UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31,SEPTEMBER 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-1627032
(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1370 TIMBERLAKE MANOR PARKWAY
CHESTERFIELD, MISSOURI 63017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(636) 736-7439
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X]X NO
[ ]----- -----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-212B-2 OF THE EXCHANGE ACT).
YES [X]X NO
[ ]----- -----
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN
RULE 12B-2 OF THE EXCHANGE ACT).
YES NO X
----- -----
COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF APRIL 30,OCTOBER 31, 2005: 62,628,356
SHARES62,642,214
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)
March 31,September 30, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Income (Unaudited) Three and
nine months ended March 31,September 30, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows (Unaudited) ThreeNine
months ended March 31,September 30, 2005 and 2004 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 1112
3 Quantitative and Qualitative Disclosures About Market Risk 2832
4 Controls and Procedures 2832
PART II - OTHER INFORMATION
1 Legal Proceedings 2832
2 Unregistered Sales of Equity Securities and Use of Proceeds 2933
6 Exhibits 2933
Signatures 3034
Index to Exhibits 3135
2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31,September 30, December 31,
2005 2004
------------- -------------------------
(Dollars in thousands)
ASSETS
Fixed maturity securities: $ 6,132,8676,500,533 $ 6,023,696
Available-for-sale at fair value (amortized cost
of $5,802,626$5,980,945 and $5,634,757 at
March 31,September 30, 2005 and December 31, 2004,
respectively)
Mortgage loans on real estate 613,614633,900 609,292
Policy loans 957,567934,275 957,564
Funds withheld at interest 2,879,4673,277,758 2,734,655
Short-term investments 26,85634,151 31,964
Other invested assets 217,565233,407 207,054
------------- ------------------------ -----------
Total investments 10,827,93611,614,024 10,564,225
Cash and cash equivalents 135,022142,072 152,095
Accrued investment income 76,18597,030 58,076
Premiums receivable 394,309387,083 376,298
Reinsurance ceded receivables 442,005510,607 434,264
Deferred policy acquisition costs 2,286,9022,456,813 2,225,974
Other reinsurance balances 154,216151,801 159,440
Other assets 112,86290,486 77,757
------------- ------------------------ -----------
Total assets $ 14,429,437 $ 14,048,129
============= =============$15,449,916 $14,048,129
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 4,225,5224,563,386 $ 4,097,722
Interest sensitive contract liabilities 5,006,9305,365,002 4,900,600
Other policy claims and benefits 1,451,3331,447,734 1,316,225
Other reinsurance balances 191,496182,658 247,164
Deferred income taxes 582,909625,794 561,985
Other liabilities 104,103177,589 81,209
Short-term debt 55,409126,593 56,078
Long-term debt 349,744276,368 349,704
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Company 158,450158,517 158,417
------------- ------------------------ -----------
Total liabilities 12,125,89612,923,641 11,769,104
Commitments and contingent liabilities - --- --
Stockholders' Equity:
Preferred stock (par value $.01 per share;
10,000,000 shares authorized; no shares
issued or outstanding) C - --- --
Common stock (par value $.01 per share;
140,000,000 shares authorized; 63,128,273
shares issued at March 31,September 30, 2005 and
December 31, 2004) 631 631
Warrants 66,915 66,915
Additional paid-in-capital 1,047,6671,050,679 1,046,515
Retained earnings 907,502985,676 846,572
Accumulated other comprehensive income:
Accumulated currency translation adjustment,
net of income taxes 85,29290,934 93,691
Unrealized appreciation of securities, net of
income taxes 210,825345,596 244,675
------------- ------------------------ -----------
Total stockholders' equity before treasury
stock 2,318,8322,540,431 2,298,999
Less treasury shares held of 513,918487,640 and 683,245 at
cost at March 31,September 30, 2005 and
December 31, 2004, respectively (15,291)(14,156) (19,974)
------------- ------------------------ -----------
Total stockholders' equity 2,303,5412,526,275 2,279,025
------------- ------------------------ -----------
Total liabilities and stockholders' equity $ 14,429,437 $ 14,048,129
============= =============$15,449,916 $14,048,129
=========== ===========
See accompanying notes to condensed consolidated financial statements
(unaudited).
3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended March 31,
------------------------------September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2005 2004 ------------- -------------2005 2004
---------- -------- ---------- ----------
(Dollars in thousands, except per share data)
REVENUES:
Net premiums $ 901,820 $ 813,874973,532 $819,454 $2,806,706 $2,430,636
Investment income, net of related expenses 157,053 133,560
Realized investment166,456 144,582 469,793 412,327
Investment related gains, net 3,979 18,4162,659 664 19,588 31,771
Change in value of embedded derivatives 22,561 1,5223,536 (18,610) 6,180 384
Other revenues 10,803 11,850
------------- -------------12,234 13,374 43,698 39,983
---------- -------- ---------- ----------
Total revenues 1,096,216 979,2221,158,417 959,464 3,345,965 2,915,101
BENEFITS AND EXPENSES:
Claims and other policy benefits 738,053 647,054774,336 641,618 2,340,319 1,923,474
Interest credited 55,053 47,01859,919 47,336 153,587 138,686
Policy acquisition costs and other insurance expenses 143,976 143,068158,698 148,090 460,529 425,315
Change in deferred acquisition costs associated with
change in value of embedded derivatives 15,708 4,2003,858 (13,209) 5,962 4,284
Other operating expenses 33,006 33,52937,992 36,868 109,030 105,293
Interest expense 9,885 9,538
------------- -------------10,052 9,655 29,832 28,735
---------- -------- ---------- ----------
Total benefits and expenses 995,681 884,4071,044,855 870,358 3,099,259 2,625,787
Income from continuing operations before
income taxes 100,535 94,815113,562 89,106 246,706 289,314
Provision for income taxes 33,271 31,821
------------- -------------40,043 31,107 80,763 99,931
---------- -------- ---------- ----------
Income from continuing operations 67,264 62,99473,519 57,999 165,943 189,383
Discontinued operations:
Loss from discontinued accident and health
operations, net of income taxes (707) (894)
------------- -------------(5,890) (18,604) (9,940) (22,551)
---------- -------- ---------- ----------
Income before cumulative effect of change in
accounting principle 66,557 62,10067,629 39,395 156,003 166,832
Cumulative effect of change in accounting principle,
net of income taxes --- -- -- (361)
------------- ----------------------- -------- ---------- ----------
Net income $ 66,55767,629 $ 61,739
============= =============39,395 $ 156,003 $ 166,471
========== ======== ========== ==========
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 1.081.17 $ 1.010.93 $ 2.65 $ 3.04
Discontinued operations (0.02) (0.01)(0.09) (0.30) (0.16) (0.36)
Cumulative effect of change in accounting principle --- -- -- (0.01)
------------- ----------------------- -------- ---------- ----------
Net income $ 1.061.08 $ 0.99
============= =============0.63 $ 2.49 $ 2.67
========== ======== ========== ==========
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 1.051.15 $ 1.000.92 $ 2.60 $ 3.02
Discontinued operations (0.01) (0.01)(0.09) (0.29) (0.15) (0.36)
Cumulative effect of change in accounting principle --- -- -- (0.01)
------------- ----------------------- -------- ---------- ----------
Net income $ 1.041.06 $ 0.98
============= =============0.63 $ 2.45 $ 2.65
========== ======== ========== ==========
DIVIDENDS DECLARED PER SHARE $ 0.09 $ 0.06 ============= =============$ 0.27 $ 0.18
========== ======== ========== ==========
See accompanying notes to condensed consolidated financial statements
(unaudited).
4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
ThreeNine months ended
March 31,
-----------------------------September 30,
-------------------------
2005 2004
------------- ------------------------ -----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 66,557156,003 $ 61,739166,471
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (18,160) (15,266)(38,872) (44,179)
Premiums receivable (20,258) (30,878)(14,789) 90,143
Deferred policy acquisition costs (60,503) (81,010)(259,075) (316,616)
Reinsurance ceded balances (7,740) 66,288(76,343) 36,655
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 229,280 263,242538,515 514,368
Deferred income taxes 39,772 20,29823,129 61,929
Other assets and other liabilities, net (11,374) (2,987)75,846 19,551
Amortization of net investment discounts and other (5,256) (8,760)
Realized investment(29,560) (26,887)
Investment related gains, net (3,982) (18,416)(19,597) (31,771)
Other, net 1,152 (7,193)
------------- -------------5,633 (8,410)
----------- -----------
Net cash provided by operating activities 209,488 247,057360,890 461,254
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturity securities - available for sale 376,380 373,7261,176,186 867,516
Maturities of fixed maturity securities - available for sale 18,983 8,15241,346 30,059
Purchases of fixed maturity securities - available for sale (563,294) (426,494)(1,483,955) (1,352,736)
Sales of mortgage loans --- 13,927
Cash invested in mortgage loans on real estate (9,555) (41,276)(47,280) (105,870)
Cash invested in policy loans (4) (658)(8,294) (9,293)
Cash invested in funds withheld at interest (28,546) (29,165)(65,211) 30,922
Principal payments on mortgage loans on real estate 5,142 4,36722,093 20,310
Principal payments on policy loans 31,582 6,995
Change in short-term investments and other invested assets (9,879) (16,182)
------------- -------------(29,087) (49,329)
----------- -----------
Net cash used in investing activities (210,773) (113,603)(362,620) (547,499)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (5,627) (3,733)
Borrowings(16,899) (11,208)
Net borrowings under credit agreements --- 4,600
Exercise of stock options 4,339 3,2074,977 8,176
Excess deposits (payments) on universal life and other
investment type policies and contracts (12,918) 32,905
------------- -------------6,087 129,387
----------- -----------
Net cash provided by (used in) financing activities (14,206) 36,979(5,835) 130,955
Effect of exchange rate changes (1,582) 832
------------- -------------(2,458) (90)
----------- -----------
Change in cash and cash equivalents (17,073) 171,265(10,023) 44,620
Cash and cash equivalents, beginning of period 152,095 84,586
------------- ------------------------ -----------
Cash and cash equivalents, end of period $ 135,022142,072 $ 255,851
============= =============129,206
=========== ===========
Supplementary information:
Cash paid for interest $ 4,19230,292 $ 7,69822,767
Cash paid for income taxes $ 52,89478,368 $ 18,00822,330
Non-cash transfer from funds withheld at interest to fixed
maturity securities $ -- $ 606,040
See accompanying notes to condensed consolidated financial
statements (unaudited).
5
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Reinsurance Group of America, Incorporated ("RGA") and its 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-monthnine-month period ended March 31,September 30, 2005 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005. These
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 2004 Annual Report on Form 10-K ("2004 Annual Report")
filed with the Securities and Exchange Commission on March 3, 2005.2005, as amended.
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 2005 presentation.
Prior to January 1, 2003, the Company applied Accounting Principles Board
("APB") Opinion No. 25 in accounting for its stock plans and, accordingly, no
compensation cost was recognized for its stock options in the financial
statements. For issuances under employee stock plans after January 1, 2003, the
Company follows the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, as amended by SFAS 148, when recording its compensation
expense. Had the Company determined compensation cost based on the fair value at
the grant date for all stock option grants under SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below. The effects of applying SFAS No. 123 may not be representative
of the effects on reported net income for future years.
THREE MONTHS ENDED MARCH 31,
----------------------------NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 2004 2005 2004
------- ------- -------- --------
(dollars in thousands, except per share information)
2005 2004
- ---------------------------------------------------- ----------- ------------
Net income as reported $ 66,557 $ 61,739$67,629 $39,395 $156,003 $166,471
Add compensation expense included in net income, net of
income taxes 1,121 5341,122 674 3,364 1,862
Deduct total fair value of compensation expense for all
awards, net of income taxes 1,475 1,156
----------- -----------(1,475) (1,136) (4,425) (3,407)
------- ------- -------- --------
Pro forma net income $ 66,203 $ 61,117$67,276 $38,933 $154,942 $164,926
Net income per share:
As reported - basic $ 1.061.08 $ 0.990.63 $ 2.49 $ 2.67
Pro forma - basic $ 1.061.07 $ 0.980.62 $ 2.47 $ 2.65
As reported - diluted $ 1.041.06 $ 0.980.63 $ 2.45 $ 2.65
Pro forma - diluted $ 1.041.06 $ 0.970.62 $ 2.43 $ 2.63
======= ======= ======== ========
6
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 ------------------------------
MARCH 31,NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2005 MARCH 31, 2004 -------------- --------------2005 2004
------- ------- -------- --------
Earnings:
Income from continuing operations (numerator for
basic and diluted calculations) $ 67,264 $ 62,994$73,519 $57,999 $165,943 $189,383
Shares:
Weighted average outstanding shares (denominator
for basic calculation) 62,553 62,210
Equivalent62,640 62,336 62,607 62,274
Common equivalent shares from outstanding stock options 1,301 498
--------- ---------1,013 535 1,149 476
------- ------- -------- --------
Denominator for diluted calculation 63,854 62,70863,653 62,871 63,756 62,750
Earnings per share:
Basic $ 1.081.17 $ 1.010.93 $ 2.65 $ 3.04
Diluted $ 1.051.15 $ 1.000.92 $ 2.60 $ 3.02
======= ======= ======== ========
The calculation of common equivalent shares from outstanding stock options does not include the impact of
options or warrants having a strike or conversion price that exceeds the average
stock price for the earnings period, as the result would be antidilutive. The
calculation of common equivalent shares also excludes the impact of outstanding
performance contingent shares, as the conditions necessary for their issuance
have not been satisfied as of the end of the reporting period. For the three-month periodthree and
nine months ended March 31,September 30, 2005, approximately 0.3 million stock options
and 0.3 million performance contingent shares were excluded from the
calculation. For the three and nine months ended March 31,September 30, 2004, all
outstanding stock options were included in the calculation of common equivalent
shares, while approximately 0.1 million performance contingent shares and all
outstanding warrants were excluded from the calculation.
3. COMPREHENSIVE INCOME
The following schedule reflects the change in accumulated other comprehensive
income (dollars in thousands):
THREE MONTHS ENDED ------------------------------
MARCH 31,NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2005 MARCH 31, 2004 -------------- --------------2005 2004
-------- -------- -------- --------
Net income $ 66,55767,629 $ 61,73939,395 $156,003 $166,471
Accumulated other comprehensive
income (loss)(expense), net of income tax:
Unrealized gains (losses), net of reclassification
adjustment for gains (losses) included in net income (33,850) 57,465(43,834) 106,330 100,921 10,830
Foreign currency items (8,399) (5,489)
----------- -----------25,541 16,166 (2,757) (6,610)
-------- -------- -------- --------
Comprehensive income $ 24,308 $ 113,715
=========== ===========49,336 $161,891 $254,167 $170,691
======== ======== ======== ========
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 2004 Annual Report.
The Company measures segment performance primarily based on profit or loss from
operations before income taxes. There are no intersegment reinsurance
transactions and the Company does not have any material long-lived assets.assets other
than internally developed software. As of September
7
30, 2005, the carrying value of internally developed software was approximately
$18.9 million. Investment income is allocated to the segments based upon average
assets and related capital levels deemed appropriate to support the segment
business volumes.
7
Information related to total revenues and income (loss) from continuing
operations before income taxes for each reportable segment are summarized below
(dollars in thousands).
INCOME (LOSS) FROM CONTINUING
TOTAL REVENUES OPERATIONS BEFORE INCOME TAXES
---------------------------- ------------------------------
THREE MONTHS ENDED MARCH 31, THREENINE MONTHS ENDED
MARCH 31,
---------------------------- ------------------------------SEPTEMBER 30, SEPTEMBER 30,
--------------------- -----------------------
2005 2004 2005 2004
------------ ------------ ------------ ----------------------- -------- ---------- ----------
U.S.TOTAL REVENUES
U.S $ 716,576 $ 650,564 $ 65,984 $ 70,247750,212 $636,256 $2,136,167 $1,949,789
Canada 103,384 85,475 24,209 15,920119,998 84,323 331,449 261,965
Europe & South Africa 144,008 122,344 14,758 6,260139,752 119,277 419,047 362,958
Asia Pacific 124,169 108,256 4,772 6,797143,605 107,581 422,371 305,845
Corporate and& Other 8,079 12,583 (9,188) (4,409)
------------ ------------ ------------ ------------4,850 12,027 36,931 34,544
---------- -------- ---------- ----------
Total $1,158,417 $959,464 $3,345,965 $2,915,101
========== ======== ========== ==========
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
U.S $ 88,198 $ 72,031 $ 184,738 $ 218,088
Canada 22,069 15,835 66,557 52,966
Europe & South Africa 15,376 9,577 23,493 27,666
Asia Pacific 3,948 (1,406) 22,551 10,085
Corporate & Other (16,029) (6,931) (50,633) (19,491)
---------- -------- ---------- ----------
Total $ 1,096,216113,562 $ 979,22289,106 $ 100,535246,706 $ 94,815
------------ ------------ ------------ ------------289,314
========== ======== ========== ==========
U.S., Canada, and Asia Pacific assets increased approximately $1.1 billion,
$436.8 million, and $212.1 million, respectively, from the amounts disclosed in
Note 16 of the 2004 Annual Report, primarily due to continued growth in these
segments.
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has commitments to fund investments in limited partnerships in the
amount of $33.3 million at September 30, 2005. The Company anticipates that the
majority of these amounts will be invested over the next five years, however,
contractually these commitments could become due at the request of the
counterparties. Investments in limited partnerships are carried at cost and
included in other invested assets in the condensed consolidated balance sheets.
The Company is currently a party to two arbitrations that involve its
discontinued accident and health business, including personal accident business
(including London market excess of loss business) and medicalworkers' compensation
carve-out business. In
addition, theThe Company is currently aalso party to litigation that involves the claim
of a brokerone arbitration related to commissions on a medicalits
life reinsurance arrangement.business. As of March 31,September 30, 2005, the companiesparties involved in
these actions have raised claims, or established reserves that may result in
claims, in the amount of $4.8$21.5 million, which is $3.9$20.8 million in excess of the
amounts held in reserve by the Company. The Company generally has little
information regarding any reserves established by the ceding companies, and must
rely on management estimates to establish policy claim liabilities. It is
possible that any such reserves could be increased in the future. The Company
believes it has substantial defenses upon which to contest these claims,
including but not limited to misrepresentation and breach of contract by direct
and indirect ceding companies. In addition, the Company is in the process of
auditing ceding companies that may have threatened arbitration,
asserted claims or indicated that they
anticipate asserting claims in the future against the Company in the amount of
$30.3$11.7 million, which is $29.9$8.6 million in excess of the amounts held in reserve or
retroceded by the Company as of March 31,September 30, 2005. These claims appear to
relate to life, personal accident business (including London market excess of loss
business), and workers' compensation carve-out business. Depending upon the audit
findings or other developments in these cases, they could result in litigation
or arbitrations in the future. See Note 20, "Discontinued Operations" of
8
the 2004 Annual Report for more information. Additionally, from time to time,
the Company is subject to litigation and arbitration related to its life reinsurance business and to employment-related matters in
the normal course of its business. While it is not
feasibledifficult to predict or determine
the ultimate outcome of the pending litigation or arbitrations or provide reasonableuseful
ranges of potential losses, it is the opinion of management, after consultation
with counsel, that their outcomes, after consideration of the provisions made in
the Company's condensed consolidated financial statements, would not have a
material adverse effect on its consolidated financial position. However, it is
possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in
particular quarterly or annual periods.
The Company has reinsured privately ownedprivately-owned pension funds that were formed as a
result of reform and privatization of Argentina's social security system. The
Company ceased renewal of reinsurance treaties associated with privatized
pension contracts in Argentina during 2001 because of adverse experience on this
business, as several aspects of the pension fund claims flow did not develop as
was contemplated when the reinsurance programs were initially priced. It is the
Company's position that certain actions of the Argentine government, which have
artificially inflated claim payments and which may affect future results from
this business for the Company, constitute violations of the Treaty on
Encouragement and Reciprocal Protection of Investments between the Argentine
Republic and the United States of America, dated November 14, 1991 (the
"Treaty"). The Company has filed a request for arbitration of its dispute
relating to these violations pursuant to the Washington Convention of 1965 on
the Settlement of Investment Disputes under the auspices of the International
Centre for Settlement of Investment Disputes of the World Bank (the "ICSID
Arbitration"). The request for arbitration was officially registered in November
of 2004. The organizational hearing for the ICSID Arbitration has been set for
November 22, 2005.
In addition, because of the regulatory action that has accelerated payment of
the deferred disability claims, during the third quarter of 2004, the Company
formally notified the Administradoras de Fondos de Jubilaciones y
8
Pensiones
("AFJP") ceding companies that it will no longer make claim payments it believes
to be artificially inflated, as it has been doing for some time under a
reservation of rights, but rather will pay claims only on the basis of the
market value of the AFJP fund units. This formal notification could result in
litigation or arbitrations in the future. In the second quarter of 2005, the
Company increased the amount of liabilities associated with the AFJP business by
$24.0 million, so that the overall amount of the liabilities reflects the
Company's current estimate of the value of its obligations. The Company commuted
treaties with three of its larger clients during the second and third quarters
of 2005 and is in discussions with the remaining clients regarding settlement of
all obligations under the remaining treaties. While it is not feasibledifficult to predict
or determine the ultimate outcome of the contemplated ICSID Arbitration, or
litigation or arbitrations that may occur in Argentina in the future, or provide
reasonableuseful ranges of potential losses if the Argentine government continues with its
present course of action, it is the opinion of management, after consultation
with counsel, that their outcomes, after consideration of the provisions made in
the Company's financial statements, would not have a material adverse effect on
its consolidated financial position. However, it is possible that an adverse
outcome could, from time to time, have a material adverse effect on the
Company's consolidated net income or cash flows in particular quarterly or
annual periods.
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 payment under the reinsurance
agreements. At September 30, 2005 and December 31, 2004, there were
approximately $17.4 million and $32.6 million, respectively, of outstanding
letters of credit in favor of third-party entities. Additionally, the Company
utilizes letters of credit to secure reserve credits when it retrocedes business
to its offshore subsidiaries, including RGA Americas Reinsurance Company, Ltd.
and RGA Reinsurance Company (Barbados) Ltd. As of September 30, 2005 and
December 31, 2004, $304.5 million and $370.5 million, respectively, in letters
of credit from various banks were outstanding between the various subsidiaries
of the Company. On September 29, 2005 the Company entered into a five-year,
syndicated credit facility with an overall capacity of $600.0 million. The
Company may borrow up to $300.0 million of cash under the facility. The amount
of the overall capacity available for issuance of letters of credit is reduced
by any cash borrowings made by the Company against this credit facility. The
Bank of New York is the administrative agent for the credit facility. Applicable
letter of credit fees and fees payable for the credit facility depend upon the
Company's senior unsecured long-term debt rating. There were no letters of
credit outstanding against this credit facility at September 30, 2005. Fees
associated with the company's other letters of credit are not
9
fixed for periods in excess of one year and are based on the Company's ratings
and the general availability of these instruments in the marketplace.
RGA has issued guarantees of its subsidiaries' performance for the payment of
amounts due under certain credit facilities, trust preferred securities and
reinsurance treaties, whereby if a subsidiary fails to meet an obligation, RGA
or one of its other subsidiaries will make a payment to fulfill the obligation.
Treaty guarantees are granted to ceding companies in order to provide them
additional security, particularly in cases where RGA's subsidiary is relatively
new, unrated, or not of a significant size, relative to the ceding company.
Liabilities supported by the treaty guarantees, before consideration for any
legally offsetting amounts due from the guaranteed party, totaled $251.5 million
and $285.4 million as of September 30, 2005 and December 31, 2004, respectively,
and are reflected on the Company's consolidated balance sheet as future policy
benefits. Guarantees related to trust preferred securities and credit facilities
provide additional security to third party banks should a subsidiary fail to
make principal and/or interest payments when due. As of September 30, 2005,
RGA's exposure related to these guarantees was $185.2 million.
6. EMPLOYEE BENEFIT PLANSPLANS..
The components of net periodic benefit costs were as follows:follows (dollars in
thousands):
Three months ended March 31,
----------------------------------------------
Pension Benefits Other Benefits
----------------------FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- (in thousands)-------------------
2005 2004 2005 2004
- ------------------------------------------- --------- --------- -------- ------------- ----- ------ ------
DETERMINATION OF NET PERIODIC PENSION BENEFIT COST:
Service cost $ 548513 $ 442 $ 103 $ 94486 $1,536 $1,370
Interest cost 382 316 99 91397 325 1,191 956
Expected rate of return on plan assets (300) (192)(289) (364) (867) (750)
Amortization of prior service cost 7 4 22 22
Amortization of prior actuarial loss 88 15 265 100
----- ----- ------ ------
Net periodic pension benefit cost $ 716 $ 466 $2,147 $1,698
===== ===== ====== ======
NET PERIODIC OTHER BENEFITS COST:
Service cost $ 208 $ 95 $ 413 $ 283
Interest cost 185 91 383 273
Expected return on plan assets -- -- -- --
Amortization of prior service cost 9 9-- -- -- --
Amortization of prior actuarial loss 40 42118 17 18
-------- -------- -------- --------153 53
----- ----- ------ ------
Net periodic benefitother benefits cost $ 679 $ 617 $ 219511 $ 203 ======== ======== ======== ========$ 949 $ 609
===== ===== ====== ======
The Company paid $1.7 million in pension contributions during the first quarter
of 2005 and expects this to be the only contribution for the year.
7. FINANCING ACTIVITIES
On September 29, 2005 the Company entered into a five-year, syndicated credit
facility with an overall capacity of $600.0 million. The Company may borrow up
to $300.0 million of cash under the facility. The amount of the overall capacity
available for issuance of letters of credit is reduced by any cash borrowings
made by the Company against this credit facility. The Bank of New York is the
administrative agent for the credit facility. Interest on borrowings is based
either on the prime, federal funds or LIBOR rates plus a base rate margin
defined in the agreement. Fees payable for the credit facility depend upon the
Company's senior unsecured long-term debt rating. The Company immediately
borrowed $50.0 million under the facility, using the funds to prepay the
outstanding debt under a $175.0 million credit facility held by the Company,
which was due to expire in May 2006. As of September 30, 2005, the Company had
$50.0 million outstanding under this new facility at an average interest rate of
4.30%. The credit agreement is unsecured but contains affirmative, negative and
financial covenants customary for financings of this type.
10
8. NEW ACCOUNTING STANDARDS
In December 2004,June 2005, the Financial Accounting Standards Board ("FASB") revised SFAS
No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") to "Share-Based
Payment" ("SFAS 123(r)"). SFAS 123(r) provides more guidance on determining
whether certain financial instruments awarded in share-based payment
transactions are liabilities. SFAS 123(r) also requires that the costcompleted its
review of all
share-based transactions should be recorded in the financial statements. The
revised pronouncement will be adopted by the Company during the first quarter of
2006. The Company expects SFAS 123(r) will increase compensation expense by $1.1
million in 2006.
In March 2004, the Emerging Issues Task Force ("EITF") of the FASB reached
further consensus on Issue No. 03-1, "TheThe Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments"Investments
("EITF 03-1"). EITF 03-1 provides accounting guidance regarding the
determination of when an impairment of debt and marketable equity securities and
investments accounted for under the cost method should be considered
other-than-temporary and recognized in income. An EITF 03-1 consensus reached in November 2003 also requires certain
quantitative and qualitative disclosures for debt and marketable equity
securities classified as available-for-sale or held-to-maturity under SFAS No.
115, "AccountingAccounting for Certain Investments in Debt and Equity Securities ("SFAS
115"), that are impaired at the balance sheet date but for which an
other-than-temporary impairment has not been recognized." The FASB decided not to
provide additional guidance on the meaning of other-than-temporary impairment
but will issue FASB Staff Position Paper ("FSP") 115-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments ("FSP
115-1"), superceding EITF 03-1 and EITF Topic D-44, Recognition of
Other-Than-Temporary Impairment on the Planned Sale of a Security Whose Cost
Exceeds Fair Value ("Topic D-44"). FSP 115-1 will nullify the accounting
guidance on the determination of whether an investment is other-than-temporarily
impaired as set forth in paragraphs 10-18 of EITF 03-1 and replace those
paragraphs with references to already existing guidance. FSP 115-1 will also
clarify and codify the guidance set forth in Topic D-44. FSP 115-1 is effective
for other-than-temporary impairment analysis conducted in periods beginning
after September 15, 2005. The Company has complied with the disclosure
requirements of EITF 03-1, which were effective December 31, 2003. The
accounting guidance of EITF 03-1 relating2003 and remain in
effect. Therefore, FSP 115-1 is not expected to have a material impact on the
recognition of investment
impairment which was to be effective in the third quarter of 2004 has been
delayed pending the development of additional guidance. The Company is actively
monitoring the deliberations relating to this issue at the FASB and currently is
unable to determine the impact of EITF 03-1 on itsCompany's consolidated financial statements.
In conformity with existing generally accepted accounting
principles,May 2005, the Company's gross unrealized losses totaling $47.3 million at
March 31, 2005 are reflected asFASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a componentreplacement of other comprehensive income on the
consolidated balance sheet. Depending on the ultimate guidance issuedAPB Opinion No. 20 and SFAS No. 3 ("SFAS 154").
The Statement is a result of a broader effort by the FASB includingto converge standards
with the International Accounting Standards Board ("IASB"). The Statement
requires retrospective application to prior periods' financial statements for a
voluntary change in accounting principle unless it is impracticable. It also
requires that a change in method of depreciation, amortization, or depletion for
long-lived, nonfinancial assets be reported as a change in accounting estimate
rather than a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. SFAS 154 is not expected to have a material impact on
the Company's consolidated financial statements.
In December 2004, the FASB revised SFAS No. 123 "Accounting for Stock Based
Compensation" ("SFAS 123") to "Share-Based Payment" ("SFAS 123(r)"). SFAS 123(r)
provides additional guidance regarding management's assertion about intent and
ability to hold available-for-sale investment securities,on determining whether certain financial
instruments awarded in share-based payment transactions are liabilities. SFAS
123(r) also requires that the cost of all share-based transactions be recorded
in the financial statements. The revised pronouncement will be adopted by the
Company could be
required to report these unrealized lossesduring the first quarter of 2006. The Company expects SFAS 123(r) will
increase compensation expense by approximately $1.1 million in a different manner, including
possibly reflecting these unrealized losses in the consolidated income
9
statement as other-than-temporary impairments, even if the unrealized losses are
attributable solely to interest rate movements.2006.
In July 2003, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts." SOP
03-1 provides guidance on separate account presentation and valuation, the
accounting for sales inducements and the classification and valuation of
long-duration contract liabilities. The Company adopted the provisions of SOP
03-1 on January 1, 2004, recording a charge of $361 thousand, net of income
taxes.
8. SUBSEQUENT EVENT
On January 31, 2005, MetLife announced an agreement to purchase Travelers Life &
Annuity and substantially all of Citigroup's international insurance business.
To help finance that transaction, MetLife indicated that it would consider
select asset sales, including its holdings of RGA's common stock. On April 22,
2005, MetLife further announced that since January 31, it had entered into
agreements for the sale of certain assets, and determined that it has sufficient
alternate means of financing the acquisition so that it now doesn't expect to
sell its interest in RGA in connection with that acquisition.
1011
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our primary business is life reinsurance, which involves reinsuring life
insurance policies that are often in force for the remaining lifetime of the
underlying individuals insured, with premiums earned typically over a period of
10 to 30 years. Each year, however, a portion of the business under existing
treaties terminates due to, among other things, lapses or surrenders of
underlying policies, deaths of policyholders, and the exercise of recapture
options by ceding companies.
We derive revenues primarily from renewal premiums from existing reinsurance
treaties, new business premiums from existing or new reinsurance treaties,
income earned on invested assets, and fees earned from financial reinsurance
transactions. We believe that industry trends have not changed materially from
those discussed in our 2004 Annual Report.
Our profitability primarily depends on the volume and amount of death claims
incurred and our ability to adequately price the risks we assume. While death
claims are reasonably predictable over a period of many years, claims become
less predictable over shorter periods and are subject to significant fluctuation
from quarter to quarter and year to year. Effective July 1, 2003, we increased
the maximum amount of coverage that we retain per life from $4 million to $6
million. This increase does not affect business written prior to July 1, 2003.
Claims in excess of this retention amount are retroceded to retrocessionaires;
however, we remain fully liable to the ceding company, our customer, for the
entire amount of risk we assume. The increase in our retention limit from $4
million to $6 million reduces the amount of premiums we pay to our
retrocessionaires, but increases the maximum impact a single death claim can
have on our results and therefore may result in additional volatility to our
results from operations. We believe our sources of liquidity are sufficient to
cover the potential increase in claims payments on both a short-term and
long-term basis.
We measure performance based on income or loss from continuing operations before
income taxes for each of our five segments. Our U.S., Canada, Asia Pacific and
Europe & South Africa operations provide traditional life reinsurance to
clients. Our U.S. operations also provide asset-intensive and financial
reinsurance products. We also provide insurers with critical illness reinsurance
in our Canada, Asia Pacific and Europe & South Africa operations. Asia Pacific
operations provide a limited amount of financial reinsurance. The Corporate and
Other segment results include the corporate investment activity, general
corporate expenses, interest expense of RGA, RGA Technology Partners, Inc., a
wholly-owned subsidiary that develops and markets technology solutions,
Argentine business in run-off and the provision for income taxes. Our
discontinued accident and health operations are not reflected in our results
from continuing operations.
RESULTS OF OPERATIONS
Consolidated income from continuing operations before income taxes increased
$5.7$24.5 million, or 6.0%27.4%, and decreased $42.6 million, or 14.7%, for the third
quarter and first quarternine months of 2005, compared to the firstrespectively. The third quarter of 2004,increase
was primarily due to strong results in Canadahigher revenues and some of our other
international businesses offsetting poorbetter than expected mortality experience in the
U.S. while the nine-month decrease was primarily due to higher claims levels in
the U.S. and the UK along with an increase to reserves for the Argentine pension
business, which is currently in run-off. Consolidated net premiums increased
$87.9$154.1 million, or 10.8%18.8%, and $376.1 million, or 15.5% during the third quarter
and first quarternine months of 2005.
Consolidated investment income, net of related expenses, increased $23.5$21.9
million, or 17.6%15.1%, and $57.5 million, or 13.9%, during the third quarter and
first quarternine months of 2005, primarilyrespectively, due to a larger invested asset base.
Invested assets as of March 31,September 30, 2005 totaled $10.8$11.6 billion, a 15.8%15.9% increase
over March 31,September 30, 2004. While our invested asset base has grown
significantly since March 31, 2004, theThe average yield earned on investments excluding funds
withheld decreased from 5.83%to 5.89% during the firstthird quarter of 2004
to 5.75%2005 from 6.03% for the
firstthird quarter of 2005. The decreasing yield is the result of
the Company investing proceeds from operations and investing activities in a
lower interest rate environment.2004. The average yield will vary from quarter to quarter and
year to year depending on a number of variables, including the prevailing
interest rate and credit spread environment, the timing of interest or dividend
payments on certain investments and changes in the mix of our underlying
investments. Investment income and a portion of realized gains (losses) are
allocated to the segments based upon average assets and related capital levels
deemed appropriate to support the segment business volumes.
The effective tax rate on a consolidated basis was 33.1%35.3% for the third quarter
and 32.7% for the first quarternine months of 2005, compared to 33.6%34.9% and 34.5% for the
comparable prior-year period.periods. The lower rate in the current periodfirst nine months
12
was due to the realizationutilization of a tax receivable againstloss carryforwards of $3.1 million, for which
weno prior financial statement tax benefit had initially established a valuation reserve of $1.6 million.
11
been taken.
CRITICAL ACCOUNTING POLICIES
Our accounting policies are described in Note 2 in the 2004 Annual Report. We
believe our most critical accounting policies include the capitalization and
amortization of deferred acquisition costs; the establishment of liabilities for
future policy benefits, other policy claims and benefits, including incurred but
not reported claims; the valuation of investment impairments; and the
establishment of arbitration or litigation reserves. The balances of these
accounts are significant to our financial position and require extensive use of
assumptions and estimates, particularly related to the future performance of the
underlying business.
Additionally, for each of itsour reinsurance contracts, the Companywe must determine if the
contract provides indemnification against loss or liability relating to
insurance risk, in accordance with applicable accounting standards. The CompanyWe must
review all contractual features, particularly those that may limit the amount of
insurance risk to which the Company is subject or features that delay the timely
reimbursement of claims. If the Company determineswe determine that the possibility of a significant
loss from insurance risk will occur only under remote circumstances, it recordswe record
the contract under a deposit method of accounting with the net amount payable/receivable
or payable reflected in other reinsurance assets or liabilities on the
consolidated balance sheets. Fees earned on the contracts are reflected as other
revenues, as opposed to net premiums, on the consolidated statements of income.
Costs of acquiring new business, which vary with and are primarily related to
the production of new business, have been deferred to the extent that such costs
are deemed recoverable from future premiums or gross profits. Deferred policy
acquisition costs ("DAC") reflect our expectations about the future experience
of the business in force and include commissions and allowances as well as
certain costs of policy issuance and underwriting. Some of the factors that can
affect the carrying value of DAC include mortality assumptions, interest spreads
and policy lapse rates. We perform periodic tests to determine that DAC remains
recoverable, and the cumulative amortization is re-estimated and, if necessary,
adjusted by a cumulative charge or credit to current operations.
Liabilities for future policy benefits under long-term life insurance policies
(policy reserves) are computed based upon expected investment yields, mortality
and withdrawal (lapse) rates, and other assumptions, including a provision for
adverse deviation from expected claim levels. We primarily rely on our own
valuation and administration systems to establish policy reserves. The policy
reserves we establish may differ from those established by ourthe ceding companies
(clients)
due to the use of different mortality and other assumptions. However, we rely
onupon our clients to provide accurate data, including policy-level information,
premiums and claims, which is the primary information used to establish
reserves. Our administration departments work directly with our clients to help
ensure information is submitted by them in accordance with the reinsurance
contracts. Additionally, we perform periodic audits of the information provided
by ceding companies. We establish reserves for processing backlogs with a goal
of clearing all backlogs within a ninety-day period. The backlogs are usually
due to data errors we discover or computer file compatibility issues, since much
of the data reported to us is in electronic format and is uploaded to our
computer systems.
We periodically review actual historical experience and relative anticipated
experience compared to the assumptions used to establish aggregate policy
reserves. Further, we establish premium deficiency reserves if actual and
anticipated experience indicates that existing aggregate policy reserves,
together with the present value of future gross premiums, are not sufficient to
cover the present value of future benefits, settlement and maintenance costs and
to recover unamortized acquisition costs. The premium deficiency reserve is
established along withthrough a charge to income, as well as a reduction to unamortized
acquisition costs and, to the extent there are no unamortized acquisition costs,
an increase to future policy benefits. Because of the many assumptions and
estimates used in establishing reserves and the long-term nature of our
reinsurance contracts, the reserving process, while based on actuarial science,
is inherently uncertain. If our assumptions, particularly on mortality, are
not correct,inaccurate, our reserves may not be adequateinadequate to pay claims and there could be a
material adverse effect on our results of operations and financial condition.
Other policy claims and benefits include claims payable for incurred but not
reported losses, which are determined using case basiscase-basis estimates and lag studies
of past experience. These estimates are periodically reviewed and any
adjustments to such estimates, if necessary, are reflected in current
operations. The time lag from the date of the
13
claim or death to the date when the ceding company reports the claim to us can
vary significantly by ceding company and business segment, but generally averages around
2.5 months on a consolidated basis. We update our analysis of incurred but not
reported claims, including lag studies, on a quarterlyperiodic basis and adjust our claim
liabilities accordingly. The adjustments in a given period are generally not
significant relative to the overall policy 12
liabilities and may result in an increase or decrease in liabilities.
We primarily invest in fixed maturity securities. Wesecurities, and monitor ourthese fixed
maturity securities to determine potential impairments in value. In conjunction withWith our
external investment managers, we evaluate our intent and ability to hold
securities, along with factors such as the financial condition of the issuer,
payment performance, the extent to which the market value has been below
amortized cost, compliance with covenants, general market and industry sector
conditions, the intent and ability to hold securities, and various other subjective factors. Securities, based on management's
judgments, with an other-than-temporary impairment in value are written down to
management's estimate of fair value.
Differences in actual experience compared with the assumptions and estimates utilized
in the justification of the recoverability of DAC, in establishing reserves for
future policy benefits and claim liabilities, or in the determination of
other-than-temporary impairments to investment securities can have a material
effect on our results of operations and financial condition.
The Company is currently a party to various litigation and arbitrations. While
it is not feasibledifficult to predict or determine the ultimate outcome of the pending
litigation or arbitrations or even to provide reasonableuseful ranges of potential losses,
it is the opinion of management, after consultation with counsel, that the
outcomes of such litigation and arbitrations, after consideration of the
provisions made in the Company's consolidated financial statements, would not
have a material adverse effect on its consolidated financial position. However,
it is possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in a
particular quarterlyquarter or annual periods.year. See Note 20, "Discontinued Operations" of the 2004
Annual Report for more information.
Further discussion and analysis of the three and nine month results for 2005
compared to 2004 are presented by segment. Certain prior-year amounts have been
reclassified to conform to the current-year presentation. References to income
before income taxes exclude the effects of discontinued operations and the
cumulative effect of changes in accounting principles.
14
U.S. OPERATIONS
U.S. operations consist of two major sub-segments: Traditional and
Non-Traditional. The Traditional sub-segment primarily specializes in
mortality-risk reinsurance. The Non-traditionalNon-Traditional category consists of
Asset-Intensive and Financial Reinsurance.
FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2005 (IN THOUSANDS)
NON-TRADITIONAL
----------------------- TOTAL
ASSET- FINANCIAL U.S.
TRADITIONAL INTENSIVE REINSURANCE OPERATIONS
------------ ------------ ----------- --------- ----------- ----------
REVENUES:
Net premiums $610,342 $ 566,894 $ 1,2241,147 $ -- $ 568,118$611,489
Investment income, net of related expenses 55,231 58,272 41 113,544
Realized investment65,328 61,227 18 126,573
Investment related gains (losses), net (423) 3,504(68) 401 -- 3,081333
Change in value of embedded derivatives -- 22,5613,536 -- 22,5613,536
Other revenues 921 1,047 7,304 9,272
----------- ----------- ----------- -----------939 2,116 5,226 8,281
-------- ------- ------ --------
Total revenues 622,623 86,608 7,345 716,576676,541 68,427 5,244 750,212
BENEFITS AND EXPENSES:
Claims and other policy benefits 483,261 (1,684) 2 481,579484,493 859 3 485,355
Interest credited 14,007 40,25113,553 45,828 -- 54,25859,381
Policy acquisition costs and other insurance expenses 71,017 13,369 2,624 87,01087,861 12,277 660 100,798
Change in deferred acquisition costs associated with change in value
of embedded derivatives -- 15,7083,858 -- 15,7083,858
Other operating expenses 9,262 1,338 1,437 12,037
----------- ----------- ----------- -----------10,161 1,174 1,287 12,622
-------- ------- ------ --------
Total benefits and expenses 577,547 68,982 4,063 650,592596,068 63,996 1,950 662,014
Income before income taxes $ 45,07680,473 $ 17,6264,431 $3,294 $ 3,282 $ 65,98488,198
======== ======= ====== ========
13
FOR THE THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2004 (IN THOUSANDS)
NON-TRADITIONAL
TOTAL-----------------------
ASSET- FINANCIAL U.S.TOTAL
TRADITIONAL INTENSIVE REINSURANCE OPERATIONSU.S.
----------- --------- ----------- ----------- --------------------
REVENUES:
Net premiums $538,524 $ 531,211 $ 1,1821,227 $ -- $ 532,393$539,751
Investment income, net of related expenses 54,053 45,467 43 99,563
Realized investment gains,53,305 53,134 14 106,453
Investment related losses, net 7,558 144(840) (966) -- 7,702(1,806)
Change in value of embedded derivatives -- 1,522(18,610) -- 1,522(18,610)
Other revenues 1,334 1,670 6,380 9,384
----------- ----------- ----------- -----------928 2,644 6,896 10,468
-------- -------- ------ --------
Total revenues 594,156 49,985 6,423 650,564591,917 37,429 6,910 636,256
BENEFITS AND EXPENSES:
Claims and other policy benefits 430,891 (1,021) -- 429,870412,021 7,831 2 419,854
Interest credited 12,078 34,49412,073 34,652 -- 46,57246,725
Policy acquisition costs and other insurance expenses 75,431 7,645 2,294 85,37087,121 7,201 2,349 96,671
Change in deferred acquisition costs associated with change in value
of embedded derivatives -- 4,200(13,209) -- 4,200(13,209)
Other operating expenses 11,724 1,159 1,422 14,305
----------- ----------- ----------- -----------11,695 1,295 1,194 14,184
-------- -------- ------ --------
Total benefits and expenses 530,124 46,477 3,716 580,317522,910 37,770 3,545 564,225
Income (loss) before income taxes $ 69,007 $ (341) $3,365 $ 72,031
======== ======== ====== ========
15
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 (IN THOUSANDS)
NON-TRADITIONAL
-----------------------
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- --------- ----------- ----------
REVENUES:
Net premiums $1,752,031 $ 3,488 $ -- $1,755,519
Investment income, net of related expenses 180,034 162,044 51 342,129
Investment related gains, net 1,141 2,061 -- 3,202
Change in value of embedded derivatives -- 6,180 -- 6,180
Other revenues 2,793 5,960 20,384 29,137
---------- -------- ------- ----------
Total revenues 1,935,999 179,733 20,435 2,136,167
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,464,773 4,109 5 1,468,887
Interest credited 41,863 109,809 -- 151,672
Policy acquisition costs and other insurance expenses 243,610 37,787 6,230 287,627
Change in deferred acquisition costs associated with
change in value of embedded derivatives -- 5,962 -- 5,962
Other operating expenses 29,464 3,748 4,069 37,281
---------- -------- ------- ----------
Total benefits and expenses 1,779,710 161,415 10,304 1,951,429
Income before income taxes $ 64,032156,289 $ 3,50818,318 $10,131 $ 2,707184,738
========== ========= ======= ==========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (IN THOUSANDS)
NON-TRADITIONAL
-----------------------
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- --------- ----------- ----------
REVENUES:
Net premiums $1,599,864 $ 70,2473,599 $ -- $1,603,463
Investment income, net of related expenses 161,332 146,096 129 307,557
Investment related gains (losses), net 10,380 (1,643) -- 8,737
Change in value of embedded derivatives -- 384 -- 384
Other revenues 3,193 6,221 20,234 29,648
---------- -------- ------- ----------
Total revenues 1,774,769 154,657 20,363 1,949,789
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,272,335 10,056 2 1,282,393
Interest credited 36,268 100,850 -- 137,118
Policy acquisition costs and other insurance expenses 235,266 23,330 6,923 265,519
Change in deferred acquisition costs associated with
change in value of embedded derivatives -- 4,284 -- 4,284
Other operating expenses 34,760 3,482 4,145 42,387
---------- -------- ------- ----------
Total benefits and expenses 1,578,629 142,002 11,070 1,731,701
Income before income taxes $ 196,140 $ 12,655 $ 9,293 $ 218,088
========== ======== ======= ==========
Income before income taxes for the U.S. operations segment totaled $66.0$88.2 million
in the
first quarter of 2005, compared to $70.2and $184.7 million for the same period in 2004.third quarter and first nine months of 2005,
respectively, compared to $72.0 million and $218.1 million for comparable
prior-year periods. The decrease in income compared to same period prior yearfor the first nine months of 2005 can
be primarilylargely attributed to the unfavorable mortality experienceexperienced in the first quartersix
months of 2005. An
increase in total business in-force for the Traditional sub-segment as well as
the change in fair value of embedded derivatives coupled with continued asset
growth in the Asset Intensive sub-segment led to the increased revenue growth
seen in the first quarter of 2005 compared to first quarter 2004.
Traditional Reinsurance
The U.S. Traditional sub-segment provides life reinsurance to domestic clients
for a variety of life products through yearly renewable term, coinsurance and
modified coinsurance agreements. These reinsurance arrangements may be either
facultative or automatic agreements. During the third quarter and first threenine
months of 2005, production totaled $36.0this sub-segment added $56.7 billion ofand $140.9 billion face
amount, respectively, of new business compared to $44.2$39.3 billion and
16
$135.2 billion for the first three months ofsame periods in 2004. Management believes industry
consolidation and the trend toward reinsuring mortality risks should continue to
provide opportunities for growth.
Income before income taxes for U.S. Traditional reinsurance decreased 29.6%increased 16.6% for
the first quarter of 2005. Thisover the same prior-year period, while year to date, income was down
20.3% compared to the prior year. The year over year decrease was primarily due
to unfavorable mortality experience.experience in the first six months of the year. This
unfavorable experience was somewhat offset in the third quarter of 2005 when
claim activity was favorable. In addition to the improved mortality experience
in the third quarter, the increase over prior year can be attributed to growth
in net premiums and net realized investment gains. Claims and other policy
benefits, as a percentage of net premiums (loss ratios), were 85.2% in79.4% for the
third quarter and 83.6% for the first quarternine months of 2005 compared to
81.1% in first quarter 2004. In addition, net realized investment losses of $0.4
million were reported compared to net realized investment gains of $7.6 million2005. The loss ratios for
the same prior-year period.periods of the prior year were 76.5% and 79.5%, respectively. As stated
above, the first six months of 2005 showed an increase in the severity of claims
in excess of $1.0 million per claim, which was the primary contributor to this
increased loss ratio.
Net premiums for U.S. Traditional reinsurance increased approximately $35.7
million during13.3% and 9.5% for the
third quarter and first threenine months of 2005, or 6.7% over the same period in
2004.respectively. This increase in net
premiums was driven by the growth of total U.S. business in force, which totaled
just over $1.0 trillion as of March 31,September 30, 2005, a 10.1%6.9% increase over the
amount in force on March 31,September 30, 2004.
Investment income and realized investment gains and losses are allocated to the
various operating segments based on average assets and related capital levels
deemed appropriate to support the segment business volumes. Investment
performance varies with the composition of investments and the relative
allocation of capital to the operating segments. Loss ratios were 85.2% and 81.1%During the third quarter of
2005, investment income in the sub-segment totaled $65.3 million, a 22.6%
increase over same prior-year period. Year to date in 2005, investment income
increased 11.6% over the first nine months of 2004. The increase in both periods
is due to growth in the invested asset base.
Mortality experience for the first threesix months of 2005 and 2004,
respectively. As stated previously, mortality experience for the quarter was unfavorable, and included an unusually high numberdue
primarily to the level of claims in excess of $1.0 million. Mortality experience is generally considered in-line with expectations
when the loss ratio is close to
14
80%.million per claim. The third
quarter, however, reflected favorable mortality experience. Death claims are
reasonably predictable over a period of many years, but are less predictable
over shorter periods and are subject to significant fluctuation.
Interest credited relates to amounts credited on cash value products, which have
a significant mortality component. The amount of interest credited fluctuates in
step with changes in deposit levels, cash surrender values and investment
performance. Income before income taxes is affected by the spread between the
investment earningsincome and the interest credited.credited on the underlying products. Interest
credited expense duringfor the third quarter and first quarternine months of 2005 totaled
$14.0$13.6 million and $41.9 million, respectively, compared to $12.1 million duringand
$36.3 million for the same periodperiods in 2004.
Policy acquisition costs and other insurance expenses, as a percentage of net
premiums, were 12.5%14.4% for the third quarter and 14.2% during13.9% for the first nine months
of 2005. Comparable ratios for third quarter and the first nine months of 20052004
were 16.2% and 2004,14.7%, respectively. Overall, these ratios are expected to
fluctuate due to varying allowance levels within coinsurance-type arrangements,
as well as the amortization pattern of previously capitalized amounts, which are
subject to the form of the reinsurance agreement and the underlying insurance
policies. Additionally, the mix of first year coinsurance business versus yearly
renewable term business can cause the percentage to fluctuate from period to
period.
Other operating expenses, as a percentage of net premiums, were 1.6%1.7% for the
third quarter and 2.2%
during the first quarternine months of 2005, and 2004, respectively. Operating expenses
decreased $2.5 million over samea slight decrease from 2.2% in the
prior-year period. In theperiods. The first quarternine months of 2004 approximately $2.0 million of one-timereflect expenses associated
with the
transferring ofthe Allianz business to RGA were incurred.RGA. The expense ratio is expected to
fluctuate slightly from period to period, however, the addition of
the Allianz business as well as the size and maturity of the
U.S. Operationsoperations segment indicateindicates it should remain fairlyreasonably constant over the
long term.
Asset-Intensive Reinsurance
The U.S. Asset-Intensive sub-segment assumes investment risk within underlying
annuities and corporate-owned life insurance policies. Most of these agreements
are coinsurance, coinsurance with funds withheld or modified coinsurance of
non-mortality risks whereby the Company recognizeswe recognize profits or losses primarily from the
spread between the investment earningsincome and the interest credited on the underlying
deposit liabilities.
17
In accordance with the provisions of Statement of Financial Accounting Standards
("SFAS")SFAS No. 133 Implementation Issue No. B36,
"Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments
That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Obligor under Those Instruments" ("Issue
B36"), the Companywe recorded a change in value of embedded derivatives of $22.6$3.5 million and
$6.2 million within revenues and
$15.7 million of amortization of related deferred acquisition costs.
Income before income taxes increased during the first quarter of 2005 to $17.6
million compared to $3.5 million for the same period in 2004. Contributing to
this growth was an increase in capital gains of $3.4 million, a $9.5 million
increase for Issue B36third quarter and continued growth in the size of the business. The
increase for Issue B36 can primarily be attributed to the general decrease in
credit spreads.
Total revenues, which are comprised primarily of investment income, increased
$36.6 million, or 73.3%, during the first threenine months of
2005, compared to the
same prior-year period. This increase was primarily due to continued growthrespectively and $3.9 million and $6.0 million of change in the asset base for this sub-segment coupleddeferred
acquisition costs associated with the change in the value of embedded
derivatives. We recorded a change in value of embedded derivatives of $(18.6)
million and $0.4 million within revenues for the third quarter and first nine
months of 2004, respectively and $(13.2) million and $4.3 million of change in
deferred acquisition costs associated with the change in the value of embedded
derivatives.
The Asset Intensive business reported income before income taxes of $4.4 million
and $18.3 million for the third quarter and first nine months of 2005.
Comparable figures for the same periods in 2004 were $(0.3) million and $12.7
million, respectively. The increase in income for the third quarter and first
nine months was primarily attributed to Issue B36.B36, which resulted in an
additional $5.1 million and $4.1 million, respectively, of income.
Total revenues increased $31.0 million from third quarter 2004, and $25.1
million from the first nine months of 2004. The primary reason for this increase
was the change in fair value of embedded derivatives, which increased $22.1
million quarter to quarter and $5.8 million nine months to nine months. The fair
value of embedded derivatives is tied primarily to movements in credit spreads,
therefore, the value may fluctuate significantly. Additionally, investment
income increased $8.1 million and $15.9 million for third quarter and the first
nine months of 2005, respectively. A larger asset base in this segment
contributed to this increase.
The average invested asset balance was $3.7base supporting this segment grew from $3.4 billion
and $3.1in the third quarter of 2004 to $3.9 billion for the firstthird quarter of 2005 and 2004, respectively.2005. The
growth in the asset base is primarily being driven by new business written on anone
existing annuity treaty. Invested assets outstanding as of March 31,September 30, 2005
and 2004 were $3.7$4.0 billion and $3.2$3.5 billion, of which $1.9$2.3 billion and $2.1$1.7
billion were funds withheld at interest, respectively. Of the $1.9$2.3 billion total
funds withheld balance 81%as of September 30, 2005, 85.5% of the assets arebalance is
associated with one client.
Total expenses, which are comprised primarily of interest credited, policy
benefits, and acquisition costs increased $22.5$26.2 million, or 48.4%69.4%, duringfrom the
third quarter of 2004, and $19.4 million or 13.7% from the first quarternine months of
2005 compared to the same period in 2004. Contributing toQuarter over quarter, this increase were policy acquisition costs and interest credited expense, which
increased $5.7 million and $5.8 million, respectively. These increases wereis primarily due to the aforementioned increase in the average invested asset base.
Finally,result of the change
in the amortization of deferred acquisition costs relatedrelating to Issue B36.
Expenses relating to Issue B36 increased $11.5$17.1 million over same prior-year period.from third quarter 2004.
As stated above, significant fluctuations may occur as the fair value of the
derivatives is tied primarily to movements in the credit spreads affecting the
underlying funds withheld investment portfolios. The increase nine months to
nine months can be attributed mainly to the increase in amortization of deferred
acquisition costs primarily related to higher investment spreads.
15
Financial Reinsurance
The U.S. Financial Reinsurance sub-segment income consists primarily of net fees
earned on financial reinsurance transactions. The majority of the financial
reinsurance transactions assumed by the Company are retroceded to other
insurance companies. The fees earned from the assumption of the financial
reinsurance contracts are reflected in other revenues, and the fees paid to
retrocessionaires are reflected in policy acquisition costs and other insurance
expenses. Fees are also earned on brokered business in which the Company does
not participate in the assumption of the financial reinsurance. This income is
reflected in other revenues.
Income before income taxes increased $0.6 million, or 21.3%decreased 2.1%, during the firstthird quarter of 2005
compared to the same period in 2004. This2004, but increased 9.0% for the first nine
months of 2005 compared to same period in the prior year. Year over year, the
increase was largely
duecan be primarily attributed to the net fees earned on two new deals bookedtransactions
recorded in late 2004.
At March 31,September 30, 2005 and 2004, the amount of reinsurance provided, as measured
by pre-tax statutory surplus, was $1.6$1.5 billion and $1.3 billion, respectively.
The pre-tax statutory surplus includes all business assumed or brokered by the
Company. Fees earned from this business can vary significantly depending on the
size of the transactions and the timing of their completion and therefore can
fluctuate from period to period.
18
CANADA OPERATIONS
The Company conducts reinsurance business in Canada through RGA Life Reinsurance
Company of Canada ("RGA Canada"), a wholly-owned subsidiary. RGA Canada assists
clients with capital management activity and mortality risk management, and is
primarily engaged in traditional individual life reinsurance, as well as group
reinsurance and non-guaranteed critical illness products.
FOR THE THREE MONTHS ENDED MARCH 31, (IN THOUSANDS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2005 2004 2005 2004
-------- ------- -------- --------
(in thousands)
REVENUES:
Net premiums $ 73,756 $ 60,14889,074 $59,231 $239,684 $181,209
Investment income, net of related expenses 28,760 23,980
Realized investment30,211 25,142 87,784 72,559
Investment related gains (losses), net 834 1,3091,032 (19) 4,247 8,159
Other revenues 34(319) (31) (266) 38
-------- ------- -------- --------
Total revenues 103,384 85,475119,998 84,323 331,449 261,965
BENEFITS AND EXPENSES:
Claims and other policy benefits 68,646 59,36673,810 59,568 216,707 178,433
Interest credited 357 377266 530 875 1,325
Policy acquisition costs and other
insurance expenses 6,713 7,08319,932 5,672 36,310 21,033
Other operating expenses 3,459 2,7293,921 2,718 11,000 8,208
-------- ------- -------- --------
Total benefits and expenses 79,175 69,55597,929 68,488 264,892 208,999
Income before income taxes $ 24,20922,069 $15,835 $ 15,92066,557 $ 52,966
======== ======= ======== ========
Income before income taxes increased by $8.3$6.2 million, or 52.1%39.4%, and by $13.6
million, or 25.7%, in the third quarter and first quarternine months of 2005.2005,
respectively. The increaseincreases in 2005 waswere primarily the result of favorable
mortality experience in the current year, offset by a decrease in realized
investment gains of $0.5 million, or 3.0%.year. In addition, the Canadian dollar was
stronger against the U.S. dollar in 2005 than in 2004, causing an increase in
2005 of $1.8$1.7 million, or 11.3%10.8%, and $5.0 million, or 9.4%, in the third quarter
and first nine months, respectively, in income before income taxes. The increase
in the first nine months was offset by a decrease in realized investment gains
of $3.9 million, or a 47.9% decrease.
Net premiums increased by $13.6$29.8 million, or 22.6%50.4%, and $58.5 million, or 32.3%,
in the third quarter and first nine months of 2005, respectively. The increase
is primarily due to new business from new and existing treaties. Approximately
$12.0 million of the premium increase represents the effect of an inforce treaty
that was executed this quarter on a retroactive basis. In addition, a stronger
Canadian dollar resulted in an increase in net premiums of $5.1$7.2 million or 8.5%12.2%
and $18.9 million or 10.4% in the third quarter and the first nine months,
respectively, in 2005 relative to 2004. Premium levels are significantly
influenced by large transactions, mix of business and reporting practices of
ceding companies and therefore can fluctuate from period to period.
Net investment income increased $4.8$5.1 million, or 19.9%20.2%, and $15.2 million, or
21.0%, in 2005.the third quarter and the first nine months of 2005, respectively.
Investment performance varies with the composition of investments. In the third
quarter of 2005, the increase in investment income was mainly the result of a
stronger 16
Canadian dollar, which resulted in an increase of $1.8$2.3 million, or 7.7%; an
increase in the invested asset base due to operating cash flows on traditional
reinsurance, which resulted in an increase of $1.2 million, or 4.9%; and interest on an
increasing amount of funds withheld at interest related to one treaty, which
resulted in an increase of $0.6 million. In the first nine months of 2005, the
increase in investment income was mainly the result of a stronger Canadian
dollar, which resulted in an increase of $6.5 million, or 2.4%.an increase in the
invested asset base due to operating cash flows on traditional reinsurance,
which resulted in an increase of $3.0 million, and interest on an increasing
amount of funds withheld at interest related to one treaty, which resulted in an
increase of $1.7 million. Investment income also includes an
19
allocation to the segments based upon average assets and related capital levels
deemed appropriate to support business volumes. The amount of investment income
allocated to the Canadian operations was $2.0$1.4 million and $1.4$5.2 million in 2005the
third quarter and 2004, respectively.
For the first quarternine months of 2005, respectively, compared to $1.0
million and $3.5 million in the loss ratiocomparable prior-year periods.
Loss ratios for this segment was 93.1%were 82.9% and 90.4% in the third quarter and first
nine months of 2005, respectively, compared to 98.7%100.6% and 98.5% in 2004.the
comparable prior-year periods. Excluding creditor business, the loss ratios for
this segment were 95.6% and 96.6% in the third quarter and first nine months of
2005, respectively, compared to 102.4% and 101.0% in the comparable prior-year
periods. The lower loss ratio for the current periodfirst nine months of 2005 is primarily due
to better mortality experience compared to the prior year.
Additionally, the current period ratio benefited from a $0.5 million reduction
in the liability for the December 2004 Indian Ocean tsunami claims. Claims
associated with that disaster have been lower than originally anticipated. Historically, the
loss ratio increased primarily as the result of several large permanent level
premium in-force blocks assumed in 1998 and 1997. These blocks are mature blocks
of permanent level premium business in which mortality as a percentage of net
premiums is expected to be higher than the historical ratios. The nature of
permanent level premium permanent policies requires the Company to set up actuarial
liabilities and invest the amounts received in excess of early-year mortality
costs to fund claims in the later years when premiums, by design, continue to be
level as compared to expected increasing mortality or claim costs. Claims and
other policy benefits, as a percentage of net premiums and investment income
were 67.0% during61.9% and 66.2% in the third quarter and first nine months of 2005,
respectively, compared to 70.6% and 70.3% in 2004.the comparable prior-year periods.
Death claims are reasonably predictable over a period of many years, but are
less predictable over shorter periods and are subject to significant
fluctuation.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums totaled 9.1%22.4% and 15.1% in the third quarter and first nine months of
2005, respectively, compared to 9.6% and 11.8%11.6% in 2004.the prior-year periods.
Excluding creditor business, policy acquisition costs and other insurance
expenses as a percentage of net premiums totaled 13.7% and 10.6% in the third
quarter and first nine months of 2005, respectively, compared to 8.3% and 10.2%
in the prior-year periods. Policy acquisition costs and other insurance expenses
as a percentage of net premiums vary from period to period primarily due to the
mix of the business in the segment.
Other operating expenses increased $0.7$1.2 million, or 26.8%44.3%, and $2.8 million, or
34.0%, in 2005. The increasethe third quarter and first nine months of 2005, respectively. Other
operating expenses as a percentage of net premiums totaled 4.4% and 4.6% in the
third quarter and first nine months of 2005, is primarily attributablerespectively, compared to 4.6% and
4.5% in the strengthening of the Canadian dollar.prior-year periods.
20
EUROPE & SOUTH AFRICA OPERATIONS
The Europe & South Africa segment has operations in India, Mexico, Spain, South
Africa and the United Kingdom. The segment provides life reinsurance for a
variety of products through yearly renewable term and coinsurance agreements,
and reinsurance of accelerated critical illness coverage, (payswhich pays on the
earlier of death or diagnosis of a pre-defined critical illness).illness. Reinsurance
agreements may be either facultative or automatic agreements covering primarily
individual risks and in some markets, group risks.
FOR THE THREE MONTHS ENDED MARCH 31, (IN THOUSANDS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2005 2004 --------- ---------2005 2004
-------- -------- -------- --------
(in thousands)
REVENUES:
Net premiums $ 141,358 $ 117,203$137,145 $116,873 $411,475 $352,963
Investment income, net of
related expenses 2,555 1,544
Realized investment2,127 1,390 7,035 3,797
Investment related gains, net 43 3,159391 341 327 4,643
Other revenues 52 438
--------- ---------89 673 210 1,555
-------- -------- -------- --------
Total revenues 144,008 122,344139,752 119,277 419,047 362,958
BENEFITS AND EXPENSES:
Claims and other policy benefits 96,332 81,99797,039 76,089 305,488 231,895
Interest credited 363109 -- 662 --
Policy acquisition costs and
other insurance expenses 26,396 29,03119,595 27,752 68,111 86,625
Other operating expenses 5,660 4,6827,264 5,480 20,042 15,686
Interest expense 499 374
--------- ---------369 379 1,251 1,086
-------- -------- -------- --------
Total benefits and expenses 129,250 116,084124,376 109,700 395,554 335,292
Income before income taxes $ 14,75815,376 $ 6,2609,577 $ 23,493 $ 27,666
======== ======== ======== ========
17
Europe & South Africa netIncome before income taxes was $15.4 million during the third quarter of 2005 as
compared to $9.6 million during the third quarter of 2004. This increase was
primarily the result of the growth in premiums and better than expected
mortality and morbidity experience. Income before income taxes was $23.5 million
for the first nine months of 2005 as compared to $27.7 million for the first
nine months of 2004. This decrease was primarily the result of adverse mortality
and morbidity experience in the UK operation reported in the second quarter.
Net premiums increased $24.2$20.3 million, or 20.6%17.3%, during the currentthird quarter
compared to the same period last year, and increased $58.5 million or 16.6%
during the nine months ended September 30, 2005 compared to the same period last
year. This increase was primarily the result of new business from both existing
treaties and new treaties, combined withand was affected by the translation effects of a generally weakerthe U.S.
dollar. Several foreign currencies, particularly the British pound, the euro,
and the South African rand weakened against the U.S. dollar and adversely
affected net premiums by approximately $2.0 million for the third quarter. These
currencies strengthened against the U.S. dollar in the current
quarter. The effect of the stronger local currencies was an increase in 2005and contributed approximately
$7.4 million to net premiums for the first nine months of $5.3 million.2005. Also, a portion
of the growth of net premiums was due to reinsurance of accelerated critical
illness, primarily in the U.K. ThisUK. Premiums earned during the third quarter and first
nine months associated with critical illness coverage provides a benefittotaled $49.2 million and
$149.4 million, respectively, compared to $41.2 million and $128.0 million in
the event of a death from or the diagnosis of a
defined critical illness. Net premiums earned from this coverage totaled $50.9
million this quarter compared to $45.6 million during the first quarter of 2004.prior-year periods. Premium levels are significantly influenced by large
transactions and reporting practices of ceding companies and therefore can
fluctuate from period to period.
Investment income increased $1.0$0.7 million thisfor the third quarter compared to the
same period in 2004, and increased $3.2 million for the nine months ended
September 30, 2005 compared to the same period in 2004. This increase wasThese increases were
primarily due to growth in the invested assets in the U.K.UK and South Africa of $24.1 millionan increase in
allocated investment income. Investment income and $20.7 million, respectively.realized investment gains and
losses are allocated to the various operating segments based on average assets
and related capital levels deemed appropriate to support the segment business
volumes.
21
Investment performance varies with the composition of investments and the
relative allocation of capital to the operating segments.
Loss ratios were 68.1% and 70.0%increased to 70.8% for the first three monthsthird quarter of 2005 from 65.1% for the
third quarter of 2004, and 2004,
respectively.to 74.2% for the nine months ended September 30, 2005
from 65.7% for the nine months ended September 30, 2004. As mentioned above,
adverse mortality experience in the UK during the second quarter contributed to
the increase in the loss ratio for the nine months ended September 30, 2005.
Death claims are reasonably predictable over a period of many years, but are
less predictable over shorter periods and are subject to significant
fluctuation.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums represented 18.7%were 14.3% in the third quarter of 2005 compared to 23.7% in the third
quarter of 2004, and 24.8%16.6% for the current and
prior-year quarter, respectively.nine months ended September 30, 2005 compared
to 24.5% for the nine months ended September 30, 2004. These percentages
fluctuate due to timing of client company reporting, variations in the mixture
of business being reinsured and the relative maturity of the business. In
addition, as the segment grows, renewal premiums, which have lower allowances
than first yearfirst-year premiums, represent a greater percentage of the total net
premiums. Accordingly, the change in the mixture of business during the current
quarter caused the loss ratio to slightly increase and caused the policy
acquisition costs and other insurance expenses as a percentage of net premiums
to slightly decrease.
Other operating expenses for the quarter increased 20.9% during this quarter compared to 5.3% of net premiums in
2005 from 4.7% in 2004, and for the same period in 2004.first nine months it increased to 4.9% from
4.4%. This increase was due to higher costs associated with maintaining and
supporting the significant increase in business. As a percentage
of net premiums, other operating expenses were 4.0% during the first three
months of 2005 and 2004. The Company believes that sustained growth
in net premiums should lessen the burden of start-up expenses and expansion
costs over time.
18
ASIA PACIFIC OPERATIONS
The Asia Pacific segment has operations in Australia, Hong Kong, Japan,
Malaysia, New Zealand, South Korea, Taiwan and mainland China. The principal
types of reinsurance for this segment include life, critical care and illness,
disability income, superannuation, and financial reinsurance. Superannuation is
the Australian government mandated compulsory retirement savings program.
Superannuation funds accumulate retirement funds for employees, and in addition,
offer life and disability insurance coverage. Reinsurance agreements may be
either facultative or automatic agreements covering primarily individual risks
and in some markets, group risks. The Company operates multiple offices
throughout eachthe Asia Pacific region in an effort to best meet the needs of the
local client companies.
FOR THE THREE MONTHS ENDED MARCH 31, (IN THOUSANDS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2005 2004 2005 2004
-------- ----------------- -------- --------
(in thousands)
REVENUES:
Net premiums $118,207 $ 103,539$135,336 $103,362 398,562 $291,079
Investment income, net of related expenses 6,228 3,735
Realized investment7,504 4,398 21,042 11,162
Investment related gains, (losses), net (79) 34766 244 120 442
Other revenues (187) 635699 (423) 2,647 3,162
-------- ----------------- -------- --------
Total revenues 124,169 108,256143,605 107,581 422,371 305,845
BENEFITS AND EXPENSES:
Claims and other policy benefits 90,660 74,845114,059 84,611 315,336 226,836
Policy acquisition costs and other insurance expenses 23,655 21,53017,943 17,514 64,147 50,922
Other operating expenses 4,674 4,7427,232 6,478 19,065 16,893
Interest expense 408 342423 384 1,272 1,109
-------- ----------------- -------- --------
Total benefits and expenses 119,397 101,459139,657 108,987 399,820 295,760
Income (loss) before income taxes $ 4,7723,948 $ 6,797(1,406) $ 22,551 $ 10,085
======== ======== ======== ========
22
Income (loss) before income taxes decreased 29.8%increased $5.4 million during the firstthird
quarter of 2005, and $12.5 million for the nine months ended September 30, 2005,
as compared to the same periodperiods in 2004. The decreaseStrengthening foreign currencies
increased the segment's income before income taxes by approximately $1.7 million
for the nine months ending September 30, 2005 although the impact for the third
quarter of 2005 was not significant. In addition to the impact of foreign
currencies, the increase in income before taxes was primarily the result of
poor mortality experience in the Japan market. Income before income taxes for
Japan reflected a $5.4 million loss for the first quarter of 2005 compared to a
$1.0 million gain for the same period in 2004. This loss in Japan was partially
offset by an increase of approximately $2.5 million in net investment income in
the first quarter of 2005 comparedstrong premium growth, and favorable underwriting results relative to the same period in 2004, and modest
changes in the underwriting results of other Asia Pacific offices.prior
year.
Net premiums grew $14.7$32.0 million, or 14.2%30.9%, during the current quarter, and
$107.5 million, or 36.9%, for the nine months ended September 30, 2005, as
compared to the same periods in 2004. This premium growth was primarily as athe
result of continued increases in the volume of business in Australia, Japan and
Korea. The reinsurance of accelerated critical illness business, primarily in
Australia and Korea, contributed to the growth. This coverage
provides a benefit in the event of a death from or the diagnosis of a defined
critical illness.increased volume. Net premiums earned
from this coverage totaled $17.1$12.2 million and $8.4$46.5 million for the third quarter
and first nine months of 2005, respectively, compared to $8.5 million and $26.7
million in the first three monthssame periods of 2005 and 2004, respectively.2004. Premium levels are significantly influenced
by large transactions and reporting practices of ceding companies and therefore
can fluctuate from period to period.
Several foreign currencies, particularly the Korean won, the Australian dollar
and the AustralianNew Zealand dollar continued to strengthen against the U.S. dollar in the current quarter.dollar. The
overall effect of the strengthening of local Asia Pacific segment currencies was
an increase of approximately $8.0 million in firstthird quarter 2005 net premiums,
and an increase of $2.8approximately $23.1 million in 2005 year to date net premiums
over the comparable prior-year period.periods.
Net investment income increased $2.5$3.1 million in the current quarter compared to
the prior-year quarter.quarter, and $9.9 million for the nine months ended September 30,
2005 as compared to the same period for 2004. This increase was primarily due to
growth in the invested assets in Australia and favorable exchange rates, along
with an increase in allocated investment income. Investment income and realized
investment gains and losses are allocated to the various operating segments
based on average assets and related capital levels deemed appropriate to support
the segment business volumes. Investment performance varies with the composition
of investments and the relative allocation of capital to the operating segments.
19
Other revenue includesrevenues, which include the profit and fees associated with financial
reinsurance deals in Japan and Taiwan. The firstmultiple locations, increased by $1.1 million for the third
quarter of 2005, includesas compared to the effects ofsame period in 2004, but have decreased by
$0.5 million for the recapturenine-month period ending September 30, 2005, as compared to
the same period in 2004. The increase for the third quarter was caused primarily
by increased business within financial reinsurance treaties in Japan. The
decrease year-to-date was caused primarily by the termination of a significant
client treaty in Korea and in Hong Kong.
Loss ratios were 76.7%84.3% and 72.3%81.9% for the firstthird quarter of 2005 and 2004,
respectively.respectively, and 79.1% and 77.9% for the nine months ended September 30, 2005
and September 30, 2004. The current quarter loss ratio was higher than the
comparable prior-year period primarily due to poor
mortality experience in Japan. The pooradverse mortality in Japan was partially offset
by approximately $0.8 millionthe New
Zealand, Hong Kong and Korea markets. Loss ratios for the nine-month period
ending September 30, 2005 are slightly higher than the comparable prior year
period primarily due to a reductionadverse mortality in the liabilityJapan market during the first
quarter of 2005. Loss ratios for Japan were 98.9% for the December 2004 Indian Ocean tsunami, as claim levels from that disaster have been
lower than originally anticipated. This percentagenine months ended
September 30, 2005, compared to 84.0% for the same period of 2004. Loss ratios
will fluctuate due to timing of client company reporting, variations in the
mixture of business being reinsured and the relative maturity of the business.
Death claims are reasonably predictable over a period of many years, but are
less predictable over shorter periods and are subject to significant
fluctuation.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums were 13.3% during the firstthird quarter of 2005, was 20.0%, consistent with the 20.8%
ratioand 16.1% for the same periodnine
months ended September 30, 2005. The comparable ratios in 2004 were 16.9% for
the third quarter, and 17.5% for the nine months ended September 30, 2004. The
ratio of policy acquisition costs and other insurance expenses as a percentage
of net premiums will generally decline as the business matures. Thematures, however, the
percentage also fluctuatesdoes fluctuate periodically due to timing of client company reporting
and variations in the mixture of business being reinsured.
Other operating expenses decreased to 4.0%5.3% of net premiums in the current
quarter, from 4.6%6.3% in the comparable prior-year period, and decreased to 4.8%
for the nine months ended September 30, 2005, from 5.8% in the comparable
prior-year period. This decrease related to
lower consulting expenses in the current period. The Company believes that
sustained growth in net premiums should lessen the burden of start-up expenses
and expansion costs over time. The timing of premium flows and the level of costs associated
with the entrance into and development of new markets in the growing Asia
Pacific segment may cause other operating expenses as a percentage of net
premiums to be somewhat volatile over periods of time.
23
CORPORATE AND OTHER OPERATIONS
Corporate and Other revenues include investment income from invested assets not
allocated to support segment operations and undeployed proceeds from the
Company's capital raising efforts, in addition to unallocated realized capital
gains or losses. General corporate expenses consist of unallocated overhead and
executive costs and interest expense related to debt and the $225.0 million of
5.75% mandatorily redeemable trust preferred securities. Additionally, the
Corporate and Other operations segment includes results from RGA Technology
Partners, Inc., a wholly-owned subsidiary that develops and markets technology
solutions for the insurance industry, the Company's Argentine privatized pension
business, which is currently in run-off, and an insignificant amount of direct
insurance operations in Argentina.
FOR THE THREE MONTHS ENDED MARCH 31, (IN THOUSANDS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2005 2004 2005 2004
-------- --------------- -------- --------
(in thousands)
REVENUES:
Net premiums $ 381488 $ 591237 $ 1,466 $ 1,922
Investment income, net of related expenses 5,966 4,738
Realized investment41 7,199 11,803 17,252
Investment related gains, net 100 5,899837 1,904 11,692 9,790
Other revenues 1,632 1,3553,484 2,687 11,970 5,580
-------- ------- -------- --------
Total revenues 8,079 12,5834,850 12,027 36,931 34,544
BENEFITS AND EXPENSES:
Claims and other policy benefits 836 9764,073 1,496 33,901 3,917
Interest credited 75 69163 81 378 243
Policy acquisition costs and other insurance expenses 202 54430 481 4,334 1,216
Other operating expenses 7,176 7,0716,953 8,008 21,642 22,119
Interest expense 8,978 8,8229,260 8,892 27,309 26,540
-------- ------- -------- --------
Total benefits and expenses 17,267 16,99220,879 18,958 87,564 54,035
Loss before income taxes $ (9,188) $(4,409)$(16,029) $(6,931) $(50,633) $(19,491)
======== ======= ======== ========
Loss before income taxes increased $4.8$9.1 million to $9.2and $31.1 million during the
firstthree- and nine-month periods ended September 30, 2005, respectively. The
increased loss in the third quarter of 2005 from $4.4 million during the same period in 2004. This increase was primarily due to a $5.8 millionreduction in
investment income and higher claims and other policy benefits partially offset
by reduced operating expenses. The decrease in unallocated realized investment gains, offset in part by a $1.2 millionincome was the result
of an allocation to other segments based upon average assets and related capital
levels deemed appropriate to support their business volumes.
Also contributing to the increase in unallocated investment
income.
20
losses for the nine-month period was a
$24.0 million pre-tax increase in the reserves associated with the reinsurance
of Argentine pension accounts recorded in the second quarter of 2005.
DISCONTINUED OPERATIONS
The discontinued accident and health division reported a loss, net of taxes, of
$0.7$5.9 million for the firstthird quarter of 2005 compared to a loss, net of taxes, of
$0.9$18.6 million for the firstthird quarter of 2004. The decrease in net loss in 2005
was due primarily to a negotiated settlement in 2004 of all disputed claims
associated with the Company's largest identified accident and health exposure.
As a result of this settlement, the Company's discontinued accident and health
operation recorded a $24.0 million pre-tax charge during the third quarter of
2004. As of March 31,September 30, 2005, amounts in dispute or subject to audit exceed
the Company's reserves by approximately $30.0$27.5 million. The calculation of the
claim reserve liability for the entire portfolio of accident and health business
requires management to make estimates and assumptions that affect the reported
claim reserve levels. Management must make estimates and assumptions based on
historical loss experience, changes in the nature of the business, anticipated
outcomes of claim disputes and claims for rescission, and projected future
premium run-off, all of which may affect the level of
24
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.
LIQUIDITY AND CAPITAL RESOURCES
The Holding Company
RGA is a holding company whose primary uses of liquidity include, but are not
limited to, the immediate capital needs of its operating companies associated
with the Company's primary businesses, dividends paid by RGA to its
shareholders, interest payments on its indebtedness, and repurchases of RGA
common stock under a plan approved by the board of directors. The Company has no
plans to purchase additional shares at this time. The primary
sources of RGA's liquidity include proceeds from its capital raising efforts,
interest income on undeployed corporate investments, interest income received on
surplus notes with two operating subsidiaries, and dividends from operating
subsidiaries. As the Company continues its expansion efforts, RGA will continue
to be dependent on these sources of liquidity.
The Company believes that it has sufficient liquidity to fund its cash needs
under various scenarios that include the potential risk of the early recapture
of a reinsurance treaty by the ceding company and significantly higher than
expected death claims. Historically, the Company has generated positive net cash
flows from operations. However, in the event of significant unanticipated cash
requirements beyond normal liquidity, the Company has multiple liquidity
alternatives available based on market conditions and the amount and timing of
the liquidity need. These options include borrowings under committed credit
facilities, secured borrowings, the ability to issue long-term debt, capital
securities or common equity and, if necessary, the sale of invested assets
subject to market conditions.assets.
Cash Flows
The Company's net cash flows provided by operating activities for the three
monthsperiods
ended March 31,September 30, 2005 and 2004 were $209.5$360.9 million and $247.1$461.3 million,
respectively. Cash flows from operating activities are affected by the timing of
premiums received, claims paid, and working capital changes. The $37.6$100.4 million
net decrease in operating cash flows during the first quarternine months of 2005 compared to
the same period in 2004 was primarily a result of cash outflows related to
claims, acquisition costs, income taxes and other operating expenses increasing
more than cash inflows related to premiums and investment income. Cash from
premiums and investment income increased $98.6$271.1 million and $20.6$62.8 million,
respectively, and was offset by higher operating cash outlays of $156.8$434.3 million
during the current quarter.nine-month period. The Company believes the short-term cash
requirements of its business operations will be sufficiently met by the positive
cash flows generated. Additionally, the Company believes it maintains a high
quality fixed maturity portfolio with positive liquidity characteristics. These
securities are available for sale and could be sold if necessary to meet the
Company's shortshort- and long-term obligations.
Net cash used in investing activities was $210.8$362.6 million and $113.6$547.5 million in
the current quarterfirst nine months of 2005 and the comparable prior-year quarter,period,
respectively. The increasedecrease in cash used in investing activities and, in
particular, the purchasessales of fixed maturity securities, are primarily related to the
management of the Company's investment portfolios and the investment of excess
cash generated by operating and financing activities.
Net cash used in financing activities was $14.2$5.8 million in the first quarternine months
of 2005 and net cash provided by financing activities was $37.0$131.0 million in the
first quartersame period of 2004. This change was largely due to net withdrawals froma decrease in excess
deposits on universal life and other investment type policies and contracts of
$12.9 million
during the current quarter compared to excess deposits or $32.9 million in 2004.
21
$123.3 million.
Debt and Preferred Securities
As of March 31,September 30, 2005, the Company had $405.2$403.0 million in outstanding
borrowings under its debt agreements and was in compliance with all covenants
under those agreements.
The Company's U.S.On September 29, 2005 the Company entered into a five-year, syndicated credit
facility expireswith an overall capacity of $600.0 million. The Company may borrow up
to $300.0 million of cash under the facility. The amount of the overall capacity
available for issuance of letters of credit is reduced by any cash borrowings
made by the Company against this credit facility. The Bank of New York is the
administrative agent for the credit facility. Interest on borrowings is based
either on the prime, federal funds or LIBOR rates plus a base rate margin
defined in the agreement. Fees payable for the credit facility depend upon the
Company's senior unsecured long-term debt rating. The Company immediately
borrowed $50.0 million under the facility, using the funds to prepay the
outstanding
25
debt under a $175.0 million credit facility held by the Company, which was due
to expire in May 2006 and has a total capacity
of $175.0 million.2006. The Company generally may not pay dividends under the
credit agreement unless, at the time of declaration and payment, a default would
not exist under the agreement. As of March 31,September 30, 2005, the Company had $50.0
million outstanding under this facility at a blendedan average interest rate of 3.5%4.30%.
The credit agreement is unsecured but contains affirmative, negative and
financial covenants that we believe to be customary for financings of this type.
The average interest rate on all long-term debt outstanding, excluding the
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company ("Trust
Preferred Securities"), was 6.3%6.43%. Interest is expensed on the face amount, or
$225 million, of the Trust Preferred Securities at a rate of 5.75%. TheDuring the
second quarter of 2005, the Company's U.K.L15.0 million credit facility had
an outstanding balance of $28.4 million as of March 31, 2005. Thisexpired and
was replaced with a new facility expires inwith a May 20052007 expiration. The capacity and
payment schedule are the same and the Companyinterest rate is currently in the process of renewing the
facility. The Company can give no assurances that it will be successful in
negotiating the renewal, and if successful, that the terms, including cost, will
be comparable to the current terms.expired
facility. At September 30, 2005 the maximum amount of borrowings (approximately
$26.5 million) were outstanding under this credit facility.
Asset / Liability Management
The Company actively manages its assets using an approach that is intended to
balance quality, diversification, asset/liability matching, liquidity and
investment return. The goals of the investment process are to optimize
after-tax, risk-adjusted investment income and after-tax, risk-adjusted total
return while managing the assets and liabilities on a cash flow and duration
basis.
The Company has established target asset portfolios for each major insurance
product, which represent the investment strategies intended to profitably fund
its liabilities within acceptable risk parameters. These strategies include
objectives for effective duration, yield curve sensitivity and convexity,
liquidity, asset sector concentration and credit quality.
The Company's liquidity position (cash and cash equivalents and short-term
investments) was $161.9$176.2 million and $184.1 million at March 31,September 30, 2005 and
December 31, 2004, respectively. Liquidity needs are determined from valuation
analyses conducted by operational units and are driven by product portfolios.
Annual evaluations of demand liabilities and short-term liquid assets are
designed to adjust specific portfolios, as well as their durations and
maturities, in response to anticipated liquidity needs.
The Company occasionally enters into sales of investment securities under
agreements to repurchase the same securities to help manage its short-term
liquidity requirements. These transactions are reported as collateralized
financings and the repurchase obligation is a component of other liabilities.
There were no agreements outstanding at December 31, 2004, and at March 31,September 30,
2005, there were $23.7$57.4 million in repurchase agreements outstanding.
Future Liquidity and Capital Needs
Based on the historic cash flows and the current financial results of the
Company, subject to any dividend limitations which may be imposed by various
insurance regulations, management believes RGA's cash flows from operating
activities, together with undeployed proceeds from its capital raising efforts,
including interest and investment income on those proceeds, interest income
received on surplus notes with two operating subsidiaries, and its ability to
raise funds in the capital 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 plan approved by the board of directors, and to meet its other liquidity
obligations.
A general economic downturn or a downturn in the equity and other capital
markets could adversely affect the market for many annuity and life insurance
products. Because the Company obtains substantially all of its revenues through
reinsurance arrangements that cover a portfolio of life insurance products, as
well as annuities, its business would be harmed if the market for annuities or
life insurance were adversely affected.
INVESTMENTS
The Company had total cash and invested assets of $11.0$11.8 billion and $9.6$10.2
billion at March 31,September 30, 2005 and 2004, respectively. All investments made by
RGA and its subsidiaries conform to the qualitative and quantitative limits
prescribed by the applicable jurisdiction's insurance laws and regulations. In
addition, the Boards of Directors of the various operating companies
periodically review the investment portfolios of their respective subsidiaries.
The RGA
22
RGA's Board of Directors also receives reports on material investment
portfolios. The Company's investment strategy is to
26
maintain a predominantly investment-grade, fixed maturity portfolio, to provide
adequate liquidity for expected reinsurance obligations, and to maximize total
return through prudent asset management. The Company's earned yield on invested
assets, excluding funds withheld, was 5.75%5.89% during the firstthird quarter of 2005,
compared with 5.83%6.03% for the firstthird quarter of 2004. See "Note 5 - INVESTMENTS" in
the Notes to Consolidated Financial Statements of the 2004 Annual Report for
additional information regarding the Company's investments.
The Company's fixed maturity securities are invested primarily in commercial and
industrial bonds, public utilities, U.S. and Canadian government securities, as
well as mortgagemortgage- and asset-backed securities. As of March 31,September 30, 2005,
approximately 97.9%97.6% of the Company's consolidated investment portfolio of fixed
maturity securities was investment-grade.investment grade. Important factors in the selection of
investments include diversification, quality, yield, total rate of return
potential and call protection. The relative importance of these factors is
determined by market conditions and the underlying product or portfolio
characteristics. Cash equivalents are invested in high-grade money market
instruments. The largest asset class in which fixed maturities were invested was
in corporate securities, including commercial, industrial, finance and utility
bonds, which represented approximately 59.8%58.0% and 60.4%44.3% of fixed maturity
securities as of March 31,September 30, 2005 and 2004, respectively. These corporate
securities had an average Standard and Poor's ("S&P") rating of "A""A-" at
March 31,September 30, 2005.
Within the fixed maturity security portfolio, the Company holds approximately
$122.7$117.2 million in asset-backed securities at March 31,September 30, 2005, which include
credit card and automobile receivables, home equity loans, manufactured housing
bonds and collateralized bond obligations. The Company's asset-backed securities
are diversified by issuer and contain both floating and fixed rate securities.
In addition to the risks associated with floating rate securities, principal
risks in holding asset-backed securities are structural, credit and capital
market risks. Structural risks include the securitiessecurities' priority in the issuer's
capital structure, the adequacy of and ability to realize proceeds from
collateral, and the potential for prepayments. Credit risks include consumer or
corporate credits such as credit card holders, equipment lessees, and corporate
obligors. Capital market risks include general level of interest rates and the
liquidity for these securities in the marketplace.
The Company monitors its fixed maturity securities to determine impairments in
value and evaluates factors such as financial condition of the issuer, payment
performance, the length of time and the extent to which the market value has
been below amortized cost, compliance with covenants, general market conditions
and industry sector, current intent and ability to hold securities and various
other subjective factors. Based on management's judgment, securities determined
to have an other-than-temporary impairment in value are written down to fair
value. The Company did not record any other-than-temporary write-downs on fixed
maturity securities duringfor the threenine months ending March 31,September 30, 2005. TheDuring the
nine months ending September 30, 2004, the Company recorded other-than-temporaryother than temporary
write-downs of $0.1 million for the three months
ending March 31, 2004.$2.5 million. During the threenine months ended March 31,September 30, 2005,
the Company sold fixed maturity securities with a fair value of $162.7$534.5 million,
which was below amortized cost, at a net loss of $3.4$14.1 million.
The following table presents the total gross unrealized losses for 638499 fixed
maturity securities and equity securities as of March 31,September 30, 2005, where the
estimated fair value had declined and remained below amortized cost by the
indicated amount (in thousands):
At March 31,AT SEPTEMBER 30, 2005
----------------------------------------------------
Gross Unrealized
Losses % of Total
-------------------------- ----------
Less than 20% $47,302$33,229 100%
20% or more for less than six months - -%-- --
20% or more for six months or greater - -%-- --
------- ---
Total $47,302$33,229 100%
While all of these securities are monitored for potential impairment, the
Company's experience indicates that the first two categories do not present as
great a risk of impairment, and often, fair values recover over time. These
securities have generally been adversely affected by overall economic
conditions, primarily an increase in the interest rate environment.
2327
The following tables presents the estimated fair values and gross unrealized
losses for the 638499 fixed maturity securities and equity securities that have
estimated fair values below amortized cost as of March 31,September 30, 2005. These
investments are presented by class and grade of security, as well as the length
of time the related market value has remained below amortized cost.
AS OF MARCH 31,SEPTEMBER 30, 2005
-----------------------------------------------------------------------------------------------------------------------------------------------------
EQUAL TO OR GREATER
LESS THAN 12 MONTHS THAN 12 MONTHS TOTAL
---------------------- ---------------------- ------------------------------------------------- ----------------------- -----------------------
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Fair Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
(in thousands)
---------- ---------- ---------- ---------- -------------- ---------- ----------
(in thousands)
INVESTMENT GRADE SECURITIES:
COMMERCIAL AND INDUSTRIAL $ 696,838597,899 $ 13,9579,987 $30,312 $1,342 $ 35,046 $ 1,582 $ 731,884 $ 15,539628,211 $11,329
PUBLIC UTILITIES 170,934 3,229 3,075 205 174,009 3,434151,243 2,112 1,877 124 153,120 2,236
ASSET-BACKED SECURITIES 32,919 500 4,500 32 37,419 53235,608 752 16,418 257 52,026 1,009
CANADIAN AND CANADIAN PROVINCIAL GOVERNMENTS 22,617 90 - - 22,617 9034,090 215 -- -- 34,090 215
MORTGAGE-BACKED SECURITIES 859,352 12,386 - - 859,352 12,386929,236 10,996 4,532 155 933,768 11,151
FINANCE 382,422 9,432 12,050 478 394,472 9,910249,540 2,767 17,989 584 267,529 3,351
U.S. GOVERNMENT AND AGENCIES 25,171 516 - - 25,171 51617,808 191 -- -- 17,808 191
MUNICIPALS 5,687 132 -- -- 5,687 132
FOREIGN GOVERNMENTS 118,129 949 - - 118,129 94988,419 429 -- -- 88,419 429
---------- ------- ------- ------ ---------- ---------- ---------- -------------- -----------------
INVESTMENT GRADE SECURITIES 2,308,382 41,059 54,671 2,297 2,363,053 43,3562,109,530 27,581 71,128 2,462 2,180,658 30,043
---------- ------- ------- ------ ---------- ---------- ---------- -------------- -----------------
NON-INVESTMENT GRADE SECURITIES:
COMMERCIAL AND INDUSTRIAL 25,776 1,189 - - 25,776 1,18935,651 837 -- -- 35,651 837
FINANCE 7,564 353 -- -- 7,564 353
ASSET-BACKED SECURITIES 4,500 7 -- -- 4,500 7
PUBLIC UTILITIES 5,101 37 - - 5,101 37
FINANCE 1,149 35 - - 1,149 351,703 6 -- -- 1,703 6
---------- ------- ------- ------ ---------- ---------- ---------- -------------- -----------------
NON-INVESTMENT GRADE SECURITIES 32,026 1,261 - - 32,026 1,26149,418 1,203 -- -- 49,418 1,203
---------- ------- ------- ------ ---------- ---------- ---------- -------------- -----------------
TOTAL FIXED MATURITY SECURITIES $2,340,408 $ 42,320 $ 54,671 $ 2,297 $ 2,395,079 $ 44,617$2,158,948 $28,784 $71,128 $2,462 $2,230,076 $31,246
========== ======= ======= ====== ========== ========== ========== ============== =================
EQUITY SECURITIES $ 83,86878,706 $ 2,6831,893 $ -3,358 $ -90 $ 83,86882,064 $ 2,6831,983
========== ======= ======= ====== ========== ========== ========== ============== =================
The Company believes that the analysis of each security whose price has been
below market for twelve months or longer indicated that the financial strength,
liquidity, leverage, future outlook and/or recent management actions support the
view that the security was not other-than-temporarily impaired as of March 31,September
30, 2005. The unrealized losses did not exceed 19.0%11.0% on an individual security
basis and are primarily a result of rising interest rates, changes in credit
spreads and the long-dated maturities of the securities. Additionally, each
security whose price has been below market for twelve months or longer is
investment grade.
The Company's mortgage loan portfolio consists principally of investments in
U.S.-based commercial offices and retail locations. The mortgage loan portfolio
is diversified by geographic region and property type. All mortgage loans are
performing and no valuation allowance has been established as of March 31,September 30,
2005.
Policy loans present no credit risk because the amount of the loan cannot exceed
the obligation due the ceding company upon the death of the insured or surrender
of the underlying policy. The provisions of the treaties in force
28
and the underlying policies determine the policy loan interest rates. Because
policy loans represent premature distributions of policy liabilities, they have
the effect of reducing future disintermediation risk. In addition, the Company
earns a spread between the interest rate earned on policy loans and the interest
rate credited to 24
corresponding liabilities.
Funds withheld at interest comprised approximately 26.3%27.9% and 25.0%25.5% of the
Company's cash and invested assets as of March 31,September 30, 2005 and December 31,
2004, respectively. For agreements written on a modified coinsurance basis and
certain agreements written on a coinsurance basis, assets equal to the net
statutory reserves are withheld and legally owned and managed by the ceding
company, and are reflected as funds withheld at interest on RGA'sthe Company's
balance sheet. In the event of a ceding company's insolvency, RGAthe Company would
need to assert a claim on the assets supporting its reserve liabilities.
However, the risk of loss to RGAthe Company is mitigated by its ability to offset
amounts it owes the ceding company for claims or allowances with amounts owed to
RGAthe Company from the ceding company. Interest accrues to these assets at rates
defined by the treaty terms. The Company is subject to the investment
performance on the withheld assets, although it does not directly control them.
These assets are primarily fixed maturity investment securities and pose risks
similar to the fixed maturity securities the Company owns. To mitigate this
risk, the Company helps set the investment guidelines followed by the ceding
company and monitors compliance. Ceding companies with funds withheld at
interest had a minimum A.M. Best rating of "A-".
Other invested assets represented approximately 2.0% and 1.9% of the Company's
cash and invested assets as of March 31,September 30, 2005 and December 31, 2004.2004,
respectively. Other invested assets include derivative contracts, common stock, preferred stocks and
limited partnership interests. During the first quarter of 2005, the Company
recorded an other-than-temporary writedown of $1.3 million on its investments in
limited partnerships based ondue to losses in the underlying holdings. There were no
additional other-than-temporary writedowns of investments in limited
partnerships in 2005 or 2004.
CONTRACTUAL OBLIGATIONS
The following table displays the Company's contractual obligations that have
materially changed since December 31, 2004 (in millions):
Payment Due by Period
-----------------------------------------------------------------PAYMENT DUE BY PERIOD
--------------------------------------------------------------
Contractual Obligations: Less than
-----------
Contractual Obligations:
Total 1 Year 1 - 3 Years 4 - 5 Years After 5 Years
- ------------------------ ------ -------------------- ----------- ----------- -------------
Short-term debt $126.6 $126.6 $ -- $ -- $ --
Long-term debt 276.4 -- 26.5 50.0 199.9
Life claims payable(1) $735.3 $735.3 $ - $ - $ -payable (1) 705.5 705.5 -- -- --
Limited partnerships 40.6 - 8.4 30.0 2.233.3 33.3 -- -- --
Structured investment contracts 26.6 4.827.4 6.7 15.1 -11.9 8.8 --
Mortgage purchase commitments 15.5 15.5 - - -
------ ------ ----- ----- ----
Total $818.0 $755.6 $15.1 $45.1 $2.2
====== ====== ===== ===== ====24.1 24.1 -- -- --
(1) Included in the other policy claims and benefits line item in the condensed
consolidated balance sheet.
The Company's insurance liabilities, including future policy benefits and
interest sensitiveinterest-sensitive contract liabilities, represent future obligations, where the
timing of payment is unknown because the payment depends on an insurable event,
such as the death of an insured, or policyholder behavior, such as the surrender
or lapse of a policy. These future obligations are established based primarily
on actuarial principles and are reflected on the Company's consolidated balance
sheet, but have been excluded from the table above due to the uncertain timing
of payment.
29
MORTALITY RISK MANAGEMENT
In the normal course of business, the Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding
reinsurance to other insurance enterprises or reinsurers under excess coverage
and coinsurance contracts. In the U.S., the Company retains a maximum of $6.0
million of coverage per individual life. For other countries, particularly those
with higher risk factors or smaller books of business, the Company
systematically reduces its retention. The Company has a number of retrocession
arrangements whereby certain business in force is retroceded on an automatic or
facultative basis.
25
Generally, RGA's insurance subsidiaries retrocede amounts in excess of their
retention to RGA Reinsurance Company ("RGA Reinsurance"), RGA Reinsurance
Company (Barbados) Ltd., or RGA Americas Reinsurance Company, Ltd. Retrocessions
are arranged through the Company's retrocession pools for amounts in excess of
its retention. The Company also retrocedes most of its financial reinsurance
business to other insurance companies to alleviate the strain on statutory
surplus created by this business. For a majority of the retrocessionaires that
wereare not rated, letters of credit or trust assets have been given as additional
security in favor of RGA Reinsurance. In addition, the Company performs annual
financial and in force reviews of its retrocessionaires to evaluate financial
stability and performance.
The Company has never experienced a material default in connection with
retrocession arrangements, nor has it experienced any material difficulty in
collecting claims recoverable from retrocessionaires; however, no assurance can
be given as to the future performance of such retrocessionaires or as to the
recoverability of any such claims.
The Company maintains twoa catastrophe insurance programsprogram ("Program") that renewrenews on
August 13th of each year. The current programsProgram began August 13, 2004. The primary
program2005, and covers
all of RGA's business worldwide and provides protection for
losses incurred during any eventevents involving 10 or more insured deaths. Under this
program, RGA retains the first $50 million in claims, the catastrophe program
covers the next $30 million in claims, and RGA retains all claims in excess of
$80 million. This program covers terrorism related losses including those due to
nuclear, chemical or biological events. Under the second program, which covers
events involving 5 or more insured deaths RGAfrom a single occurrence. The Company
retains the first $25 million in claims, the catastrophe programProgram covers the next $25$50 million
in claims, and RGAthe Company retains all claims in excess of $50$75 million. ItThe
Program covers only losses under U.S. guaranteed issue (corporate owned life
insurance, bank owned life insurance, etc.) reinsurancesreinsurance programs and includes
losses due to acts of terrorism, but excludes terrorism losses due to nuclear, chemical
and/or biological events. Both
programs areThe Program is insured by several insurance companies
and LloydsLloyd's Syndicates, with no single entity providing more than $13$10 million of
coverage.
COUNTERPARTY RISK
In the normal course of business, the Company seeks to limit its exposure to
reinsurance contracts by ceding a portion of the reinsurance to other insurance
companies or reinsurers. Should a counterparty not be able to fulfill its
obligation to the Company under a reinsurance agreement, the impact could be
material to the Company's financial condition and results of operations.
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. RGAThe
Company 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 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).
30
There has been no significant change in the Company's quantitative or
qualitative aspects of market risk during the quarter ended March 31,September 30, 2005
from that disclosed in the 2004 Annual Report.
NEW ACCOUNTING STANDARDS
In December 2004,June 2005, the Financial Accounting Standards Board ("FASB") revised SFAS
No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") to "Share-Based
Payment" ("SFAS 123(r)"). SFAS 123(r) provides
26
more guidance on determining whether certain financial instruments awarded in
share-based payment transactions are liabilities. SFAS 123(r) also requires that
the costFASB completed its review of all share-based transactions should be recorded in the financial
statements. The revised pronouncement will be adopted by the Company during the
first quarter of 2006. The Company expects SFAS 123(r) will increase
compensation expense by $1.1 million in 2006.
In March 2004, the Emerging Issues Task Force ("EITF") of FASB reached further
consensus on Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments" ("EITF 03-1").03-1. EITF 03-1 provides
accounting guidance regarding the determination of when an impairment of debt
and marketable equity securities and investments accounted for under the cost
method should be considered other-than-temporary and recognized in income. An
EITF
03-1 consensus reached in November 2003 also requires certain quantitative and qualitative disclosures for debt and
marketable equity securities classified as available-for-sale or
held-to-maturity under SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities, that are impaired at the balance sheet date but
for which an other-than-temporary impairment has not been recognized." The FASB
decided not to provide additional guidance on the meaning of
other-than-temporary impairment but will issue FSP 115-1, superceding EITF 03-1
and EITF Topic D-44. FSP 115-1 will nullify the accounting guidance on the
determination of whether an investment is other-than-temporarily impaired as set
forth in paragraphs 10-18 of EITF 03-1 and replace those paragraphs with
references to already existing guidance. FSP 115-1 will also clarify and codify
the guidance set forth in Topic D-44. FSP 115-1 is effective for
other-than-temporary impairment analysis conducted in periods beginning after
September 15, 2005. The Company has complied with the disclosure requirements of
EITF 03-1, which were effective December 31, 2003. The accounting guidance of EITF
03-1 relating2003 and remain in effect.
Therefore, FSP 115-1 is not expected to have a material impact on the recognition of investment impairment which was to be
effective in the third quarter of 2004 has been delayed pending the development
of additional guidance. The Company is actively monitoring the deliberations
relating to this issue at the FASB and currently is unable to determine the
impact of EITF 03-1 on itsCompany's
consolidated financial statements.
In conformity with
existing generally accepted accounting principles,May 2005, the Company's gross
unrealized losses totaling $47.3 million at March 31, 2005 are reflected asFASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a componentreplacement of other comprehensive income on the consolidated balance sheet.
Depending on the ultimate guidance issuedAPB Opinion No. 20 and SFAS No. 3. The Statement
is a result of a broader effort by the FASB includingto converge standards with the IASB.
The Statement requires retrospective application to prior periods' financial
statements for a voluntary change in accounting principle unless it is
impracticable. It also requires that a change in method of depreciation,
amortization, or depletion for long-lived, nonfinancial assets be reported as a
change in accounting estimate rather than a change in accounting principle. SFAS
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. SFAS 154 is not expected to have a
material impact on the Company's consolidated financial statements.
In December 2004, the FASB revised SFAS 123 to SFAS 123(r). SFAS 123(r) provides
additional guidance regarding management's assertion about intent and ability to hold
available-for-sale investment securities,on determining whether certain financial instruments awarded
in share-based payment transactions are liabilities. SFAS 123(r) also requires
that the cost of all share-based transactions be recorded in the financial
statements. The revised pronouncement will be adopted by the Company could be required to
report these unrealized lossesduring the
first quarter of 2006. The Company expects SFAS 123(r) will increase
compensation expense by approximately $1.1 million in a different manner, including possibly
reflecting these unrealized losses in the consolidated income statement as
other-than-temporary impairments, even if the unrealized losses are attributable
solely to interest rate movements.2006.
In July 2003, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts."SOP 03-1. SOP
03-1 provides guidance on separate account presentation and valuation, the
accounting for sales inducements and the classification and valuation of
long-duration contract liabilities. The Company adopted the provisions of SOP
03-1 on January 1, 2004, recording a charge of $361 thousand, net of income
taxes.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 including,
among others, statements relating to projections of the strategies, earnings,
revenues, income or loss, ratios, future financial performance, and growth
potential of Reinsurance Group of America, Incorporated and its subsidiaries
(referred to in the following paragraphs as "we," "us," or "our"). The words
"intend," "expect," "project," "estimate," "predict," "anticipate," "should,"
"believe," and other similar expressions also are intended to identify
forward-looking statements. Forward-looking statements are inherently subject to
risks and uncertainties, some of which cannot be predicted or quantified. Future
events and actual results, performance, and achievements could differ materially
from those set forth in, contemplated by, or underlying the forward-looking
statements.
Numerous important factors could cause actual results and events to differ
materially from those expressed or implied by forward-looking statements
including, without limitation, (1) adverse changes in mortality, morbidity or
claims experience, (2) changes in our financial strength and credit ratings or
those of MetLife, Inc. ("MetLife"), the beneficial owner of a majority of our
common shares, or its subsidiaries, and the effect of such changes on our future
results of operations and financial condition, (3) inadequate risk analysis and
underwriting, (4) general economic conditions or a prolonged economic downturn
affecting the demand for insurance and reinsurance in our
31
current and planned markets, (4)(5) the availability and cost of collateral
necessary for regulatory reserves and capital, (6) market or economic conditions
that adversely affect our ability to make timely sales of investment securities,
(5)(7) risks inherent in our risk management and investment strategy, including
changes in investment portfolio yields due to interest rate or credit quality
changes, (6)(8) fluctuations in U.S. or foreign currency exchange rates, interest
rates, or securities and real estate markets, (7)(9) adverse litigation or
arbitration results, (8)(10) the adequacy of reserves, resources and accurate
information relating to settlements, awards and terminated and discontinued
lines of business, (9)(11) the stability of and actions by governments and
economies in the markets in which we operate, (10)(12) competitive factors and
competitors' responses to our initiatives, (11)(13) the success of our clients, (12)(14)
successful execution of our entry into new markets, (13)(15) successful development
and introduction of new products 27
(14)and distribution opportunities, (16) our
ability to successfully integrate and operate reinsurance business that we
acquire, including without limitation, the traditional life reinsurance
business of Allianz Life, (15)(17) regulatory action that may be taken by state Departments of
Insurance with respect to us, MetLife, or its subsidiaries, (16)(18) our dependence
on third parties, including those insurance companies and reinsurers to which we
cede some reinsurance, third-party investment managers and others, (17)(19) the
threat of natural disasters, catastrophes, terrorist attacks, epidemics or
pandemics anywhere in the world where we or our clients do business, (20)
changes in laws, regulations, and accounting standards applicable to us, our
subsidiaries, or our business, (21) the effect of our status as a holding
company and (18)regulatory restrictions on our ability to pay principal of and
interest on our debt obligations, and (22) other risks and uncertainties
described in this document and in our other filings with the Securities and
Exchange Commission ("SEC").
Forward-looking statements should be evaluated together with the many risks and
uncertainties that affect our business, including those mentioned in this
document and the cautionary statements described in the periodic reports we file
with the SEC. These forward-looking statements speak only as of the date on
which they are made. We do not undertake any obligations to update these
forward-looking statements, even though our situation may change in the future.
We qualify all of our forward-looking statements by these cautionary statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.RISK
See "Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk" which is incorporated by referenceincluded herein.
ITEM 4. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer have evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as defined in Exchange Act Rule 13a-15(e) as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that these disclosure controls
and procedures were effective.
There was no change in the Company's internal control over financial reporting
as defined in Exchange Act Rule 13a-15(f) during the quarter ended March 31,September 30,
2005, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is currently a party to two arbitrations that involve its
discontinued accident and health business, including personal accident business
(including London market excess of loss business) and medicalworkers' compensation
carve-out business. In
addition, theThe Company is currently aalso party to litigation that involves the claim
of a brokerone arbitration related to commissions on a medicalits
life reinsurance arrangement.business. As of March 31,September 30, 2005, the companiesparties involved in
these actions have raised claims, or established reserves that may result in
claims, in the amount of $4.8$21.5 million, which is $3.9$20.8 million in excess of the
amounts held in reserve by the Company. The Company generally has little
information regarding any reserves established by the ceding companies, and must
rely on management estimates to establish policy claim liabilities. It is
possible that any such reserves could be increased in the future. The Company
believes it has substantial defenses upon which to contest these claims,
including but not limited to misrepresentation and breach of contract by direct
and indirect ceding companies. In addition, the Company is in the process of
auditing ceding companies that may have threatened
arbitration, asserted claims or indicated that they
anticipate asserting claims in the future against the Company in the amount of
$30.3$11.7 million, which is $29.9$8.6 million in excess of the amounts held in reserve or
retroceded by the Company as of March 31,September 30, 2005. These claims appear to
relate to life, personal accident business (including London market excess of loss
business), and workers' compensation carve-out business. Depending upon the audit
findings or other developments
32
in these cases, they could result in litigation or arbitrations in the future.
See Note 20, "Discontinued Operations," in the Company's 2004 Annual Report for
more information. Additionally, from time to time, the Company is subject to
litigation and arbitration related to its life reinsurance business
and to employment-related matters in the normal course of its
business. While it is not feasible to predict or determine the ultimate outcome
of the pending litigation or arbitrations or provide reasonable ranges of
potential losses, it is the opinion of management, after consultation with
counsel, that their outcomes, after consideration of the provisions made in the
Company's condensed consolidated financial statements, would not have a material
adverse effect on its consolidated financial position. However, it is possible
that an adverse outcome could, from time to time, 28
have a material adverse effect
on the Company's consolidated net income or cash flows in particular quarterly
or annual periods.
In addition, as discussed in the Company's 2004 Annual Report, AFJP claims
payments are linked to AFJP fund unit values, which are artificially inflated
because of the regulatory intervention of the Argentine government. In view of
this fact, coupled with the acceleration of permanent disability payments,
during the third quarter of 2004, the Company formally notified the AFJP ceding
companies that it will no longer make artificially inflated claim payments, as
it has been doing for some time under a reservation of rights, but rather will
pay claims only on the basis of the market value of the AFJP fund units. This
formal notification could result in litigation or arbitrations in the future.
While it is not feasible to predict or determine the ultimate outcome of any
such future litigations or arbitrations or provide reasonable ranges of
potential losses, it is the opinion of management, after consultation with
counsel, that their outcomes, after consideration of the provisions made in the
Company's consolidated financial statements, would not have a material adverse
effect on its consolidated financial position.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Under a Board of Directors approved plan, the Company may purchase at its
discretion up to $50 million of its common stock on the open market. As of
March
31,September 30, 2005, the Company had purchased 225,500 shares of treasury stock
under this program at an aggregate price of $6.6 million. All purchases were
made during 2002. The Company generally uses treasury shares to support the
future exercise of options granted under its stock option plans.
ITEM 66. EXHIBITS
See index to exhibits.
2933
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 May 6,November 7, 2005
-----------------------------------------------------------------------------
A. Greig Woodring
President & Chief Executive
Officer
(Principal Executive Officer)
By: /s/ Jack B. Lay May 6,November 7, 2005
-----------------------------------------------------------------------------
Jack B. Lay
Executive Vice President &
Chief Financial Officer
(Principal Financial and
Accounting Officer)
3034
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation, incorporated by reference to
Exhibit 3.1 of Current Report on Form 8-K filed June 30, 2004.
3.2 Bylaws of RGA, as amended, incorporated by reference to Exhibit 3.2 of
Quarterly Report on Form 10-Q filed August 6, 2004.
10.1* Summary of the salaries for the named executive officers of the
Company, incorporated by reference to Exhibit 10.1 to Form 8-K dated
March 2, 2005 (File No. 1-11848), filed March 8, 2005.
10.2* Summary of the award levels and performance goals under the
Management Incentive Plan for the named executive officers of the
Company, incorporated by reference to Exhibit 10.2 to Form 8-K dated
March 2, 2005 (File No. 1-11848), filed March 8, 2005.
10.3 Amendment No. 2 dated as of February 25, 2005 to First Amended and
Restated Credit Agreement dated as of May 23, 2003 betweenSeptember 29, 2005 among RGA and certain
subsidiaries, as borrower,Account Parties, the financial institutions listed on
the signature pages thereof, The Bank of New York, as Administrative
Agent,Agent; Bank of America, N.A., as Syndication Agent; and FleetKeyBank
National Bank, as Co-Syndication Agents, and
KeyAssociation, Wachovia Bank, National Association, and
Deutsche Bank, AG New York Branch, as Documentation Agent,Co-Documentation Agents,
incorporated by reference to Exhibit 10.2310.1 to AnnualCurrent Report on Form
10-K,8-K dated September 29, 2005 (File No. 1-11848), filed MarchOctober 3,
2005.
31.1 Certification of Chief Executive Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to section 906 of
the Sarbanes-Oxley Act of 2002
* Denotes management contract or compensatory plan arrangements.
3135