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 JUNE 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
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] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12b-2 OF THE EXCHANGE ACT). YES [X] NO [ ]
COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 31, 2005: 62,638,633 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)
June 30, 2005 and December 31, 2004 3
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended June 30, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 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 12
3 Quantitative and Qualitative Disclosures About Market Risk 31
4 Controls and Procedures 31
PART II - OTHER INFORMATION
1 Legal Proceedings 31
2 Unregistered Sales of Equity Securities and Use of Proceeds 32
4 Submission of Matters to a Vote of Security Holders 32
6 Exhibits 32
Signatures 33
Index to Exhibits 34
2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2005 2004
------------ ------------
(Dollars in thousands)
ASSETS
Fixed maturity securities: $ 6,319,564 $ 6,023,696
Available-for-sale at fair value (amortized cost of $5,726,188 and
$5,634,757 at June 30, 2005 and December 31, 2004, respectively)
Mortgage loans on real estate 627,880 609,292
Policy loans 953,316 957,564
Funds withheld at interest 3,020,301 2,734,655
Short-term investments 33,429 31,964
Other invested assets 227,608 207,054
------------ ------------
Total investments 11,182,098 10,564,225
Cash and cash equivalents 159,111 152,095
Accrued investment income 80,416 58,076
Premiums receivable 439,469 376,298
Reinsurance ceded receivables 474,799 434,264
Deferred policy acquisition costs 2,344,920 2,225,974
Other reinsurance balances 156,829 159,440
Other assets 191,928 77,757
------------ ------------
Total assets $ 15,029,570 $ 14,048,129
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 4,343,918 $ 4,097,722
Interest sensitive contract liabilities 5,111,861 4,900,600
Other policy claims and benefits 1,513,983 1,316,225
Other reinsurance balances 185,986 247,164
Deferred income taxes 715,473 561,985
Other liabilities 115,858 81,209
Short-term debt 176,570 56,078
Long-term debt 226,772 349,704
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company 158,483 158,417
------------ ------------
Total liabilities 12,548,904 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) - -
Common stock (par value $.01 per share; 140,000,000 shares authorized;
63,128,273 shares issued at June 30, 2005 and December 31, 2004) 631 631
Warrants 66,915 66,915
Additional paid-in-capital 1,048,828 1,046,515
Retained earnings 923,684 846,572
Accumulated other comprehensive income:
Accumulated currency translation adjustment, net of income taxes 65,393 93,691
Unrealized appreciation of securities, net of income taxes 389,430 244,675
------------ ------------
Total stockholders' equity before treasury stock 2,494,881 2,298,999
Less treasury shares held of 489,640 and 683,245 at cost at
June 30, 2005 and December 31, 2004, respectively (14,215) (19,974)
------------ ------------
Total stockholders' equity 2,480,666 2,279,025
------------ ------------
Total liabilities and stockholders' equity $ 15,029,570 $ 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 June 30, Six months ended June 30,
----------------------------- ----------------------------
2005 2004 2005 2004
-------------- ------------- ------------- -------------
REVENUES: (Dollars in thousands, except per share data)
Net premiums $ 931,354 $ 797,308 $ 1,833,174 $ 1,611,182
Investment income, net of related expenses 146,284 134,185 303,337 267,745
Investment related gains, net 12,950 12,691 16,929 31,107
Change in value of embedded derivatives (19,917) 17,472 2,644 18,994
Other revenues 20,661 14,759 31,464 26,609
-------------- ------------- ------------- -------------
Total revenues 1,091,332 976,415 2,187,548 1,955,637
BENEFITS AND EXPENSES:
Claims and other policy benefits 827,930 634,802 1,565,983 1,281,856
Interest credited 38,615 44,332 93,668 91,350
Policy acquisition costs and other insurance expenses 157,855 134,157 301,831 277,225
Change in deferred acquisition costs associated with
change in value of embedded derivatives (13,604) 13,293 2,104 17,493
Other operating expenses 38,032 34,896 71,038 68,425
Interest expense 9,895 9,542 19,780 19,080
-------------- ------------- ------------- -------------
Total benefits and expenses 1,058,723 871,022 2,054,404 1,755,429
Income from continuing operations before
income taxes 32,609 105,393 133,144 200,208
Provision for income taxes 7,449 37,003 40,720 68,824
-------------- ------------- ------------- -------------
Income from continuing operations 25,160 68,390 92,424 131,384
Discontinued operations:
Loss from discontinued accident and health
operations, net of income taxes (3,343) (3,053) (4,050) (3,947)
-------------- ------------- ------------- -------------
Income before cumulative effect of change in
accounting principle 21,817 65,337 88,374 127,437
Cumulative effect of change in accounting principle,
net of income taxes - - - (361)
-------------- ------------- ------------- -------------
Net income $ 21,817 $ 65,337 $ 88,374 $ 127,076
============== ============= ============= =============
BASIC EARNINGS PER SHARE:
Income from continuing operations $ 0.40 $ 1.10 $ 1.48 $ 2.11
Discontinued operations (0.05) (0.05) (0.07) (0.06)
Cumulative effect of change in accounting principle - - - (0.01)
-------------- ------------- ------------- -------------
Net income $ 0.35 $ 1.05 $ 1.41 $ 2.04
============== ============= ============= =============
DILUTED EARNINGS PER SHARE:
Income from continuing operations $ 0.39 $ 1.09 $ 1.45 $ 2.09
Discontinued operations (0.05) (0.05) (0.06) (0.06)
Cumulative effect of change in accounting principle - - - -
-------------- ------------- ------------- -------------
Net income $ 0.34 $ 1.04 $ 1.39 $ 2.03
============== ============= ============= =============
DIVIDENDS DECLARED PER SHARE $ 0.09 $ 0.06 $ 0.18 $ 0.12
============== ============= ============= =============
See accompanying notes to condensed consolidated financial statements
(unaudited).
4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
June 30,
------------------------
2005 2004
---------- ----------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 88,374 $ 127,076
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (22,584) (24,484)
Premiums receivable (72,993) 90,216
Deferred policy acquisition costs (156,899) (190,057)
Reinsurance ceded balances (40,535) 81,060
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 447,292 297,197
Deferred income taxes 95,349 55,396
Other assets and other liabilities, net (97,525) (27,892)
Amortization of net investment discounts and other (16,275) (17,153)
Investment related gains, net (16,929) (31,107)
Other, net 1,919 (11,448)
---------- ----------
Net cash provided by operating activities 209,194 348,804
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of fixed maturity securities - available for sale 816,369 668,201
Maturities of fixed maturity securities - available for sale 72,295 10,749
Purchases of fixed maturity securities - available for sale (961,349) (916,031)
Sales of mortgage loans - 13,927
Cash invested in mortgage loans on real estate (28,496) (86,072)
Cash invested in policy loans (8,294) (2,381)
Cash invested in funds withheld at interest (35,831) (24,549)
Principal payments on mortgage loans on real estate 9,719 12,041
Principal payments on policy loans 12,541 4,140
Change in short-term investments and other invested assets (23,042) (43,155)
---------- ----------
Net cash used in investing activities (146,088) (363,130)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (11,262) (7,468)
Net borrowings under credit agreements - 4,600
Exercise of stock options 4,913 6,181
Excess deposits (payments) on universal life and other
investment type policies and contracts (47,402) 54,263
---------- ----------
Net cash provided by (used in) financing activities (53,751) 57,576
Effect of exchange rate changes (2,339) (520)
---------- ----------
Change in cash and cash equivalents 7,016 42,730
Cash and cash equivalents, beginning of period 152,095 84,586
---------- ----------
Cash and cash equivalents, end of period $ 159,111 $ 127,316
========== ==========
Supplementary information:
Cash paid for interest $ 19,256 $ 18,915
Cash paid for income taxes $ 77,805 $ 24,686
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
six-month period ended June 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.
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.
(in thousands, except per share information) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
--------- --------- --------- ----------
Net income as reported $ 21,817 $ 65,337 $ 88,374 $ 127,076
Add compensation expense included in net
income, net of income taxes 1,121 653 2,242 1,188
Deduct total fair value of compensation
expense for all awards, net of income taxes (1,475) (1,115) (2,950) (2,271)
--------- --------- --------- ----------
Pro forma net income 21,463 $ 64,875 $ 87,666 $ 125,993
Net income per share:
As reported - basic $ 0.35 $ 1.05 $ 1.41 $ 2.04
Pro forma - basic $ 0.34 $ 1.04 $ 1.40 $ 2.02
As reported - diluted $ 0.34 $ 1.04 $ 1.39 $ 2.03
Pro forma - diluted $ 0.34 $ 1.03 $ 1.37 $ 2.01
========= ========= ========= ==========
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 thousands, except per
share information):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Earnings:
Income from continuing operations (numerator
for basic and diluted calculations) $ 25,160 $ 68,390 $ 92,424 $ 131,384
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 62,628 62,275 62,591 62,243
Equivalent shares from outstanding stock
options 1,136 480 1,215 480
---------- ---------- ---------- ----------
Denominator for diluted calculation 63,764 62,755 63,806 62,723
Earnings per share:
Basic $ 0.40 $ 1.10 $ 1.48 $ 2.11
Diluted $ 0.39 $ 1.09 $ 1.45 $ 2.09
========== ========== ========== ==========
The calculation of 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 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 and six month periods ended June 30, 2005, approximately
0.3 million stock options and 0.3 million performance contingent shares were
excluded from the calculation. For the three and six months ended June 30, 2004,
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 SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
------------- ------------- ------------- -------------
Net income $ 21,817 $ 65,337 $ 88,374 $ 127,076
Accumulated other comprehensive
income (expense), net of income tax:
Unrealized gains (losses), net of
reclassification adjustment for
gains (losses) included in net income 178,605 (152,965) 144,755 (95,500)
Foreign currency items (19,899) (17,287) (28,298) (22,776)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 180,523 $ (104,915) $ 204,831 $ 8,800
========== ========== ========== ==========
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.
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).
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
------------- ------------- ------------- -------------
TOTAL REVENUES
U.S $ 669,379 $ 662,969 $ 1,385,955 $ 1,313,533
Canada 108,067 92,167 211,451 177,642
Europe & South Africa 135,287 121,337 279,295 243,681
Asia Pacific 154,597 90,008 278,766 198,264
Corporate & Other 24,002 9,934 32,081 22,517
------------- ------------- ------------- -------------
Total $ 1,091,332 $ 976,415 $ 2,187,548 $ 1,955,637
============= ============= ============= =============
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
U.S $ 30,556 $ 75,810 $ 96,540 $ 146,057
Canada 20,279 21,211 44,488 37,131
Europe & South Africa (6,641) 11,829 8,117 18,089
Asia Pacific 13,831 4,694 18,603 11,491
Corporate & Other (25,416) (8,151) (34,604) (12,560)
------------- ------------- ------------- -------------
Total $ 32,609 $ 105,393 $ 133,144 $ 200,208
============= ============= ============= =============
5. COMMITMENTS AND CONTINGENT LIABILITIES
The Company has commitments to fund investments in limited partnerships in the
amount of $38.2 million at June 30, 2005. The Company anticipates that the
majority of these amounts will be invested over the next five years. 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 workers' compensation
carve-out business. In addition, the Company is currently a party to litigation
that involves the claim of a broker to commissions on a medical reinsurance
arrangement. As of June 30, 2005, the parties involved in these actions raised
claims, or established reserves that may result in claims, in the amount of
$20.1 million, which is $19.4 million in excess of the amounts held in reserve
by the Company. The Company generally has little information regarding any
reserves established by ceding companies, and must rely on management estimates
to establish policy claim liabilities. It is possible that any such reserves
could be increased in the future. The Company believes it has substantial
defenses upon which to contest these claims, including but not limited to
misrepresentation and breach of contract by direct and indirect ceding
companies. In addition, the Company is in the process of auditing ceding
companies that may have threatened arbitration, asserted claims, or indicated
that they anticipate asserting claims in the future against the Company in the
amount of $22.5 million, which is $19.2 million in excess of the amounts held in
reserve or retroceded by the Company as of June 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 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 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, have a material adverse effect
on the Company's consolidated net income or cash flows in particular quarterly
or annual periods.
8
The Company has reinsured privately-owned pension funds that were formed as a
result of reform and privatization of Argentina's social security system. The
Company ceased renewal of reinsurance treaties associated with privatized
pension contracts in Argentina during 2001 because of adverse experience on this
business, as several aspects of the pension fund claims flow did not develop as
was contemplated when the reinsurance programs were initially priced. It is the
Company's position that 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.
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 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
a treaty with one of its larger clients during the second quarter of 2005 and is
in discussions with the remaining clients regarding settlement of all
obligations under the remaining treaties. While it is not feasible to predict or
determine the ultimate outcome of the contemplated ICSID Arbitration, or
litigation or arbitrations that may occur in Argentina in the future, or provide
reasonable ranges of potential losses if the Argentine government continues with
its present course of action, it is the opinion of management, after
consultation with counsel, that their outcomes, after consideration of the
provisions made in the Company's 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.
6. EMPLOYEE BENEFIT PLANS
The components of net periodic benefit costs were as follows (dollars in
thousands):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
NET PERIODIC PENSION BENEFIT COST:
Service cost $ 475 $ 442 $ 1,023 $ 884
Interest cost 412 315 794 631
Expected return on plan assets (278) (194) (578) (386)
Amortization of prior service cost 6 9 15 18
Amortization of prior actuarial loss 137 43 177 85
---------- ---------- ---------- ----------
Net periodic pension benefit cost $ 752 $ 615 $ 1,431 $ 1,232
========== ========== ========== ==========
NET PERIODIC OTHER BENEFITS COST:
Service cost $ 102 $ 94 $ 205 $ 188
Interest cost 99 91 198 182
Expected return on plan assets -- -- -- --
Amortization of prior service cost -- -- -- --
Amortization of prior actuarial loss 18 18 35 36
---------- ---------- ---------- ----------
Net periodic other benefits cost $ 219 $ 203 $ 438 $ 406
========== ========== ========== ==========
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.
9
7. FINANCING ACTIVITIES
On June 7, 2005, the Company entered into a revolving credit facility whereby it
may borrow (pound)15.0 million. The Company immediately borrowed (pound)15.0
million under the facility, using the funds to repay the outstanding debt under
a credit facility held by the Company's wholly-owned subsidiary, RGA Holdings
Limited, which expired during the second quarter. The capacity and payment
schedule are the same and the interest rate is comparable to the expired
facility. At June 30, 2005 the maximum amount of borrowings (approximately $26.9
million) were outstanding under this credit facility.
8. NEW ACCOUNTING STANDARDS
In June 2005, the Financial Accounting Standards Board ("FASB") completed its
review of Emerging Issues Task Force ("EITF") Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments
("EITF 03-1"). EITF 03-1 provides accounting guidance regarding the
determination of when an impairment of debt and marketable equity securities and
investments accounted for under the cost method should be considered
other-than-temporary and recognized in income. EITF 03-1 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 ("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 and remain in
effect. Therefore, FSP 115-1 is not expected to have a material impact on the
Company's unaudited interim condensed consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3 ("SFAS 154").
The Statement is a result of a broader effort by the FASB to 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 accounted for 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 unaudited interim condensed 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 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 during the first quarter of 2006. The Company expects SFAS 123(r) will
increase compensation expense by approximately $1.1 million in 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.
10
9. METLIFE ANNOUNCEMENTS
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 does not expect to sell
its interest in RGA to generate funds for that acquisition.
11
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 decreased
$72.8 million, or 69.1%, and $67.1 million, or 33.5%, for the second quarter and
first six months of 2005, respectively. The decrease was primarily due to high
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 $134.0 million, or 16.8%, and $222.0 million, or 13.8% during
the second quarter and first six months of 2005.
Consolidated investment income, net of related expenses, increased $12.1
million, or 9.0%, and $35.6 million, or 13.3%, during the second quarter and
first six months of 2005, respectively, primarily due to a larger invested asset
base. Invested assets as of June 30, 2005 totaled $11.2 billion, a 19.3%
increase over June 30, 2004. The average yield earned on investments excluding
funds withheld increased to 5.99% during the second quarter of 2005 from 5.79%
for the second quarter of 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 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 22.8% for the second quarter
of 2005, compared to 35.1% for the prior-year period. The lower rate in the
current period was due to the utilization of tax loss carryforwards of $2.7
million, for which no prior financial statement benefit had been taken.
12
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 our reinsurance contracts, we must determine if the
contract provides indemnification against loss or liability relating to
insurance risk, in accordance with applicable accounting standards. We 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 we determine that the possibility of a significant
loss from insurance risk will occur only under remote circumstances, we record
the contract under a deposit method of accounting with the net amount 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 the ceding companies
due to the use of different mortality and other assumptions. However, we rely
upon 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 through 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
accurate, our reserves may not be adequate 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-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 claim or death to the date when
the ceding company reports the claim to us can vary significantly by ceding
13
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 quarterly basis and adjust our claim liabilities
accordingly. The adjustments in a given period are generally not significant
relative to the overall policy liabilities and may result in an increase or
decrease in liabilities.
We primarily invest in fixed maturity securities. We monitor our fixed maturity
securities to determine potential impairments in value. In conjunction with our
external investment managers, we evaluate 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 feasible to predict or determine the ultimate outcome of the pending
litigation or arbitrations or even provide reasonable ranges of potential
losses, it is the opinion of management, after consultation with counsel, that
the outcomes of such litigation and arbitrations, after consideration of the
provisions made in the Company's consolidated financial statements, would not
have a material adverse effect on its consolidated financial position. However,
it is possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in
particular quarterly or annual periods. See Note 20, "Discontinued Operations"
of the 2004 Annual Report for more information.
Further discussion and analysis of the 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.
U.S. OPERATIONS
U.S. operations consist of two major sub-segments: Traditional and
Non-Traditional. The Traditional sub-segment primarily specializes in
mortality-risk reinsurance. The Non-traditional category consists of
Asset-Intensive and Financial Reinsurance.
FOR THE THREE MONTHS ENDED JUNE 30, 2005 (IN THOUSANDS)
NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
TRADITIONAL INTENSIVE REINSURANCE OPERATIONS
------------ ------------ ------------ ------------
REVENUES:
Net premiums $ 574,795 $ 1,117 $ -- $ 575,912
Investment income, net of related expenses 59,475 42,545 (8) 102,012
Investment related gains (losses), net 1,632 (1,844) -- (212)
Change in value of embedded derivatives -- (19,917) -- (19,917)
Other revenues 933 2,797 7,854 11,584
------------ ------------ ------------ ------------
Total revenues 636,835 24,698 7,846 669,379
BENEFITS AND EXPENSES:
Claims and other policy benefits 497,019 4,934 -- 501,953
Interest credited 14,303 23,730 -- 38,033
Policy acquisition costs and other insurance
expenses 84,732 12,141 2,946 99,819
Change in deferred acquisition costs associated
with change in value of embedded derivatives -- (13,604) -- (13,604)
Other operating expenses 10,041 1,236 1,345 12,622
------------ ------------ ------------ ------------
Total benefits and expenses 606,095 28,437 4,291 638,823
Income (loss) before income taxes $ 30,740 $ (3,739) $ 3,555 $ 30,556
============ ============ ============ ============
14
FOR THE THREE MONTHS ENDED JUNE 30, 2004 (IN THOUSANDS)
NON-TRADITIONAL
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- ---------- ----------- ----------
REVENUES:
Net premiums $ 530,129 $ 1,190 $ -- $ 531,319
Investment income, net of related expenses 53,974 47,495 72 101,541
Investment related gains (losses), net 3,662 (821) -- 2,841
Change in value of embedded derivatives -- 17,472 -- 17,472
Other revenues 931 1,907 6,958 9,796
----------- ---------- ----------- ----------
Total revenues 588,696 67,243 7,030 662,969
BENEFITS AND EXPENSES:
Claims and other policy benefits 429,423 3,246 -- 432,669
Interest credited 12,117 31,704 -- 43,821
Policy acquisition costs and other insurance
expenses 72,714 8,484 2,280 83,478
Change in deferred acquisition costs associated
with change in value of embedded derivatives -- 13,293 -- 13,293
Other operating expenses 11,341 1,028 1,529 13,898
----------- ---------- ----------- ----------
Total benefits and expenses 525,595 57,755 3,809 587,159
Income before income taxes $ 63,101 $ 9,488 $ 3,221 $ 75,810
=========== ========== =========== ==========
FOR THE SIX MONTHS ENDED JUNE 30, 2005 (IN THOUSANDS)
NON-TRADITIONAL
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- ---------- ----------- -----------
REVENUES:
Net premiums $ 1,141,689 $ 2,341 $ -- $ 1,144,030
Investment income, net of related expenses 114,706 100,817 33 215,556
Investment related gains, net 1,209 1,660 -- 2,869
Change in value of embedded derivatives -- 2,644 -- 2,644
Other revenues 1,854 3,844 15,158 20,856
----------- ---------- ----------- -----------
Total revenues 1,259,458 111,306 15,191 1,385,955
BENEFITS AND EXPENSES:
Claims and other policy benefits 980,280 3,250 2 983,532
Interest credited 28,310 63,981 -- 92,291
Policy acquisition costs and other insurance
expenses 155,749 25,510 5,570 186,829
Change in deferred acquisition costs associated
with change in value of embedded derivatives -- 2,104 -- 2,104
Other operating expenses 19,303 2,574 2,782 24,659
----------- ---------- ----------- -----------
Total benefits and expenses 1,183,642 97,419 8,354 1,289,415
Income before income taxes $ 75,816 $ 13,887 $ 6,837 $ 96,540
=========== ========== =========== ===========
15
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (IN THOUSANDS)
NON-TRADITIONAL
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------- ---------- ----------- -----------
REVENUES:
Net premiums $ 1,061,340 $ 2,372 $ -- $ 1,063,712
Investment income, net of related expenses 108,027 92,962 115 201,104
Investment related gains (losses), net 11,220 (677) -- 10,543
Change in value of embedded derivatives -- 18,994 -- 18,994
Other revenues 2,265 3,577 13,338 19,180
----------- ---------- ----------- -----------
Total revenues 1,182,852 117,228 13,453 1,313,533
BENEFITS AND EXPENSES:
Claims and other policy benefits 860,314 2,225 -- 862,539
Interest credited 24,195 66,198 -- 90,393
Policy acquisition costs and other insurance
expenses 148,145 16,129 4,574 168,848
Change in deferred acquisition costs associated
with change in value of embedded derivatives -- 17,493 -- 17,493
Other operating expenses 23,065 2,187 2,951 28,203
----------- ---------- ----------- -----------
Total benefits and expenses 1,055,719 104,232 7,525 1,167,476
Income before income taxes $ 127,133 $ 12,996 $ 5,928 $ 146,057
=========== ========== =========== ===========
Income before income taxes for the U.S. operations segment totaled $30.6 million
and $96.5 million for the second quarter and first six months of 2005,
respectively, compared to $75.8 million and $146.1 million for comparable
prior-year periods. The decrease in income can be largely attributed to the
unfavorable mortality experienced year to date in this segment.
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 second quarter and first six
months of 2005, this sub-segment added $48.3 billion and $84.3 billion face
amount, respectively, of new business compared to $51.7 billion and $95.9
billion for the same 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 51.3% and
40.4% for the second quarter and first six months of 2005, respectively. This
decrease was primarily due to unfavorable mortality experience. Claims and other
policy benefits, as a percentage of net premiums (loss ratios), were 86.5% for
the second quarter and 85.9% for the first six months of 2005. The loss ratios
for the same periods prior year were 81.0% and 81.1%, respectively. An increase
in the severity of claims was the primary contributor to this increased loss
ratio.
Net premiums for U.S. Traditional reinsurance increased 8.4% and 7.6% for the
second quarter and first six months of 2005, 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 June 30, 2005, a 5.8% increase over the amount in
force on June 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. During the second quarter of
2005, investment income in the segment totaled $59.5 million, a 10.2% increase
over same period prior year. Year to date in 2005, investment income grew 6.2%
over the first six months of 2004.
Mortality experience for the second quarter and first six months of 2005 was
unfavorable, due primarily to the severity of claims in excess of $1.0 million.
Death claims are reasonably predictable over a period of many years,
16
but are less predictable over shorter periods and are subject to significant
fluctuation. We do not expect this adverse claims experience to continue on an
ongoing basis.
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 income and the interest credited on the underlying products. Interest
credited expense for the second quarter and first six months of 2005 totaled
$14.3 million and $28.3 million, respectively, compared to $12.1 million and
$24.2 million for the same periods in 2004.
Policy acquisition costs and other insurance expenses, as a percentage of net
premiums, were 14.7% during the second quarter and 13.6% for the first six
months of 2005. Comparable ratios for second quarter and the first six months of
2004 were 13.7% and 14.0%, 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 1.7% during the
second quarter and first six months of 2005, a slight decrease from 2.1% and
2.2% in the prior-year periods. The first six months of 2004 reflect expenses
associated with transferring the Allianz business to RGA. The expense ratio is
expected to fluctuate slightly from period to period, however, the size and
maturity of the U.S. operations segment indicates it should remain reasonably
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 we recognize profits or losses primarily from the
spread between the investment income and the interest credited on the underlying
deposit liabilities.
In accordance with the provisions of SFAS No. 133 Implementation Issue No. B36,
"Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments
That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Obligor under Those Instruments" ("Issue
B36"), we recorded a change in value of embedded derivatives of $(19.9) million
and $2.6 million within revenues for the second quarter and first six months of
2005, respectively and $(13.6) million and $2.1 million of amortization of
related deferred acquisition costs.
The Asset Intensive business reported a loss for the second quarter equal to
$(3.7) million and a gain of $13.9 million for the first six months of 2005.
Comparable figures for the same periods 2004 were $9.5 million and $13.0
million, respectively. The decrease in income from quarter to quarter is
primarily attributed to the change in fair value of embedded derivatives. This
decrease of $10.5 million represents 79.3% of the change in net income from
second quarter 2004.
Total revenues decreased $42.5 million from second quarter 2004, and $5.9
million from the first six months of 2004. Contributing to this decline were a
decrease in investment income and a decrease in the fair value of embedded
derivatives. Investment income decreased $5.0 million and the fair value of
embedded derivatives decreased $37.4 million from the second quarter of 2004.
Year to date, investment income is up $7.9 million, but is offset by the change
in derivatives which is down $16.3 million from same period in the prior year.
The decline in investment income in the second quarter of 2005 is related to
option income on a funds withheld agreements and is offset by a decrease in
interest credited. The fair value of embedded derivatives is tied primarily to
movements in credit spreads; therefore the value may fluctuate significantly.
Total expenses, which are comprised primarily of interest credited, policy
benefits, and acquisition costs decreased $29.3 million, or 50.8%, during the
second quarter of 2005 compared to the same period in 2004. This decrease is
primarily the result of the change in the amortization of deferred acquisition
costs relating to Issue B36. Expenses relating to Issue B36 decreased $26.9
million from second 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. In
addition to the change attributable to Issue B36, interest
17
credited expense also decreased from second quarter 2004. This decrease is
primarily offset by a decrease in investment income associated with a reduction
in the market value of options within a funds withheld portfolio.
The average invested asset base supporting this segment grew from $3.2 billion
in the second quarter of 2004 to $3.8 billion for the second quarter of 2005.
The growth in the asset base is primarily driven by new business written on one
existing annuity treaty. Invested assets outstanding as of June 30, 2005 and
2004 were $3.8 billion and $3.3 billion, of which $2.1 billion and $2.2 billion
were funds withheld at interest, respectively. Of the $2.1 billion total funds
withheld balance, 83.8% of the balance is associated with one client.
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 $0.3 million, or 10.4%, during the second
quarter of 2005 compared to the same period in 2004 and $0.9 million or 15.3%
for the first six months of 2005 compared to same period in the prior year. This
increase was largely due to two new transactions recorded in the second half of
2004.
At June 30, 2005 and 2004, the amount of reinsurance provided, as measured by
pre-tax statutory surplus, was $1.8 billion and $1.2 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.
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 FOR THE SIX MONTHS ENDED
(in thousands) JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
------------- ------------- ------------- -------------
REVENUES:
Net premiums $ 76,854 $ 61,830 $150,610 $121,978
Investment income, net of related expenses 28,813 23,437 57,573 47,417
Investment related gains, net 2,381 6,869 3,215 8,178
Other revenues 19 31 53 69
-------- -------- -------- --------
Total revenues 108,067 92,167 211,451 177,642
BENEFITS AND EXPENSES:
Claims and other policy benefits 74,251 59,499 142,897 118,865
Interest credited 252 418 609 795
Policy acquisition costs and other
insurance expenses 9,665 8,278 16,378 15,361
Other operating expenses 3,620 2,761 7,079 5,490
-------- -------- -------- --------
Total benefits and expenses 87,788 70,956 166,963 140,511
Income before income taxes $ 20,279 $ 21,211 $ 44,488 $ 37,131
======== ======== ======== ========
Income before income taxes decreased by $0.9 million, or 4.4%, and increased by
$7.4 million, or 19.8%, in the second quarter and first six months of 2005,
respectively. The decrease in the second quarter of 2005 was primarily
18
related to a decrease in the realized investment gains of $4.5 million, or
65.3%, offset by favorable mortality experience in the current year. The
increase in the first six months of 2005 was primarily the result of favorable
mortality experience in the current year, offset by a decrease in realized
investment gains of $5.0 million, or 60.7%. 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 million, or 8.6%, and $3.6 million, or 8.1%, in the second quarter
and first six months, respectively, in income before income taxes.
Net premiums increased by $15.0 million, or 24.3%, and $28.6 million, or 23.5%,
in the second quarter and first six months of 2005, respectively. The increase
is primarily due to new business from new and existing treaties. In addition, a
stronger Canadian dollar resulted in an increase in net premiums of $6.4 million
and $11.5 million in the second quarter and the first six 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 $5.4 million, or 22.9%, and $10.2 million, or
21.4%, in the second quarter and the first six months of 2005, respectively.
Investment performance varies with the composition of investments. In the second
quarter of 2005, the increase in investment income was mainly the result of a
stronger Canadian dollar, which resulted in an increase of $2.3 million, an
increase in the invested asset base due to operating cash flows on traditional
reinsurance, which resulted in an increase of $0.8 million, 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 six months of 2005, the
increase in investment income was mainly the result of a stronger Canadian
dollar, which resulted in an increase of $4.2 million, an increase in the
invested asset base due to operating cash flows on traditional reinsurance,
which resulted in an increase of $1.9 million, and interest on an increasing
amount of funds withheld at interest related to one treaty, which resulted in an
increase of $1.1 million. Investment income also includes an allocation to the
segments based upon average assets and related capital levels deemed appropriate
to support business volumes. The amount of investment income allocated to the
Canadian operations was $1.8 million and $3.8 million in the second quarter and
first six months of 2005, respectively, compared to $1.1 million and $2.5
million in the comparable prior-year periods.
Loss ratios for this segment were 96.6% and 94.9% in the second quarter and
first six months of 2005, respectively, compared to 96.2% and 97.4% in the
comparable prior-year periods. The lower loss ratio for the first six months of
2005 is primarily due to better mortality experience compared to the prior year.
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 level premium permanent policies requires the Company to set up
actuarial liabilities and invest the amounts received in excess of early-year
mortality costs to fund claims in the later years when premiums, by design,
continue to be level as compared to expected increasing mortality or claim
costs. Claims and other policy benefits, as a percentage of net premiums and
investment income were 70.3% and 68.6% in the second quarter and first six
months of 2005, respectively, compared to 69.8% and 70.2% in 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 12.6% and 10.9% in the second quarter and first six months of
2005, respectively, compared to 13.4% and 12.6% 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 $0.9 million, or 31.1%, and $1.6 million, or
28.9%, in the second quarter and first six months of 2005, respectively. The
increase in 2005 is primarily attributable to the strengthening of the Canadian
dollar.
EUROPE & SOUTH AFRICA OPERATIONS
The segment provides life reinsurance for a variety of products through yearly
renewable term and coinsurance agreements, and reinsurance of accelerated
critical illness coverage (pays on the earlier of death or diagnosis of a
19
pre-defined critical illness). Reinsurance agreements may be either facultative
or automatic agreements covering primarily individual risks and in some markets,
group risks.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
(in thousands) JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
------------- ------------- ------------- -------------
REVENUES:
Net premiums $ 132,972 $ 118,887 $ 274,330 $ 236,090
Investment income, net of related expenses 2,353 863 4,908 2,407
Investment related gains (losses), net (107) 1,143 (64) 4,302
Other revenues 69 444 121 882
--------- --------- --------- ---------
Total revenues 135,287 121,337 279,295 243,681
BENEFITS AND EXPENSES:
Claims and other policy benefits 112,117 73,809 208,449 155,806
Interest credited 190 -- 553 --
Policy acquisition costs and other
insurance expenses 22,120 29,842 48,516 58,873
Other operating expenses 7,118 5,524 12,778 10,206
Interest expense 383 333 882 707
--------- --------- --------- ---------
Total benefits and expenses 141,928 109,508 271,178 225,592
Income (loss) before income taxes $ (6,641) $ 11,829 $ 8,117 $ 18,089
========= ========= ========= =========
Income (loss) before income taxes was $(6.6) million during the second quarter
of 2005 as compared to $11.8 million during the second quarter of 2004, and $8.1
million for the first six months of 2005 as compared to $18.1 million for the
first six months of 2004. The decrease was primarily the result of adverse
mortality experience in the UK.
Net premiums increased $14.1 million, or 11.8%, during the second quarter
compared to the same period last year, and increased $38.2 million or 16.2%
during the six months ended June 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, augmented by the translation effects of a generally
weaker U.S. dollar. Several foreign currencies, particularly the British pound,
the euro, and the South African rand strengthened against the U.S. dollar.
Stronger local currencies contributed approximately $3.2 million and $8.5
million to net premiums for the second quarter and first six months of 2005,
respectively. Also, a portion of the growth of net premiums was due to
reinsurance of accelerated critical illness, primarily in the UK. This coverage
provides a benefit in the event of a death from or the diagnosis of a defined
critical illness. Premiums earned during the second quarter and first six months
associated with critical illness coverage totaled $49.3 million and $100.2
million, respectively, compared to $41.2 million and $86.9 million in the
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 $1.5 million for the second quarter compared to the
same period in 2004, and increased $2.5 million for the six months ended June
30, 2005 compared to the same period in 2004. This increase was primarily due to
growth in the invested assets in the UK and 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.
Loss ratios increased from 62.1% for the second quarter of 2004 to 84.3% for the
second quarter of 2005, and from 66.0% for the six months ended June 30, 2004 to
76.0% for the six months ended June 30, 2005. As mentioned above, adverse
mortality experience in the UK contributed to the increase in the loss ratio.
Death claims are
20
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 16.6% in the second quarter of 2005 compared to 25.1% in the
second quarter of 2004, and 17.7% for the six months ended June 30, 2005
compared to 24.9% for the six months ended June 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-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 from 4.6% of net premiums in
2004 to 5.4% in 2005, and for the first six months it increased from 4.3% to
4.7%. This increase was due to higher costs associated with maintaining and
supporting the increase in business. The Company believes that sustained growth
in net premiums should lessen the burden of start-up expenses and expansion
costs over time.
ASIA PACIFIC OPERATIONS
The Asia Pacific segment has operations in Australia, Hong Kong, Japan,
Malaysia, New Zealand, South Korea, 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 the Asia Pacific region in an effort to best meet the needs of the
local client companies.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
(in thousands) JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
------------- ------------- ------------- -------------
REVENUES:
Net premiums $ 145,019 $ 84,178 $ 263,226 $ 187,717
Investment income, net of related expenses 7,310 3,029 13,538 6,764
Investment related gains (losses), net 133 (149) 54 198
Other revenues 2,135 2,950 1,948 3,585
--------- --------- --------- ---------
Total revenues 154,597 90,008 278,766 198,264
BENEFITS AND EXPENSES:
Claims and other policy benefits 110,617 67,380 201,277 142,225
Policy acquisition costs and other
insurance expenses 22,549 11,878 46,204 33,408
Other operating expenses 7,159 5,673 11,833 10,415
Interest expense 441 383 849 725
--------- --------- --------- ---------
Total benefits and expenses 140,766 85,314 260,163 186,773
Income before income taxes $ 13,831 $ 4,694 $ 18,603 $ 11,491
========= ========= ========= =========
Income before income taxes increased approximately $9.1 million, or 194.7%,
during the second quarter of 2005, and approximately $7.1 million, or 61.9%, for
the six months ended June 30, 2005, as compared to the same periods in 2004.
Improved underwriting results for the Australia, New Zealand and Hong Kong
markets contributed to the increases. Additionally, strengthening foreign
currencies increased the segment's income before income taxes by approximately
$1.4 million for the second quarter of 2005, while the effect of changes in
foreign currencies on income before income taxes for the six months ending June
30, 2005 was approximately $2.1 million.
21
After consideration of the impact of foreign currencies, the increase in income
before taxes was primarily the result of strong premium growth, and favorable
underwriting results relative to the prior year. Net premiums grew approximately
$60.8 million, or 72.3%, during the current quarter, and approximately $75.5
million, or 40.2% for the six months ended June 30, 2005, as compared to the
same periods in 2004. This premium growth was primarily the 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 increased volume. This coverage provides a benefit in
the event of a death from or the diagnosis of a defined critical illness. Net
premiums earned from this coverage totaled approximately $19.9 million and $37.0
million for the second quarter and first six months of 2005, respectively,
compared to $9.8 million and $18.2 million in the same periods of 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 New Zealand dollar continued to strengthen against the U.S. dollar. The
overall effect of the strengthening of local Asia Pacific segment currencies was
an increase of approximately $10.5 million in second quarter 2005 net premiums,
and an increase of approximately $13.3 million in 2005 year to date net premiums
over the comparable prior-year periods.
Net investment income increased approximately $4.3 million in the current
quarter compared to the prior-year quarter, and approximately $6.8 million for
the six months ended June 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.
Other revenues, which include the profit and fees associated with financial
reinsurance deals in multiple locations, decreased by approximately $0.8 million
for the second quarter of 2005, as compared to the same period in 2004, and
decreased by approximately $1.6 million for the six-month period ending June 30,
2005, as compared to the same period in 2004. The decrease was caused primarily
by the termination of a significant financial reinsurance treaty in Korea.
Loss ratios were 76.3% and 80.0% for the second quarter of 2005 and 2004,
respectively, and 76.5% and 75.8% for the six months ended June 30, 2005 and
June 30, 2004. The current quarter loss ratio was lower than the comparable
prior-year period primarily due to favorable mortality in the two largest
markets, Australia and Korea. Loss ratios for the six-month period ending June
30, 2005 are slightly higher than the comparable prior year period primarily due
to adverse mortality in the Japan market during the first quarter of 2005. Loss
ratios for Japan were 131% for the first quarter of 2005, as compared to 88% for
the first quarter 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 was 15.5% during the second quarter of 2005, and 17.6% for the six
months ended June 30, 2005 which is relatively consistent with the 14.1% ratio
for the second quarter of 2004, and the 17.8% ratio for the six months ended
June 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, however, the percentage does fluctuate periodically due to timing of
client company reporting and variations in the mixture of business being
reinsured.
Other operating expenses decreased to 4.9% of net premiums in the current
quarter, from 6.7% in the comparable prior-year period, and decreased to 4.5%
for the six months ended June 30, 2005, from 5.5% in the comparable prior-year
period. The timing of the entrance into and development of new markets in the
growing Asia Pacific segment may cause other operating expenses as a percentage
of net premiums to be somewhat volatile over periods of time.
22
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 FOR THE SIX MONTHS ENDED
(in thousands) JUNE 30, 2005 JUNE 30, 2004 JUNE 30, 2005 JUNE 30, 2004
------------- ------------- ------------- -------------
REVENUES:
Net premiums $ 597 $ 1,094 $ 978 $ 1,685
Investment income, net of related expenses 5,796 5,315 11,762 10,053
Investment related gains, net 10,755 1,987 10,855 7,886
Other revenues 6,854 1,538 8,486 2,893
--------- --------- --------- ---------
Total revenues 24,002 9,934 32,081 22,517
BENEFITS AND EXPENSES:
Claims and other policy benefits 28,992 1,445 29,828 2,421
Interest credited 140 93 215 162
Policy acquisition costs and other
insurance expenses 3,702 681 3,904 735
Other operating expenses 7,513 7,040 14,689 14,111
Interest expense 9,071 8,826 18,049 17,648
--------- --------- --------- ---------
Total benefits and expenses 49,418 18,085 66,685 35,077
Loss before income taxes $ (25,416) $ (8,151) $ (34,604) $ (12,560)
========= ========= ========= =========
Loss before income taxes increased $17.3 million and $22.0 million during the
three- and six-month periods ended June 30, 2005, respectively. This increase
was primarily due to a $24.0 million, pretax, increase in the reserves
associated with the reinsurance of Argentine pension accounts during the second
quarter of 2005.
DISCONTINUED OPERATIONS
The discontinued accident and health division reported a loss, net of taxes, of
$3.3 million for the second quarter of 2005 compared to a loss, net of taxes, of
$3.1 million for the second quarter of 2004. As of June 30, 2005, amounts in
dispute or subject to audit exceed the Company's reserves by approximately $34.8
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 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
23
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.
Cash Flows
The Company's net cash flows provided by operating activities for the periods
ended June 30, 2005 and 2004 were $209.2 million and $348.8 million,
respectively. Cash flows from operating activities are affected by the timing of
premiums received, claims paid, and working capital changes. The $139.6 million
net decrease in operating cash flows during the six 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 $58.8 million and $37.5 million,
respectively, and was offset by higher operating cash outlays of $235.9 million
during the current six-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 short- and long-term obligations.
Net cash used in investing activities was $146.1 million and $363.1 million in
the first six months of 2005 and the comparable prior-year period, respectively.
The decrease in cash used in investing activities and, in particular, the sales
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 $53.8 million in the first six months
of 2005 and net cash provided by financing activities was $57.6 million in the
same period of 2004. This change was largely due to net withdrawals from
universal life and other investment type policies and contracts of $47.4 million
during the current period compared to excess deposits of $54.3 million in 2004.
Debt and Preferred Securities
As of June 30, 2005, the Company had $403.3 million in outstanding borrowings
under its debt agreements and was in compliance with all covenants under those
agreements.
The Company's $175.0 million U.S. credit facility expires in May 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 June 30, 2005, the Company had $50.0 million outstanding under
this facility at an average interest rate of 3.5%. 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 6.4%.
Interest is expensed on the face amount, or $225 million, of the Trust Preferred
Securities at a rate of 5.75%. During the second quarter of 2005, the Company's
(pound)15.0 million credit facility expired and was replaced with a new facility
with a May 2007 expiration. The capacity and payment schedule are the same and
the interest rate is comparable to the expired facility. At June 30, 2005 the
maximum amount of borrowings (approximately $26.9 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-
24
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 $192.5 million and $184.1 million at June 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 June 30, 2005.
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 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 $11.3 billion and $9.5 billion
at June 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. RGA's Board of Directors
also receives reports on material investment portfolios. The Company's
investment strategy is to maintain a predominantly investment-grade, fixed
maturity portfolio, to provide adequate liquidity for expected reinsurance
obligations, and to maximize total return through prudent asset management. The
Company's earned yield on invested assets, excluding funds withheld, was 5.99%
during the second quarter of 2005, compared with 5.79% for the second 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 mortgage- and asset-backed securities. As of June 30, 2005,
approximately 97.6% of the Company's consolidated investment portfolio of fixed
maturity securities was investment-grade. Important factors in the selection of
investments include diversification, quality, yield, total rate of return
potential and call protection. The relative importance of these factors is
determined by market conditions and the underlying product or portfolio
characteristics. Cash equivalents are invested in high-grade money market
instruments. The largest asset class in which fixed maturities were invested was
in corporate securities, including commercial, industrial, finance and utility
bonds, which represented approximately 59.5% and 44.7% of fixed maturity
securities as of June 30, 2005 and 2004, respectively. These corporate
securities had an average Standard and Poor's ("S&P") rating of "A-" at June 30,
2005.
25
Within the fixed maturity security portfolio, the Company holds approximately
$112.7 million in asset-backed securities at June 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 securities priority in the issuer's capital
structure, the adequacy of and ability to realize proceeds from collateral, and
the potential for prepayments. Credit risks include consumer or corporate
credits such as credit card holders, equipment lessees, and corporate obligors.
Capital market risks include general level of interest rates and the liquidity
for these securities in the marketplace.
The Company monitors its 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 other-than-temporary write-downs on fixed
maturity securities for the six months ending June 30, 2005. During the six
months ending June 30, 2004, the Company recorded other than temporary
write-downs of $0.1 million. During the six months ended June 30, 2005, the
Company sold fixed maturity securities with a fair value of $380.1 million at a
loss of $11.3 million.
The following table presents the total gross unrealized losses for 333 fixed
maturity securities and equity securities as of June 30, 2005, where the
estimated fair value had declined and remained below amortized cost by the
indicated amount (in thousands):
AT JUNE 30, 2005
-------------------------------
Gross Unrealized
Losses % of Total
---------------- ----------
Less than 20% $11,019 100%
20% or more for less than six months - -
20% or more for six months or greater - -
------- ---
Total $11,019 100%
While all of these securities are monitored for potential impairment, the
Company's experience indicates that the first two categories do not present as
great a risk of impairment, and often, fair values recover over time. These
securities have generally been adversely affected by overall economic
conditions, primarily an increase in the interest rate environment.
The following tables presents the estimated fair values and gross unrealized
losses for the 333 fixed maturity securities and equity securities that have
estimated fair values below amortized cost as of June 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.
26
AS OF JUNE 30, 2005
----------------------------------------------------------------------------
EQUAL TO OR GREATER THAN
LESS THAN 12 MONTHS 12 MONTHS TOTAL
---------------------- ----------------------- --------------------------
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Fair Unrealized
(in thousands) Fair Value Loss Fair Value Loss Value Loss
---------- ---------- ---------- ---------- -------------- ----------
INVESTMENT GRADE SECURITIES:
COMMERCIAL AND INDUSTRIAL $ 213,719 $ 3,701 $ 16,244 $380 $ 229,963 $ 4,081
PUBLIC UTILITIES 41,773 501 1,915 86 43,688 587
ASSET-BACKED SECURITIES 20,013 370 3,501 40 23,514 410
CANADIAN AND CANADIAN PROVINCIAL
GOVERNMENTS 1,665 15 - - 1,665 15
MORTGAGE-BACKED SECURITIES 281,925 2,094 - - 281,925 2,094
FINANCE 136,356 1,888 14,720 339 151,076 2,227
U.S. GOVERNMENT AND AGENCIES 2,713 15 - - 2,713 15
FOREIGN GOVERNMENTS 15,153 19 - - 15,153 19
---------- ---------- ---------- ---- ---------- -------
INVESTMENT GRADE SECURITIES 713,317 8,603 36,380 845 749,697 9,448
---------- ---------- ---------- ---- ---------- -------
NON-INVESTMENT GRADE SECURITIES:
COMMERCIAL AND INDUSTRIAL 8,821 218 - - 8,821 218
PUBLIC UTILITIES 3,390 13 - - 3,390 13
FINANCE 5,510 291 - - 5,510 291
---------- ---------- ---------- ---- ---------- -------
NON-INVESTMENT GRADE SECURITIES 17,721 522 - - 17,721 522
---------- ---------- ---------- ---- ---------- -------
TOTAL FIXED MATURITY SECURITIES $ 731,038 $ 9,125 $ 36,380 $845 $ 767,418 $ 9,970
========== ========== ========== ==== ========== =======
EQUITY SECURITIES $ 172,758 $ 1,049 $ - $ - $ 172,758 $ 1,049
========== ========== ========== ==== ========== =======
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 June 30,
2005. The unrealized losses did not exceed 18.0% 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 June 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 and the
underlying policies determine the policy loan interest rates. Because policy
loans represent premature distributions of policy liabilities, they have the
effect of reducing future disintermediation risk. In addition, the Company earns
a spread between the interest rate earned on policy loans and the interest rate
credited to corresponding liabilities.
Funds withheld at interest comprised approximately 26.6% and 25.5% of the
Company's cash and invested assets as of June 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
27
owned and managed by the ceding company, and are reflected as funds withheld at
interest on RGA's balance sheet. In the event of a ceding company's insolvency,
RGA would need to assert a claim on the assets supporting its reserve
liabilities. However, the risk of loss to RGA is mitigated by its ability to
offset amounts it owes the ceding company for claims or allowances with amounts
owed to RGA from the ceding company. Interest accrues to these assets at rates
defined by the treaty terms. 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 June 30, 2005 and December 31, 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 due to losses in the underlying
holdings. There were no other-than-temporary writedowns of investments in
limited partnerships in the second quarter of 2005.
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
------------------------------------------------------------
Less than 1
Contractual Obligations: Total Year 1 - 3 Years 4 - 5 Years After 5 Years
------ ----------- ----------- ----------- -------------
Short-term debt $176.6 $176.6 $ - $ - $ -
Long-term debt 226.8 - 26.9 - 199.9
Life claims payable(1) 749.2 749.2 - - -
Limited partnerships 38.2 38.2 - - -
Structured investment contracts 26.0 6.3 11.3 8.4 -
Mortgage purchase commitments 19.9 19.9 - - -
------ ------ ----- ---- ------
(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 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.
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.
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
28
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
are not rated, letters of credit or trust assets have been given as additional
security in favor of RGA Reinsurance. In addition, the Company performs annual
financial and in force reviews of its retrocessionaires to evaluate financial
stability and performance.
The Company has never experienced a material default in connection with
retrocession arrangements, nor has it experienced any material difficulty in
collecting claims recoverable from retrocessionaires; however, no assurance can
be given as to the future performance of such retrocessionaires or as to the
recoverability of any such claims.
The Company maintains two catastrophe insurance programs that renew on August
13th of each year. The current programs began August 13, 2004. The primary
program covers all of RGA's business worldwide and provides protection for
losses incurred during any event 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, RGA retains the first $25 million in
claims, the catastrophe program covers the next $25 million in claims, and RGA
retains all claims in excess of $50 million. It covers only losses under U.S.
guaranteed issue (corporate owned life insurance, bank owned life insurance,
etc.) reinsurances and includes losses due to acts of terrorism, but excludes
terrorism losses due to nuclear, chemical and/or biological events. Both
programs are insured by several insurance companies and Lloyds Syndicates with
no single entity providing more than $13 million of coverage.
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. RGA
is primarily exposed to interest rate risk and foreign currency risk.
Interest rate risk arises from many of the Company's primary activities, as the
Company invests substantial funds in interest-sensitive assets and also has
certain interest-sensitive contract liabilities. The Company manages interest
rate risk and credit risk to maximize the return on the Company's capital
effectively and to preserve the value created by its business operations. As
such, certain management monitoring processes are designed to minimize the
impact of sudden and sustained changes in interest rates on fair value, cash
flows, and net interest income.
The Company is subject to foreign currency translation, transaction, and net
income exposure. The Company generally does not hedge the foreign currency
translation exposure related to its investment in foreign subsidiaries as 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).
There has been no significant change in the Company's quantitative or
qualitative aspects of market risk during the quarter ended June 30, 2005 from
that disclosed in the 2004 Annual Report.
NEW ACCOUNTING STANDARDS
In June 2005, the FASB completed its review of 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. EITF
03-1 also requires certain quantitative and qualitative disclosures for debt and
marketable equity securities classified as available-for-sale or
held-to-maturity under SFAS 115, that are impaired at the balance sheet date but
for which an other-than-
29
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 and
remain in effect. Therefore, FSP 115-1 is not expected to have a material impact
on the Company's unaudited interim condensed consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and SFAS No. 3. The Statement
is a result of a broader effort by the FASB to 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 accounted for
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 unaudited interim condensed consolidated
financial statements.
In December 2004, the FASB revised SFAS 123 to SFAS 123(r). SFAS 123(r) provides
additional guidance on determining whether certain financial instruments awarded
in share-based payment transactions are liabilities. SFAS 123(r) also requires
that the cost of all share-based transactions 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 approximately $1.1 million in 2006.
In July 2003, the Accounting Standards Executive Committee issued 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 current and planned
markets, (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, (7) risks inherent in
our risk management and investment strategy, including changes in investment
portfolio yields due to interest rate or credit quality changes, (8)
fluctuations in U.S. or foreign currency exchange rates, interest rates, or
securities and real estate markets, (9) adverse litigation or arbitration
results, (10) the adequacy of reserves, resources and accurate information
relating to settlements, awards and terminated and discontinued lines of
business, (11) the stability of and actions by governments and economies in the
markets in which we operate, (12) competitive factors and competitors' responses
to our initiatives, (13) the success of our clients, (14) successful execution
of our entry into new markets, (15) successful development and introduction of
new products and
30
distribution opportunities, (16) our ability to successfully integrate and
operate reinsurance business that we acquire, (17) regulatory action that may be
taken by state Departments of Insurance with respect to us, MetLife, or its
subsidiaries, (18) our dependence on third parties, including those insurance
companies and reinsurers to which we cede some reinsurance, third-party
investment managers and others, (19) the threat of natural disasters or
terrorist attacks 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 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.
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.
See "Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Market Risk" which is included 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 June 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 workers' compensation
carve-out business. In addition, the Company is currently a party to litigation
that involves the claim of a broker to commissions on a medical reinsurance
arrangement. As of June 30, 2005, the parties involved in these actions have
raised claims, or established reserves that may result in claims, in the amount
of $20.1 million, which is $19.4 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 $22.5 million, which is $19.2 million in excess of the amounts held in
reserve or retroceded by the Company as of June 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," 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
31
a material adverse effect on its consolidated financial position. However, it is
possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in
particular quarterly or annual periods.
In addition, as 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 June
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 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 25, 2005. At the
Annual Meeting, the following proposal was voted upon by the shareholders as
indicated below:
Election of the following Directors:
Directors Voted For Withheld
- --------- ---------- ----------
J. Cliff Eason 56,422,872 698,745
Joseph A. Reali 46,149,630 10,971,987
ITEM 6.
EXHIBITS
See index to exhibits.
32
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 August 4, 2005
---------------------------------------
A. Greig Woodring
President & Chief Executive Officer
(Principal Executive Officer)
By: /s/ Jack B. Lay August 4, 2005
--------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
33
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 compensation arrangement for non-employee directors
effective January 1, 2005, incorporated by reference to Exhibit 10.1
to Form 8-K dated April 22, 2005 (File No. 1-11848), filed April 25,
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.
34