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)
2319
INDEX TO EXHIBITS
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.
20
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.
2421