the Company's primary businesses, dividends paid by RGA to its shareholders, interest payments on its senior indebtedness and junior subordinated notes (See Notes 16, "Long-Term Debt," and 17, "Issuance of Trust Piers Units," in the Annual Report), and repurchases of RGA common stock under a board of director approved plan. The primary sources of fundsRGA's liquidity include proceeds from the Company'sits capital raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes with two operating subsidiaries, consist of premiums and deposits receiveddividends from ceding insurers, investment income, proceeds from sales and redemptions of investments, and cash infusions from RGA. Premiums are generally received in advance of related claim payments. Funds are primarily applied to policy claims and benefits, interest credited, operating expenses, income taxes, and investment purchases.subsidiaries. As the Company continues its expansion efforts, management continually analyzes capital adequacy issues. During the third quarterRGA will continue to be dependent on these sources of 2000, the Company entered into a credit agreement (the "Credit Agreement") with a bank syndicate, whereby it may borrow up to $140.0 million to continue expansionliquidity. Certain of the Company's business. Interest ondebt agreements contain financial covenant restrictions related to, among others, liens, the issuance and disposition of stock of restricted subsidiaries, minimum requirements of net worth ranging from $600 million to $700 million, and minimum rating requirements. A material ongoing covenant default could require immediate payment of the amount due, including principal, under the various agreements. Additionally, the Company's debt agreements contain cross-default covenants, which would make outstanding borrowings isimmediately payable quarterly at rates based eitherin the event of a material uncured covenant default under any of the agreements, including, but not limited 15 to, non-payment of indebtedness when due for amounts greater than $10 million or $25 million depending on the prime, federal funds or LIBOR rates plus a base rate margin definedagreement, bankruptcy proceedings, and any event which results in the Credit Agreement.acceleration of the maturity of indebtedness. As of September 30, 2001,March 31, 2002, the Company had approximately $120.0$323.7 million in outstanding borrowings under the Credit Agreement. The termination date of the Credit Agreement is May 24, 2003. RGA Australian Holdings PTY, Limited ("Australian Holdings") has AUD$19.0 million (approximately $9.3 million) outstanding on a line of credit as of September 30, 2001. The line of creditits debt agreements and was amended and restated in January 2001 (the "Australian Credit Agreement") increasing the capacity to AUD$35.0 million (approximately $17.2 million) and now expires December 2005. Interest on borrowings is payable quarterly at rates based on Reuter rate quotes plus an applicable margin defined in the Australian Credit Agreement. On May 8, 2000, RGA Holdings 19 Limited, a wholly-owned subsidiary of the Company, entered into a revolving credit facility (the "U.K. Credit Agreement"), whereby it may borrow up to (pound)15.0 million (approximately $22.1 million) for expansion of the Company's business primarily in the United Kingdom. Interest on borrowings is payable quarterly at LIBOR rates plus a base rate margin defined in the U.K. Credit Agreement. As of September 30, 2001, the Company had (pound)10.0 million (approximately $14.7 million) outstandingcompliance with all covenants under the U.K. Credit Agreement. The termination date of the U.K. Credit Agreement is May 8, 2004. On March 1, 2001, the Company entered into a $75.0 million intercompany loan from MetLife Credit Corp. replacing a $75.0 million loan from General American Life Insurance Company, both wholly-owned subsidiaries of MetLife, Inc., that was first made in 1999. Interest is payable at 75.5 basis points over the 30-day AA financial discount rate on commercial paper. The Company's borrowing arrangements contain covenants that are considered usual and customary for facilities of these sizes, types and purposes.those agreements. The ability of the Company and its subsidiaries to make debt principal and interest payments and of the Company to continue to pay dividends to stockholders, is ultimately dependentdepends primarily on the earnings and statutory surplus of the Company'sits subsidiaries, and their ability to pay dividends, the investment earnings on the undeployed funds at the Company,capital proceeds, and the Company's ability to raise additional capital.funds. At September 30, 2001,March 31, 2002, RGA Reinsurance and RGA Canada had statutory capital and surplus of $450.6$591.4 million and $179.8$176.6 million, respectively. The transfer of funds from the subsidiaries to the Company is subject to applicable insurance laws and regulations. The Company expects any future increases in liquidity needs due to treaty recaptures, relatively large policy loans or unanticipated material claims levels would be met first by operating cash flows and then by selling fixed-income securities or short-term investments. The Company has several treaties that provide clientsexpects consolidated interest expense to increase significantly in 2002 due to the rightaddition of the $225.0 million face amount, 5.75% trust preferred securities issued by RGA Capital Trust I and the interest expense associated with its $200.0 million 6.75% Senior Notes due 2011, the proceeds of which were used to recapture, generallypay down a balance of $120 million on its U.S. revolving credit facility and to prepay and terminate the $75 million term loan with MetLife Credit Corp. As of March 31, 2002, the average interest rate on long-term debt outstanding was 6.34%. Based on the historic cash flows and the current financial results of the Company, subject to 90 days written notice, ifany dividend limitations which may be imposed by various insurance regulations, management believes RGA's cash flows from operating activities, together with undeployed proceeds from its capital raising efforts, including interest and investment income on those proceeds, interest income received on surplus notes with two operating subsidiaries, and its ability to raise funds in the Company's ratings fall below certain thresholds. The extentcapital markets, will be sufficient to enable RGA to make dividend payments to its shareholders, to make interest payments on its senior indebtedness and junior subordinated notes, to repurchase RGA common stock under the board of any realized gains or losses associated with such recaptures would depend on market conditions at the time of recapture.director approved plan, and to meet its other obligations. INVESTMENTS Invested assets, including cash and short-term investments, totaled $4.9$5.6 billion at September 30, 2001,March 31, 2002 compared to $4.6 billion$5.3 at December 31, 2000. The increase resulted primarily2001. Increases from an increase in deposits on Asset Intensive reinsurance and positive operating cash flows.flows were offset, in part by the impact of Canadian and Australian currency devaluation during the first three months of 2002. The Company has historically generated positive cash flows from operations. At September 30, 2001,Within the Company's portfolio of fixed maturity security portfolio, the Company holds approximately $225.6 million in asset-backed securities available for sale had net unrealizedat March 31, 2002, which include credit card and automobile receivables, home equity loans and collateralized bond obligations. The Company's asset-backed securities are primarily floating rate securities and are diversified by issuer. Approximately 48.3%, or $109.0 million are collateralized bond obligations. The Company recorded $8.3 million in realized losses before income taxesduring the first quarter of $33.9 million.2002 due to the other than temporary impairment in value of certain collateralized bond obligations. MARKET RISK Market risk is the risk of loss that may occur when fluctuations in interest and currency exchange rates and equity and commodity prices change the value of a financial instrument. Both derivative and nonderivative financial instruments have market risk so the Company's risk management extends beyond derivatives to encompass all financial instruments held that are sensitive to market risk. RGA is primarily exposed to interest rate risk and foreign currency risk. Interest Rate Risk arises from many of the Company's primary activities, as the Company invests substantial funds in interest-sensitive assets and also has certain interest-sensitive contract liabilities. The Company manages interest rate risk and credit risk to maximize the return on the Company's capital effectively and to preserve the value created by its business operations. As such, certain management monitoring processes are designed to minimize the impact of sudden and sustained changes in interest rates on fair value, cash flows, and net interest income. The Company is subject to foreign currency translation, transaction, and net income exposure. The Company generally does not hedge the foreign currency translation exposure related to its investment in foreign subsidiaries as 16 it views these investments to be long-term. Translation differences resulting from translating foreign subsidiary balances to U.S. dollars are reflected in equity. The Company generally does not hedge the foreign currency exposure of its subsidiaries transacting business in currencies other than their functional currency (transaction exposure). Currently, the Company believes its foreign currency transaction exposure is not material to the consolidated results of operations. 20 There has been no significant change in the Company's quantitative or qualitative aspects of market risk during the quarter ended September 30, 2001March 31, 2002 from that disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2000.2001. FORWARD-LOOKING AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The statements included in thisThis Quarterly Report on Form 10-Q regarding the Company's business which are not historical facts, including, without limitation,contains forward-looking statements and information relating to future financial performance, growth potential, increases in premiums, the effect of mortality rates and experience, claims levels, its views on the life reinsurance industry, and other statements related to the Company's business are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These "forward-looking statements" include, without limitation, certain1995, including, among others, statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations." Such statements also may include, but are not limitedrelating to projections of the earnings, revenues, income or loss, estimated fair valuesfuture financial performance and growth potential of fixed rate instruments, estimated cash flowsReinsurance Group of floating rate instruments, capital expenditures, plans for future operationsAmerica, Incorporated and financing needsits subsidiaries (which we refer to in the following paragraphs as "we," "us" or plans, growth prospects and targets, industry trends, trends in or expectations regarding operations and capital commitments, the sufficiency of claims reserves and assumptions relating to the foregoing."our"). The words "intend","intend," "expect," "project," "estimate," "predict","predict," "anticipate," "should," "believe""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) market conditions and the timing of sales of investment securities, (2) regulatory action taken by the New York or Missouri Departments of Insurance with respect to Metropolitan Life Insurance Company ("MetLife") or General American Life Insurance Company ("General American") or the Company or its subsidiaries, (3) changes in the credit ratings of the Company, MetLife, or General American and the effect of such changes on the Company's future results of operations and financial condition, (4) material changes in mortality and claims experience, (5)(2) market or economic conditions that adversely affect our ability to make timely sales of investment securities, (3) competitive factors and competitors' responses to the Company'sour initiatives, (6)(4) general economic conditions affecting the demand for insurance and reinsurance in the Company'sour current and planned markets, (5) changes in our financial strength and credit ratings or those of Metropolitan Life Insurance Company ("MetLife"), General American Life Insurance Company ("General American"), and their respective affiliates, and the effect of such changes on our future results of operations and financial condition, (6) fluctuations in U.S. or foreign currency exchange rates, interest rates, or securities and real estate markets, (7) changes in investment portfolio yields due to interest rate or credit quality changes, (8) the stability of governments and economies in the markets in which we operate, (9) adverse litigation or arbitration results, (10) the success of our clients, (11) successful execution of the Company'sour entry into new markets, (8)(12) successful development and introduction of new products, (9) the stability(13) regulatory action that may be taken by state Departments of governments and economies in foreign markets in which we operate, (10) fluctuations in U.S. and foreign currency exchange rates, interest rates and securities and real estate markets, (11) the success of the Company's clients, (12)Insurance with respect to us, MetLife, or General American, (14) changes in laws, regulations, and accounting standards applicable to the Companyus, our subsidiaries, or our business, and its subsidiaries, and (13)(15) other risks and uncertainties described in this Quarterly Reportdocument and in the Company'sour other filings with the Securities and Exchange Commission. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. WE DO NOT UNDERTAKE ANY OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING STATEMENTS, EVEN THOUGH OUR SITUATION MAY CHANGE IN THE FUTURE. WE QUALIFY ALL OF OUR FORWARD-LOOKING STATEMENTS BY THESE CAUTIONARY STATEMENTS.Forward-looking statements should be evaluated together with the many risks and uncertainties that affect our business, including those mentioned in this document and described in the periodic reports we file with the Securities and Exchange Commission. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date on which they are made. We do not undertake any obligations to update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk" which isare incorporated by reference herein. 2117 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is currently a party in severalto arbitrations primarily involving groupthat involve three separate medical reinsurance coverages as discussed in Note 21arrangements, three arbitrations relative to the consolidated financial statements containedCompany's portfolio of personal accident business, one lawsuit seeking to enforce an arbitration award relating to a medical reinsurance arrangement, and one lawsuit involving aviation bodily injury carve-out reinsurance coverage. As of March 31, 2002, the ceding companies involved in these disputes have raised claims that are $35.4 million in excess of the Company'samounts held in reserve by the Company. The Company believes it has substantial defenses upon which to contest these claims, including but not limited to misrepresentation and breach of contract by direct and indirect ceding companies. See Note 22 of the Annual Report on Form 10-K for the year ended December 31, 2000.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 arbitration or legal proceedings or provide reasonable ranges of potential losses, it is the opinion of Management that their outcomes after consideration of the provisions made in the Company's consolidated financial statements it is the opinion of Management that the outcome of these disputes would not have a material adverse effect on its consolidated financial position. ITEM 6.6 EXHIBITS AND REPORTS ON FORM 8-K (a) See index to exhibits. (b) The following report on Form 8-K was filed with the Securities and Exchange Commission during the three months ended September 30, 2001:March 31, 2002: The Company filed a Current Report on Form 8-K on September 24, 2001, dated as of September 24, 2001, to commentJanuary 17, 2002, referring under Item 5 on9 to its potential exposure to claims arising from the terrorist attacks of September 11, 2001.press release regarding, among other things, certain financial results. The Company additionally reported under Item 5 that the Company's Board of Directors approved a stock repurchase program under which the Company may purchase up to $25 million of its shares of stock. Finally, the Company reported and described under Item 5 several historic agreements between RGA and MetLife, Inc. ("MetLife"), and their respective affiliates, that had not previously been filed. 22press release was attached thereto as Exhibit 99.1. 18 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 November 13, 2001 ------------------------------------------- A. Greig Woodring President & Chief Executive Officer (Principal Executive Officer) /s/ Jack B. Lay November 13, 2001 ------------------------------------------Reinsurance Group of America, Incorporated By: /s/ A. Greig Woodring May 13, 2002 -------------------------------------- A. Greig Woodring President & Chief Executive Officer (Principal Executive Officer) /s/ Jack B. Lay May 13, 2002 -------------------------------------- Jack B. Lay Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)
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Exhibit Number Description - --------------- ----------- 3.1 Second Restated Articles of Incorporation of Reinsurance Group of America, Incorporated, as amended, incorporated by reference to Post-Effective Amendment No. 1 to Form S-310-Q for the quarter ended September 30, 1999 (No. 333-55304)1-11848) filed on September 6, 2001November 12, 1999 at the corresponding exhibit. 3.2 Bylaws of Reinsurance Group of America, Incorporated,RGA, as amended, incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter ended September 30, 2000 (No. 1-11848), filed on November 13, 2000. 3.3 Form of Certificate of Designations for Series A Junior Participating Preferred Stock incorporated by reference(included as Exhibit A to Exhibit 3.3 to Amendment No. 1 to Form 10-Q for the quarter ended September 30, 1997 (No. 1-11848) filed May 21, 1997.4.2). 4.1 Form of Specimen Certificate for Common Stock of RGA, incorporated by reference to Amendment No. 1 to Registration Statement on Form S-1 (No. 33-58960), filed on April 14, 1993 at the corresponding exhibit. 4.2 Rights Agreement dated as of May 4, 1993, between RGA and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, incorporated by reference to Amendment No. 1 to Form 10-Q for the quarter ended September 30,March 31, 1997 (No. 1-11848) filed on 21 May 21, 1997 at the corresponding exhibit. 4.3 Second Amendment to Rights Agreement, dated as of April 22, 1998, between RGA and ChaseMellon Shareholder Services, L.L.C. (as successor to Boatmen's Trust Company), as Rights Agent, incorporated by reference to Registration Statement on Form S-3 (No. 333-5177) filed on September 4 June 1998 at the corresponding exhibit. 4.4 Third Amendment to Rights Agreement dated as of August 12, 1999, between Reinsurance Group of America, Incorporated and ChaseMellon Shareholder Services, L.L.C. (as successor to Boatmen's Trust Company), as Rights Agent, incorporated by reference to Exhibit 4.4 to Form 8-K dated August 10, 1999 (No. 1-11848), filed August 25, 1999. 4.5 Fourth Amendment to Rights Agreement dated as of August 23, 1999, between Reinsurance Group of America, Incorporated and ChaseMellon Shareholder Services, L.L.C. (as successor to Boatmen's Trust Company), as Rights Agent, incorporated by reference to Exhibit 4.44.1 to Form 8-K dated August 10,26, 1999 (No. 1-11848), filed August 25,September 10, 1999. 4.5 Fourth Amendment4.6 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 RightsExhibit 4.1 to Registration Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001. 4.7 Form of Global Unit Certificate, incorporated by reference to Exhibit A of Exhibit 4.6 of this Report, incorporated by reference to Registration Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001. 4.8 Form of Warrant Agreement datedbetween the Company and the Bank of New York, as Warrant Agent, incorporated by reference to Exhibit 4.3 to Registration Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001. 4.9 Form of August 23, 1999,Warrant Certificate, incorporated by reference to Exhibit A of Exhibit 4.8 of this Report.
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Exhibit Number Description - ------- ----------- 4.10 Trust Agreement of RGA Capital Trust I, incorporated by reference to Exhibit 4.11 to the Registration Statements on Form S-3 (File Nos. 333.55304, 333-55304-01 and 333-55304-02), previously filed with the SEC on February 9, 2001, as amended (the "Original S-3"). 4.11 Form of Amended and Restated Trust Agreement of RGA Capital Trust I, incorporated by reference to Exhibit 4.7 to Registration Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001. 4.12 Form of Preferred Security Certificate for the Trust, included as Exhibit A to Exhibit 4.11 to this Report. 4.13 Form of Remarketing Agreement between the Company, as Guarantor, and The Bank of New York, as Guarantee Trustee, incorporated by reference to Exhibit 4.12 to Registration Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001. 4.14 Form of Junior Subordinated Indenture, incorporated by reference to Exhibit 4.3 of the Original S-3. 4.15 Form of First Supplemental Junior Subordinated Indenture between the Company and The Bank of New York, as Trustee, incorporated by reference to Exhibit 4.10 to Registration Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001. 4.16 Form of Guarantee Agreement between the Company, as Guarantor, and The Bank of New York, as Guarantee Trustee, incorporated by reference to Exhibit 4.11 to Registration Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001. 4.17 Form of Senior Indenture between Reinsurance Group of America, Incorporated and ChaseMellon Shareholder Services, L.L.C. (as successor to Boatmen's Trust Company),The Bank of New York, as Rights Agent,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 August 26, 1999December 12, 2001 (No. 1-11848), filed September 10, 1999.December 18, 2001.
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