UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2001
____ 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 (I.R.S. Employer
of incorporation or organization) Identification No.)
1370 TIMBERLAKE MANOR PARKWAY, CHESTERFIELD, MISSOURI 63017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (636) 736-7439
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, par value $0.01 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Trust Preferred Equity Redeemable New York Stock Exchange
Securities (Piers(SM)) Units
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of the stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 1,
2002, as reported on the New York Stock Exchange was approximately $594,236,774.
As of March 1, 2002, Registrant had outstanding 49,307,043 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2002
Annual Meeting of Shareholders ("the Proxy Statement") which will be filed with
the Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year ended December 31, 2001, are incorporated by reference
in Part III of this Form 10-K.
2
REINSURANCE GROUP OF AMERICA, INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 2001
INDEX
ITEM PAGE
NUMBER OF THIS FORM
------ ------------
PART I
1. BUSINESS.......................................................................... 4
2. PROPERTIES........................................................................ 19
3. LEGAL PROCEEDINGS................................................................. 20
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................... 20
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................................. 20
6. SELECTED FINANCIAL DATA........................................................... 21
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................................. 23
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................ 46
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................... 46
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................... 80
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................................ 80
11. EXECUTIVE COMPENSATION............................................................ 81
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................... 81
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................... 81
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................. 81
3
Item 1. BUSINESS
A. OVERVIEW
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company formed December 31, 1992. On December 31, 2001, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
48.7% of the outstanding shares of common stock of RGA. Equity Intermediary
Company is a wholly owned subsidiary of General American Life Insurance Company
("General American"), a Missouri life insurance company, which in turn is a
wholly owned subsidiary of GenAmerica Financial Corporation ("GenAmerica"), a
Missouri corporation. GenAmerica was acquired and became a wholly owned
subsidiary of Metropolitan Life Insurance Company ("MetLife"), a New York life
insurance company, on January 6, 2000. As a result of MetLife's ownership of
GenAmerica and its own direct investment in RGA, MetLife beneficially owns 58.4%
of the outstanding shares of common stock of RGA as of December 31, 2001.
On January 30, 2002, MetLife announced its intention to purchase up to
an aggregate of $125 million of additional common shares of RGA. The purchases
are intended to offset potential future dilution of MetLife's holding of RGA
stock arising from the issuance of convertible securities by RGA in December
2001.
The Company is primarily engaged in traditional life reinsurance in the
U.S., Canada, and various international markets. In addition, the Company
provides reinsurance of asset-intensive products and financial reinsurance. RGA
and its predecessor, the Reinsurance Division of General American, have been
engaged in the business of life reinsurance since 1973. Approximately 84% of the
Company's 2001 net premiums were from its more established operations in the
U.S. and Canada. In 1994, the Company began expanding into international markets
and now has subsidiaries, branch operations, or representative offices in the
Asia Pacific, Latin America, Europe and South Africa regions. The Company is
considered one of the leading life reinsurers in the North American market based
on premiums and inforce business. As of December 31, 2001, the Company had
approximately $6.9 billion in consolidated assets.
Reinsurance is an arrangement under which an insurance company, the
"reinsurer," agrees to indemnify another insurance company, the "ceding
company," for all or a portion of the insurance risks underwritten by the ceding
company. Reinsurance is designed to (i) reduce the net liability on individual
risks, thereby enabling the ceding company to increase the volume of business it
can underwrite, as well as increase the maximum risk it can underwrite on a
single life or risk; (ii) stabilize operating results by leveling fluctuations
in the ceding company's loss experience; (iii) assist the ceding company to meet
applicable regulatory requirements; and (iv) enhance the ceding company's
financial strength and surplus position.
Life reinsurance primarily refers to reinsurance of individual term
life insurance policies, whole life insurance policies, universal life insurance
policies, and joint and survivor insurance policies. Asset-intensive reinsurance
primarily refers to reinsurance of corporate-owned life insurance and annuities.
Ceding companies typically contract with more than one company to reinsure their
business. Reinsurance may be written on an indemnity or an assumption basis.
Indemnity reinsurance does not discharge a ceding company from liability to the
policyholder. A ceding company is required to pay the full amount of its
insurance obligations regardless of whether it is entitled or able to receive
payments from its reinsurers. In the case of assumption reinsurance, the ceding
company is discharged from liability to the policyholder, with such liability
passed to the reinsurer. Reinsurers also may purchase reinsurance, known as
retrocession reinsurance, to cover their own risk exposure. Reinsurance
companies enter into retrocession agreements for reasons similar to those that
cause primary insurers to purchase reinsurance.
Reinsurance also may be written on a facultative basis or an automatic
treaty basis. Facultative reinsurance is individually underwritten by the
reinsurer for each policy to be reinsured, with the pricing and other terms
established at the time the policy is underwritten based upon rates negotiated
in advance. Facultative reinsurance normally is purchased by insurance companies
for medically impaired lives, unusual risks, or liabilities in excess of binding
limits on their automatic treaties.
An automatic reinsurance treaty provides that the ceding company will
cede risks to a reinsurer on specified blocks of business where the underlying
policies meet the ceding company's underwriting criteria. In contrast to
facultative reinsurance, the reinsurer does not approve each individual risk.
Automatic reinsurance treaties generally provide that the reinsurer will be
liable for a portion of the risk associated with the specified policies written
by the ceding company.
4
Automatic reinsurance treaties specify the ceding company's binding limit, which
is the maximum amount of risk on a given life that can be ceded automatically
and that the reinsurer must accept. The binding limit may be stated either as a
multiple of the ceding company's retention or as a stated dollar amount.
Facultative and automatic reinsurance may be written as yearly
renewable term, coinsurance, or modified coinsurance, which vary with the type
of risk assumed and the manner of pricing the reinsurance. Under a yearly
renewable term treaty, the reinsurer assumes only the mortality or morbidity
risk. Under a coinsurance arrangement, depending upon the terms of the contract,
the reinsurer may share in the risk of loss due to mortality or morbidity,
lapses, and the investment risk, if any, inherent in the underlying policy.
Modified coinsurance differs from coinsurance in that the assets supporting the
reserves are retained by the ceding company while the risk is transferred to the
reinsurer.
Generally, the amount of life reinsurance ceded under facultative and
automatic reinsurance agreements is stated on either an excess or a quota share
basis. Reinsurance on an excess basis covers amounts in excess of an agreed-upon
retention limit. Retention limits vary by ceding company and also vary by age
and underwriting classification of the insured, product, and other factors.
Under quota share reinsurance, the ceding company states its retention in terms
of a fixed percentage of the risk that will be retained, with the remainder up
to the maximum binding limit to be ceded to one or more reinsurers.
Reinsurance agreements, whether facultative or automatic, may provide
for recapture rights on the part of the ceding company. Recapture rights permit
the ceding company to reassume all or a portion of the risk formerly ceded to
the reinsurer after an agreed-upon period of time (generally 10 years) or in
some cases due to changes in the financial condition or ratings of the
reinsurer. Recapture of business previously ceded does not affect premiums ceded
prior to the recapture of such business, but would reduce premiums in subsequent
periods. Additionally, some treaties give the ceding company the right to
request the Company to place assets in trust for their benefit to support their
reserve credits, in the event of a downgrade of the Company's ratings to
specified levels. As of December 31, 2001, these treaties had approximately
$246.7 million in reserves. Assets placed in trust continue to be owned by the
Company, but their use is restricted based on the terms of the trust agreement.
Securities with an amortized cost of $396.8 million were held in trust in Canada
at December 31, 2001 to satisfy collateral requirements for reinsurance
business. Additionally, securities with an amortized cost of $820.9 million, as
of December 31, 2001, were held in trust to satisfy collateral requirements of
certain other reinsurance treaties. Under certain conditions, RGA may be
obligated to move reinsurance from one RGA subsidiary company to another RGA
subsidiary or make payments under the treaty. These conditions generally include
unusual or remote circumstances, such as change in control, insolvency,
nonperformance under a treaty, or loss of the reinsurance license of such
subsidiary.
The potential adverse effects of recapture rights are mitigated by the
following factors: (i) recapture rights vary by treaty and the risk of recapture
is a factor which is taken into account when pricing a reinsurance agreement;
(ii) ceding companies generally may exercise their recapture rights only to the
extent they have increased their retention limits for the reinsured policies;
and (iii) ceding companies generally must recapture all of the policies eligible
for recapture under the agreement in a particular year if any are recaptured,
which prevents a ceding company from recapturing only the most profitable
policies. In addition, when a ceding company increases its retention and
recaptures reinsured policies, the reinsurer releases the reserves it maintained
to support the recaptured portion of the policies.
B. CORPORATE STRUCTURE
RGA is a holding company, the principal assets of which consist of the
common stock of Reinsurance Company of Missouri, Incorporated ("RCM"), RGA
Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life Reinsurance
Company of Canada ("RGA Canada") and RGA Americas Reinsurance Company, Ltd.
("RGA Americas"), as well as investments in several other subsidiaries and a
joint venture. The primary sources of funds for RGA to make dividend
distributions and to fund debt service are dividends paid to RGA by its
operating subsidiaries, securities maintained in its investment portfolio, and
proceeds from securities offerings. RCM's primary sources of funds are dividend
distributions paid by RGA Reinsurance Company ("RGA Reinsurance"), whose
principal source of funds is derived from current operations. Dividends paid by
the Company's reinsurance subsidiaries are subject to regulatory restrictions of
the respective governing bodies where each reinsurance subsidiary is domiciled.
As of December 31, 1998, the Company formally reported its accident and
health division as a discontinued operation. The accident and health operation
was placed into run-off and all treaties (contracts) were terminated at the
5
earliest possible date. RGA gave notice to all reinsureds and retrocessionaires
that all treaties were cancelled at the expiration of their term. The nature of
the underlying risks is such that the claims may take years to reach the
reinsurers involved. Thus, the Company expects to pay claims out of existing
reserves over a number of years as the level of business diminishes.
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and Europe & South
Africa. The Asia Pacific, Latin America, and Europe & South Africa operational
segments are presented herein as one reportable segment, Other International.
The operational segment results do not include the corporate investment
activity, general corporate expenses, interest expense of RGA, and the provision
for income tax expense (benefit). In addition, the Company's discontinued
accident and health operations are not reflected in the continuing operations of
the Company. The Company measures segment performance based on profit or loss
from operations before income taxes.
Prior to September 1999, the U.S. operations reinsured approximately
25% of General American's funding agreement business, an asset-intensive
product. Effective September 29, 1999, General American completed the recapture
of the entire block of funding agreement business it had reinsured with the
Company. The transaction resulted in the Company's transfer to General American
of all remaining liabilities related to the recaptured block and the underlying
assets supporting it. The Company transferred primarily investments in fixed
maturity securities and cash with a total market value of $1.8 billion in
satisfaction of all funding agreement liabilities. The associated liquidation of
investment securities and the transfer of assets to General American caused the
Company to incur an after tax net capital loss in 1999 of approximately $33.2
million, $26.0 million of which was associated with the recapture transaction
alone.
The U.S. operations represented 73.6% of the Company's business as
measured by 2001 net premiums. The U.S. operations market life reinsurance,
reinsurance of asset-intensive products, and financial reinsurance through RGA
Reinsurance, primarily to the largest U.S. life insurance companies.
Asset-intensive products primarily include reinsurance of corporate-owned life
insurance and annuities. RGA Reinsurance, a Missouri domiciled stock life
insurance company, is wholly owned by RCM, a wholly owned subsidiary of RGA. As
of December 31, 2001, RGA Reinsurance and RCM had regulatory capital and surplus
of $540.5 million and $544.5 million, respectively.
The Company's Canada operations, which represented 10.4% of the
Company's business as measured by 2001 net premiums, are conducted primarily
through RGA Canada. The Canada operations assist clients with capital management
activity and mortality risk management and provide traditional individual life
reinsurance, including preferred underwriting products, as well as creditor and
critical illness products. As of December 31, 2001, RGA Canada had regulatory
capital and surplus of $179.3 million.
The Company's Latin America operations represented 3.1% of the
Company's business as measured by 2001 net premiums. The Company conducts
reinsurance business in the Latin America region through RGA Reinsurance.
Representative offices were opened in Mexico City and Buenos Aires in 1998 and
1999, respectively, to more directly assist clients in these markets.
Historically, the Latin America reinsurance operations have derived revenue
primarily from the reinsurance of privatized pension products in Argentina.
Since 1999, the Company has reduced its participation in these types of treaties
and effective July 1, 2001, ceased all treaty renewals. The Company continues to
market additional types of reinsurance in the region such as traditional
individual life, credit, and group life insurance as well as reinsurance
transactions in Mexico. Through its wholly-owned subsidiary, General American
Argentina S.A. ("GA Argentina"), the Company also markets and sells direct
policies including individual, group, credit, universal life and disability
insurance. Premiums for GA Argentina totaled $7.8 million in 2001, less than 1%
of the Company's total net premiums. The Company had operations in Chile until
2000 when those operations were sold.
The Company's Asia Pacific operations represented 7.2% of the Company's
business as measured by total net premiums in 2001. The Company conducts
reinsurance business in the Asia Pacific region through a branch operation in
Hong Kong and representative offices in Japan and Taiwan. In January 1996, RGA
formed Australian Holdings, a wholly owned holding company, and RGA Reinsurance
Company of Australia Limited ("RGA Australia"), a wholly owned reinsurance
company of Australian Holdings licensed to assume life reinsurance in Australia.
Business is also conducted through Malaysian Life Reinsurance Group Berhad
("MLRe"), a joint venture in Malaysia in which the Company holds a 30% interest.
The principal types of reinsurance provided in the region are life, critical
care, superannuation, and financial
6
reinsurance. Superannuation funds accumulate retirement funds for employees, and
in addition, offer life and disability insurance coverage.
The Company's Europe & South Africa operations represented 5.7% of the
Company's total net premiums for 2001. This segment provides life reinsurance to
clients throughout Europe and South Africa through yearly renewable term and
coinsurance agreements. These agreements may be either facultative or automatic
agreements. In April 2000, the Company's United Kingdom subsidiary, RGA
Reinsurance (UK) Limited ("RGA UK"), obtained approval as a licensed United
Kingdom life reinsurer. The Company also opened a representative office in Spain
during the second quarter of 2000. In addition, the Company conducts reinsurance
through its wholly owned subsidiary, RGA Reinsurance Company of South Africa,
Limited ("RGA South Africa"), with offices in Cape Town and Johannesburg, South
Africa.
RGA Barbados and RGA Americas were formed and capitalized in 1995 and
1999, respectively, providing reinsurance for a portion of certain business
assumed by RGA Reinsurance and other RGA insurance subsidiaries, as well as
assuming life reinsurance directly from clients.
Intercorporate Relationships
The Company has reinsurance agreements with MetLife and certain of its
subsidiaries. As of December 31, 2001, the Company had assets and liabilities
related to these agreements totaling $112.5 million and $109.0 million,
respectively. Under these agreements, the Company reflected net premiums of
approximately $149.3 million, $144.0 million, and $130.3 million in 2001, 2000,
and 1999, respectively. The net premiums reflect the net of business assumed
from and ceded to MetLife and its subsidiaries, including General American. The
pre-tax gain (loss) on this business was approximately $26.1 million, $17.8
million, and $(31.0) million in 2001, 2000, and 1999, respectively.
Ratings
The ability of RGA Reinsurance to write reinsurance partially depends
on its financial condition and its ratings. RGA Reinsurance and RGA Canada have
been assigned ratings of "A+" (Superior) by A.M. Best Company. The ratings
reflect the Company's strong franchise in the North American life reinsurance
market, high level of expertise in assessing mortality risk which has led to
sustained earnings growth in its core businesses, high quality balance sheet,
and strong risk-adjusted capitalization, as well as the implicit and explicit
benefits the Company derives from its affiliation with MetLife. RGA Reinsurance
also maintains ratings from Standard & Poor's ("S & P") and Moody's Investor
Services ("Moody's"). S & P has assigned RGA Reinsurance a financial strength
rating of "AA". A rating of "AA" by S & P means that, in S & P's opinion, the
insurer has very strong financial security characteristics, differing only
slightly from those rated higher. Moody's has assigned RGA Reinsurance a rating
of "A1". A Moody's "A1" rating means that Moody's believes that the insurance
company offers good financial security; however, elements may be present which
suggest a susceptibility to impairment sometime in the future. These ratings are
based on an insurance company's ability to pay policyholder obligations and are
not directed toward the protection of investors. Additionally, RGA has senior
long-term debt ratings of "A" from S&P, "A3" from Moody's and "a" from A.M.
Best.
A security rating is not a recommendation to buy, sell or hold
securities. It is subject to revision or withdrawal at any time by the assigning
rating organization, and each rating should be evaluated independently of any
other rating.
Regulation
RGA Reinsurance and RCM; RGA Canada; GA Argentina; RGA Barbados, RGA
Americas, and Triad Re, Ltd.; RGA Australia; RGA South Africa; and RGA UK; are
regulated by authorities in Missouri, Canada, Argentina, Barbados, Australia,
South Africa, and the United Kingdom, respectively. RGA Reinsurance is subject
to regulations in the other jurisdictions in which it is licensed or authorized
to do business. Insurance laws and regulations, among other things, establish
minimum capital requirements and limit the amount of dividends, distributions,
and intercompany payments affiliates can make without prior regulatory approval.
Missouri law imposes restrictions on the amounts and type of investments
insurance companies like RGA Reinsurance may hold.
7
General
The insurance laws and regulations, as well as the level of supervisory
authority that may be exercised by the various insurance departments, vary by
jurisdiction, but generally grant broad powers to supervisory agencies or
regulators to examine and supervise insurance companies and insurance holding
companies with respect to every significant aspect of the conduct of the
insurance business, including approval or modification of contractual
arrangements. These laws and regulations generally require insurance companies
to meet certain solvency standards and asset tests, to maintain minimum
standards of business conduct, and to file certain reports with regulatory
authorities, including information concerning their capital structure,
ownership, and financial condition, and subject insurers to potential
assessments for amounts paid by guarantee funds.
RGA Reinsurance, RCM, and RGA Canada are required to file annual,
semi-annual, or quarterly statutory financial statements in each jurisdiction in
which they are licensed. Additionally, RGA Reinsurance, RCM, and RGA Canada are
subject to periodic examination by the insurance departments of the
jurisdictions in which each is licensed, authorized, or accredited. The most
recent examination of RGA Reinsurance by the Missouri Department of Insurance
was completed for the year ended December 31, 1999. The report on this
examination contained no material adverse findings. RCM was licensed in April
2000 and has not subsequently been examined by the Missouri Department of
Insurance. RGA Canada, which was formed in 1992, was last reviewed by the
Canadian Superintendent of Financial Institutions for the year ended December
31, 1999. The report on this examination contained no material adverse findings.
The Company's other operating reinsurance subsidiaries are also subject to
periodic reporting requirements and regulatory examinations.
Although some of the rates and policy terms of U.S. direct insurance
agreements are regulated by state insurance departments, the rates, policy
terms, and conditions of reinsurance agreements generally are not subject to
regulation by any regulatory authority. However, the National Association of
Insurance Commissioners ("NAIC") Model Law on Credit for Reinsurance, which has
been adopted in most states, imposes certain requirements for an insurer to take
reserve credit for reinsurance ceded to a reinsurer. Generally, the reinsurer is
required to be licensed or accredited in the insurer's state of domicile, or
security must be posted for reserves transferred to the reinsurer in the form of
letters of credit or assets placed in trust. The NAIC Life and Health
Reinsurance Agreements Model Regulation, which has been passed in most states,
imposes additional requirements for insurers to claim reserve credit for
reinsurance ceded (excluding yearly renewable term reinsurance and
non-proportional reinsurance). These requirements include bona fide risk
transfer, an insolvency clause, written agreements, and filing of reinsurance
agreements involving in force business, among other things.
In recent years, the NAIC and insurance regulators increasingly have
been re-examining existing laws and regulations and their application to
insurance companies. In particular, this re-examination has focused on insurance
company investment and solvency issues, and, in some instances, has resulted in
new interpretation of existing law, the development of new laws, and the
implementations of non-statutory guidelines. The NAIC has formed committees and
appointed advisory groups to study and formulate regulatory proposals on such
diverse issues as the use of surplus debentures, accounting for reinsurance
transactions, and the adoption of risk-based capital rules. It is not possible
to predict the future impact of changing state and federal regulation on the
operations of RGA or its subsidiaries.
RGA Reinsurance prepares its statutory financial statements in
conformity with accounting practices prescribed or permitted by the State of
Missouri. Beginning in 2001, the State of Missouri required that insurance
companies domiciled in the State of Missouri prepare their statutory basis
financial statements in accordance with the NAIC Accounting Practices and
Procedures manual - Version effective March 2001, subject to any deviations
prescribed or permitted by the State of Missouri insurance commissioner.
Accounting changes adopted to conform to the provisions of the NAIC
Accounting Practices and Procedures manual - Version effective March 2001 are
reported as changes in accounting principles. The cumulative effect of changes
in accounting principles is reported as an adjustment to unassigned funds
(surplus) in the period of the change in accounting principle. RGA Reinsurance
recorded an immaterial positive adjustment to statutory surplus in 2001 as a
result of implementing the new standards.
8
Capital Requirements
Guidelines on Minimum Continuing Capital and Surplus Requirements
("MCCSR") became effective for Canadian insurance companies in December 1992,
and Risk-Based Capital ("RBC") guidelines promulgated by the National
Association of Insurance Commissioners ("NAIC") became effective for U.S.
companies in 1993. The MCCSR risk-based capital guidelines, which are applicable
to RGA Canada, prescribe surplus requirements and consider both assets and
liabilities in establishing solvency margins. The RBC guidelines, applicable to
RGA Reinsurance and RCM, similarly identify minimum capital requirements based
upon business levels and asset mix. RGA Canada, RCM, and RGA Reinsurance
maintain capital levels in excess of the amounts required by the applicable
guidelines. Regulations in Argentina, Australia, Barbados, South Africa and
United Kingdom also require certain minimum capital levels, and subject the
companies operating there to oversight by the applicable regulatory bodies. The
Company's subsidiaries in Argentina, Australia, Barbados, South Africa and
United Kingdom meet the minimum capital requirements in their respective
jurisdiction. The Company cannot predict the effect that any proposed or future
legislation or rule making in the countries in which the Company operates may
have on the financial condition or operations of the Company or its
subsidiaries.
Insurance Holding Company Regulations
RGA is regulated in Missouri as an insurance holding company. The
Company is subject to regulation under the insurance and insurance holding
company statutes of Missouri. The Missouri insurance holding company laws and
regulations generally require insurance and reinsurance subsidiaries of
insurance holding companies to register with the Missouri Department of
Insurance and to file with the Missouri Department of Insurance certain reports
describing, among other information, their capital structure, ownership,
financial condition, certain intercompany transactions, and general business
operations. The Missouri insurance holding company statutes and regulations also
require prior approval of, or in certain circumstances, prior notice to the
Missouri Department of Insurance of certain material intercompany transfers of
assets, as well as certain transactions between insurance companies, their
parent companies and affiliates.
Under Missouri insurance laws and regulations, unless (i) certain
filings are made with the Missouri Department of Insurance, (ii) certain
requirements are met, including a public hearing, and (iii) approval or
exemption is granted by the Missouri Director of Insurance, no person may
acquire any voting security or security convertible into a voting security of an
insurance holding company, such as RGA, which controls a Missouri insurance
company, or merge with such a holding company, if as a result of such
transaction such person would "control" the insurance holding company. "Control"
is presumed to exist under Missouri law if a person directly or indirectly owns
or controls 10% or more of the voting securities of another person.
Restrictions on Dividends and Distributions
Current Missouri law (applicable to RGA, RCM, and RGA Reinsurance)
permits the payment of dividends or distributions which, together with dividends
or distributions paid during the preceding twelve months, do not exceed the
greater of (i) 10% of statutory capital and surplus as of the preceding December
31, or (ii) statutory net gain from operations for the preceding calendar year.
Any proposed dividend in excess of this amount is considered an "extraordinary
dividend" and may not be paid until it has been approved, or a 30-day waiting
period has passed during which it has not been disapproved, by the Missouri
Director of Insurance. RCM's allowable dividend without prior approval for 2002
is approximately $54.5 million pursuant to this calculation. RGA Reinsurance's
allowable dividend without prior approval for 2002 is approximately $54.1
million pursuant to this calculation. Dividends may be paid only to the extent
the insurer has unassigned surplus (as opposed to contributed surplus). As of
December 31, 2001, RCM and RGA Reinsurance had unassigned surplus of
approximately $19.3 million and $51.7 million, respectively. Any dividends paid
by RGA Reinsurance would be paid to RCM, who in turn has the ability to pay
dividends to RGA. Historically, RGA has not relied on dividends from its
subsidiaries to fund its obligations. However, the regulatory limitations
described here could limit the Company's financial flexibility in the future
should it choose to or need to use subsidiary dividends as a funding source for
its obligations.
In contrast to current Missouri law, the NAIC Model Insurance Holding
Company Act (the "Model Act") defines an extraordinary dividend as a dividend or
distribution which, together with dividends or distributions paid during the
preceding twelve months, exceeds the lesser of (i) 10% of statutory capital and
surplus as of the preceding December 31, or (ii)
9
statutory net gain from operations for the preceding calendar year. The Company
is unable to predict whether, when, or in what form Missouri will enact a new
measure for extraordinary dividends. Neither RGA Reinsurance or RCM would have
been able to pay anything other than an extraordinary dividend in 2002 under
this formula due to their loss from operations during 2001.
In addition to the foregoing, Missouri insurance laws and regulations
require that the statutory surplus of RCM and RGA Reinsurance following any
dividend or distribution be reasonable in relation to its outstanding
liabilities and adequate to meet its financial needs. The Missouri Director of
Insurance may bring an action to enjoin or rescind the payment of a dividend or
distribution by RGA Reinsurance or RCM that would cause its statutory surplus to
be inadequate under the standards of Missouri.
RGA Canada may not pay a dividend if there are reasonable grounds for
believing that RGA Canada is, or the payment of the dividend would cause RGA
Canada to be, in contravention of any regulation made by the Governor in Council
and the guidelines adopted by the Superintendent of Financial Institutions
respecting the maintenance by life companies of adequate and appropriate forms
of liquidity. The Canadian MCCSR guidelines consider both assets and liabilities
in establishing solvency margins, the effect of which could limit the maximum
amount of dividends that may be paid by RGA Canada. RGA Canada's ability to
declare and pay dividends in the future will be affected by its continued
ability to comply with such guidelines. Moreover, RGA Canada must give notice to
the Superintendent of Financial Institutions of the declaration of any dividend
at least ten days prior to the day fixed for its payment. The maximum amount
available for payment of dividends by RGA Canada under the Canadian MCCSR
guidelines was $50.6 million at December 31, 2001. Dividend payments from other
subsidiaries are subject to the regulations in the country of domicile.
Default or Liquidation
In the event of a default on any debt that may be incurred by RGA or
the bankruptcy, liquidation, or other reorganization of RGA, the creditors and
stockholders of RGA will have no right to proceed against the assets of RCM, RGA
Reinsurance, RGA Canada, or other insurance or reinsurance company subsidiaries
of RGA. If RCM or RGA Reinsurance were to be liquidated, such liquidation would
be conducted by the Missouri Director of Insurance as the receiver with respect
to such insurance company's property and business. If RGA Canada were to be
liquidated, such liquidation would be conducted pursuant to the general laws
relating to the winding-up of Canadian federal companies. In both cases, all
creditors of such insurance company, including, without limitation, holders of
its reinsurance agreements and, if applicable, the various state guaranty
associations, would be entitled to payment in full from such assets before RGA,
as a direct or indirect stockholder, would be entitled to receive any
distributions made to it prior to commencement of the liquidation proceedings,
and, if the subsidiary was insolvent at the time of the distribution,
shareholders of RGA might likewise be required to refund dividends subsequently
paid to them.
In addition to RCM, RGA Reinsurance and RGA Canada, the Company has an
interest in licensed insurance subsidiaries in Australia, Argentina, Barbados,
Malaysia, South Africa, and the United Kingdom. In the event of default or
liquidation, the rules and regulations of the appropriate governing body in the
country of incorporation would be followed.
Federal Regulation
Discussions continue in the Congress of the United States concerning
the future of the McCarran-Ferguson Act, which exempts the "business of
insurance" from most federal laws, including anti-trust laws, to the extent such
business is subject to state regulation. Judicial decisions narrowing the
definition of what constitutes the "business of insurance" and repeal or
modification of the McCarran-Ferguson Act may limit the ability of the Company,
and RGA Reinsurance in particular, to share information with respect to matters
such as rate-setting, underwriting, and claims management. It is not possible to
predict the effect of such decisions or change in the law on the operation of
the Company.
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. The Company retains a maximum of $4.0
million of coverage per individual life. The Company has a number of
retrocession arrangements whereby certain business in force is retroceded on an
automatic or facultative basis.
10
Generally, RGA's insurance subsidiaries retrocede amounts in excess of
their retention to RGA Reinsurance or RGA Americas. Retrocessions are arranged
through the Company's retrocession pools for amounts in excess of its retention.
As of December 31, 2001, all retrocession pool members in this excess retention
pool reviewed by the A.M. Best Company were rated "A-" or better. 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 were not rated, security in the
form of letters of credit or trust assets has 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 difficulty in collecting
claims recoverable from retrocessionaires; however, no assurance can be given as
to the future performance of such retrocessionaires or as to recoverability of
any such claims.
The Company has catastrophe insurance coverage issued by 2 insurers
rated "A" or higher by A.M. Best as of December 31, 2001, that provides benefits
of up to $100 million per occurrence for claims involving three or more deaths
in a single accident. The Company pays a deductible of $1.5 million per
occurrence and 20% of the first $30 million of claims reported per occurrence.
As a result of the September 11, 2001 terrorist attacks on the United States,
the Company had received in excess of 300 claims totaling approximately $33
million as of December 31, 2001. The Company expects to recover amounts in
excess of its deductible and retention under its catastrophe insurance
coverages. As of December 31, 2001, the amount recoverable is expected to be
approximately $22 million. However, the Company believes it will take several
more months before all claims are reported. This coverage is terminable annually
in August with 90 days prior notice. The Company believes such catastrophe
insurance coverage adequately protects it from risks associated with multiple
deaths in a single accident of reinsured lives. Due to the events of September
11, many catastrophe insurance carriers have indicated that they will not renew
coverage or will significantly change the level and type of coverage they will
provide. It is also expected that the cost for catastrophe coverage will
significantly increase. The Company can give no assurances that it will be able
to obtain cost effective catastrophe coverage when its current policy expires in
August 2002.
RGA Canada's policy is normally to retain up to C$100,000 of individual
life and up to C$100,000 of Accidental Death and Dismemberment liability on any
one life. RGA Canada retrocedes amounts in excess of its retention mostly to RGA
Reinsurance directly or through General American. Retrocessions are arranged
through RGA Reinsurance's retrocession pool. RGA Canada has never experienced a
default in connection with its retrocession arrangements, nor has it experienced
any difficulty in collecting claims recoverable from its retrocessionaires.
However, no assurance can be given as to the future performance of such
retrocessionaires or as to the recoverability of any such claims.
For other international business, the Company retains up to $4.0
million for U.S., Canadian, Australian, and New Zealand currency-denominated
business. For other currencies and for countries with higher risk factors, the
Company systematically reduces its retention. The Argentine subsidiary cedes
business in excess of 40,000 Argentine pesos. RGA Australia has a retrocession
arrangement with RGA Reinsurance in which the majority of life risks above
$100,000 Australian dollars are retroceded to RGA Reinsurance. RGA UK has a
retrocession arrangement such that life risks above (pound)100,000 are
retroceded to RGA Americas. RGA South Africa has retrocession arrangements such
that life risks above R200,000 are retroceded to RGA Americas or RGA Barbados.
On an aggregate basis among all of its subsidiaries, the Company does not retain
more than $4.0 million on any one life.
Underwriting
Facultative. Senior management has developed underwriting guidelines,
policies, and procedures with the objective of controlling the quality of
business written as well as its pricing. The Company's underwriting process
emphasizes close collaboration among its underwriting, actuarial, and operations
departments. Management periodically updates these underwriting policies,
procedures, and standards to account for changing industry conditions, market
developments, and changes occurring in the field of medical technology; however,
no assurance can be given that all relevant information has been analyzed or
that additional risks will not materialize. These policies, procedures, and
standards are documented in an on-line underwriting manual. The Company
regularly performs internal reviews of its underwriters and underwriting
process.
11
The Company's management determines whether to accept facultative
reinsurance business on a prospective insured by reviewing the client company's
applications and medical requirements, and assessing financial information and
any medical impairments. Most facultative applications involve a prospective
insured with multiple impairments, such as heart disease, high blood pressure,
and diabetes, requiring a difficult underwriting assessment. To assist its
underwriters in making this assessment, the Company employs three full-time
medical directors, as well as a medical consultant.
Automatic. The Company's management determines whether to write
automatic reinsurance business by considering many factors, including the types
of risks to be covered; the ceding company's retention limit and binding
authority, product, and pricing assumptions; and the ceding company's
underwriting standards, financial strength and distribution systems. For
automatic business, the Company ensures that the underwriting standards and
procedures of its ceding companies are compatible with those of RGA. To this
end, the Company conducts periodic reviews of the ceding companies' underwriting
and claims personnel and procedures.
Competition
Reinsurers compete on the basis of many factors, including financial
strength, pricing and other terms and conditions of reinsurance agreements,
reputation, service, and experience in the types of business underwritten. The
U.S. and Canadian life reinsurance markets are served by numerous international
and domestic reinsurance companies. The Company believes that its primary
competitors in the U.S. life reinsurance market are currently Transamerica
Occidental Life Insurance Company, Swiss Re Life of America, ING Re, Munich
American Reinsurance Company, and Employers Reinsurance Company. However, within
the reinsurance industry, this can change from year to year. The Company
believes that its major competitors in the Canadian life reinsurance market are
Employers Reassurance Corporation, Munich Reinsurance Company, and Swiss Re Life
and Health Canada.
The Company's international operations compete with subsidiaries of
several U.S. life insurers and reinsurers and other internationally based
insurers and reinsurers, some of which are larger, more established in their
markets, and have access to greater resources than the Company. Competition is
primarily on the basis of price, service, and financial strength.
Employees
As of December 31, 2001, the Company had 678 employees located in the
United States, Canada, Argentina, Mexico, Hong Kong, Australia, Japan, Taiwan,
South Africa, Spain, and the United Kingdom. None of these employees are
represented by a labor union. The Company believes that employee relations at
all of its subsidiaries are good.
C. SEGMENTS
The Company obtains substantially all of its revenues through
reinsurance agreements that cover a portfolio of life insurance products,
including term life, credit life, universal life, whole life, and joint and last
survivor insurance, as well as annuities, financial reinsurance, and direct
premiums which include single premium pension annuities, universal life, and
group life. Generally, the Company, through a subsidiary, has provided
reinsurance and, to a lesser extent, insurance for mortality and morbidity risks
associated with such products. With respect to asset-intensive products, the
Company has also provided reinsurance for investment-related risks. RGA
Reinsurance has written a small amount of primary insurance on General American
directors and officers, and a small amount of short-term life insurance.
The following table sets forth the Company's gross and net premiums
attributable to each of its segments for the periods indicated:
12
GROSS AND NET PREMIUMS BY SEGMENT
(in millions)
Year Ended December 31,
----------------------------------------------------------------------
2001 2000 1999
----------------- ------------------ -----------------
Amount % Amount % Amount %
--------- ----- --------- ----- --------- -----
GROSS PREMIUMS:
U.S. $1,366.7 73.9 $1,210.9 74.4 $1,158.2 73.1
Canada 200.2 10.8 218.0 13.4 219.1 13.8
Latin America 51.9 2.8 66.1 4.1 105.5 6.7
Asia Pacific 135.6 7.3 100.7 6.2 76.6 4.8
Europe & South Africa 96.2 5.2 30.5 1.9 25.4 1.6
-------- ----- -------- ----- -------- -----
Total $1,850.6 100.0 $1,626.2 100.0 $1,584.8 100.0
======== ===== ======== ===== ======== =====
NET PREMIUMS:
U.S. $1,222.9 73.6 $1,038.9 74.0 $ 950.4 72.2
Canada 173.3 10.4 176.3 12.6 162.5 12.4
Latin America 51.1 3.1 64.9 4.6 104.2 7.9
Asia Pacific 119.7 7.2 94.3 6.7 73.9 5.6
Europe & South Africa 94.8 5.7 29.7 2.1 24.6 1.9
-------- ----- -------- ----- -------- -----
Total $1,661.8 100.0 $1,404.1 100.0 $1,315.6 100.0
======== ===== ======== ===== ======== =====
The following table sets forth selected information concerning assumed
reinsurance business in force for the Company's U.S., Canada, Latin America,
Asia Pacific, and Europe & South Africa segments for the indicated periods. (The
term "in force" refers to face amounts or net amounts at risk.)
REINSURANCE BUSINESS IN FORCE BY SEGMENT
(in billions)
Year Ended December 31,
-------------------------------------------------------------
2001 2000 1999
---------------- --------------- -----------------
Amount % Amount % Amount %
------ ---- ------ ---- ------ ----
U.S. $468.1 76.0 $412.7 75.6 $345.7 77.4
Canada 55.8 9.1 54.3 10.0 45.8 10.2
Latin America 7.5 1.2 44.6 8.2 31.9 7.1
Asia Pacific 44.1 7.1 31.9 5.8 22.1 5.0
Europe & South Africa 40.5 6.6 2.4 0.4 1.4 0.3
------ ----- ------ ----- ------ -----
Total $616.0 100.0 $545.9 100.0 $446.9 100.0
====== ===== ====== ===== ====== =====
Reinsurance business in force reflects the addition or acquisition of
new reinsurance business, offset by terminations (e.g., voluntary surrenders of
underlying life insurance policies, lapses of underlying policies, deaths of
insureds, the exercise of recapture options, changes in foreign exchange, and
any other changes in the amount of insurance in force). As a result of
terminations, assumed in force amounts at risk of $98.0 billion, $59.3 billion,
and $48.6 billion were released in 2001, 2000, and 1999, respectively.
The following table sets forth selected information concerning assumed
new business volume for the Company's U.S., Canada, Latin America, Asia Pacific,
and Europe & South Africa operations for the indicated periods. (The term
"volume" refers to face amounts or net amounts at risk.)
13
NEW BUSINESS VOLUME BY SEGMENT
(in billions)
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999
----------------- -------------- ----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
U.S. $99.5 58.2 $115.7 71.8 $121.3 73.6
Canada 8.5 5.0 13.8 8.6 9.4 5.7
Latin America 10.2 5.9 21.3 13.2 20.6 12.5
Asia Pacific 19.3 11.3 9.7 6.0 12.5 7.5
Europe & South Africa 33.6 19.6 0.6 0.4 1.1 0.7
------ ----- ------ ----- ------ -----
Total $171.1 100.0 $161.1 100.0 $164.9 100.0
====== ===== ====== ===== ====== =====
Additional information regarding the operations of the Company's
segments and geographic operations is contained in Note 18 to the Consolidated
Financial Statements within Item 8 of Part II.
U.S. Operations
The U.S. operations represented 73.6%, 74.0%, and 72.2% of the
Company's net premiums in 2001, 2000, and 1999, respectively. The U.S.
operations market life reinsurance, reinsurance of asset-intensive products and
financial reinsurance primarily to the largest U.S. life insurance companies.
Traditional
The U.S. traditional reinsurance sub-segment provides life reinsurance
to domestic clients for a variety of life products through yearly renewable term
agreements, coinsurance, and modified coinsurance. This business has been
accepted under many different rate scales, with rates often tailored to suit the
underlying product and the needs of the ceding company. Premiums typically vary
for smokers and non-smokers, males and females, and may include a preferred
underwriting class discount. Reinsurance premiums are paid in accordance with
the treaty, regardless of the premium mode for the underlying primary insurance.
This business is made up of facultative and automatic treaty business.
In addition, several of the Company's U.S. clients have purchased life
insurance policies insuring the lives of their executives. These policies have
generally been issued to fund deferred compensation plans and have been
reinsured with the Company. As of December 31, 2001, reinsurance of such
policies was reflected in interest sensitive contract reserves of approximately
$1,312.3 million and policy loans of $774.7 million.
The U.S. facultative reinsurance operation involves the assessment of
the risks inherent in (i) multiple impairments, such as heart disease, high
blood pressure, and diabetes; (ii) cases involving large policy face amounts;
and (iii) financial risk cases, i.e., cases involving policies
disproportionately large in relation to the financial characteristics of the
proposed insured. The U.S. operation's marketing efforts have focused on
developing facultative relationships with client companies because management
believes facultative reinsurance represents a substantial segment of the
reinsurance activity of many large insurance companies and has been an effective
means of expanding the U.S. operation's automatic business. In 2001, 2000, and
1999, approximately 21.8%, 29.1%, and 30.2%, respectively, of the U.S. gross
premiums were written on a facultative basis. The U.S. operations have
emphasized personalized service and prompt response to requests for facultative
risk assessment. The amount of facultative business as a percent of premiums has
decreased over the past several years due to the increase in premiums from
automatic treaties on in force business.
14
Only a portion of approved facultative applications result in paid
reinsurance. This is because applicants for impaired risk policies often submit
applications to several primary insurers, which in turn seek facultative
reinsurance from several reinsurers. Ultimately, only one insurance company and
one reinsurer are likely to obtain the business. The Company tracks the
percentage of declined and placed facultative applications on a client-by-client
basis and generally works with clients to seek to maintain such percentages at
levels deemed acceptable.
Mortality studies performed by the Company have shown that its
facultative mortality experience is comparable to its automatic mortality
experience relative to expected mortality rates. Because the Company applies its
underwriting standards to each application submitted to it facultatively, it
generally does not require ceding companies to retain a portion of the
underlying risk when business is written on a facultative basis.
Automatic business, including financial reinsurance treaties, is
generated pursuant to treaties, which generally require that the underlying
policies meet the ceding company's underwriting criteria, although a number of
such policies may be rated substandard. In contrast to facultative reinsurance,
reinsurers do not engage in underwriting assessments of the risks assumed
through an automatic treaty.
Because the Company does not apply its underwriting standards to each
policy ceded to it under automatic treaties, the U.S. operations generally
require ceding companies to keep a portion of the business written on an
automatic basis, thereby increasing the ceding companies' incentives to
underwrite risks with due care and, when appropriate, to contest claims
diligently.
Asset-Intensive Business
Reinsurance business in which the investment risk is reinsured is
referred to as asset-intensive business. Asset-intensive business includes the
reinsurance of corporate-owned life insurance and annuities. Most of these
agreements are coinsurance or modified coinsurance of nonmortality risks such
that the Company recognizes profits or losses primarily from the spread between
the investment earnings and the interest credited on the underlying deposit
liabilities.
Asset-intensive business that does not produce mortality risk
(annuities) is normally limited by size of the deposit, from any one depositor.
Business which does produce mortality risks (corporate-owned and bank-owned)
normally involves a large number of insureds associated with each deposit.
Underwriting of these deposits also limits the size of any one deposit but the
individual policies associated with any one deposit are typically issued within
pre-set guaranteed issue parameters.
The Company looks for highly rated, financially secure companies as
clients for asset-intensive business. These companies may wish to limit their
own exposure to certain products. Ongoing asset/liability analysis is required
for the management of asset-intensive business. The Company performs this
analysis itself, in conjunction with asset/liability analysis performed by the
ceding companies.
Financial Reinsurance
The Company's financial reinsurance sub-segment assists ceding
companies in meeting applicable regulatory requirements while enhancing the
ceding companies' financial strength and regulatory surplus position. The
Company commits cash or assumes insurance liabilities from the ceding companies.
Generally, such amounts are offset by receivables from ceding companies that are
repaid by the future profits from the reinsured block of business. The Company
structures its financial reinsurance transactions so that the projected future
profits of the underlying reinsured business significantly exceed the amount of
regulatory surplus provided to the ceding company.
The Company primarily targets highly rated insurance companies for
financial reinsurance due to the credit risk associated with this business. A
careful analysis is performed before providing any surplus enhancement to the
ceding company. This analysis assures that the Company understands the risks of
the underlying insurance product and that the surplus has a high likelihood of
being repaid through the future profits of the business. If the future profits
of the business are not sufficient to repay the Company or if the ceding company
becomes financially distressed and is unable to make
15
payments under the treaty, the Company may incur losses. A staff of actuaries
and accountants tracks experience for each treaty on a quarterly basis in
comparison to expected models. 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.
Customer Base
The U.S. reinsurance operation markets life reinsurance primarily to
the largest U.S. life insurance companies and currently has treaties with most
of the largest 100 companies. These treaties generally are terminable by either
party on 90 days written notice, but only with respect to future new business;
existing business generally is not terminable, unless the underlying policies
terminate or are recaptured. In 2001, 55 clients had annual gross premiums of $5
million or more and the aggregate gross premiums from these clients represented
approximately 93.0% of 2001 U.S. life gross premiums. For the purpose of this
disclosure, companies that are within the same holding company structure are
combined.
In 2001, no single non-affiliated U.S. client accounted for more than
10% of the Company's consolidated gross premiums; however, three non-affiliated
clients ceded more than 5% of U.S. life gross premiums. These clients ceded
$229.5 million, or 16.8%, of U.S. operations gross premiums in 2001.
MetLife and its affiliates generated approximately $130.3 million or
9.5% of U.S. operation's gross premium for 2001.
Operations
During 2001, substantially all gross U.S. life business was obtained
directly, rather than through brokers. The Company has an experienced marketing
staff that works to maintain existing relationships and to provide responsive
service.
The Company's auditing, valuation and accounting departments are
responsible for treaty compliance auditing, financial analysis of results,
generation of internal management reports, and periodic audits of administrative
practices and records. A significant effort is focused on periodic audits of
administrative and underwriting practices, records, and treaty compliance of
reinsurance clients.
The Company's claims department (i) reviews and verifies reinsurance
claims, (ii) obtains the information necessary to evaluate claims, (iii)
determines the Company's liability with respect to claims, and (iv) arranges for
timely claims payments. Claims are subjected to a detailed review process to
ensure that the risk was properly ceded, the claim complies with the contract
provisions, and the ceding company is current in the payment of reinsurance
premiums to the Company's operations. The claims department also investigates
claims generally for evidence of misrepresentation in the policy application and
approval process. In addition, the claims department monitors both specific
claims and the overall claims handling procedure of ceding companies.
Claims personnel work closely with their counterparts at client
companies to attempt to uncover fraud, misrepresentation, suicide, and other
situations where the claim can be reduced or eliminated. By law, the ceding
company cannot contest claims made after two years of the issuance of the
underlying insurance policy. By developing good working relationships with the
claims departments of client companies, major claims or problem claims can be
addressed early in the investigation process. Claims personnel review material
claims presented to the Company in detail to find potential mistakes such as
claims ceded to the wrong reinsurer and claims submitted for improper amounts.
Canada Operations
The Canada operation represented 10.4%, 12.6%, and 12.4% of the
Company's net premiums in 2001, 2000, and 1999, respectively. In 2001, the
Canadian life operations assumed $8.5 billion in new business, most of which
resulted from recurring new business. Approximately 87% of the 2001 recurring
new business was written on an automatic basis.
The Company operates in Canada primarily through RGA Canada, a
wholly-owned company. RGA Canada is a leading life reinsurer in Canada assisting
clients with capital management activity and mortality risk management and is
16
primarily engaged in traditional individual life reinsurance, including
preferred underwriting products, as well as creditor and critical illness
products. Approximately 88% of RGA Canada's premium income is derived from life
reinsurance products.
Clients include most of the life insurers in Canada. During 2001, two
clients accounted for more than 10% of the Canada operation's gross premiums,
consisting of C$93.3 and C$39.9 million, or 30.1% and 12.9%, respectively, of
the Canada operation's gross premiums in 2001. Four other clients, including
General American, a related party, individually accounted for more than 5% of
Canada's gross premiums. The Canada operation competes with a small number of
individual and group life reinsurers primarily on the basis of price, service,
and financial strength.
RGA Canada has two offices and maintains a staff of sixty-six people at
the Montreal office and fifteen people at the office in Toronto. RGA Canada
employs its own underwriting, actuarial, claims, pricing, accounting, systems,
marketing and administrative staff.
Latin America Operations
The Latin American operations represented 3.1%, 4.6%, and 7.9% of the
Company's net premiums in 2001, 2000, and 1999, respectively. The Company
conducts reinsurance business in the Latin American region through RGA
Reinsurance Company. During 1999, a representative office was opened in Buenos
Aires and during 1998 a representative office was opened in Mexico City to more
directly assist clients in these markets. Historically, the Latin American
reinsurance operations have derived revenue primarily from the reinsurance of
privatized pension products in Argentina. Since 1999, the Company has reduced
its participation in these types of treaties and is more actively marketing
traditional individual life, credit, and group life reinsurance as well as
reinsurance transactions in Mexico. During 2001, the Company ceased renewal of
reinsurance treaties associated with privatized pension contracts in Argentina
because of adverse experience on this business, as several aspects of the
pension fund claims flow did not develop as was contemplated when the
reinsurance programs were initially priced.
Direct insurance has been generated primarily from subsidiaries in
Argentina and Chile. During April 2000, the Company sold its Chilean interests.
In 1994, to develop markets in Argentina, RGA formed GA Argentina. GA
Argentina writes direct individual and group life insurance and life insurance
primarily related to group life and disability insurance for the Argentine
privatized pension system as well as traditional group life insurance. Effective
July 1998, GA Argentina no longer entered into new contracts related to the
privatized pension system, but continues to market individual universal life and
group products.
The Latin American reinsurance operations are primarily supported by
the Latin American Division of RGA Reinsurance based in St. Louis with a staff
of eight people in St. Louis, four people in a representative office in Mexico
and three people in a representative office in Argentina. The division provides
bilingual underwriting, actuarial, claims, pricing, marketing, and
administrative support. Claims, accounting, and systems support are provided on
a corporate basis through the Company's operations in St. Louis. GA Argentina
maintains a staff of seventy-seven people in Buenos Aires, Argentina, and
employs its own underwriting, actuarial, claims, pricing, accounting, systems,
marketing and administrative staff.
Asia Pacific Operations
The Asia Pacific operations represented 7.2%, 6.7%, and 5.6% of the
Company's net premiums in 2001, 2000, and 1999, respectively. The Company has a
presence in the Asia Pacific region with a licensed branch office in Hong Kong
and representative offices in Tokyo and Taiwan. The Company also established a
reinsurance subsidiary in Australia in January 1996. During 2001, two clients of
the Company's, one each in Australia and Hong Kong, generated approximately
$54.1 million, or 39.9% of the total gross premiums for the Asia Pacific
operations.
Within the Asia Pacific segment, nine people are on staff in the Hong
Kong office, ten people are on staff in the Tokyo office, six people are on
staff in the Taiwan office, and RGA Australia maintains a staff of twenty-two
people in Sydney. The Hong Kong, Tokyo and Taiwan offices primarily provide
marketing and underwriting service to the direct life insurance companies with
other service support provided directly by the Company's St. Louis operations.
RGA Australia
17
directly maintains its own underwriting, actuarial, claims, pricing, accounting,
systems, marketing and administration service with additional support provided
by the Company's St. Louis operations.
Europe & South Africa Operations
The Europe & South Africa operations represented 5.7%, 2.1%, and 1.9%
of the Company's net premiums in 2001, 2000, and 1999, respectively. This
segment provides life reinsurance to clients located in Europe (primarily in the
United Kingdom and Spain) and South Africa. The principal type of reinsurance
being provided has been life reinsurance for a variety of life products through
yearly renewable term and coinsurance agreements and the reinsurance of critical
illness coverage. These agreements may be either facultative or automatic
agreements. During 2001, two clients of the Company's UK operations generated
approximately $56.2 million, or 58.4% of the total gross premiums for the Europe
& South Africa operations.
During 2000, RGA UK obtained approval as a licensed United Kingdom life
reinsurer, operating in the United Kingdom. In 1998, the Company established RGA
South Africa, with offices in Cape Town and Johannesburg to promote life
reinsurance in South Africa.
In the United Kingdom, an increasing number of insurers are ceding the
mortality and accelerated critical illness (pays on earlier of death or
diagnosis of a critical illness) covers of individual life products on a quota
share basis creating reinsurance opportunities. The reinsurers present in the
market include the main global players with which RGA competes in other markets
as well.
In South Africa, the Company's subsidiary has managed to establish a
substantial position in the facultative market, through excellent service and
competitive pricing as well as gaining an increasing share in the automatic
market. The Company is concentrating on the life insurance market, as opposed to
competitors that are also in the health market. The Company has a small portion
of accelerated critical illness business in South Africa.
In Spain, the Company has business relationships with more than twenty
of the leading companies covering both individual and group life business. Also,
in 2001 RGA extended its activities in Italy writing a number of life
reinsurance treaties.
The Company's subsidiaries in the United Kingdom and South Africa
employ their own underwriting, actuarial, claims pricing, accounting, marketing,
and administration staff with additional support provided by the Company's St.
Louis Operations. Divisional management through RGA International Corporation
(Nova Scotia ULC) ("RGA International") based in Toronto provides additional
services for existing and future markets. The Toronto staff consists of fourteen
people, operations in the United Kingdom maintains a staff of twenty people, RGA
South Africa maintains a staff of twenty-seven people, and three people are on
staff in the Madrid office.
Discontinued Operations
As of December 31, 1998, the Company formally reported its accident and
health division as a discontinued operation. More information about the
Company's discontinued accident and health divisions may be found in Note 22 to
the Consolidated Financial Statements within Item 8 of Part II.
D. FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS
The Company's foreign operations are primarily in Canada, Latin
America, the Asia Pacific region, which includes Australia, and Europe. Revenue,
income (loss) which includes net realized gains (losses) before income tax,
interest expense, depreciation and amortization, and identifiable assets
attributable to these geographic regions are identified in Note 18 to the
Consolidated Financial Statements within Item 8 of Part II.
18
E. EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding the executive officers of the Company, see
Part III, Item 10, entitled "Directors and Executive Officers of the
Registrant."
Item 2. PROPERTIES
RGA Reinsurance houses its employees and the majority of RGA's officers
in approximately 116,000 square feet of office space at 1370 Timberlake Manor
Parkway, Chesterfield, Missouri. These premises are leased through August 31,
2009, at annual rents ranging from approximately $2,000,000 to $2,400,000.
RGA Reinsurance also conducts business from approximately 1,400 square
feet in Norwalk, Connecticut, 2,979 square feet of office space located in Hong
Kong, approximately 2,900 square feet of office space located in Tokyo, Japan,
and 2,800 square feet of office space in Taipei, Taiwan. The rental expenses
paid by RGA Reinsurance under these leases during 2001 were approximately
$22,000, $136,000, $328,000, and $53,000 for Norwalk, Hong Kong, Tokyo, and
Taipei, respectively. RGA Australia conducts business from approximately 6,000
square feet of office space located in Sydney, Australia and paid approximately
$85,000 during 2001 for lease expense. The Norwalk, Hong Kong, Tokyo, and Taipei
leases expire in December 2002, October 2002, January 2004, and October 2003,
respectively. The Sydney lease expires in October 2003.
RGA Reinsurance also conducts business from approximately 1,500 square
feet of office space in Mexico City, Mexico. The rental expenses paid by RGA
Reinsurance under the lease during 2001 were approximately $23,000. The lease
expires in December 2002.
General American Argentina conducts business from approximately 11,000
square feet of office space in Buenos Aires, Argentina, pursuant to several
leases. Rental expense paid for the office space was approximately $184,000
during 2001. Three of the Buenos Aires leases expire in 2002, and one expires in
2003.
RGA Argentina conducts business from approximately 800 square feet of
office space in Buenos Aires, Argentina. The rental expenses paid by RGA
Argentina under the lease during 2001 were approximately $28,000. The lease
expires in December 2002.
RGA Canada moved to a new location during 2001 and leased approximately
20,000 square feet of office space located in Montreal, Canada. This lease
expires in 2016. The lease at the previous location expires in 2010. The Company
has subleased the majority of the 13,000 square feet of office space at the
previous location and accrued a negligible charge for the remaining space.
Rental expenses paid by RGA Canada during 2001 were approximately $243,000. RGA
Canada also leases approximately 5,900 square feet of space in Toronto, Canada.
This lease expires in 2005. The rental expenses paid by RGA Canada under the
Toronto lease during 2001 were approximately $142,000. RGA International
conducts operations from approximately 9,800 square feet of office space located
in Toronto, Canada. The lease with respect to such space expires in 2007. The
rental expenses paid by RGA International under the lease during 2001 were
approximately $302,000.
RGA UK conducts business from approximately 3,000 square feet of office
space in London, England. The rental expenses paid by RGA UK Reinsurance under
the lease during 2001 were approximately $311,000. The lease expires in 2009.
RGA South Africa conducts business from approximately 5,300 square feet
of office space in Cape Town and 5,600 square feet of office space located in
Johannesburg, South Africa. The rental expenses paid by RGA South Africa under
the leases during 2001 were approximately $45,000 and $30,000 for Cape Town and
Johannesburg, respectively. The leases expire in September 2003 and May 2004 for
Cape Town and Johannesburg, respectively.
19
RGA Spain conducts business from approximately 2,400 square feet of office space
in Madrid, Spain. Rental expense paid for the office was approximately $27,000
during 2001. The lease expires in March 2003.
RGA Reinsurance conducts business from office space provided by
Corporate Offices at the Towers, Inc. in North Palm Beach, Florida. Rental
expense paid for the office was approximately $10,000 during 2001. The lease
expires in December 2002.
The Company believes its facilities have been generally well maintained
and are in good operating condition. The Company believes the facilities are
sufficient for our current and projected future requirements.
Item 3. LEGAL PROCEEDINGS
Since April of 2000, RGA Reinsurance has been involved in a dispute
with a ceding company involving certain quota share reinsurance agreements
covering first dollar medical insurance policies. The dispute was subsequently
referred to an arbitration panel pursuant to the terms of these reinsurance
agreements. In the fourth quarter of 2001, the arbitration panel issued its
final award, which required RGA Reinsurance to make a payment to the ceding
company. RGA Reinsurance incurred a charge, after utilization of existing
reserves, of approximately $10.0 million on a pre-tax basis in the fourth
quarter of 2001.
The Company is currently a party to arbitrations that involve four
separate medical reinsurance arrangements, two arbitrations relative to the
Company's portfolio of personal accident business, and one recent lawsuit
involving aviation bodily injury carve-out reinsurance coverage. As of January
31, 2002, the ceding companies involved in these disputes have raised claims
that are $35.4 million in excess of the amounts held in reserve by the Company.
The Company believes it has substantial defenses upon which to contest these
claims, including but not limited to misrepresentation and breach of contract by
direct and indirect ceding companies. See Note 22, "Discontinued Operations," of
the Notes to Consolidated Financial Statements. From time to time, the Company
is subject to litigation and arbitration related to its reinsurance business and
to employment-related matters in the normal course of its business. While it is
not feasible to predict or determine the ultimate outcome of the pending
arbitration or legal proceedings or provide reasonable ranges of potential
losses, it is the opinion of Management that their outcomes after consideration
of the provisions made in the Company's consolidated financial statements would
not have a material adverse effect on its consolidated financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of security holders
during the fourth quarter of 2001.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In December 2001, RGA, through its wholly owned trust ("RGA Capital
Trust I") issued $225.0 million in Preferred Income Equity Redeemable Securities
("PIERS") Units. See Note 17, "Issuance of Trust PIERS Units" of the Notes to
Consolidated Financial Statements. Each PIERS unit consists of a preferred
security issued by the Trust and a warrant to purchase, at any time prior to
December 15, 2050, 1.2508 shares of RGA stock at an exercise price of $50. The
fair market value of the warrants on the issuance date was $66.9 million. The
warrants are detachable from the preferred security. Although a market may
develop for the detachable warrant in the future, only a market for the PIERS
unit has developed as of December 31, 2001. The PIERS units, which were sold at
$50 per unit, had a market value of $50.50 per unit as of December 31, 2001. The
net proceeds from the issuance of the PIERS units will be used for general
corporate purposes including, but not limited to, the immediate capital needs of
its operating companies associated with the Company's primary businesses,
dividends paid by RGA to its shareholders, interest payments on its senior
indebtedness and junior subordinated notes (See Notes 16, "Long-Term Debt," and
17, "Issuance of Trust Piers Units," of the Notes to Consolidated Financial
Statements), and repurchases of RGA common stock under a board of director
approved plan.
20
Information about the market price of the Company's common equity,
dividends and related stockholder matters is contained in Item 8 under the
caption "Quarterly Data (Unaudited)" and in Item 1 under caption "Restrictions
on Dividends and Distributions". Additionally, Insurance companies are subject
to statutory regulations that restrict the payment of dividends. See Item I
under the caption "Restrictions on Dividends and Distributions".
Item 6. SELECTED FINANCIAL DATA
The selected financial data presented for, and as of the end of, each
of the years in the five-year period ended December 31, 2001, have been prepared
in accordance with accounting principals generally accepted in the United States
of America for stock life insurance companies. All amounts shown are in
millions, except per share and operating data. The following data should be read
in conjunction with the Consolidated Financial Statements and the Notes to
Consolidated Financial Statements appearing in Part II Item 8 and Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in Part II Item 7.
21
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in millions, except per share and operating data)
YEARS ENDING DECEMBER 31, 2001 2000 1999 1998 1997
------------------------- -------------- ------------ -------------- ------------- ------------
INCOME STATEMENT DATA
Revenues:
Net premiums $1,661.8 $1,404.1 $1,315.6 $1,016.4 $ 744.8
Investment income, net of related expenses 340.6 326.5 340.3 301.8 187.1
Realized investment (losses) gains, net (68.4) (28.7) (75.3) 3.1 0.3
Other revenues 34.3 23.8 26.5 23.2 46.0
-------------- -------------- --------------- ------------- -------------
Total revenues 1,968.3 1,725.7 1,607.1 1,344.5 978.2
Benefits and expenses:
Claims and other policy benefits 1,376.8 1,103.6 1,067.1 797.9 569.1
Interest credited 111.7 104.8 153.1 153.2 92.3
Policy acquisition costs and other insurance expenses 304.2 243.5 218.3 188.5 148.1
Other operating expenses 91.3 81.2 65.5 57.3 47.9
Interest expense 18.1 17.6 11.0 8.8 7.8
-------------- -------------- --------------- ------------- -------------
Total benefits and expenses 1,902.1 1,550.7 1,515.0 1,205.7 865.2
-------------- -------------- --------------- ------------- -------------
Income from continuing operations before income taxes 66.2 175.0 92.1 138.8 113.0
Provision for income taxes 26.3 69.2 39.1 49.1 40.4
-------------- -------------- --------------- ------------- --------------
Income from continuing operations 39.9 105.8 53.0 89.7 72.6
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (6.9) (28.1) (12.1) (27.6) (18.0)
-------------- -------------- --------------- ------------- -------------
Net income $33.0 $77.7 $40.9 $62.1 $54.6
============== ============== =============== ============= =============
BASIC EARNINGS PER SHARE
Continuing operations $0.81 $2.14 $1.16 $2.11 $1.91
Discontinued operations $(0.14) $(0.57) $(0.27) $(0.61) $(0.47)
-------------- -------------- --------------- ------------- -------------
Net income $0.67 $1.57 $0.89 $1.50 $1.44
DILUTED EARNINGS PER SHARE
Continuing operations $0.80 $2.12 $1.15 $2.08 $1.89
Discontinued operations $(0.14) $(0.56) $(0.27) $(0.60) $(0.47)
-------------- -------------- --------------- ------------- -------------
Net income $0.66 $1.56 $0.88 $1.48 $1.42
Weighted average diluted shares, in thousands 49,905 49,920 46,246 42,559 38,406
Dividends per share on common stock $0.24 $0.24 $0.22 $0.17 $0.15
BALANCE SHEET DATA
Total investments $5,088.4 $4,560.2 $3,811.9 $5,129.6 $3,634.0
Total assets 6,894.3 6,061.9 5,123.7 6,318.6 4,673.6
Policy liabilities 5,077.1 4,617.7 3,998.1 5,053.1 3,558.7
Total long-term debt 323.4 272.3 184.0 108.0 106.8
Stockholders' equity 1,005.6 862.9 732.9 748.5 499.3
Stockholders' equity per share $20.30 $17.51 $14.68 $16.52 $13.21
OPERATING DATA (IN BILLIONS)
Assumed ordinary life reinsurance business in force $616.0 $545.9 $446.9 $330.6 $227.3
Assumed new business production 171.1 161.1 164.9 125.0 75.9
22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Annual Report on Form 10-K 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 earnings,
revenues, income or loss, future financial performance, and growth potential of
Reinsurance Group of America, incorporated (which we refer 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) material changes in mortality and claims
experience, (2) market or economic that adversely affect our ability to make
timely sales of investment securities, (3) competitive factors and competitors'
responses to our initiatives, (4) general economic conditions affecting the
demand for insurance and reinsurance in our current and planned markets, (5)
changes in our financial strength and credit ratings or those of Metropolitan
Life Insurance Company ("MetLife") or General American Life Insurance Company
("General American"), and their respective affiliates, and the effect of such
changes on our future results of operations and financial condition, (6)
fluctuations in U.S. or foreign currency exchange rates, interest rates, or
securities and real estate markets, (7) changes in investment portfolio yields
due to interest rate or credit quality changes, (8) the stability of governments
and economies in the markets in which we operate, (9) adverse litigation or
arbitration results, (10) the success of our clients, (11) successful execution
of our entry into new markets, (12) successful development and introduction of
new products, (13) regulatory action that may be taken by state Departments of
Insurance with respect to us, MetLife, or General American, (14) changes in
laws, regulations, and accounting standards applicable to us, our subsidiaries,
or our business, and (15) other risks and uncertainties described in this Annual
Report and in our other filings with the Securities and Exchange Commission
("SEC").
You are cautioned not to place undue reliance on the forward-looking
statements, which speak only as of the date on which they are made. We do not
undertake any obligations to update these forward-looking statements, even
though our situation may change in the future. We qualify all of our
forward-looking statements by these cautionary statements.
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. For a discussion of these risks and uncertainties, which
could cause actual results to differ materially from those contained in the
forward-looking statements, you are advised to consult the sections named "Risk
Factors" and "Cautionary Statement Regarding Forward-Looking Statements"
contained in our prospectus dated December 3, 2001, filed with our prospectus
supplements, each dated December 12, 2001, and filed with the SEC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company formed December 31, 1992. On December 31, 2001, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
48.7% of the outstanding shares of common stock of RGA. Equity Intermediary
Company is a wholly owned subsidiary of General American, a Missouri life
insurance company, which in turn is a wholly owned subsidiary of GenAmerica
Financial Corporation ("GenAmerica"), a Missouri corporation. GenAmerica was
acquired and became a wholly owned subsidiary of MetLife, a New York life
insurance company, on January 6, 2000. On April 7, 2000, MetLife completed a
demutualization
23
and became a subsidiary of MetLife, Inc., a publicly traded company. As a
result of MetLife's ownership of GenAmerica and its own direct investment in
RGA, MetLife beneficially owns 58.4% of the outstanding shares of common stock
of RGA at December 31, 2001.
The consolidated financial statements include the assets, liabilities,
and results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"), RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life
Reinsurance Company of Canada ("RGA Canada") and RGA Americas Reinsurance
Company, Ltd. ("RGA Americas"), as well as several other subsidiaries and a
joint venture, subject to an ownership position of greater than fifty percent
(collectively, the "Company"). During 2000, the Company sold its interest in RGA
Sudamerica, S.A., and its subsidiaries, and Benefit Resource Life Insurance
Company (Bermuda) Ltd.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are described in Note 2 to the
Consolidated Financial Statements included in Item 8 of this Form 10-K. The
Company believes its most critical accounting policies include the
capitalization and amortization of deferred acquisition costs, the establishment
of liabilities for future policy benefits, including incurred but not reported
claims, and the valuation of investment impairments. The balances of these
accounts are significant to the Company's financial position and require
extensive use of assumptions and estimates, particularly related to the future
performance of the underlying business.
Additionally, for each of its reinsurance contracts, the Company must
determine if the contract provides indemnification against loss or liability
relating to insurance risk, in accordance with applicable accounting standards.
The Company must review all contractual features, particularly those that may
limit the amount of insurance risk to which the Company is subject to or
features that delay the timely reimbursement of claims. If the Company
determines that a contract does not expose it to a reasonable possibility of a
significant loss from insurance risk, the Company records the contract on a
deposit method of accounting with the net amount payable / receivable reflected
in other reinsurance assets or liabilities on the consolidated balance sheet.
Fees earned on the contracts are reflected as other revenues, as opposed to
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. Such
costs include commissions and allowances as well as certain costs of policy
issuance and underwriting. The Company performs periodic tests to determine that
the cost of business acquired remains recoverable, and the cumulative
amortization is re-estimated and, if necessary, adjusted by a cumulative charge
or credit to current operations.
The Company periodically reviews actual and anticipated experience
compared to the assumptions used to establish policy benefits. The Company
establishes premium deficiency reserves if actual and anticipated experience
indicates that existing policy liabilities together with the present value of
future gross premiums will not be 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 by a charge to
income, as well as a reduction in unamortized acquisition costs and, to the
extent there are no unamortized acquisition costs, an increase in future policy
benefits.
The Company monitors its fixed maturity securities to determine
impairments in value. In conjunction with its external investments manager, the
Company evaluates factors such as the financial condition of the issuer, payment
performance, market value, compliance with covenants, general market conditions,
various other subjective factors, and the intent and ability to hold securities.
Differences in actual experience compared with the assumptions and
estimates utilized in the justification of the recoverability of deferred
acquisition costs or in establishing reserves for future policy benefits and
claim liabilities can have a material impact on the Company's results of
operations and financial condition.
24
RESULTS OF OPERATIONS
The Company derives 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 on
financial reinsurance.
The Company's primary business is life reinsurance, which involves
reinsuring life insurance policies that are often in force for the remaining
lifetime of the underlying individual insureds, 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 underlying insureds, and the
exercise of recapture options by the ceding companies.
Assumed insurance in force for the Company increased $70.1 billion to
$616.0 billion at December 31, 2001. Assumed new business production for 2001
totaled $171.1 billion compared to $161.1 billion in 2000 and $164.9 billion in
1999.
As is customary in the reinsurance business, life insurance clients
continually update, refine, and revise reinsurance information provided to the
Company. Such revised information is used by the Company in the preparation of
its financial statements and the financial effects resulting from the
incorporation of revised data are reflected currently.
The Company's profitability primarily depends on the volume and amount
of death claims incurred. While death claims are reasonably predictable over a
period of many years, claims become less predictable over shorter periods and
are subject to fluctuation from quarter to quarter and year to year. The Company
has catastrophe insurance coverage issued by 2 insurers rated "A" or higher by
A.M. Best as of December 31, 2001, that provides benefits of up to $100 million
per occurrence for claims involving three or more deaths in a single accident.
The Company pays a deductible of $1.5 million per occurrence and 20% of the
first $30 million of claims reported per occurrence. As a result of the
September 11, 2001 terrorist attacks on the United States, the Company had
received in excess of 300 claims totaling approximately $33 million as of
December 31, 2001. The Company expects to recover amounts in excess of its
deductible and retention under its catastrophe insurance coverages. As of
December 31, 2001, the amount recoverable is expected to be approximately $22
million. However, the Company believes it will take several more months before
all claims are reported. This coverage is terminable annually in August with 90
days prior notice. The Company believes such catastrophe insurance coverage
adequately protects it from risks associated with multiple deaths in a single
accident of reinsured lives. Due to the events of September 11, many catastrophe
insurance carriers have indicated that they will not renew coverage or will
significantly change the level and type of coverage they will provide. It is
also expected that the cost for catastrophe coverage will significantly
increase. The Company can give no assurances that it will be able to obtain cost
effective catastrophe coverage when its current policy expires in August 2002.
Through December 31, 2000, the Company retained a maximum of $2.5 million of
coverage per individual life. Effective January 1, 2001, the Company increased
its retention to $4.0 million of coverage per individual life.
The Company has foreign currency risk on business conducted in foreign
currencies to the extent that the exchange rates of the foreign currencies are
subject to adverse change over time. Additionally, the Company is exposed to the
economic and political risk associated with its net investment in foreign
locations. The Company's operations in Canada transact business in Canadian
dollars. The exchange rate from Canadian to U.S. currency was 0.6277, 0.6676,
and 0.6876 at December 31, 2001, 2000, and 1999, respectively. The Company's
Latin America operations primarily conduct business in Argentine and Mexican
pesos.
Since 1991, the Argentine peso has been pegged to the U.S. dollar at a
rate of one Argentine peso to one U.S. dollar. In early December 2001,
restrictions were put in place that prohibited cash withdrawals above a certain
amount and foreign money transfers with certain limited exceptions. While the
legal exchange rate remained at one Argentine peso to one U.S. dollar, financial
institutions were allowed to conduct only limited activity due to these
restrictions, and currency exchange was effectively halted.
In January 2002, the Argentine government announced its intent to
create a dual currency system with an official exchange rate of 1.4 Argentine
pesos to one U.S. dollar for import and export transactions and a free floating
rate for other
25
transactions. On January 11, 2002, the Argentine peso began free floating
against the U.S. dollar and closed at rates ranging from 1.6 to 1.7 Argentine
pesos to one U.S. dollar. Since that time, the Argentine economy has remained
volatile and the government has periodically suspended the free-floating
exchange rates.
In an effort to reduce its exposure to this volatile situation, during
2001, the Company liquidated substantially all its Argentine based investment
securities, resulting in pre-tax losses of $27.0 million, and reinvested the
proceeds into investment securities denominated in U.S. dollars. The Company's
obligations under its insurance and reinsurance contracts continue to be
denominated in Argentine pesos, which is the functional currency for this
business. Those net contract liabilities totaled approximately 97.6 million
Argentine pesos as of December 31, 2001. As a result, the devaluation of the
Argentine peso has generated a net unrealized foreign currency gain of $38.5
million, which has been reflected in accumulated other comprehensive income on
the consolidated balance sheets as of December 31, 2001. The ongoing volatility
of the exchange rate suggests that the Company's results for its Argentine
business may be volatile going forward, particularly since the Company cannot
reasonably predict the timing of its claim settlements and what the exchange
rate will be at settlement. The Company does not expect the ongoing economic
turmoil in Argentina, including the devaluation of the Argentine peso, to have
additional negative impact on its Argentine policy liabilities. However, the
Company cannot predict the impact on its ability to write new business in that
market.
The business generated from the Asia Pacific region is primarily
denominated in U.S. dollars, Australian dollars, and Japanese yen. Additionally,
the Company reinsures business in other international currencies including the
Great British pound sterling and South African rand.
Since December 31, 1998, the Company has formally reported its accident
and health division as a discontinued operation. The accident and health
business was placed into run-off, and all treaties were terminated at the
earliest possible date. Notice was given to all cedants and retrocessionaires
that all treaties were being cancelled at the expiration of their terms. The
nature of the underlying risks is such that the claims may take several years to
reach the reinsurers involved. Thus, the Company expects to pay claims out of
existing reserves over a number of years as the level of business diminishes.
During 2001, the accident and health division reported a net loss of $6.9
million due to reserve increases related to the settlement of an arbitration for
an amount in excess of the Company's reserves.
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and Europe & South
Africa operations. The Asia Pacific, Latin America, and Europe & South Africa
operational segments are presented herein as one reportable segment, Other
International. The U.S. operations provide traditional life, asset-intensive,
and financial reinsurance to domestic clients. Asset-intensive products
primarily include reinsurance of corporate-owned life insurance and annuities.
The Canada operations provide insurers with traditional reinsurance as well as
creditor and critical illness products. The Latin America operations include
traditional reinsurance, reinsurance of privatized pension products primarily in
Argentina, which the Company ceased writing during 2001, and direct life
insurance through a joint venture and subsidiaries in Chile and Argentina. The
Company sold its Chilean interests during 2000. Asia Pacific operations provide
primarily traditional life reinsurance and, to a lesser extent, financial
reinsurance through RGA Reinsurance Company of Australia, Limited ("RGA
Australia") and RGA Reinsurance Company ("RGA Reinsurance"). Europe & South
Africa operations include traditional business from Europe and South Africa, in
addition to other markets being developed by the Company. The operational
segment results do not include the corporate investment activity, general
corporate expenses, interest expense of RGA, and the provision for income tax
expense (benefit). In addition, the Company's discontinued accident and health
operations are not reflected in the continuing operations of the Company. The
Company measures segment performance based on profit or loss from operations
before income taxes.
Prior to September 29, 1999, the U.S. Operations reinsured funding
agreements, an asset-intensive product from General American. Effective
September 29, 1999, General American completed the recapture of the entire block
of General American's funding agreement business reinsured by the Company. Prior
to the recapture, the Company reinsured approximately 25% of General American's
funding agreement business. Pursuant to the recapture transaction, the Company
transferred all remaining liabilities related to the funding agreement business
and an equivalent amount of assets to General American. In the third quarter of
1999, the Company transferred to General American approximately $1.8 billion in
market value of assets. Those assets, consisting primarily of investments in
fixed maturity securities and cash, were transferred in satisfaction of $1.8
billion in funding agreement liabilities. The Company incurred an after tax net
capital loss of
26
approximately $33.2 million associated with the liquidation of investment
securities and the transfer of assets to General American during the third
quarter of 1999.
Consolidated income from continuing operations decreased 62.3% in 2001
to $39.9 million and increased 99.4% in 2000 to $105.8 million. Diluted earnings
per share from continuing operations were $0.80 for 2001 compared to $2.12 for
2000 and $1.15 for 1999. Earnings during these years were attributed primarily
to the traditional reinsurance in the U.S. and Canada. Earnings during 2001 were
adversely affected by the terrorist attacks of September 11, investment losses
on sales and impairments of investment securities, the accrual of additional
reserves to support the Company's Argentinean business, and higher than expected
mortality results in the U.S. operations. Earnings in 1999 were affected by the
investment losses incurred in connection with the recapture of the funding
agreement business.
Consolidated investment income increased 4.3% during 2001 and decreased
4.0% during 2000. The increase in 2001 was affected by an increase in the
invested asset base due to deposits on a new annuity coinsurance agreement in
2001 and positive cash flows from operations, offset, in part, by a drop in the
invested asset yield due to a decline in prevailing interest rates and the
write-off of accrued investment income associated with the write-down of
impaired securities. The decrease during 2000 was affected by the reduction in
invested assets related to the recapture of the funding agreement business by
General American on September 29, 1999. The cost basis of invested assets
increased by $0.6 billion, or 13.0% in 2001 and increased $0.6 billion, or 14.9%
in 2000. The increase in the cost basis of invested assets during 2001 was
primarily a result of proceeds from the Company's capital raising efforts in
December 2001, in addition to the factors previously discussed. The increase in
invested assets during 2000 was primarily a result of positive operating cash
flows and new reinsurance transactions involving asset-intensive products. The
average yield earned on investments was 6.79% in 2001, compared with 7.30% in
2000, and 7.10% in 1999. The average yield will vary from year to year depending
on a number of variables, including prevailing interest rate fluctuations,
changes in the mix of asset-intensive products, and yields related to funds
withheld at interest. Investment income is allocated to the segments based upon
average assets and related capital levels deemed appropriate to support the
segment business volumes.
The consolidated provision for income taxes for continuing operations
represented approximately 39.7%, 39.6%, and 42.4% of pre-tax income for 2001,
2000, and 1999, respectively. The effective tax rate for 2001 and 2000 was
affected by realized capital losses domestically and operating losses from
foreign subsidiaries for which deferred tax assets cannot be fully established.
The Company calculated a tax benefit of $3.7 million, $15.1 million, and $6.9
million related to the discontinued operations in 2001, 2000, and 1999,
respectively. The effective tax rate on the discontinued operations was 35.0% in
2001 and 2000, and 36.0% in 1999.
27
Further discussion and analysis of the results for 2001 compared to
2000 and 1999 are presented by segment. Certain prior year amounts have been
reclassified to conform to the current year presentation.
U.S. OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(in thousands)
-----------------------------------------------------------------
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------------- ------------ ------------- --------------
REVENUES:
Net premiums $ 1,219,674 $ 3,248 $ -- $ 1,222,922
Investment income, net of related expenses 150,262 93,252 474 243,988
Realized investment gains (losses), ne t (29,933) 1,193 -- (28,740)
Other revenues 2,232 2,379 25,958 30,569
--------------- ------------ ------------- --------------
Total revenues 1,342,235 100,072 26,432 1,468,739
BENEFITS AND EXPENSES:
Claims and other policy benefits 976,740 4,658 -- 981,398
Interest credited 51,596 58,087 -- 109,683
Policy acquisition costs and other insurance expenses 181,307 21,632 9,925 212,864
Other operating expenses 30,363 740 7,980 39,083
--------------- ------------ ------------- --------------
Total benefits and expenses 1,240,006 85,117 17,905 1,343,028
Income before income taxes $ 102,229 $ 14,955 $ 8,527 $ 125,711
---------------- ----------- ------------- --------------
FOR THE YEAR ENDED DECEMBER 31, 2000
(in thousands)
-----------------------------------------------------------------
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------------- ------------ ------------- --------------
REVENUES:
Net premiums $ 1,036,656 $ 2,216 $ -- $ 1,038,872
Investment income, net of related expenses 139,688 89,001 (37) 228,652
Realized investment losses, net (12,206) (1,066) -- (13,272)
Other revenues 321 686 16,370 17,377
-------------- ----------- ------------- -------------
Total revenues 1,164,459 90,837 16,333 1,271,629
BENEFITS AND EXPENSES:
Claims and other policy benefits 793,494 (95) -- 793,399
Interest credited 47,445 55,006 -- 102,451
Policy acquisition costs and other insurance expenses 150,347 23,446 5,457 179,250
Other operating expenses 25,244 802 3,274 29,320
-------------- ----------- ------------- --------------
Total benefits and expenses 1,016,530 79,159 8,731 1,104,420
Income before income taxes $ 147,929 $ 11,678 $ 7,602 $ 167,209
-------------- ----------- ------------- --------------
28
FOR THE YEAR ENDED DECEMBER 31, 1999
(in thousands)
-----------------------------------------------------------------
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------------- ------------ ------------- --------------
REVENUES:
Net premiums $ 949,054 $ 1,380 $ -- $ 950,434
Investment income, net of related expenses 125,745 124,713 -- 250,458
Realized investment losses, net (17,043) (65,844) -- (82,887)
Other revenues (597) 12,655 13,180 25,238
--------------- ------------- ------------ ------------
Total revenues 1,057,159 72,904 13,180 1,143,243
BENEFITS AND EXPENSES:
Claims and other policy benefits 740,339 1,009 -- 741,348
Interest credited 40,240 109,644 -- 149,884
Policy acquisition costs and other insurance expenses 145,529 2,850 9,370 157,749
Other operating expenses 23,002 623 100 23,725
--------------- ------------- ------------ ------------
Total benefits and expenses 949,110 114,126 9,470 1,072,706
Income (loss) before income taxes $ 108,049 $ (41,222) $ 3,710 $ 70,537
--------------- ------------- ----------- ------------
During 2001, the U.S. operations segment was negatively impacted by the
events of September 11th and higher than expected claims in its traditional
business. Income before income taxes totaled $125.7 million, compared with
$167.2 million in 2000 and $70.5 million in 1999. The decrease in income for
2001 can primarily be attributed to lower investment yields, poor claim
experience incurred in the first and fourth quarters, and the claims arising
from the terrorist attacks of September 11, 2001. Management does not believe
the claim results experienced in 2001 indicate a systemic pricing or
profitability problem on our underlying business. The Company recorded a $16.1
million pre-tax loss resulting from September 11th claims at the end of the
third quarter, 2001. The Company believes its reinsurance programs, including
its catastrophe coverage will limit its net losses to the amount reflected.
However, the Company believes it will take several more months before all claims
are reported. Results for 1999 include $52.9 million in pre-tax investment
losses associated with the recaptured funding agreement business. Net premium
growth continued for the U.S. operations with premium increases of 17.7% and
9.3% in 2001 and 2000, respectively.
Traditional Reinsurance
The U.S. traditional reinsurance sub-segment is the oldest and largest
sub-segment of the Company. This sub-segment provides life reinsurance to
domestic clients for a variety of life products through yearly renewable term
agreements, coinsurance, and modified coinsurance arrangements. These
reinsurance arrangements may be either facultative or automatic agreements.
During 2001, production totaled $99.5 billion face amount of new business,
compared to $115.7 billion in 2000 and $121.3 billion in 1999. The decrease in
2001 and 2000 can be attributed to more inforce blocks of business being
reinsured in 1999 compared to 2000 and 2001. This decrease was somewhat offset
by continued strong production on new and existing treaties. Management believes
industry consolidation, demutualizations, and the trend toward reinsuring
mortality risks should continue to provide reinsurance opportunities.
Income before income taxes for U.S. traditional reinsurance decreased
30.9% in 2001 and increased 36.9% in 2000. The decrease in income for 2001 was
primarily due to lower investment yields, and the poor claims experience in
2001, as well as the events of September 11th. The increase in income for 2000
was primarily due to premium growth, improved investment performance and
favorable mortality experience.
Net premiums for U.S. traditional reinsurance rose 17.7% and 9.2% in
2001 and 2000, respectively. New premiums from facultative and automatic
treaties and renewal premiums on existing blocks of business all contributed to
continued
29
growth. Premium levels are significantly influenced by large transactions and
reporting practices of ceding companies and therefore can fluctuate from period
to period.
Net investment income increased 7.6% and 11.1% in 2001 and 2000,
respectively. This increase in both years was due to the continued growth of
business in this sub-segment from facultative and automatic treaties, which
resulted in an increase in the underlying invested asset base. The growth in
investment income was somewhat offset by lower returns in its investment
portfolio due to declining interest rates and the write-off of accrued interest
on impaired investment securities.
Realized investment losses of approximately $29.9 million were reported
for 2001 compared to $12.2 million in 2000 and $17.0 million in 1999. Included
in the net realized losses are write-downs of fixed income securities along with
capital losses associated with the sale of investments.
Claims and other policy benefits, as a percentage of net premiums, were
80.1%, 76.5%, and 78.0% in 2001, 2000, and 1999, respectively. The 2001 loss
ratio, when adjusted for the claims of $16.1 million related to the events of
September 11, 2001, is reduced to 78.8%. Mortality results (death claims) during
the first and fourth quarters of 2001 exceeded management expectations,
primarily related to traditional business that has been on the books for many
years. Analysis of claims activity does not indicate any particular pricing or
profitability issues. The lower percentage in 2000 compared to 1999 is the
result of generally positive mortality experience. Mortality is expected to
fluctuate somewhat from period to period, but remains fairly constant over the
long term.
Interest credited relates to amounts credited on the Company's cash
value products in this segment, which have a significant mortality component.
This amount fluctuates with the changes in cash surrender value and changes in
interest crediting rates.
The amount of policy acquisition costs and other insurance expenses, as
a percentage of net premiums, were 14.9%, 14.5%, and 15.3% in 2001, 2000, and
1999, respectively. These percentages fluctuate slightly due to variations in
the mixture of business being written.
Other operating expenses, as a percentage of net premiums, were 2.5%,
2.4%, and 2.4% in 2001, 2000, and 1999, respectively. The increase was primarily
due to increases in costs associated with the growth of the business.
Asset-Intensive Reinsurance
The U.S. asset-intensive reinsurance sub-segment includes the
reinsurance of annuities and corporate-owned life insurance. Most of these
agreements are coinsurance or modified coinsurance of non-mortality risks such
that the Company recognizes profits or losses primarily from the spread between
the investment earnings and the interest credited on the underlying deposit
liabilities. As of December 31, 2001, approximately 41.2%, or $631.3 million of
the invested assets associated with the Company's asset-intensive business were
funds withheld at interest.
Income before income taxes increased in 2001 to $15.0 million from
$11.7 million in 2000, a 28.1% increase over prior year. Contributing to this
growth was a new coinsurance agreement of single premium deferred annuities,
executed during the third quarter, with assets of approximately $200 million as
of December 31, 2001. The growth in revenue is offset, in part, by the growth in
claims and other policy benefits, interest credited, and policy acquisition
costs and other insurance expenses.
Income before income taxes increased significantly in 2000 as a result
of funding agreement losses incurred in 1999. The funding agreement business in
1999 had a net loss before income taxes of approximately $47.8 million, which
included pre-tax investment losses of $52.9 million. Excluding the impact of the
funding agreements, income grew 77.3% in 2000, from $6.6 million to $11.7
million. The income growth was primarily attributable to a new coinsurance
agreement on a block of single premium deferred annuities.
Total revenues, which is comprised primarily of investment income and
realized investment gains (losses), increased 10.2% and 24.6% in 2001 and 2000,
respectively. The increase in 2001 can be attributed to the new annuity
coinsurance
30
agreement in 2001 coupled with a higher asset base. The growth in 2001 was
somewhat offset by lower investment income related to one specific annuity
agreement. However, this reduction in investment income was mostly offset by a
corresponding decrease in interest credited. The average asset-intensive
investment balance was $1.4 billion and $1.2 billion for 2001 and 2000,
respectively. The increase in total revenue in 2000 compared to 1999 can
primarily be attributed to the realized losses incurred as a result of the
liquidation and termination of the funding agreement business in 1999.
Interest credited increased 5.6% in 2001 and decreased 49.8% in 2000.
Interest credited is primarily driven by investment income. The increase in 2001
is a result of growth in the asset base driven by new business. The decrease for
2000 can be attributed to the termination of the funding agreement business
during 1999. Policy acquisition costs and other insurance expenses relate
primarily to the commission payments and premium taxes (if applicable) on
deposits received.
Financial Reinsurance
The U.S. financial reinsurance sub-segment includes net fees earned on
financial reinsurance agreements and the Company's investment in RGA Financial
Group, L.L.C. ("RGA Financial Group"). Effective July 1, 2000, the Company
increased its ownership of RGA Financial Group from 40% to 80%. The Company
acquired the remaining 20% interest during the fourth quarter of 2000. The
majority of the financial reinsurance transactions assumed by the Company are
retroceded to other insurance companies. Financial reinsurance agreements
represent low risk mortality business that the Company assumes and subsequently
retrocedes with a net fee earned on the transaction. 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.
Income before income taxes increased 12.2% and 104.9% in 2001 and 2000,
respectively. The results in 2001 and 2000 can be primarily attributed to the
increased ownership interest in RGA Financial Group coupled with higher amounts
of financial reinsurance placed during the respective periods. At December 31,
2001, 2000, and 1999, the amount of outstanding statutory financial reinsurance
assumed from client companies, as measured by pre-tax statutory surplus, was
$547.8 million, $498.4 million, and $310.0 million, respectively.
CANADA OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001 2000 1999
(in thousands) ---------------- ---------------- ---------------
REVENUES:
Net premiums $ 173,269 $ 176,326 $ 162,482
Investment income, net of related expenses 65,006 61,950 52,767
Realized investment gains (losses), net 9,148 (1,291) 5,923
Other revenues 201 318 (38)
---------------- ---------------- ---------------
Total revenues 247,624 237,303 221,134
BENEFITS AND EXPENSES:
Claims and other policy benefits 172,799 171,417 154,194
Interest credited 299 763 1,799
Policy acquisition costs and other insurance
expenses 14,101 16,563 19,970
Other operating expenses 8,909 8,702 7,292
---------------- ---------------- ----------------
Total benefits and expenses 196,108 197,445 183,255
Income before income taxes $ 51,516 $ 39,858 $ 37,879
--------------- ---------------- ---------------
The Company conducts reinsurance business in Canada through RGA Canada.
RGA Canada assists clients with capital management activity and mortality risk
management and is primarily engaged in traditional individual life reinsurance,
including preferred underwriting products, as well as creditor and critical
illness products. The Canadian operation is one of the leading life reinsurers
in Canada. RGA Canada's reinsurance inforce has more than doubled over a
31
five-year period, to approximately $55.8 billion in 2001 from approximately
$22.7 billion in 1996. At December 31, 2001, RGA Canada included most of the
life insurance companies in Canada as clients.
Income before income taxes increased 29.2% in 2001 and 5.2% in 2000.
Excluding net realized investment gains (losses), income before taxes increased
by 3.0% in 2001 and 28.8% in 2000. In local currency, excluding net realized
investment gains (losses), the increase was 12.1% and 31.1%. The increase in
2001 is driven by an increase in investment income of 4.9% and generally
favorable mortality experience. The increase in 2000 was driven by a growth in
premiums of 8.5%, an increase in investment income of 17.4% and favorable
mortality experience.
Net premiums decreased by 1.7% to $173.3 million in 2001 and increased
8.5% to $176.3 million in 2000. In original currency, net premiums increased by
2.4% in 2001 and 9.1% in 2000. The decline in the strength of the Canadian
dollar had an adverse effect of $7.6 million or 4.2% on the amount of net
premiums reported for 2001. The original currency premium growth in 2001 and
2000 resulted primarily from increasing renewal premiums and new business
premiums. Business 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 by 4.9% and 17.4% during 2001 and 2000,
respectively. Investment income is allocated to the segments based upon average
assets and related capital levels deemed appropriate to support the segment
business volumes. Investment performance varies with the composition of
investments. The increase in investment income was mainly the result of an
increase in the invested asset base offset by the effects of the change in the
foreign exchange rate. For 2001 and 2000, the invested asset base growth was due
to operating cash flows on traditional reinsurance, proceeds from capital
contributions and interest on an increasing amount of funds withheld at interest
related to an inforce block added in 1998. In 2001, the increase in the invested
asset base was partially offset by a decline in interest rates. The average book
yield on the Canadian investment portfolio decreased slightly to 6.97% for 2001
from 7.02% in 2000 and 6.97% in 1999.
Claims and other policy benefits, as a percentage of net premiums, were
99.7% of total 2001 net premiums compared to 97.2% in 2000 and 94.9% in 1999.
The increased percentages experienced are primarily the result of several large
inforce blocks assumed in 1998 and 1997. These blocks are mature blocks of level
premium business in which mortality as a percentage of premiums is expected to
be higher than the historical ratios and improve over time. The nature of level
premium policies requires that the Company invest the amounts received in excess
of mortality costs to fund claims in the later years. Claims and other policy
benefits as a percentage of net premiums and investment income were 72.5% of
total 2001 net premiums compared to 71.9% in 2000 and 71.6% in 1999. The Company
expects mortality to fluctuate somewhat from period to period but believes it is
fairly constant over longer periods of time. In addition, RGA Canada continues
to monitor mortality trends to determine the appropriateness of reserve levels.
Policy acquisition costs and other insurance expenses as a percentage
of net premiums totaled 8.1% in 2001, 9.4% in 2000, and 12.3% in 1999. The
decrease in this ratio is primarily due to the changing mix of business to
yearly renewable term from coinsurance agreements. These yearly renewable term
agreements tend to have lower commission costs compared to coinsurance
agreements.
Other operating expenses increased $0.2 million in 2001 and $1.4
million in 2000. The overall increase in operating expenses was attributed to
planned increases in costs associated with the ongoing growth of the business.
32
OTHER INTERNATIONAL OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(in thousands)
-------------- --------------- --------------- -----------------
TOTAL
LATIN EUROPE & OTHER
ASIA PACIFIC AMERICA SOUTH AFRICA INTERNATIONAL
-------------- --------------- --------------- -----------------
REVENUES:
Net premiums $119,702 $ 51,069 $94,800 $265,571
Investment income, net of related expenses 3,935 14,684 1,536 20,155
Realized investment gains (losses), net 113 (32,619) (137) (32,643)
Other revenues 2,903 547 256 3,706
-------------- --------------- --------------- -----------------
Total revenues 126,653 33,681 96,455 256,789
BENEFITS AND EXPENSES:
Claims and other policy benefits 75,595 87,581 59,429 222,605
Interest credited -- 1,730 -- 1,730
Policy acquisition costs and other insurance
expenses 36,103 14,395 26,753 77,251
Other operating expenses 11,081 9,072 10,555 30,708
Interest expense 867 -- 681 1,548
-------------- --------------- --------------- -----------------
Total benefits and expenses 123,646 112,778 97,418 333,842
Income (loss) before income taxes $ 3,007 $(79,097) $ (963) $(77,053)
-------------- --------------- --------------- -----------------
FOR THE YEAR ENDED DECEMBER 31, 2000
-------------- --------------- --------------- -----------------
TOTAL
LATIN EUROPE & OTHER
ASIA PACIFIC AMERICA SOUTH AFRICA INTERNATIONAL
-------------- --------------- --------------- -----------------
REVENUES:
Net premiums $ 94,282 $64,897 $29,690 $188,869
Investment income, net of related expenses 4,628 19,782 2,056 26,466
Realized investment gains (losses), net (191) (9,099) 365 (8,925)
Other revenues 2,266 364 3,177 5,807
-------------- --------------- --------------- -----------------
Total revenues 100,985 75,944 35,288 212,217
BENEFITS AND EXPENSES:
Claims and other policy benefits 56,377 62,205 20,151 138,733
Interest credited -- 1,568 -- 1,568
Policy acquisition costs and other insurance
expenses 32,484 7,772 7,473 47,729
Other operating expenses 9,939 10,934 9,542 30,415
Interest expense 980 -- 502 1,482
-------------- --------------- --------------- -----------------
Total benefits and expenses 99,780 82,479 37,668 219,927
Income (loss) before income taxes $ 1,205 $(6,535) $(2,380) $ (7,710)
-------------- --------------- --------------- -----------------
33
FOR THE YEAR ENDED DECEMBER 31, 1999
-------------- --------------- --------------- -----------------
TOTAL
LATIN EUROPE & OTHER
ASIA PACIFIC AMERICA SOUTH AFRICA INTERNATIONAL
-------------- --------------- --------------- -----------------
REVENUES:
Net premiums $73,887 $104,167 $24,668 $202,722
Investment income, net of related expenses 2,182 23,753 775 26,710
Realized investment gains (losses), net (3) 95 101 193
Other revenues 1,263 (224) 105 1,144
----------- ------------ ------------ --------------
Total revenues 77,329 127,791 25,649 230,769
BENEFITS AND EXPENSES:
Claims and other policy benefits 46,785 111,479 13,305 171,569
Interest credited -- 1,435 -- 1,435
Policy acquisition costs and other insurance
expenses 29,860 2,340 8,388 40,588
Other operating expenses 6,983 10,177 7,810 24,970
Interest expense 491 -- -- 491
----------- ------------ ------------ --------------
Total benefits and expenses 84,119 125,431 29,503 239,053
Income (loss) before income taxes $(6,790) $ 2,360 $(3,854) $ (8,284)
----------- ------------ ------------ --------------
During 2001, the Other International reportable segment generated
business from reinsurance operations in the Asia Pacific and Latin American
regions as well as Europe and South Africa. The Company conducts reinsurance
business in the Asia Pacific region through branch operations in Hong Kong and
representative offices in Japan and Taiwan. Business is also conducted through
RGA Australia, a wholly owned subsidiary in Australia, and Malaysian Life
Reinsurance Group Berhad ("MLRe"), a joint venture in Malaysia. The principal
types of reinsurance provided in the region are life, critical care,
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.
The Company's Latin American operations include reinsurance and direct
business written in the Latin American region. Historically, business for the
segment has been generated from reinsurance through RGA Reinsurance and also
through direct operations in Argentina and Chile. The Latin America reinsurance
operations have derived revenue primarily from the reinsurance of privatized
pension products in Argentina. Privatized pension reinsurance covers the life
insurance as well as the total and permanent disability components of the
pension program. The claims under that program are initially established as
units of the underlying pension fund at the time at which they are filed. As
such, the ultimate amounts of claims paid by the reinsurer under the program
vary with the underlying fund performance of the related pension fund over the
period in which the claims were adjudicated. In addition, the reinsurer is
subject to the mortality and morbidity risks associated with the underlying plan
participants. Effective in 2001, the Company ceased writing these types of
treaties and is more actively marketing traditional individual life, credit, and
group life reinsurance in the region. It is anticipated that the mix of business
will continue to evolve in the upcoming years.
RGA formed General American Argentina Seguros de Vida S.A. ("GA
Argentina") in 1994 to develop markets in Argentina. GA Argentina writes direct
individual and group life products, and life insurance primarily related to
group life and disability insurance for the Argentine privatized pension system.
Effective July 1998, GA Argentina no longer entered into new contracts related
to the privatized pension system, but continues to market individual universal
life and group life products. Premiums for GA Argentina totaled $7.8 million in
2001 and the Company's net investment was $12.5 million as of December 31, 2001.
During 2001, with the unstable economic conditions in Argentina, opportunities
for growth have been limited, and the Company does not expect growth to be
meaningful in the foreseeable future.
In 1993, the Company entered into a joint venture in Chile to form
BHIFAmerica Seguros de Vida, S.A. ("BHIFAmerica"). This company was a direct
life insurer whose primary source of premium was generated from single
34
premium immediate annuities in addition to other lines including credit,
individual, and group life. During 1996, in an effort to support the growth of
this business and develop additional reinsurance opportunities in Chile, the
Company formed RGA Reinsurance Company Chile, S.A. ("RGA Chile"), a wholly-owned
reinsurance company licensed to assume life reinsurance in Chile. During April
2000, the Company sold its interest in all of its Chilean subsidiaries: RGA
Sudamerica, S.A., RGA Reinsurance Company Chile, S.A. and BHIFAmerica. The
Company received approximately $26.5 million in proceeds and recorded a loss on
the sale of approximately $8.6 million, primarily consisting of the realization
of accumulated foreign currency depreciation on the Company's net investment.
The Europe & South Africa sub-segment primarily includes business
received from reinsurance clients located in Europe and South Africa. The
principal type of reinsurance provided through this segment has been life
reinsurance for a variety of life products through yearly renewable term and
coinsurance agreements and reinsurance of critical illness coverage. These
agreements may be either facultative or automatic agreements covering primarily
individual risks and in some markets group risks.
Loss before income taxes for the Other International segment totaled
$77.1 million for 2001, compared to losses of $7.7 million and $8.3 million for
2000 and 1999, respectively. The increase in losses for 2001 was primarily
attributable to poor performance in Argentina relating to higher than expected
claims for privatized pension reinsurance, an increase of reserves by $35.0
million on a pre-tax basis related to this business during the fourth quarter,
and realized losses of $27.0 million related to investment security sales in the
Argentine portfolio. A majority of those losses occurred in the third quarter of
2001 when the Company liquidated all remaining Argentine investment securities
supporting the reinsurance operations and invested in U.S. dollar-denominated
securities due to its concern over the stability of the Argentine peso, which is
the functional currency of this sub-segment.
Since 1991, the Argentine peso has been pegged to the U.S. dollar at a
rate of one Argentine peso to one U.S. dollar. In early December 2001,
restrictions were put in place that prohibited cash withdrawals above a certain
amount and foreign money transfers with certain limited exceptions. While the
legal exchange rate remained at one Argentine peso to one U.S. dollar, financial
institutions were allowed to conduct only limited activity due to these
restrictions, and currency exchange was effectively halted. In January 2002, the
Argentine government announced its intent to create a dual currency system with
an official exchange rate of 1.4 Argentine pesos to one U.S. dollar for import
and export transactions and a free floating rate for other transactions. On
January 11, 2002, the Argentine peso began free floating against the U.S. dollar
and closed at rates ranging from 1.6 to 1.7 Argentine pesos to one U.S. dollar.
Since that time, the Argentine economy has remained volatile and the government
has periodically suspended the free-floating exchange rates.
Asia Pacific reported income before income taxes of $3.0 million for
2001, an increase of $1.8 million compared to 2000, a result of improved
persistency and an increase in premium volume during 2001. The decrease in Other
International losses reported for 2000 was primarily due to favorable mortality
results, additional premium volume, and a full year of experience from a large
financial reinsurance transaction executed at the end of 1999 in the Asia
Pacific sub-segment, offset, in part, by the sale of the Chilean operations in
Latin America.
Net premiums increased 40.6%, to $265.6 million in 2001 and decreased
6.8%, to $188.9 million, in 2000. The increase during 2001 was primarily the
result of renewal premiums from existing blocks of business, new business
premiums from facultative and automatic treaties and several large blocks of
business, and premiums associated with accelerated critical illness coverage in
Asia Pacific and Europe & South Africa. Accelerated critical illness coverage
provides a benefit in the event of a death from or the diagnosis of a defined
critical illness. Premiums earned during 2001 from this coverage totaled $43.3
million for Asia Pacific and Europe & South Africa compared to $9.8 million in
2000. Increases in net premiums were partially offset by a decrease in
privatized pension business in Argentina and a decrease in premiums related to
the sale of the Chilean operations. Premiums from other sources included the
development of new business opportunities in Mexico and Argentina, however
current economic instability in Argentina may have a negative impact on future
growth in this market. The Company's operation in South Africa also contributed
to the 2001 net premium growth mainly through the facultative market as well as
the Company's representative office in Spain through reinsuring both individual
and group products. Premium levels are significantly influenced by large
transactions and reporting practices of ceding companies and therefore can
fluctuate from period to period.
35
Net investment income decreased $6.3 million or 23.8% in 2001 and was
relatively flat for 2000 and 1999. The decrease was primarily attributable to a
smaller invested asset base resulting from the sale of the Chilean operations.
However, the decrease was partially offset with an increase related to higher
yields on the underlying Argentine investment portfolio. These Argentine based
bond investments supporting the Latin America reinsurance business were sold
during 2001 to reduce the Company's exposure to the volatile Argentine economy
and the proceeds were reinvested in U.S. based securities which have lower
yields. In addition, 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 revenue
during 2001 and 2000 predominantly represented profit and risk fees associated
with financial reinsurance transactions in Taiwan and Japan. The Taiwanese
treaty was commenced in late 1999, with a full year in 2001 and 2000 versus a
partial year in 1999. A Japanese financial reinsurance treaty was discontinued
in early 1999, reducing the fees earned for 1999. Fees paid to retrocessionaires
that were included in policy acquisition costs and other insurance expenses
partially offset these fees earned for these years.
Claims and other policy benefits as a percentage of net premiums
totaled 83.8%, 73.5% and 84.6% for 2001, 2000 and 1999, respectively. The
increase in 2001 is primarily related to an increase in reserves for the
privatized pension business in Argentina during the fourth quarter of 2001. The
decrease in 2000 was due, in part, to adverse experience on Japanese business
during 1999 in the Asia Pacific sub-segment. Mortality may fluctuate somewhat
from period to period, but is expected to be fairly constant over longer periods
of time. The Company monitors mortality trends to evaluate the appropriateness
of reserve levels and adjusts the reserve levels on a periodic basis. During
2001, the Company ceased renewal of reinsurance treaties associated with
privatized pension contracts in Argentina because of adverse experience on this
business, as several aspects of the pension fund claims flow did not develop as
was contemplated when the reinsurance programs were initially priced, and to
focus on other traditional opportunities in the region. Although premiums will
continue to decline, it is estimated that claims for the privatized pension
business will continue to be paid over the next several years. The Company
regularly evaluates the reserve adequacy on these treaties, and increased
reserves by pre-tax $35.0 million during the fourth quarter of 2001. It is
expected that these reserves are necessary to absorb additional claims
development associated with the run-off of the treaties. As the underlying
reserves for the privatized pension business are in Argentine pesos, the
functional currency of this sub-segment, the devaluation of the peso during 2002
is not expected to have an immediate impact to earnings until actual claims
settlement or adjustments to the underlying peso reserves occur. The impact of
fluctuating exchange rates will continue to be closely monitored by the
Company's management and is expected to be volatile over the near term. Interest
credited represents amounts credited on Mexican and Argentine universal life
products.
Policy acquisition costs and other insurance expenses as a percentage
of net premiums represented 29.1%, 25.3%, and 20.0% for 2001, 2000, and 1999,
respectively. The percentages fluctuate due to timing of client company
reporting and variations in the mixture of business being reinsured. During 2001
and 2000, the Europe & South Africa segment experienced an increased amount of
new business with higher allowances, particularly in the United Kingdom,
compared to 1999. Other operating expenses were relatively flat for 2001 and
increased 21.8% during 2000. As a percentage of premiums, other operating
expenses decreased to 11.6% in 2001 and increased to 16.1% in 2000 from 12.3% in
1999. The Company believes that sustained growth in premiums should lessen the
burden of start-up expenses and expansion costs over time.
CORPORATE AND OTHER
Corporate activity generally represents investment income on invested
assets not allocated to support segment operations, undeployed proceeds from the
Company's capital raising efforts, unallocated realized capital gains or losses,
corporate expenses that include unallocated overhead and executive costs, and
interest expense related to the $225.0 million, 5.75% mandatorily redeemable
trust preferred securities issued by a wholly-owned subsidiary in 2001
("Preferred Securities"), the $200.0 million, 6.75% Senior Notes issued in 2001
("2001 Senior Notes"), borrowings under the Company's $140 million credit
agreement executed during 2000 (the "U.S. Credit Agreement"), a $75.0 million
term loan note with a subsidiary of MetLife ("MetLife Note") issued and
terminated in 2001 and the $100.0 million 7.25% Senior Notes ("Senior Notes")
issued in 1996.
36
Corporate revenues decreased $9.5 million in 2001 and $7.4 million in
2000, primarily a result of unallocated investment losses associated with the
sale or impairment of investment securities. Corporate unallocated other
operating expenses were less than one percent of consolidated premiums in 2001,
2000 and 1999. Corporate interest expense was $16.5 million in 2001, compared to
$16.1 million in 2000 and $10.5 million in 1999. The moderate increase in 2001
compared to 2000 was affected by increased weighted average borrowings
outstanding, partially offset by a decrease in the interest rate on those
borrowings. The increase in 2000 compared to 1999 was primarily affected by an
increase in the weighted average borrowings outstanding. Management expects
corporate interest expense to increase significantly in 2002 due to the addition
of the Preferred Securities (See Note 17, "Issuance of Trust Piers Units" of the
Notes to Consolidated Financial Statements) and the 2011 Senior Notes, the
proceeds of which were used to pay down a balance of $120 million on its U.S.
Credit Agreement and to prepay and terminate the $75 million term loan with
MetLife Credit Corp. Interest rates on the U.S. Credit Agreement and MetLife
Note ranged from 2.6% to 7.1% in 2001. The Company views its long-term debt at
its current level as an integral and ongoing part of its capital structure, and
therefore felt it appropriate to convert its shorter-term borrowings under its
U.S. Credit Agreement into longer-term capital.
DISCONTINUED OPERATIONS
Since December 31, 1998, the Company has formally reported its accident
and health division as a discontinued operation. The accident and health
business was placed into run-off, and all treaties were terminated at the
earliest possible date. Notice was given to all cedants and retrocessionaires
that all treaties were being cancelled at the expiration of their terms. The
nature of the underlying risks is such that the claims may take several years to
reach the reinsurers involved. Thus, the Company expects to pay claims out of
existing reserves over a number of years as the level of business diminishes.
At the time it was accepting accident and health risks, the Company
directly underwrote certain business using its own staff of underwriters.
Additionally, it participated in pools of risks underwritten by outside managing
general underwriters, and offered high level common account and catastrophic
protection coverages to other reinsurers and retrocessionaires. Types of risks
covered included a variety of medical, disability, workers compensation
carve-out, personal accident, and similar coverages.
The reinsurance markets for several accident and health risks, most
notably involving workers' compensation carve-out and personal accident
business, have been quite volatile over the past several years. In particular,
certain programs are alleged to have been inappropriately underwritten by third
party managers, and some of the reinsurers and retrocessionaires involved have
alleged material misrepresentation and non-disclosures by the underwriting
managers. As a result, there have been a significant number of claims for
recission, arbitration, and litigation among a number of the parties involved.
This has had the effect of significantly slowing the reporting of claims between
parties, as the various outcomes of a series of arbitrations and similar actions
affects the extent to which higher level reinsurers and retrocessionaires may
ultimately have exposure to claims.
While RGA did not underwrite workers' compensation carve-out business
directly, it did offer certain high-level common account coverages to other
reinsurers and retrocessionaires. The Company continues to investigate to
determine if any material indirect claims exposures arise from workers'
compensation carve-out or personal accident plans through pool participations or
high-level common account retrocessional coverage. To date, no such material
exposures have been identified. If any material exposure is identified at some
point in the future, based upon the experience of others involved in these
markets, any exposures will potentially be subject to claims for rescission,
arbitration, or litigation. Thus, resolution of any disputes will likely take
several years. In any event, it is management's opinion that future
developments, if any, will not materially adversely affect the Company's
financial position.
As of January 31, 2002, the Company is a party to arbitrations that
involve four separate medical reinsurance arrangements. The Company expects two
of these arbitrations to be completed during 2002 and 2003. The other two
medical reinsurance arbitrations have only recently been instituted and no final
hearing date has been set. Also, there are two arbitrations under way relative
to the Company's portfolio of personal accident business. Both of these personal
accident reinsurance arbitrations have only recently been instituted and no
final hearing date has been set. Finally, there is one recent lawsuit in
progress involving aviation bodily injury carve-out reinsurance coverage in
which no final hearing date has been set.
37
Since April of 2000, RGA Reinsurance has been involved in a dispute
with a ceding company involving certain quota share reinsurance agreements
covering first dollar medical insurance policies in the discontinued accident
and health business. The dispute was subsequently referred to an arbitration
panel pursuant to the terms of these reinsurance agreements. In the fourth
quarter of 2001, the arbitration panel issued its final award, which required
RGA Reinsurance to make a payment to the ceding company. RGA Reinsurance
incurred a charge, after utilization of existing reserves, of approximately
$10.0 million on a pre-tax basis in the fourth quarter of 2001.
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. The reserve balance
as of December 31, 2001 and 2000 was $55.3 million and $89.1 million,
respectively. 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. The consolidated
statements of income for all periods presented reflect this line of business as
a discontinued operation. Revenues associated with discontinued operations,
which are not reported on a gross basis in the Company's consolidated statements
of income, totaled $3.0 million, $23.7 million, and $113.6 million for 2001,
2000, and 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Holding Company
RGA is a holding company whose primary uses of liquidity include, but
are not limited to, the immediate capital needs of its operating companies
associated with the Company's primary businesses, dividends paid by RGA to its
shareholders, interest payments on its senior indebtedness and junior
subordinated notes (See Notes 16, "Long-Term Debt," and 17, "Issuance of Trust
Piers Units," of the Notes to Consolidated Financial Statements), and
repurchases of RGA common stock under a board of director approved plan. 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 RGA Reinsurance and RCM, and dividends from
operating subsidiaries. As the Company continues its expansion efforts, RGA will
continue to be dependent on these sources of liquidity.
RGA Reinsurance is subject to statutory provisions that restrict the
payment of dividends. It may not pay dividends in any 12-month period in excess
of the greater of the prior year's statutory operating income or 10% of capital
and surplus at the preceding year-end, without regulatory approval. Pursuant to
this calculation, RGA Reinsurance's allowable dividend without prior approval
for 2002 would be $54.1 million. However, the applicable statutory provisions
only permit an insurer to pay a shareholder dividend from unassigned surplus. As
of December 31, 2001, RGA Reinsurance had unassigned surplus of $51.7 million.
Any dividends paid by RGA Reinsurance would be paid to RCM, its parent company,
which in turn has restrictions related to its ability to pay dividends to RGA.
The assets of RCM consist primarily of its investment in RGA Reinsurance. As of
January 1, 2002, RCM could pay a maximum dividend to RGA equal to its unassigned
surplus, approximately $19.3 million. The maximum amount available for dividends
by RGA Canada under the Canadian Minimum Continuing Capital and Surplus
Requirements ("MCCSR") is $50.6 million. Dividend payments from other
subsidiaries are subject to regulations in the country of domicile.
The dividend limitation is based on statutory financial results.
Statutory accounting practices differ in certain respects from accounting
principles used in financial statements prepared in conformity with GAAP. The
significant differences relate to deferred acquisition costs, deferred income
taxes, required investment reserves, reserve calculation assumptions, and
surplus notes.
RGA has repurchased shares in the open market in the past primarily to
satisfy obligations under its stock option program. Currently, the board of
directors has approved a repurchase program authorizing RGA to purchase up to
$50 million of its shares of stock, as conditions warrant. As of December 31,
2001, RGA had not repurchased any shares under the program. RGA purchased
approximately 0.7 million shares of treasury stock in 2000 at an aggregate cost
of $20.0 million. No shares were repurchased in 1999.
38
Historically, RGA has paid quarterly dividends ranging from $0.027 per
share in 1993 to $0.06 per share in 2001. All future payments of dividends are
at the discretion of the Company's Board of Directors and will depend on the
Company's earnings, capital requirements, insurance regulatory conditions,
operating conditions, and such other factors as the Board of Directors may deem
relevant. The amount of dividends that the Company can pay will depend in part
on the operations of its reinsurance subsidiaries.
Certain of the Company's debt agreements contain financial covenant
restrictions related to, among others, liens, the issuance and disposition of
stock of restricted subsidiaries, minimum requirements of net worth ranging from
$600 million to $700 million, and minimum rating requirements. A material
ongoing covenant default could require immediate payment of the amount due,
including principal, under the various agreements. Additionally, the Company's
debt agreements contain cross-default covenants, which would make outstanding
borrowings immediately payable in the event of a material uncured covenant
default under any of the agreements, including, but not limited to, non-payment
of indebtedness when due for amounts greater than $10 million or $25 million
depending on the agreement, bankruptcy proceedings, and any event which results
in the acceleration of the maturity of indebtedness. The facility fee and
interest rate for the Company's credit facilities is based on its senior
long-term debt ratings. A decrease in those ratings could result in an increase
in costs for the credit facilities. As of December 31, 2001, the Company had
$323.4 million in outstanding borrowings under its debt agreements and was in
compliance with all covenants under those agreements. Of that amount,
approximately $24.2 million is subject to immediate payment upon a downgrade of
the Company's senior long-term debt rating, unless a waiver is obtained from the
lenders. The ability of the Company to make debt principal and interest payments
depends primarily on the earnings and surplus of subsidiaries, investment
earnings on undeployed capital proceeds, and the Company's ability to raise
additional funds.
In December 2001, RGA, through its wholly owned subsidiary trust,
issued $225.0 million in Preferred Income Redeemable Securities ("PIERS") Units.
See Notes 2, "Summary of Significant Accounting Policies," and 17, "Issuance of
Trust Piers Units," of the Notes to Consolidated Financial Statements for
additional information on the terms of the PIERS units. Each PIERS unit consists
of a preferred security with a face value of $50 and a stated maturity of March
18, 2051 and a warrant to purchase 1.2508 shares of RGA stock at an exercise
price of $50. The warrant expires on December 15, 2050. The holders of the PIERS
units have the ability to exercise their warrant for stock at any time and
require RGA to payoff the preferred security. Because the exercise price of the
warrant to be received from the holder is equal to the amount to be paid for the
preferred security, there is no net cash required on RGA's part.
The Company expects consolidated interest expense to increase
significantly in 2002 due to the addition of the $225.0 million face amount,
5.75% trust preferred securities issued by RGA Capital Trust I and the interest
expense associated with its $200.0 million 6.75% Senior Notes due 2011, the
proceeds of which were used to pay down a balance of $120 million on its U.S.
revolving credit facility and to prepay and terminate the $75 million term loan
with MetLife Credit Corp. Interest rates on the U.S. revolving credit facility
and $75 million term loan ranged from 2.6% to 7.1% in 2001. As of December 31,
2001, the average interest rate on long-term debt outstanding was 6.75%.
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 RGA Reinsurance and RCM, 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 board of director approved plan, and to meet its other obligations.
Reinsurance Operations
The Company's principal cash inflows from its reinsurance operations
are life insurance premiums and deposit funds received from ceding companies.
The primary liquidity concerns with respect to these cash flows is early
recapture of the reinsurance contract by the ceding company. Reinsurance
agreements, whether facultative or automatic, may provide for recapture rights
on the part of the ceding company. Recapture rights permit the ceding company to
reassume all or a portion of the risk formerly ceded to the reinsurer after an
agreed-upon period of time (generally 10 years) or in some cases due to changes
in the financial condition or ratings of the reinsurer. Recapture of business
previously ceded does not affect
39
premiums ceded prior to the recapture of such business, but would reduce
premiums in subsequent periods. Additionally, some treaties give the ceding
company the right to request the Company to place assets in trust for their
benefit to support their reserve credits, in the event of a downgrade of the
Company's ratings to specified levels. As of December 31, 2001, these treaties
had approximately $246.7 million in reserves. Assets placed in trust continue to
be owned by the Company, but their use is restricted based on the terms of the
trust agreement. Securities with an amortized cost of $396.8 million were held
in trust in Canada at December 31, 2001 to satisfy collateral requirements for
reinsurance business. Additionally, securities with an amortized cost of $820.9
million, as of December 31, 2001, were held in trust to satisfy collateral
requirements of certain other reinsurance treaties. Under certain conditions,
RGA may be obligated to move reinsurance from one RGA subsidiary company to
another RGA subsidiary or make payments under the treaty. These conditions
generally include unusual or remote circumstances, such as change in control,
insolvency, nonperformance under a treaty, or loss of reinsurance license of
such subsidiary.
The Company's principal cash inflows from its investing activities
results from investment income, maturity and sales of invested assets, and
repayments of principal. The primary liquidity concern with respect to these
cash inflows relates to the risk of default by debtors and interest rate
volatility. The Company manages these risks very closely. See -- Investments and
-- Interest Rate Risk below.
Additional sources of liquidity to meet unexpected cash outflows in
excess of operating cash flows include selling short-term investments or fixed
maturity securities and drawing additional funds under existing credit
facilities, under which the Company had availability of $155.8 million as of
December 31, 2001.
The Company's principal cash outflows primarily relate to the payment
of claims liabilities, operating expenses, income taxes, principal and interest
under debt obligations. 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 (See Note 2, "Summary of Significant Accounting Policies"
of the Notes to Consolidated Financial Statements). The Company also retrocedes
most of its financial reinsurance business to other insurance companies to
alleviate capital requirements created by this business. The Company performs
annual financial 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
difficulty in collecting claims recoverable from retrocessionaires; however, no
assurance can be given as to the future performance of such retrocessionaires or
as to recoverability of any such claims. The Company's management believes its
current sources of liquidity are adequate to meet its current cash requirements.
The Company's net cash flows from operating activities for the years
ended December 31, 2001, 2000, and 1999, were $243.9 million, $192.8 million,
and $277.7 million, respectively. Cash flows from operating activities are
affected by the timing of premiums received, claims paid, and working capital
changes. The Company believes the short-term cash requirements of its business
operations will be sufficiently met by the positive cash flows generated.
Additionally, the Company maintains a very high quality fixed maturity portfolio
with good liquidity characteristics. These securities are available for sale and
can be easily sold to meet the Company's obligations, if necessary.
The following table displays the Company's contractual obligations,
which primarily consist of the payment of outstanding debt upon maturity and
leases.
(in millions) Payment Due by Period
-------------------------------------------------------------------
Contractual Obligations Total 1 - 3 Years 4 - 5 Years After 5 Years
----------------------- --------------- --------------- ---------------- ----------------
Long - Term Debt $323.4 $- $123.6 $199.8
Operating Leases 31.9 12.5 7.4 12.0
Trust Preferred Securities of Subsidiary 225.0 - - 225.0
--------------- --------------- ---------------- ---------------
Total $580.3 $12.5 $131.0 $436.8
=============== =============== ================ ===============
The Company has obtained letters of credit in favor of various
affiliated and unaffiliated insurance companies from which the Company assumes
business. This allows the ceding company to take statutory reserve credits. The
letters of credit
40
issued by banks represent a guarantee of performance under the reinsurance
agreements. At December 31, 2001, there were approximately $33.8 million of
outstanding bank letters of credit in favor of unaffiliated entities and $4.0
million in favor of entities affiliated with the Company. Additionally, the
Company utilizes letters of credit to secure reserve credits when it retrocedes
business to its offshore subsidiaries, including RGA Americas, RGA Barbados, and
Triad Re, Ltd. As of December 31, 2001, $338.1 million in letters of credit from
various banks were outstanding between the various subsidiaries of the Company.
Fees associated with letters of credit are not fixed and are based on the
Company's ratings and the general availability of these instruments in the
marketplace. The Company has direct policies and reinsurance agreements in
addition to certain investment, advisory, and administrative services contracts
with affiliated entities (See Note 12, "Related Party Transactions," of the
Notes to Consolidated Financial Statements).
Net cash provided by (used in) investing activities was $(576.4)
million, $(712.5) million, and $1,341.8 million in 2001, 2000, and 1999,
respectively. Changes in cash provided by investing activities primarily relate
to the management of the Company's investment portfolios and the investment of
excess capital generated by operating and financing activities. The $1.3 billion
source of cash in 1999 primarily relates to the transfer of investment assets to
satisfy funding agreement liabilities that were recaptured (See Note 5,
"Significant Transactions - Recapture Transaction," of the Notes to Consolidated
Financial Statements).
Net cash provided by (used in) financing activities was $487.9 million,
$565.5 million, and $(1,611.4) million in 2001, 2000, and 1999, respectively.
Changes in cash provided by investing activities primarily relate to the
issuance of equity or debt securities, borrowings or payments under the
Company's existing credit agreements, treasury stock activity, and excess
deposits or withdrawals under investment type contracts. The $1.6 billion use of
cash in 1999 primarily relates to the recapture of deposits on funding agreement
business.
The Company's asset-intensive products are primarily supported by
investments in fixed maturity securities. Investment guidelines are established
to structure the investment portfolio based upon the type, duration and behavior
of products in the liability portfolio so as to achieve targeted levels of
profitability. The Company manages the asset-intensive business to provide a
targeted spread between the interest rate earned on investments and the interest
rate credited to the underlying interest sensitive contract liabilities. The
Company periodically reviews models projecting different interest rate scenarios
and their impact on profitability. One of the Company's asset-intensive
agreements reinsures a market value adjusted annuity product on a modified
coinsurance basis. Pursuant to the terms of this reinsurance agreement, the
ceding company withholds the annuity liabilities and funds supporting the
liabilities. The underlying product reinsured provides the contract holder with
a minimum return guarantee over the life of the product. The Company shares in
this guarantee pursuant to the reinsurance agreement. The ceding company manages
the underlying investment portfolio. The risk to RGA is that the return on the
investment portfolio is not sufficient to satisfy the minimum guarantee. This
investment risk is mitigated through the Company's participation in establishing
investment guidelines and through management's regular monitoring of the
underlying investment performance. As of December 31, 2001, funds withheld at
interest totaled $631.3 million for the Company's asset-intensive products.
Effective December 31, 1993, the National Association of Insurance
Commissioners ("NAIC") adopted risk-based capital ("RBC") statutory requirements
for U.S.-based life insurance companies. These requirements measure statutory
capital and surplus needs based on the risks associated with a company's mix of
products and investment portfolio. At December 31, 2001, statutory capital and
surplus of RGA Reinsurance and RCM exceeded all RBC thresholds and RGA Canada's
capital levels exceeded any MCCSR requirements. All of the Company's insurance
operating subsidiaries exceed the minimum capital requirements in their
respective jurisdiction.
INVESTMENTS
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, their respective Boards of
Directors regularly review the investment portfolios of the international
subsidiaries. The RGA Board of Directors also reviews all 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 asset/liability duration matching differs
between the U.S. and Canada operating segments. The target duration for U.S.
portfolios, which are segmented along product lines, range between four and
seven years. Based on
41
Canadian reserve requirements, a portion of the Canadian liabilities is strictly
matched with long duration Canadian assets, with the remaining assets invested
to maximize the total rate of return, given the characteristics of the
corresponding liabilities and Company liquidity needs. The Company's earned
yield on invested assets was 6.79% in 2001, compared with 7.30% in 2000, and
7.10% in 1999.
The Company's fixed maturity securities are invested primarily in
commercial and industrial bonds, public utilities, Canadian government
securities, and mortgage and asset-backed securities. As of December 31, 2001,
more than 94% 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 commercial and industrial bonds, which represented approximately 16.6% of
total investments as of December 31, 2001, a decrease from 23.3% of total
investments as of December 31, 2000. A majority of these securities were
classified as corporate securities, with an average Standard and Poor's rating
of A at December 31, 2001. The Company owns floating rate securities that
represent approximately 3.3% of total investments at December 31, 2001, compared
to 4.7% at December 31, 2000. These investments may have a higher degree of
income variability than the other fixed income holdings in the portfolio due to
the floating rate nature of the interest payments.
Within the fixed maturity security portfolio, the Company holds
approximately $244.7 million in asset-backed securities at December 31, 2001,
which include credit card and automobile receivables, home equity loans and
collateralized bond obligations. The Company's asset-backed securities are
primarily floating rate securities and are diversified by issuer. Approximately
50.4%, or $123.3 million are collateralized bond obligations. 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 market place. These factors were the primary driver
behind other than temporary write-downs of $43.4 million, $10.1 million, and
$15.4 million in 2001, 2000, and 1999, respectively.
The Company monitors its fixed maturity securities to determine
impairments in value. In conjunction with its external investments manager, the
Company evaluates factors such as:
o Financial condition of the issuer
o Payment performance
o Market value
o Compliance with covenants
o General market conditions
o Various other subjective factors
o Intent and ability to hold securities
As a result of the evaluation, securities deemed to be impaired, either
on a temporary or other than temporary basis, are placed on the Company's watch
list. As of December 31, 2001, the Company had approximately $71.5 million in
market value of securities on its watch list. Securities, based on management's
judgment, with an other than temporary impairment in value are written down to
management's estimate of net realizable value.
For agreements written on a modified coinsurance basis and certain
agreements written on a coinsurance basis, assets equal to the net statutory
reserves are withheld and legally owned and managed by the ceding company and
are reflected as funds withheld at interest on RGA'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 control
them. To mitigate this risk, the Company helps set the investment guidelines
followed by the ceding company and monitors compliance. Funds withheld at
interest comprised approximately 22.5% and 20.6% of the Company's investments as
of December 31, 2001 and 2000, respectively.
42
Policy loans comprised approximately 15.2% and 15.5% of the Company's
investments as of December 31, 2001 and 2000, respectively. These 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.
Mortgage loans represented approximately 3.2% and 2.8% of the Company's
investments as of December 31, 2001 and 2000, respectively. As of December 31,
2001, all mortgages are U.S.-based. The Company invests primarily in mortgages
on commercial offices and retail locations. The Company's mortgage loans
generally range in size from $0.3 million to $10.3 million, with the average
mortgage loan investment as of December 31, 2001, totaling approximately $3.4
million. The mortgage loan portfolio was diversified by geographic region and
property type as discussed further in Note 6 of the Notes to Consolidated
Financial Statements.
The Company utilizes derivative financial instruments on a very limited
basis, primarily to improve the management of the investment-related risks on a
small portfolio of equity-indexed annuities. The Company uses both
exchange-traded and customized, over-the-counter derivative financial
instruments. RGA Reinsurance has established minimum credit quality standards
for counterparties and seeks to obtain collateral or other credit supports. The
Company limits its total financial exposure to counterparties. The Company's use
of derivative financial instruments historically has not been significant to its
financial position.
As of December 31, 2001, the invested assets of RGA, RCM, RGA
Reinsurance, RGA Barbados, Australian Holdings, and RGA Canada are primarily
managed by a third-party, however, the Company's chief investment officer has
the primary responsibility for the day to day oversight of all the Company's
investments.
MARKET RISK
Market risk is the risk of loss that may occur when fluctuation 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
This 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's exposure to interest rate price risk and interest rate
cash flow risk is reviewed on a quarterly basis. Interest rate price risk
exposure is measured using interest rate sensitivity analysis to determine the
change in fair value of the Company's financial instruments in the event of a
hypothetical change in interest rates. Interest rate cash flow risk exposure is
measured using interest rate sensitivity analysis to determine the Company's
variability in cash flows in the event of a hypothetical change in interest
rates. If estimated changes in fair value, net interest income, and cash flows
are not within the limits established, management may adjust its asset and
liability mix to bring interest rate risk within Board-approved limits.
In order to reduce the exposure of changes in fair values from interest
rate fluctuations, RGA has developed strategies to manage its liquidity, and
increase the interest rate sensitivity of its asset base. From time to time, RGA
has utilized the swap market to manage the volatility of cash flows to interest
rate fluctuations.
Interest rate sensitivity analysis is used to measure the Company's
interest rate price risk by computing estimated changes in fair value of fixed
rate assets and liabilities in the event of a hypothetical 10% change (increase
or decrease) in
43
market interest rates. The Company does not have fixed-rate instruments
classified as trading securities. The Company's projected loss in fair value of
financial instruments in the event of a 10% change (increase or decrease) in
market interest rates at its fiscal years ended December 31, 2001 and 2000 was
$61.0 million and $86.7 million, respectively.
The calculation of fair value is based on the net present value of
estimated discounted cash flows expected over the life of the market risk
sensitive instruments, using market prepayment assumptions and market rates of
interest provided by independent broker quotations and other public sources as
of December 31, 2001, with adjustments made to reflect the shift in the treasury
yield curve as appropriate.
At December 31, 2001, the Company's estimated changes in fair value
were within the targets outlined in the Company's investment policy.
Interest rate sensitivity analysis is also used to measure the
Company's interest rate cash flow risk by computing estimated changes in the
cash flows expected in the near term attributable to floating rate assets and
liabilities in the event of a range of assumed changes in market interest rates.
This analysis assesses the risk of loss in cash flows in the near term in market
risk sensitive floating rate instruments in the event of a hypothetical 10%
change (increase or decrease) in market interest rates. The Company does not
have variable-rate instruments classified as trading securities. The Company's
projected decrease in cash flows in the near term associated with floating-rate
instruments in the event of a 10% change (increase or decrease) in market
interest rates at its fiscal years ended December 31, 2001 and 2000 was $6.0
million and $1.3 million, respectively.
The cash flows from coupon payments move in the same direction as
interest rates for the Company's floating rate instruments. The volatility in
mortgage prepayments partially offsets the cash flows from interest. At December
31, 2001, the Company's estimated changes in cash flows were within the targets
outlined in the Company's investment policy.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, and mortgage prepayments, and should not be relied on as
indicative of future results. Further, the computations do not contemplate any
actions management could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented
in the computation of the estimated fair value of fixed rate instruments and the
estimated cash flows of floating rate instruments, which estimates constitute
forward-looking statements. Actual values may differ materially from those
projections presented due to a number of factors, including, without limitation,
market conditions varying from assumptions used in the calculation of the fair
value. In the event of a change in interest rates, prepayments could deviate
significantly from those assumed in the calculation of fair value. Finally, the
desire of many borrowers to repay their fixed-rate mortgage loans may decrease
in the event of interest rate increases.
FOREIGN CURRENCY RISK
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). The majority of the Company's foreign currency
transactions are denominated in Australian dollars, Argentine pesos, Canadian
dollars, and Great British pounds. Currently, the Company believes its foreign
currency transaction exposure, with the possible exception of its Argentine peso
exposure, to be immaterial to the consolidated results of operations. In an
effort to reduce its exposure to the Argentine peso, during 2001, the Company
liquidated substantially all its Argentine based investment securities and
reinvested the proceeds into investment securities denominated in U.S. dollars.
The Company's obligations under its insurance and reinsurance contracts continue
to be denominated in Argentine pesos, which is the functional currency for this
sub-segment. Those net contract liabilities totaled approximately 97.6 million
Argentine pesos as of December 31, 2001. As a result, the devaluation of the
Argentine peso has generated a net unrealized foreign currency gain of $38.5
million, which has been reflected in accumulated other comprehensive income on
the consolidated balance sheet as of December 31, 2001.
44
The Company does not expect the ongoing economic turmoil in Argentina, including
the devaluation of the Argentine peso, to have additional negative impact on its
Argentine policy liabilities, however, because the Company cannot reasonably
predict the timing of its claim settlements and what the exchange rate will be
at settlement, reported results may be volatile in the future. Additionally, the
Company cannot predict the impact on its ability to write new business in that
market. Net income exposure that may result from the strengthening of the U.S.
dollar to foreign currencies will adversely affect results of operations since
the income earned in the foreign currencies is worth less in U.S. dollars. When
evaluating investments in foreign countries, the Company considers the stability
of the political and currency environment. Devaluation of the currency after an
investment decision has been made will affect the value of the investment when
translated to U.S. dollars for financial reporting purposes.
INFLATION
The primary, direct effect on the Company of inflation is the increase
in operating expenses. A large portion of the Company's operating expenses
consists of salaries, which are subject to wage increases at least partly
affected by the rate of inflation. The rate of inflation also has an indirect
effect on the Company. To the extent that a government's policies to control the
level of inflation result in changes in interest rates, the Company's investment
income is affected.
NEW ACCOUNTING STANDARDS
In July 2001, the SEC issued Staff Accounting Bulletin No. 102 -
Selected Loan Loss Allowance Methodology and Documentation Issues ("SAB 102"),
expressing certain of the staff's views on the development, documentation, and
application of a systematic methodology as required by Financial Reporting
Release No. 28 for determining allowances for loan and lease losses in
accordance with generally accepted accounting principles. In particular, the
guidance focuses on the documentation the staff normally would expect
registrants to prepare and maintain in support of their allowances for loan
losses. The Company believes its mortgage loan loss allowance policies and
procedures are in compliance with SAB 102.
Also in July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against these new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. SFAS No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a non-amortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. The Company
will adopt the provisions of each statement, which apply to goodwill and
intangible assets acquired prior to June 30, 2001, on January 1, 2002. Based on
its preliminary assessment during the first quarter of 2002, the Company does
not currently expect a significant adjustment related to the adoption of these
accounting standards; however, impairment reviews subsequent to the initial
adoption date may result in future write-downs.
In June 2000, FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
Statement No. 133". This Statement addresses a limited number of issues causing
implementation difficulties for numerous entities that apply SFAS 133. SFAS No.
133 requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. It also requires that gains or losses
resulting from changes in the values of those derivatives be reported depending
on the use of the derivative and whether it qualifies for hedge accounting. The
Company adopted SFAS No. 138 as of January 1, 2001, resulting in an after-tax
loss included in the first quarter of 2001 of $0.5 million, substantially all of
which related to embedded derivatives on a specific market value annuity
product. The Company has a variety of reasons to use derivative instruments,
such as to attempt to protect the Company against possible changes in the market
value of its investment portfolio as a result of interest rate changes and to
manage the portfolio's effective yield, maturity, and duration. The Company does
not invest in derivatives for speculative purposes. The Company may use both
exchange-traded and customized over-the-counter derivative financial
instruments. The Company's use of derivatives historically has not been
significant to its financial position.
45
The Company prepares its statutory financial statements in conformity
with accounting practices prescribed or permitted by the State of Missouri.
Beginning in 2001, the State of Missouri required that insurance companies
domiciled in the State of Missouri prepare their statutory basis financial
statements in accordance with the National Association of Insurance
Commissioners ("NAIC") Accounting Practices and Procedures manual - Version
effective March 2001 subject to any deviations prescribed or permitted by the
State of Missouri insurance commissioner. Accounting changes adopted to conform
to the provisions of the NAIC Accounting Practices and Procedures manual -
Version effective March 2001 are reported as changes in accounting principles.
The cumulative effect of changes in accounting principles is reported as an
adjustment to unassigned funds (surplus) in the period of the change in
accounting principle. The Company recorded an immaterial positive adjustment to
statutory surplus in 2001 as a result of implementing the new standards.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by Item 7A is contained in Item 7 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations - Market Risk".
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
46
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2001 2000
-------------- --------------
(Dollars in thousands)
ASSETS
Fixed maturity securities available for sale, at fair value $ 2,768,285 $ 2,692,840
Mortgage loans on real estate 163,948 128,111
Policy loans 774,660 706,877
Funds withheld at interest 1,142,643 938,362
Short-term investments 140,573 68,735
Other invested assets 98,315 25,233
------------- --------------
Total investments 5,088,424 4,560,158
Cash and cash equivalents 226,670 70,797
Accrued investment income 30,454 37,555
Premiums receivable 161,436 226,365
Reinsurance ceded receivables 410,947 296,368
Deferred policy acquisition costs 800,319 621,475
Other reinsurance balances 146,427 202,158
Other assets 29,668 46,984
------------- --------------
Total assets $ 6,894,345 $ 6,061,860
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 2,101,777 $ 1,912,834
Interest sensitive contract liabilities 2,325,264 2,149,417
Other policy claims and benefits 650,082 555,423
Other reinsurance balances 47,687 69,343
Deferred income taxes 162,092 170,905
Other liabilities 120,374 68,758
Long-term debt 323,396 272,257
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company 158,085 --
------------- --------------
Total liabilities 5,888,757 5,198,937
Commitments and contingent liabilities (Note 15) -- --
Stockholders' equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) -- --
Common stock (par value $.01 per share; 75,000,000 shares authorized,
51,053,273 shares issued at December 31, 2001 and 2000) 511 511
Warrants 66,915 --
Additional paid-in-capital 611,806 611,349
Retained earnings 369,349 348,158
Accumulated other comprehensive loss:
Accumulated currency translation adjustment, net of income taxes (6,088) (15,867)
Unrealized depreciation of securities, net of income taxes (87) (42,004)
-------------- --------------
Total stockholders' equity before treasury stock 1,042,406 902,147
Less treasury shares held of 1,526,730 and 1,759,715 at cost at
December 31, 2001 and 2000, respectively (36,818) (39,224)
-------------- --------------
Total stockholders' equity 1,005,588 862,923
-------------- --------------
Total liabilities and stockholders' equity $ 6,894,345 $ 6,061,860
============== ==============
See accompanying notes to consolidated financial statements.
47
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
---------------------------------------------
2001 2000 1999
---------------------------------------------
(Dollars in thousands, except per share data)
REVENUES:
Net premiums $1,661,762 $1,404,066 $1,315,638
Investment income, net of related expenses 340,559 326,505 340,280
Realized investment losses, net (68,431) (28,651) (75,308)
Other revenues 34,394 23,815 26,472
---------- ---------- ----------
Total revenues 1,968,284 1,725,735 1,607,082
---------- ---------- ----------
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,376,802 1,103,548 1,067,111
Interest credited 111,712 104,782 153,118
Policy acquisition costs and other insurance expenses 304,217 243,542 218,314
Other operating expenses 91,306 81,209 65,415
Interest expense 18,097 17,596 11,020
---------- ---------- ----------
Total benefits and expenses 1,902,134 1,550,677 1,514,978
---------- ---------- ----------
Income from continuing operations
before income taxes 66,150 175,058 92,104
Provision for income taxes 26,249 69,271 39,059
---------- ---------- ----------
Income from continuing operations 39,901 105,787 53,045
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (6,855) (28,118) (12,187)
---------- ---------- ----------
Net income $ 33,046 $ 77,669 $ 40,858
========== ========== ==========
Earnings per share from continuing operations:
Basic earnings per share $ 0.81 $ 2.14 $ 1.16
========== ========== ==========
Diluted earnings per share $ 0.80 $ 2.12 $ 1.15
========== ========== ==========
Earnings per share from net income:
Basic earnings per share $ 0.67 $ 1.57 $ 0.89
========== ========== ==========
Diluted earnings per share $ 0.66 $ 1.56 $ 0.88
========== ========== ==========
Weighted average number of diluted shares outstanding
(in thousands) 49,905 49,920 46,246
========== ========== ==========
See accompanying notes to consolidated financial statements.
48
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
Non-Voting Additional
Preferred Common Common Paid In
Stock Stock Stock Warrants Capital
--------- ---------- ---------- -------- ----------
Balance, January 1, 1999 $ -- $ 392 $ 74 $ -- $ 486,669
Comprehensive loss:
Net income
Other comprehensive loss, net of income tax
Currency translation adjustments
Unrealized investment losses, net of related
offsets and reclassification adjustment
Other comprehensive loss
Comprehensive loss
Dividends to stockholders
Conversion of non-voting into voting stock 72 (74) (655)
MetLife private placement 47 124,873
Reissuance of treasury stock 129
--------- ---------- ---------- -------- ----------
Balance, December 31, 1999 -- 511 -- -- 611,016
========= ========== ========== ======== ==========
Comprehensive income:
Net income
Other comprehensive income, net of income tax
Currency translation adjustments
Unrealized investment gains, net of related
offsets and reclassification adjustment
Other comprehensive income
Comprehensive income
Dividends to stockholders
Purchase of treasury stock
Reissuance of treasury stock 333
--------- ---------- ---------- -------- ----------
Balance, December 31, 2000 -- 511 -- -- 611,349
========= ========== ========== ======== ==========
Comprehensive income:
Net income
Other comprehensive income, net of income tax
Currency translation adjustments
Unrealized investment gains, net of related
offsets and reclassification adjustment
Other comprehensive income
Comprehensive income
Dividends to stockholders
Issuance of warrants 66,915
Reissuance of treasury stock 457
--------- ---------- ---------- -------- ----------
Balance, December 31, 2001 $ -- $ 511 $ -- $ 66,915 $ 611,806
========= ========== ========== ======== ==========
Accumulated
Other
Retained Comprehensive Comprehensive Treasury
Earnings Income (Loss) Income (Loss) Stock Total
---------- ------------- ------------- --------- ---------
Balance, January 1, 1999 $ 251,512 $ 30,305 $ (20,475) $ 748,477
Comprehensive loss:
Net income 40,858 $ 40,858 40,858
Other comprehensive loss, net of income tax
Currency translation adjustments 5,059 5,059
Unrealized investment losses, net of related
offsets and reclassification adjustment (176,614) (176,614)
------------
Other comprehensive loss (171,555) (171,555)
------------
Comprehensive loss (130,697)
------------
Dividends to stockholders (9,981) (9,981)
Conversion of non-voting into voting stock (657)
MetLife private placement 124,920
Reissuance of treasury stock 757 886
---------- ------------- --------- ---------
Balance, December 31, 1999 282,389 (141,250) (19,718) 732,948
========== ============= ========= =========
Comprehensive income:
Net income 77,669 $ 77,669 77,669
Other comprehensive income, net of income tax
Currency translation adjustments (5,958) (5,958)
Unrealized investment gains, net of related
offsets and reclassification adjustment 89,337 89,337
--------------
Other comprehensive income 83,379 83,379
--------------
Comprehensive income 161,048
--------------
Dividends to stockholders (11,900) (11,900)
Purchase of treasury stock (20,000) (20,000)
Reissuance of treasury stock 494 827
---------- ------------- --------- ---------
Balance, December 31, 2000 348,158 (57,871) (39,224) 862,923
========== ============= ========= =========
Comprehensive income:
Net income 33,046 $ 33,046 33,046
Other comprehensive income, net of income tax
Currency translation adjustments 9,779 9,779
Unrealized investment gains, net of related
offsets and reclassification adjustment 41,917 41,917
--------------
Other comprehensive income 51,696 51,696
--------------
Comprehensive income 84,742
--------------
Dividends to stockholders (11,855) (11,855)
Issuance of warrants 66,915
Reissuance of treasury stock 2,406 2,863
---------- ------------- --------- ----------
Balance, December 31, 2001 $ 369,349 (6,175) $ (36,818) $1,005,588
========== ============= ========= ==========
See accompanying notes to consolidated financial statements.
49
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
-----------------------------------------------
2001 2000 1999
----------- ------------ -------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,046 $ 77,669 $ 40,858
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income 7,101 (379) 25,288
Premiums receivable 64,929 68,407 (121,032)
Deferred policy acquisition costs (180,110) (154,229) (112,085)
Reinsurance ceded balances (114,579) (908) (35,914)
Future policy benefits, other policy claims and benefits, a
other reinsurance balances 357,840 188,595 383,672
Deferred income taxes (32,901) 57,210 48,013
Other assets and other liabilities 70,139 (24,958) (2,490)
Amortization of net investment discounts, goodwill and other (38,985) (35,884) (26,692)
Realized investment losses, net 68,431 28,651 75,308
Other, net 9,020 (11,375) 2,775
--------- ----------- -----------
Net cash provided by operating activities 243,931 192,799 277,701
========= =========== ===========
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of subsidiaries -- 26,509 --
Purchase of business - net of cash received -- (21,850) --
Sales of investments:
Fixed maturity securities - available for sale 1,129,263 576,240 2,873,723
Mortgage loans on real estate - - 8,136
Maturities of fixed maturity securities - available for sale 12,410 20,153 6,204
Purchases of fixed maturity securities - available for sale (1,211,104) (1,352,647) (1,369,576)
Cash invested in:
Mortgage loans on real estate (51,050) (21,951) (50,300)
Policy loans (67,784) (63,812) (146,177)
Funds withheld at interest (257,101) (64,394) (73,684)
Principal payments on:
Mortgage loans on real estate 15,376 9,525 24,378
Policy loans 1 16,997 4,475
Change in short-term investments and other invested assets (146,388) 162,746 64,644
--------- ----------- -----------
Net cash (used in) provided by investing activities (576,377) (712,484) 1,341,823
========= =========== ===========
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (11,855) (11,900) (9,981)
Proceeds from stock offering -- -- 124,920
Proceeds from PIERS units offering, net 217,340 -- --
Debt issuance and borrowings under credit agreements, net 49,029 88,303 75,000
Purchase of treasury stock - (20,000) --
Exercise of stock options 4,684 827 886
Exchange of voting for non-voting shares -- -- (657)
Excess deposits (withdrawals) on universal life and other
investment type policies and contracts 228,667 508,259 (1,801,601)
--------- ------------ -----------
Net cash provided by (used in) financing activities 487,865 565,489 (1,611,433)
Effect of exchange rate changes 454 677 259
--------- ------------ -----------
Change in cash and cash equivalents 155,873 46,481 8,350
Cash and cash equivalents, beginning of year 70,797 24,316 15,966
--------- ------------ -----------
Cash and cash equivalents, end of year $ 226,670 $ 70,797 $ 24,316
========= ============ ===========
See accompanying notes to consolidated financial statements.
50
Note 1 ORGANIZATION
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding
company formed December 31, 1992. On December 31, 2001, Equity Intermediary
Company, a Missouri holding company, directly owned approximately 48.7% of the
outstanding shares of common stock of RGA. Equity Intermediary Company is a
wholly owned subsidiary of General American Life Insurance Company ("General
American"), a Missouri life insurance company, which in turn is a wholly owned
subsidiary of GenAmerica Financial Corporation ("GenAmerica"), a Missouri
corporation. GenAmerica was acquired and became a wholly owned subsidiary of
Metropolitan Life Insurance Company ("MetLife"), a New York life insurance
company, on January 6, 2000. As a result of MetLife's ownership of GenAmerica
and its own direct investment in RGA, MetLife beneficially owns 58.4% of the
outstanding shares of common stock of RGA as of December 31, 2001.
On January 30, 2002, MetLife announced its intention to purchase up to an
aggregate of $125 million of additional common shares of RGA. The purchases are
intended to offset potential future dilution of MetLife's holding of RGA stock
arising from the issuance of convertible securities by RGA in December 2001.
The consolidated financial statements include the assets, liabilities, and
results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"), RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life
Reinsurance Company of Canada ("RGA Canada") and RGA Americas Reinsurance
Company, Ltd. ("RGA Americas"), as well as several other subsidiaries and a
joint venture, subject to an ownership position greater than fifty percent
(collectively, the "Company").
The Company is primarily engaged in life reinsurance. Reinsurance is an
arrangement under which an insurance company, the reinsurer, agrees to indemnify
another insurance company, the ceding company, for all or a portion of the
insurance risks underwritten by the ceding company. Reinsurance is designed to
(i) reduce the net liability on individual risks, thereby enabling the ceding
company to increase the volume of business it can underwrite, as well as
increase the maximum risk it can underwrite on a single life or risk; (ii)
stabilize operating results by leveling fluctuations in the ceding company's
loss experience; (iii) assist the ceding company to meet applicable regulatory
requirements; and (iv) enhance the ceding company's financial strength and
surplus position.
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation. The consolidated financial statements
of the Company have been prepared in accordance with accounting principles
generally accepted in the United States of America for stock life insurance
companies. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates include those used in
determining deferred policy acquisition costs, premiums receivable, future
policy benefits, other policy claims and benefits, provision for adverse
litigation, and valuation of investment impairments. In all instances, actual
results could differ materially from the estimates and assumptions used by
management.
For each of its reinsurance contracts, the Company must determine if the
contract provides indemnification against loss or liability relating to
insurance risk, in accordance with applicable accounting standards. The Company
must review all contractual features, particularly those that may limit the
amount of insurance risk to which the Company is subject to or features that
delay the timely reimbursement of claims. If the Company determines that a
contract does not expose it to a reasonable possibility of a significant loss
from insurance risk, the Company records the contract on a deposit method of
accounting with the net amount payable / receivable reflected in other
reinsurance assets or liabilities on the consolidated balance sheet. Fees earned
on the contracts are reflected as other revenues, as opposed to premiums, on the
consolidated statements of income.
The accompanying financial statements consolidate the accounts of RGA and its
subsidiaries, both direct and indirect, subject to an ownership position greater
than fifty percent. Entities in which the Company has an ownership position
greater than
51
twenty percent, but less than or equal to fifty percent are reported under the
equity method of accounting. All significant intercompany balances and
transactions have been eliminated.
Investments. Fixed maturity securities available for sale are reported at fair
value and are so classified based upon the possibility that such securities
could be sold prior to maturity if that action enables the Company to execute
its investment philosophy and appropriately match investment results to
operating and liquidity needs.
Impairments in the value of securities held by the Company, considered to be
other than temporary, are recorded as a reduction of the carrying value of the
security, and a corresponding realized capital loss is recognized in the
consolidated statements of income. The Company's policy is to recognize such
impairment when the projected cash flows of these securities have been reduced
on other than a temporary basis so that the realizable value is reduced to an
amount less than the carrying value. In conjunction with its external
investments manager, the Company evaluates factors such as the financial
condition of the issuer, payment performance, market value, compliance with
covenants, general market conditions, various other subjective factors, and the
intent and ability to hold securities.
Mortgage loans on real estate are carried at unpaid principal balances, net of
any unamortized premium or discount and valuation allowances. Valuation
allowances on mortgage loans are being established based upon losses expected by
management to be realized in connection with future dispositions or settlement
of mortgage loans, including foreclosures. The valuation allowances are being
established after management considers, among other things, the value of
underlying collateral and payment capabilities of debtors.
Short-term investments are stated at amortized cost, which approximates fair
value.
Policy loans are reported at the unpaid principal balance.
Funds withheld represent amounts contractually withheld by ceding companies in
accordance with reinsurance agreements. For agreements written on a modified
coinsurance basis and certain agreements written on a coinsurance basis, assets
equal to the net statutory reserves are withheld and legally owned by the ceding
company and are reflected as funds withheld at interest on the balance sheet.
Interest accrues to these assets at rates defined by the treaty terms.
For reinsurance transactions executed prior to December 31, 1994, assets and
liabilities related to treaties written on a modified coinsurance basis with
funds withheld are reported on a gross basis. For modified coinsurance
reinsurance transactions with funds withheld executed on or after December 31,
1994, assets and liabilities are reported on a net or gross basis, depending on
the specific details within each treaty. Reinsurance agreements reported on a
net basis are generally included in other reinsurance balances on the
consolidated balance sheet because a legal right of offset exists.
Other invested assets, including derivative contracts, common stocks and
preferred stocks, are carried at fair value. Changes in fair value are recorded
through other comprehensive income. Other invested assets are periodically
reviewed for impairment.
The Company has a variety of reasons to use derivative instruments, such as to
attempt to protect the Company against possible changes in the market value of
its investment portfolio as a result of interest rate changes and to manage the
portfolio's effective yield, maturity, and duration. The Company does not invest
in derivatives for speculative purposes. The Company uses both exchange-traded
and customized over-the-counter derivative financial instruments. The Company's
use of derivatives historically has not been significant to its financial
position. Income or expense on derivative financial instruments used to manage
interest-rate exposure is recorded on an accrual basis as an adjustment to the
yield of the related interest-earning assets or interest-bearing liabilities for
the periods covered by the contracts. Gains or losses from early terminations of
derivative contracts are deferred and amortized as an adjustment to the yield of
the designated assets or liabilities over the remaining period originally
contemplated by the derivative financial instrument. The Company is currently
holding exchange-traded derivatives with a notional amount of $25.6 million,
which are carried at fair value of $8.1 million. It is the Company's policy to
enter into derivative contracts primarily with highly rated companies.
52
Investment income is recognized as it accrues or is legally due. Realized gains
and losses on sales of investments are included in net income, as are
write-downs of securities where declines in value are deemed to be other than
temporary in nature. The cost of investment securities sold is determined based
upon the specific identification method. Unrealized gains and losses on
marketable equity securities and fixed maturity securities, less applicable
deferred income taxes as well as related adjustments to deferred acquisition
costs, if applicable, are reflected as a direct charge or credit to accumulated
other comprehensive income (loss) in stockholders' equity on the consolidated
balance sheet.
Additional Information Regarding Statements of Cash Flows. Cash and cash
equivalents include cash on deposit and highly liquid debt instruments purchased
with an original maturity of three months or less. The consolidated statements
of cash flows includes the results of discontinued operations in net cash from
operations for all years presented, as the impact of the discontinued operations
on cash flows is not considered material.
Deferred Policy Acquisition Costs. 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. Such costs include commissions and allowances as well
as certain costs of policy issuance and underwriting. The Company performs
periodic tests to determine that the cost of business acquired remains
recoverable, and the cumulative amortization is re-estimated and adjusted by a
cumulative charge or credit to current operations.
Deferred costs related to traditional life insurance contracts, substantially
all of which relate to long-duration contracts, are amortized over the
premium-paying period of the related policies in proportion to the ratio of
individual period premium revenues to total anticipated premium revenues over
the life of the policy. Such anticipated premium revenues are estimated using
the same assumptions used for computing liabilities for future policy benefits.
Deferred costs related to interest-sensitive life and investment-type policies
are amortized over the lives of the policies, in relation to the present value
of estimated gross profits from mortality, investment income, and expense
margins.
Other Reinsurance Balances. The Company assumes and retrocedes financial
reinsurance contracts that represent low mortality risk reinsurance treaties.
These contracts are reported as deposits and included in other reinsurance
assets/liabilities. The amount of revenue reported on these contracts represents
fees and the cost of insurance under the terms of the reinsurance agreement.
Balances resulting from the assumption and/or subsequent transfer of benefits
and obligations resulting from cash flows related to variable annuities have
also been classified as other reinsurance balance assets and/or liabilities.
Goodwill and Value of Business Acquired. Through December 31, 2001, goodwill
representing the excess of purchase price over the fair value of net assets
acquired was amortized on a straight-line basis over ten to twenty years.
Beginning January 1, 2002, the Company will utilize a non-amortization approach
(see "New Accounting Pronouncements"). The value of business acquired is
amortized in proportion to the ratio of annual premium revenues to total
anticipated premium revenues or in relation to the present value of estimated
profits. Anticipated premium revenues have been estimated using assumptions
consistent with those used in estimating reserves for future policy benefits.
The carrying value is reviewed periodically for indicators of impairment in
value. Goodwill was approximately $7.8 million and $9.5 million as of December
31, 2001 and 2000, respectively, including accumulated amortization of $6.0
million and $4.4 million. The value of business acquired was approximately $9.8
million and $12.6 million as of December 31, 2001 and 2000, respectively,
including accumulated amortization of $3.7 million and $0.8 million. Goodwill
amortization expense for the years ended December 31, 2001, 2000, and 1999 was
$1.6 million, $1.4 million, and $1.7 million, respectively. Value of business
acquired amortization expense for the years ended December 31, 2001, 2000, and
1999 was $2.9 million, $0.8 million, and $0.0 million, respectively. These
amortized balances are included in other assets on the consolidated balance
sheet.
Other Assets. In addition to the goodwill and value of business acquired
previously discussed, other assets include separate accounts, unamortized debt
issuance costs, and other capitalized assets.
Future Policy Benefits and Interest-Sensitive Contract Liabilities. Liabilities
for future benefits on life policies are established in an amount adequate to
meet the estimated future obligations on policies in force. Liabilities for
future policy benefits under long-term life insurance policies have been
computed based upon expected investment yields, mortality and withdrawal rates,
and other assumptions. These assumptions include a margin for adverse deviation
and vary with the
53
characteristics of the plan of insurance, year of issue, age of insured, and
other appropriate factors. Interest rates range from 6.0% to 10.0%. The
mortality and withdrawal assumptions are based on the Company's experience as
well as industry experience and standards. Liabilities for future benefits on
interest-sensitive life and investment-type contract liabilities are carried at
the accumulated contract holder values without reduction for potential surrender
or withdrawal charges.
The Company periodically reviews actual and anticipated experience compared to
the assumptions used to establish policy benefits. The Company establishes
premium deficiency reserves if actual and anticipated experience indicates that
existing policy liabilities together with the present value of future gross
premiums will not be 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 by a charge to income, as well as
a reduction in unamortized acquisition costs and, to the extent there are no
unamortized acquisition costs, an increase in future policy benefits.
In establishing reserves for future policy benefits, the Company assigns policy
liability assumptions to particular time frames (eras) in such a manner as to be
consistent with the underlying assumptions and economic conditions at the time
the risks are assumed. The Company generally maintains a consistent level of
provision for adverse deviation between eras.
The reserving process includes normal periodic reviews of assumptions used and
adjustments of reserves to incorporate the refinement of the assumptions. Any
such adjustments relate only to policies assumed in recent periods and the
adjustments are reflected by a cumulative charge or credit to current
operations.
The Company reinsures asset-intensive products, including annuities,
corporate-owned life insurance and, prior to September 1999, funding agreement
products, on a coinsurance basis. The investment portfolios for these products
are segregated within the general account of RGA Reinsurance Company ("RGA
Reinsurance"). During 1999, the assets and liabilities of two major
asset-intensive blocks of business were recaptured by the ceding companies. The
results of these recaptures are included in the 1999 consolidated statement of
income. The liabilities for the remaining asset-intensive reinsurance contracts
are included in interest sensitive contract liabilities on the consolidated
balance sheet.
Other Policy Claims and Benefits. Claims payable for incurred but not reported
losses are determined using case basis estimates and lag studies of past
experience. These estimates are periodically reviewed and required adjustments
to such estimates are reflected in current operations. The Company has no
material policy claims liability balances that would require fair value
disclosure.
Other Liabilities. Liabilities primarily related to investments in transit,
separate accounts, employee benefits, and current federal income taxes payable
are included in other liabilities on the consolidated balance sheet.
Income Taxes. RGA and its eligible U.S. subsidiaries file a consolidated federal
income tax return. The U.S. consolidated tax return includes RGA, RGA
Reinsurance, RGA Barbados, RCM and Fairfield Management Group, Incorporated
("Fairfield"). Due to rules which affect the ability of an entity to join in a
consolidated tax return, RGA Americas Reinsurance Company, Ltd., and Triad Re
Ltd. file separate tax returns even though these entities are considered to be
U.S. taxpayers. The Company's Argentine, Australian, Bermudan, Canadian,
Malaysian, South African and United Kingdom subsidiaries are taxed under
applicable local statutes.
For all years presented the Company uses the asset and liability method to
record deferred income taxes. Accordingly, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, using enacted tax rates.
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Company. During
December 2001, RGA Capital Trust I (the "Trust"), a wholly owned subsidiary of
RGA, sold Preferred Income Equity Redeemable Securities (PIERS) Units. Each unit
consists of a preferred security issued by the Trust with a detachable warrant
to purchase 1.2508 shares of RGA common stock. The Trust sold 4.5 million PIERS
Units. The market value of the preferred security on the date issued is recorded
in liabilities on the consolidated balance sheet under
54
the caption "Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Company."
Warrants. During December 2001, RGA Capital Trust I (the "Trust"), a wholly
owned subsidiary of RGA, sold Preferred Income Equity Redeemable Securities
(PIERS) Units. Each unit consists of a preferred security issued by the Trust
with a detachable warrant to purchase 1.2508 shares of RGA common stock. The
Trust sold 4.5 million PIERS Units. The market value of the detachable warrants
on the date issued is recorded in stockholders' equity on the consolidated
balance sheet under the caption "Warrants."
Foreign Currency Translation. The functional currency is the Argentine peso for
the Company's Argentine operations, the Australian dollar for the Company's
Australian operations, the Canadian dollar for the Company's Canada operations,
the South African Rand for the Company's South African operations and the
British Pound Sterling for the Company's United Kingdom operations. The
translation of the foreign currency into U.S. dollars is performed for balance
sheet accounts using current exchange rates in effect at the balance sheet date
and for revenue and expense accounts using a weighted average exchange rate
during each year. Gains or losses, net of deferred income taxes, resulting from
such translation are included in accumulated currency translation adjustments,
net of income taxes, in accumulated other comprehensive income (loss) on the
consolidated balance sheet. See Note 24, "Subsequent Events" for a discussion of
the Argentine peso devaluation.
Retrocession Arrangements and Reinsurance Ceded Receivables. The Company
generally reports retrocession activity on a gross basis. Amounts paid or deemed
to have been paid for reinsurance are reflected in reinsurance ceded
receivables. The cost of reinsurance related to long-duration contracts is
recognized over the terms of the reinsured policies on a basis consistent with
the reporting of those policies.
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. Through December 31, 2000, the Company retained a
maximum of $2.5 million of coverage per individual life. Effective January 1,
2001, the Company increased its retention to $4.0 million of coverage per
individual life. RGA Reinsurance has a number of retrocession arrangements
whereby certain business in force is retroceded on an automatic or facultative
basis. The Company also retrocedes most of its financial reinsurance business to
other insurance companies to alleviate capital requirements created by this
business.
Generally, RGA's insurance subsidiaries retrocede amounts in excess of their
retention to RGA Reinsurance and RGA Americas. Retrocessions are arranged
through RGA Reinsurance's retrocession pools for amounts in excess of its
retention. As of December 31, 2001, substantially all retrocession pool
participants followed by the A.M. Best Company were rated A- or better. For a
majority of the retrocessionaires that were not rated, security in the form of
letters of credit or trust assets has been given as additional security in favor
of RGA Reinsurance. In addition, the Company performs annual financial 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 difficulty in collecting
claims recoverable from retrocessionaires; however, no assurance can be given as
to the future performance of such retrocessionaires or as to recoverability of
any such claims.
Recognition of Revenues and Related Expenses. Revenues and expenses are reported
gross, except that initial reserve changes are netted against premiums when an
in force block of business is reinsured. Life and health premiums are recognized
as revenue when due from the insured. Benefits and expenses are associated with
earned premiums so that profits are recognized over the life of the related
contract. This association is accomplished through the provision for future
policy benefits and the amortization of deferred policy acquisition costs. Other
revenue includes items such as treaty recapture fees, profit and risk fees
associated with financial reinsurance. Any fees that are collected in advance of
the period benefited are deferred and recognized over the period benefited.
Revenues for interest-sensitive and investment-type products consist of
investment income, policy charges for the cost of insurance, policy
administration, and surrenders that have been assessed against policy account
balances during the period. Interest-sensitive contract liabilities for these
products represent policy account balances before applicable surrender charges.
Deferred policy acquisition costs are recognized as expenses over the term of
the policies. Policy benefits and claims that are
55
charged to expenses include claims incurred in the period in excess of related
policy account balances and interest credited to policy account balances. The
weighted average interest-crediting rates for interest-sensitive products were
6.1%, 6.7%, and 6.4%, during 2001, 2000, and 1999, respectively. Interest
crediting rates for U.S. dollar-denominated investment-type contracts ranged
from 3.6% to 7.3% during 2001, 5.3% to 7.2% during 2000, and 5.2% to 6.7% during
1999. Weighted average interest crediting rates for Mexican peso-denominated
investment-type contracts were 12.8%, 26.0% and 33.0% for 2001, 2000 and 1999,
respectively.
Net Earnings Per Share. Basic earnings per share exclude any dilutive effects of
options and warrants. Diluted earnings per share include the dilutive effects
assuming outstanding stock options and warrants were exercised. All share and
earnings per share information has been adjusted to reflect the three-for-two
stock split paid in the form of a dividend on February 26, 1999.
New Accounting Pronouncements. In July 2001, the SEC issued Staff Accounting
Bulletin No. 102 - Selected Loan Loss Allowance Methodology and Documentation
Issues ("SAB 102"), expressing certain of the staff's views on the development,
documentation, and application of a systematic methodology as required by
Financial Reporting Release No. 28 for determining allowances for loan and lease
losses in accordance with generally accepted accounting principles. In
particular, the guidance focuses on the documentation the staff normally would
expect registrants to prepare and maintain in support of their allowances for
loan losses. The Company believes its current policies and procedures are in
compliance with SAB 102.
Also in July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against these new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. SFAS No. 142 requires the use of a non-amortization approach to
account for purchased goodwill and certain intangibles. Under a non-amortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. The Company
will adopt the provisions of each statement, which apply to goodwill and
intangible assets acquired prior to June 30, 2001, on January 1, 2002. Based on
its preliminary assessment during the first quarter of 2002, the Company does
not currently expect a significant adjustment related to the adoption of these
accounting standards; however, impairment reviews subsequent to the initial
adoption date may result in future write-downs.
In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of FASB Statement No.
133". This Statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. It also requires that gains or losses resulting from
changes in the values of those derivatives be reported depending on the use of
the derivative and whether it qualifies for hedge accounting. The Company
adopted SFAS No. 138 as of January 1, 2001, resulting in an after-tax loss
included in the first quarter of 2001 of $0.5 million, substantially all of
which related to embedded derivatives on a specific market value annuity
product. The Company has a variety of reasons to use derivative instruments,
such as to attempt to protect the Company against possible changes in the market
value of its investment portfolio as a result of interest rate changes and to
manage the portfolio's effective yield, maturity, and duration. The Company does
not invest in derivatives for speculative purposes. The Company may use both
exchange-traded and customized over-the-counter derivative financial
instruments. The Company's use of derivatives historically has not been
significant to its financial position.
The Company prepares its statutory financial statements in conformity with
accounting practices prescribed or permitted by the State of Missouri. Beginning
in 2001, the State of Missouri required that insurance companies domiciled in
the State of Missouri prepare their statutory basis financial statements in
accordance with the National Association of Insurance Commissioners ("NAIC")
Accounting Practices and Procedures manual - Version effective March 2001
subject to any deviations prescribed or permitted by the State of Missouri
insurance commissioner. Accounting changes adopted to conform to the provisions
of the NAIC Accounting Practices and Procedures manual - Version effective March
2001 are reported as changes in accounting principles. The cumulative effect of
changes in accounting principles is reported as an
56
adjustment to unassigned funds (surplus) in the period of the change in
accounting principle. The Company recorded an immaterial positive adjustment to
statutory surplus in 2001 as a result of implementing the new standards.
Reclassification. The Company has reclassified the presentation of certain prior
period information to conform to the 2001 presentation.
Note 3 STOCK TRANSACTIONS
On September 18, 2001, the board of directors approved a repurchase program
authorizing the Company to purchase up to $25 million of its shares of stock.
Subsequent to December 31, 2001 the board of directors approved an additional
repurchase of $25 million shares under the program, for a total of up to $50
million of its shares of stock, as conditions warrant. The Board's action allows
management, in its discretion, to purchase shares on the open market. As of
December 31, 2001, no shares have been purchased under this program.
During 2000, the Company purchased 689,953 shares of treasury stock at an
aggregate cost of $20.0 million. The Company plans to use the repurchased shares
to support the future exercise of options granted under its stock option plan.
On November 23, 1999, RGA completed a private placement of securities in which
it sold 4,784,689 shares of the Company's common stock, $0.01 par value per
share, to MetLife. The price per share was $26.125, and the aggregate value of
the transaction was approximately $125 million.
Note 4 DIVIDENDS
RGA paid cash dividends on common shares of $0.24 per share in 2001, $0.24 per
share in 2000, and $0.22 per share in 1999.
Note 5 SIGNIFICANT TRANSACTIONS
2001 Reinsurance Agreement
During 2001, the Company entered into a new agreement reinsuring a
single-premium deferred annuity product on a coinsurance basis with funds
withheld. Pursuant to the terms of the reinsurance agreement, the funds
supporting the liabilities are withheld by the ceding company. To reflect the
Company's obligations under the agreement, the amounts withheld have been
included in "Funds withheld at interest" on the balance sheet. As of December
31, 2001, approximately $203.1 million and $201.2 million related to this
agreement were included in funds withheld at interest and interest sensitive
contract liabilities, respectively.
Recapture Transaction
Effective September 29, 1999, General American completed the recapture of the
entire block of General American's funding agreement business reinsured by the
Company. Prior to the recapture, the Company reinsured approximately 25% of
General American's funding agreement business. Pursuant to the recapture
transaction, the Company transferred all remaining liabilities related to the
funding agreement business and an equivalent amount of assets to General
American. Over the course of the third quarter of 1999, the Company transferred
to General American approximately $1.8 billion in market value of assets,
including $1.5 billion in connection with the recapture. Those assets,
consisting primarily of investments in fixed maturity securities and cash, were
transferred in satisfaction of $1.8 billion in funding agreement liabilities.
Associated with the liquidation of investment securities and the transfer of
assets to General American during the third quarter of 1999, the Company
incurred an after tax net capital loss of approximately $33.2 million, including
$26.0 million associated with the recapture transaction.
57
Note 6 INVESTMENTS
Major categories of net investment income consist of the following (in
thousands):
Years Ended December 31 2001 2000 1999
----------------------- ----------- ------------ -----------
Fixed maturity securities $ 192,685 $ 189,750 $ 252,399
Mortgage loans on real estate 11,569 10,003 11,284
Policy loans 54,713 44,712 42,378
Funds withheld at interest 72,753 69,715 23,490
Short-term investments 6,513 11,129 10,901
Other invested assets 5,092 3,497 2,912
----- ----- -----
Investment revenue 343,325 328,806 343,364
Investment expense 2,766 2,301 3,084
----- ----- -----
Net investment income $ 340,559 $ 326,505 $ 340,280
======= ======= =======
The amortized cost, gross unrealized gains and losses, and estimated fair values
of investments in fixed maturity securities at December 31, 2001 and 2000 are as
follows (in thousands):
Amortized Unrealized Unrealized Fair
2001 Cost Gains Losses Value
------------------ ----------- ------------- ------------- -------------
Available for sale:
Commercial and industrial $ 861,369 $ 22,127 $ 37,052 $ 846,444
Public utilities 260,856 9,429 5,860 264,425
Asset-backed securities 244,736 6,590 38,348 212,978
Canadian and Canadian provincial governments 445,077 64,240 17,320 491,997
Mortgage-backed securities 460,245 13,190 6,922 466,513
Finance 260,630 6,939 12,619 254,950
U.S. government and agencies 165,416 2,104 2,206 165,314
Other foreign government 32,357 71 522 31,906
Australian government agencies 13,761 167 67 13,861
Argentine government and agencies 20,975 -- 1,078 19,897
----------- ------------- ------------- -------------
$ 2,765,422 $ 124,857 $ 121,994 $ 2,768,285
=========== ============= ============= =============
Amortized Unrealized Unrealized Fair
2000 Cost Gains Losses Value
------------------ ----------- ------------- ------------- -------------
Available for sale:
Commercial and industrial $ 1,138,047 $ 21,837 $ 97,220 $ 1,062,664
Public utilities 366,767 39,285 20,273 385,779
Asset-backed securities 319,929 3,631 55,178 268,382
Canadian and Canadian provincial governments 289,144 58,565 7,924 339,785
Mortgage-backed securities 266,171 6,202 10,538 261,835
Finance 213,654 6,081 6,726 213,009
U.S. government and agencies 87,208 2,513 25 89,696
Other foreign government 18,373 177 - 18,550
Australian government agencies 14,889 18 30 14,877
Argentine government and agencies 39,339 205 1,281 38,263
----------- ------------- ------------- -------------
$ 2,753,521 $ 138,514 $ 199,195 $ 2,692,840
=========== ============= ============= =============
There were no investments in any entity in excess of 10% of stockholders' equity
at December 31, 2001 or 2000, other than investments issued or guaranteed by the
U.S. government.
Common and preferred equity investments and derivative financial instruments are
included in other invested assets in the Company's consolidated balance sheet.
The cost basis of equity investments at December 31, 2001 and 2000 was
58
approximately $89.9 million and $15.4 million, respectively. The cost basis of
the derivative financial instruments at December 31, 2001 and 2000 was
approximately $4.4 million.
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 2001 are shown by contractual maturity for all securities except
certain U.S. government agencies securities, which are distributed to maturity
year based on the Company's estimate of the rate of future prepayments of
principal over the remaining lives of the securities. These estimates are
developed using prepayment rates provided in broker consensus data. Such
estimates are derived from prepayment rates experienced at the interest rate
levels projected for the applicable underlying collateral and can be expected to
vary from actual experience. Actual maturities can differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
At December 31, 2001, the contractual maturities of investments in fixed
maturity securities were as follows (in thousands):
Amortized Fair
Cost Value
------------- -------------
Available for sale:
Due in one year or less $ 32,908 $ 33,643
Due after one year through five years 394,005 405,450
Due after five years through ten years 540,229 545,655
Due after ten years 1,093,299 1,104,046
Asset and mortgage-backed securities 704,981 679,491
------- -------
$ 2,765,422 $ 2,768,285
========= =========
Net realized investment gains or losses, consist of the following (in
thousands):
2001 2000 1999
------------ ------------- ------------
Years Ended December 31
Fixed maturities and equity securities available for sale:
Realized gains $ 34,108 $ 2,487 $ 19,683
Realized losses (101,854) (23,142) (81,936)
Other, net (685) (7,996) (13,055)
------- -------- --------
Net losses $ (68,431) $ (28,651) $ (75,308)
======= ======== ========
Included in net realized losses are other than temporary write-downs of fixed
maturity securities of approximately $43.4 million, $10.1 million, and $15.4
million in 2001, 2000, and 1999, respectively. Approximately $36.3 million of
the other than temporary write-downs in 2001 related to the Company's
asset-backed securities portfolio. The Company incurred approximately $9.1
million in realized losses associated with the other than temporary write-down
and sale of Enron securities. Additionally, the Company incurred approximately
$27.0 million in realized capital losses when it liquidated substantially all of
its Argentine-based investment securities. The Company reinvested the proceeds
from these sales in U.S. dollar based securities in order to reduce its exposure
to the volatile Argentine economy. Other losses during 2000 include $8.9 million
in realized losses associated with the sale of subsidiaries. The recapture of
the funding agreement business by General American led to the majority of the
realized losses in 1999.
Securities with an amortized cost of $2.8 million and $3.1 million were on
deposit with various state or governmental insurance departments to comply with
applicable insurance laws at December 31, 2001 and 2000, respectively.
Securities with an amortized cost of $396.8 million and $411.6 million were held
in trust in Canada at December 31, 2001 and 2000, respectively, to satisfy
collateral requirements for reinsurance business conducted in Canada.
Additionally, securities with an amortized cost of $820.9 million and $821.5
million at December 31, 2001 and 2000, respectively, were held in trust to
satisfy collateral requirements of certain reinsurance treaties.
At December 31, 2001, fixed maturities held by the Company that were below
investment grade or not rated by an independent rating agency had an estimated
fair value of approximately $159.5 million. At December 31, 2001, the Company
owned non-income producing securities with an amortized cost of $48.1 million.
The Company makes mortgage loans on income producing properties, such as
apartments, retail and office buildings, light warehouses and light industrial
facilities. Loan to value ratios at the time of loan approval are 75 percent or
less for domestic mortgages. The distribution of mortgage loans by property type
is as follows (in thousands):
59
2001 2000
----------------------------------- ------------------------------
Carrying Percentage Carrying Percentage
Value Of Total Value Of Total
------------ ---------- ------------ ----------
Property Type:
Apartment $ 705 .43% $ 1,028 .80%
Retail 49,153 29.98% 48,290 37.65%
Office building 72,958 44.50% 50,299 39.21%
Industrial 39,037 23.81% 26,423 20.60%
Other commercial 2,095 1.28% 2,227 1.74%
------- ------- ------- -------
163,948 100.00% 128,267 100.00%
======= =======
Less: Allowance - (156)
------- -------
Total $ 163,948 $ 128,111
======= =======
All the Company's mortgage loans are amortizing loans. As of December 31, 2001
and 2000, the Company's mortgage loans were distributed as follows (in
thousands):
2001 2000
-------------------------------- ---------------------------
Carrying Percentage Carrying Percentage
Value Of Total Value of Total
-------------- ---------- ------------ -------------
United States:
Arizona $ 9,102 5.55% $ 13,606 10.61%
California 38,178 23.29% 20,538 16.01%
Colorado 7,998 4.88% 1,924 1.50%
Florida 7,944 4.85% 5,787 4.51%
Georgia 21,258 12.97% 8,013 6.25%
Illinois 12,187 7.43% 12,606 9.83%
Indiana 5,363 3.27% 5,497 4.29%
Kansas 7,379 4.50% 7,663 5.97%
Maryland 4,436 2.71% 4,686 3.65%
Missouri 7,301 4.45% 7,475 5.83%
Nevada 1,340 .81% 1,414 1.10%
North Carolina 16,301 9.94% 16,688 13.01%
Pennsylvania 5,668 3.46% 5,759 4.49%
Texas 2,159 1.32% 2,233 1.74%
Virginia 3,442 2.10% - -
Washington 13,892 8.47% 14,378 11.21%
------- ------- ------- -------
163,948 100.00% 128,267 100.00%
======= =======
Less: Allowance - (156)
------- -------
Total $ 163,948 $ 128,111
======= =======
There were no loans delinquent at December 31, 2001.
The maturities of the mortgage loans are as follows (in thousands):
2001 2000
--------------- ----------------
Due within one year $ - $ 311
Due one year through five years 8,609 1,160
Due after five years 84,839 45,446
Due after ten years 70,500 81,350
------- -------
Subtotal 163,948 128,267
Less: Allowance - (156)
------- -------
Total $ 163,948 $ 128,111
======= =======
60
Note 7 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 2001 and 2000. SFAS No. 107,
"Disclosures about the Fair Value of Financial Instruments," defines fair value
of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties (in thousands):
2001 2000
---------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------------ ------------- ------------------ -------------
Assets:
Fixed maturities $ 2,768,285 $ 2,768,285 $ 2,692,840 $ 2,692,840
Mortgage loans on real estate 163,948 164,904 128,111 131,730
Policy loans 774,660 774,660 706,877 706,877
Funds withheld at interest 1,142,643 1,133,781 938,362 935,748
Short-term investments 140,573 140,573 68,735 68,735
Other invested assets 98,315 98,315 25,233 25,233
Liabilities:
Interest sensitive contract $ 2,325,264 $ 2,264,432 $ 2,149,417 $ 2,095,165
liabilities
Long-term debt 323,396 328,905 272,257 274,420
Company-obligated mandatorily
redeemable preferred securities 158,085 158,839 - -
Publicly traded fixed maturity securities are valued based upon quoted market
prices. Private placement securities are valued based on the credit quality and
duration of marketable securities deemed comparable by the Company's investment
advisor, which may be of another issuer. The fair value of mortgage loans on
real estate is estimated using discounted cash flows. Policy loans typically
carry an interest rate that is tied to the crediting rate applied to the related
policy and contract reserves. The carrying value of funds withheld at interest
generally equals fair value except were the funds withheld are specifically
identified in the agreement. The carrying value of short-term investments at
December 31, 2001 and 2000 approximates fair value. Common and preferred equity
investments and derivative financial instruments included in other invested
assets are reflected at fair value on the consolidated balance sheet.
The fair value of the Company's interest sensitive contract liabilities is based
on the cash surrender value of the liabilities, adjusted for recapture fees. The
fair value of the Company's long-term debt and the company-obligated mandatorily
redeemable preferred securities are estimated based on quoted market prices for
corporations with similar credit quality.
Note 8 REINSURANCE
Retrocession reinsurance contracts do not relieve the Company from its
obligations to direct writing companies. Failure of retrocessionaires to honor
their obligations could result in losses to the Company; consequently,
allowances would be established for amounts deemed uncollectible. At December
31, 2001 and 2000, no allowances were deemed necessary. The Company regularly
evaluates the financial condition of its reinsurers/retrocessionaires.
The effect of reinsurance on premiums and amounts earned is as follows (in
thousands):
2001 2000 1999
--------------- ------------- -------------
Years Ended December 31
Direct premiums and amounts assessed
against policyholders $ 11,471 $ 26,077 $ 41,174
Reinsurance assumed 1,839,083 1,600,106 1,543,634
Reinsurance ceded (188,792) (222,117) (269,170)
--------- --------- ---------
Net premiums and amounts earned $ 1,661,762 $ 1,404,066 $ 1,315,638
========= ========= =========
61
The effect of reinsurance on policyholder claims and other policy benefits is as
follows (in thousands):
2001 2000 1999
--------------- ------------- -------------
Years Ended December 31
Direct $ 6,104 $ 27,327 $ 53,358
Reinsurance assumed 1,525,248 1,290,175 1,200,155
Reinsurance ceded (154,550) (213,954) (186,402)
--------- ---------- ---------
Net policyholder claims and benefits $ 1,376,802 $ 1,103,548 $ 1,067,111
========= ========== =========
At December 31, 2001 and 2000, there were no reinsurance receivables associated
with a single reinsurer with a carrying value in excess of 5% of total assets.
The impact of reinsurance on life insurance in force is shown in the following
schedule (in millions):
Life Insurance In Force Direct Assumed Ceded Net Assumed/Net %
----------------------- ----------- ------------- ------------- ----------- -------------
December 31, 2001 $ 73 $ 615,990 $ 117,748 $ 498,315 123.61%
December 31, 2000 86 545,950 78,226 467,810 116.70%
December 31, 1999 81 446,943 36,569 410,455 108.89%
At December 31, 2001, RGA Reinsurance has provided approximately $547.8 million
of statutory financial reinsurance, as measured by pre-tax statutory surplus, to
other insurance companies under financial reinsurance transactions to assist
ceding companies in meeting applicable regulatory requirements and to enhance
ceding companies' financial strength. Generally, such financial reinsurance is
provided by the Company committing cash or assuming insurance liabilities, which
are collateralized by future profits on the reinsured business. The Company
retrocedes the majority of the assumed financial reinsurance, including
approximately $23.2 million to MetLife and its subsidiaries. The Company earns a
fee based on the amount of net outstanding financial reinsurance.
Reinsurance agreements, whether facultative or automatic, may provide for
recapture rights on the part of the ceding company. Recapture rights permit the
ceding company to reassume all or a portion of the risk formerly ceded to the
reinsurer after an agreed-upon period of time (generally 10 years) or in some
cases due to changes in the financial condition or ratings of the reinsurer.
Recapture of business previously ceded does not affect premiums ceded prior to
the recapture of such business, but would reduce premiums in subsequent periods.
Additionally, some treaties give the ceding company the right to request the
Company to place assets in trust for their benefit to support their reserve
credits, in the event of a downgrade of the Company's ratings to specified
levels. As of December 31, 2001, these treaties had approximately $246.7 million
in reserves. Assets placed in trust continue to be owned by the Company, but
their use is restricted based on the terms of the trust agreement. Securities
with an amortized cost of $396.8 million were held in trust in Canada at
December 31, 2001 to satisfy collateral requirements for reinsurance business.
Additionally, securities with an amortized cost of $820.9 million, as of
December 31, 2001, were held in trust to satisfy collateral requirements of
certain other reinsurance treaties. Additionally, under certain conditions, RGA
may be obligated to move reinsurance from one RGA subsidiary company to another
RGA subsidiary or make payments under the treaty. These conditions generally
include unusual or remote circumstances, such as change in control, insolvency,
nonperformance under a treaty, or loss of reinsurance license of such
subsidiary.
Note 9 DEFERRED POLICY ACQUISITION COSTS
The following reflects the amounts of policy acquisition costs deferred and
amortized (in thousands):
2001 2000 1999
--------------- --------------- -------------
Years Ended December 31
Deferred policy acquisition costs
Assumed $ 901,709 $ 715,318 $ 542,393
Retroceded (101,390) (93,843) (64,004)
--------- ------- -------
Net $ 800,319 $ 621,475 $ 478,389
========= ======= =======
62
Year Ended December 31, 2001 2000 1999
------- ------ ------
Beginning of year $ 621,475 $ 478,389 $ 351,042
Capitalized
Assumed 485,647 382,772 333,020
Retroceded (29,805) (43,452) (30,922)
Amortized
Assumed (299,256) (209,847) (177,440)
Retroceded 22,258 13,613 2,689
------ ------ -----
End of year $ 800,319 $ 621,475 $ 478,389
======= ======= =======
Some reinsurance agreements involve reimbursing the ceding company for
allowances and commissions in excess of first-year premiums. These amounts
represent an investment in the reinsurance agreement, and are capitalized to the
extent deemed recoverable from the future premiums and amortized against future
profits of the business. This type of agreement presents a risk to the extent
that the business lapses faster than originally anticipated resulting in future
profits being insufficient to recover the Company's investment.
Note 10 INCOME TAX
Provision for income tax expense attributable to income from operations consists
of the following (in thousands):
2001 2000 1999
--------------- --------------- -------------
Years Ended December 31
Current income tax $ 49,738 $ 12,789 $ (20,835)
Deferred income tax expense (31,866) 46,494 40,430
Foreign current tax 9,412 (728) 11,881
Foreign deferred tax (1,035) 10,716 7,583
------ ------ ------
Provision for income taxes $ 26,249 $ 69,271 $ 39,059
====== ====== ======
Provision for income tax expense differed from the amounts computed by applying
the U.S. federal income tax statutory rate of 35% to pre-tax income as a result
of the following (in thousands):
2001 2000 1999
-------------- ----------- ----------
Years Ended December 31
Tax provision at U.S. statutory rate $ 23,153 $ 61,371 $ 32,575
Increase in income taxes resulting from:
Foreign tax rate differing from U.S. tax rate (784) 1,049 994
Foreign tax credit -- -- --
Travel and entertainment 32 134 136
Intangible amortization 65 215 284
Deferred tax valuation allowance 3,501 2,369 2,655
Basis differential on sale of Chilean subsidiaries -- 2,447 --
Other, net 282 1,686 2,415
------ ------ ------
Total provision for income taxes $ 26,249 $ 69,271 $ 39,059
====== ====== ======
63
Total income taxes were as follows (in thousands):
2001 2000 1999
-------------- ----------- ----------
Years Ended December 31
Income tax from continuing operations: $ 26,249 $ 69,271 $ 39,059
Tax benefit on discontinued operations (3,691) (15,140) (6,855)
Income tax from stockholders' equity:
Unrealized holding gain or (loss) on debt and equity
securities recognized for financial reporting purposes 21,320 51,766 (104,174)
Exercise of stock options (1,653) (344) (194)
Foreign currency translation (5,266) 3,208 2,702
------- ------- -------
Total income tax provided $ 36,959 $ 108,761 $ (69,462)
======= ======= =======
The tax effects of temporary differences that give rise to significant portions
of the deferred income tax assets and liabilities at December 31, 2001 and 2000,
are presented in the following tables (in thousands):
2001 2000
------------- -----------
Years Ended December 31
Deferred income tax assets:
Nondeductible accruals $ 19,433 $ 12,271
Differences in foreign currency translation 3,824 11,349
Deferred acquisition costs capitalized for tax 28,103 24,976
Net operating loss carryforward 122,852 94,781
Foreign tax & AMT credit carryforward 7,540 2,347
Capital loss carryforward 4,748 1,759
----- -----
Subtotal 186,500 147,483
Valuation allowance (13,748) (6,204)
------- ------
Total deferred income tax assets 172,752 141,279
------- -------
Deferred income tax liabilities:
Deferred acquisition costs capitalized for financial reporting 296,290 208,060
Differences between tax and financial reporting amounts concerning
certain reinsurance transactions and reserve for policies 22,661 95,400
Differences in the tax basis of cash and invested assets 15,893 8,724
------ -----
Total deferred income tax liabilities 334,844 312,184
------- -------
Net deferred income tax liabilities $ 162,092 $ 170,905
======= =======
As of December 31, 2001 and 2000, a valuation allowance for deferred tax assets
of approximately $13.7 million and $6.2 million, respectively, was provided on
the foreign tax credits and net operating and capital losses of RGA, RGA
Reinsurance, RGA Australia, GA Argentina, RGA South Africa, and RGA UK. The
Company utilizes valuation allowances when it determines, based on the weight of
the available evidence, that it is more likely than not that the deferred income
taxes will not be realized. The Company has not recognized a deferred tax
liability for the undistributed earnings of its wholly owned domestic and
foreign subsidiaries because the Company currently does not expect those
unremitted earnings to become taxable to the Company in the foreseeable future.
This is due to the fact that the unremitted earnings will not be repatriated in
the foreseeable future, or because those unremitted earnings that may be
repatriated will not be taxable through the application of tax planning
strategies that management would utilize.
During 2001 and 2000, the Company received federal income tax refunds of
approximately $5.0 million and $44.8 million, respectively. The Company did not
receive a federal income tax refund in 1999. The Company made federal income tax
payments of approximately $26.4 million, $6.5 million, and $18.4 million during
2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, the Company
recognized deferred tax assets associated with net operating losses of
approximately $313.9 million and $247.7 million, respectively, that will expire
between 2011 and 2016. However, these net operating losses are expected to be
utilized in the normal course of business during the period allowed for carry
forwards and in any event, will not be lost due to the application of tax
planning strategies that management would utilize.
64
The Internal Revenue Service has audited the Company for the years through and
including 1997. The Company is being audited for the years 1998, 1999 and 2000.
The Company believes that any adjustments that might be required for open years
will not have a material effect on the Company's consolidated financial
statements.
Note 11 EMPLOYEE BENEFIT PLANS
Most of the Company's U.S. employees participate in a non-contributory defined
benefit pension plan sponsored by RGA Reinsurance. The benefits under the
pension plan are based on years of service and compensation levels. Certain
management individuals participate in several nonqualified defined benefit and
defined contribution plans sponsored by RGA Reinsurance. Those plans are
unfunded and are deductible for federal income tax purposes when the benefits
are paid. The Company recorded net benefits expense of approximately $1.1
million, $0.9 million, and $0.7 million for 2001, 2000 and 1999, respectively,
related to these plans. The unfunded benefit liability related to these plans as
of December 31, 2001 and 2000 was approximately $6.5 million and $5.4 million,
respectively.
The Company's full time U.S. employees may participate in a defined benefit
profit sharing plan. The plan also has a cash or deferred option under Internal
Revenue Code section 401(k). The Company's contributions, which are partially
tied to RGA's operating results and employee 401(k) contributions, were
approximately $1.3 million in 2001.The Company also provides certain health care
and life insurance benefits for retired employees. The health care benefits are
provided through a self-insured welfare benefit plan. Employees become eligible
for these benefits if they meet minimum age and service requirements. The
retiree's cost for health care benefits varies depending upon the credited years
of service. The Company recorded benefits expense of approximately $0.5 million,
$0.3 million, and $0.3 million for 2001, 2000 and 1999, respectively, related to
these postretirement plans. The projected obligation was approximately $3.5
million and $2.2 million as of December 31, 2001 and 2000, respectively.
The 2001 postretirement benefit cost assumes a 12% annual rate of increase in
the per capita cost of covered health care benefits. The rate is assumed to
decrease gradually to 5% for 2008 and remain at that level thereafter. Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plan. A one-percentage point increase in assumed health care
cost trend rates would increase the 2001 net periodic benefit cost by
approximately $98,000 and the 2001 postretirement benefit obligation by
approximately $664,000.
Note 12 RELATED PARTY TRANSACTIONS
Prior to September 1, 2000, Conning Asset Management Company ("Conning"), a
majority-owned subsidiary of General American, until its sale in April 2001,
provided investment management and advisory services to RGA, RGA Reinsurance,
RGA Barbados, Australian Holdings and RGA Life Reinsurance Company of Canada
("RGA Canada"). These services were provided pursuant to agreements at the rate
of 0.09% of fixed maturity assets managed and 0.22% of mortgage loans managed,
payable quarterly, based on the average book value of the portfolios managed
during each calendar quarter. On September 1, 2000, the Company contracted with
a third party to provide the majority of investment management and advisory
services for these portfolios. Conning, however, continues to provide accounting
services for such portfolios, and certain accounting, management, and advisory
services related to the Company's mortgage loan and collateralized
mortgage-backed securitization portfolios. The cost for Conning's services for
the years ended December 31, 2001, 2000, and 1999, was approximately $0.3
million, $1.7 million, and $2.8 million, respectively. Management does not
believe that the various amounts charged by Conning to the Company would have
been materially different if they had been incurred from an unrelated third
party.
Subject to written agreements with RGA and RGA Reinsurance, General American has
historically provided certain administrative services to RGA and RGA
Reinsurance. Such services have included legal, treasury, employee benefit,
payroll, and personnel. The cost for the years ended December 31, 2001, 2000,
and 1999, was approximately $1.1 million, $2.6 million, and $2.2 million,
respectively. Management does not believe that the various amounts charged by
General American to the Company would be materially different if they had been
incurred from an unrelated third party. During 2001, the Company began
performing certain of these services in-house.
Prior to moving its operations in August of 1999 to a leased facility owned by a
third party, the Company conducted its business primarily from premises leased
by RGA Reinsurance from General American. RGA Reinsurance made rental payments
in 1999 to General American, principally for office space, of approximately $1.1
million.
The Company also has direct policies and reinsurance agreements with MetLife and
certain of its subsidiaries. As of December 31, 2001 and 2000, the Company had
assets and liabilities related to these agreements totaling $112.5 million and
$109.0 million, and $103.3 million and $114.1 million, respectively.
Additionally, the Company reflected net assumed premiums of approximately $149.3
million, $144.0 million, and $130.3 million in 2001, 2000, and 1999,
respectively. The
65
premiums reflect the net of business assumed from and ceded to MetLife and its
subsidiaries. The pre-tax gain (loss) on this business was approximately $26.1
million, $17.8 million, and $(31.0) million in 2001, 2000, and 1999,
respectively. This includes realized gains (losses) on the disposal of
investment securities of ($70.4) million for 1999.
The loss in 1999 includes the impact of reinsuring the General American funding
agreements and an annuity coinsurance agreement with Cova Financial Services
Life Insurance Company ("Cova"), a subsidiary of General American, both of which
were recaptured during 1999. The funding agreement and annuity coinsurance
agreement contributed net pre-tax earnings (loss) of $(47.8) million and $2.6
million, respectively, during 1999, including pre-tax net capital losses on
disposal of investment securities of $52.9 million and $13.1 million,
respectively. Deposits related to funding agreements and the annuity coinsurance
at the time of recapture were $1.5 billion and $206.6 million, respectively.
Note 13 LEASE COMMITMENTS
The Company leases office space and furniture and equipment under non-cancelable
operating lease agreements, which expire at various dates. Future minimum office
space annual rentals under non-cancelable operating leases at December 31, 2001
are as follows:
2002 $4.4 million
2003 $4.3 million
2004 $3.8 million
2005 $3.7 million
2006 $3.7 million
Thereafter $12.0 million
Rent expenses amounted to approximately $5.3 million, $4.7 million, and $4.3
million for the years ended December 31, 2001, 2000, and 1999, respectively.
Note 14 FINANCIAL CONDITION AND NET INCOME ON A STATUTORY BASIS -
SIGNIFICANT SUBSIDIARIES
The statutory basis financial condition of RCM, RGA Reinsurance and RGA Canada,
as of December 31, 2001 and 2000 was as follows (in thousands):
RCM RGA Reinsurance RGA Canada
------------------------- ---------------------------- ------------------------------
2001 2000 2001 2000 2001 2000
---------- ------------ ------------ ------------ ------------ -------------
Assets $ 549,359 $ 500,879 $ 5,760,814 $ 4,876,745 $ 881,996 $ 826,841
Liabilities 4,837 7,927 5,220,271 4,377,685 702,707 659,096
Total capital and surplus 544,522 492,952 540,543 499,060 179,289 167,745
The statutory basis net income (loss) of RCM, RGA Reinsurance and RGA Canada for
the periods indicated was as follows (in thousands):
2001 2000 1999
------- ------- -------
RCM $ 4,025 $ (7,348) $ --
RGA Reinsurance (84,463) 80,575 (51,283)
RGA Canada 12,285 6,646 2,087
The total capital and surplus positions of RCM, RGA Reinsurance and RGA Canada
exceed the risk based capital requirements of the applicable regulatory bodies.
RCM and RGA Reinsurance are subject to statutory provisions that restrict the
payment of dividends. They may not pay dividends in any 12-month period in
excess of the greater of the prior year's statutory operating income or 10% of
capital and surplus at the preceding year-end, without regulatory approval.
Pursuant to this calculation, RGA Reinsurance's allowable dividend without prior
approval for 2002 would be $54.1 million. However, the applicable statutory
provisions only permit an insurer to pay a shareholder dividend from unassigned
surplus. As of December 31, 2001, RGA Reinsurance had unassigned surplus of
$51.7 million. Any dividends paid by RGA Reinsurance would be paid to RCM, its
parent company, which in turn has restrictions related to its ability to pay
dividends to RGA. The assets of RCM consist primarily of its investment in RGA
Reinsurance. As of January 1, 2002, RCM could pay a maximum dividend, without
prior approval, to RGA equal to its unassigned surplus, approximately $19.3
million. The maximum amount available for dividends by RGA Canada to RGA under
the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR") is
$50.6 million. Dividend payments from other subsidiaries and joint ventures are
subject to regulations in the country of domicile.
66
Note 15 COMMITMENTS AND CONTINGENT LIABILITIES
The Company is currently a party to arbitrations that involve four separate
medical reinsurance arrangements, two arbitrations relative to the Company's
portfolio of personal accident business, and one recent lawsuit involving
aviation bodily injury carve-out reinsurance coverage. As of January 31, 2002,
the ceding companies involved in these disputes have raised claims that are
$35.4 million in excess of the amounts held in reserve by the Company. The
Company believes it has substantial defenses upon which to contest these claims,
including but not limited to misrepresentation and breach of contract by direct
and indirect ceding companies. See Note 22, "Discontinued Operations" for more
information. From time to time, the Company is subject to litigation and
arbitration related to its reinsurance business and to employment-related
matters in the normal course of its business. While it is not feasible to
predict or determine the ultimate outcome of the pending arbitration or legal
proceedings or provide reasonable ranges of potential losses, it is the opinion
of Management that their outcomes after consideration of the provisions made in
the Company's consolidated financial statements would not have a material
adverse effect on its consolidated financial position.
The Company has obtained letters of credit in favor of various affiliated and
unaffiliated insurance companies from which the Company assumes business. This
allows the ceding company to take statutory reserve credits. The letters of
credit issued by banks represent a guarantee of performance under the
reinsurance agreements. At December 31, 2001, there were approximately $33.8
million of outstanding bank letters of credit in favor of unaffiliated entities
and $4.0 million in favor of entities affiliated with the Company. Additionally,
the Company utilizes letters of credit to secure reserve credits when it
retrocedes business to its offshore subsidiaries, including RGA Americas, RGA
Barbados, and Triad Re, Ltd. As of December 31, 2001, $338.1 million in letters
of credit from various banks were outstanding between the various subsidiaries
of the Company. Fees associated with letters of credit are not fixed and are
based on the Company's ratings and the general availability of these instruments
in the marketplace.
Note 16 LONG-TERM DEBT
The Company's long-term debt consists of the following:
(in millions) 2001 2000
----------------------------- ----- -----
Senior Notes @ 6.75% due 2011 $199.8 $ --
Senior Notes @7.25% due 2006 99.4 99.3
Revolving Credit Facilities 24.2 98.0
Affiliated Term Loan - 75.0
- ----
Total $323.4 $272.3
====== ======
On March 1, 2001, RGA entered into a term loan agreement and note whereby it
borrowed $75.0 million from MetLife Credit Corp., an affiliate of MetLife, at an
interest rate of 75.5 basis points over the 30-day AA financial discount rate on
commercial paper. RGA used the proceeds to prepay and terminate a $75.0 million
term loan note with General American, also an affiliate of MetLife.
On December 19, 2001, RGA issued 6.75% Senior Notes with a face value of $200.0
million. These senior notes have been registered with the SEC. The net proceeds
from the offering were approximately $198.5 million and were used to pay down a
balance of $120 million on a revolving credit facility and to prepay and
terminate the $75 million term loan with MetLife Credit Corp. Capitalized
issuance costs were $2.1 million.
The Company has revolving credit facilities in the United States, Great Britain,
and Australia, under which it may borrow up to approximately $180 million. As of
December 31, 2001, the Company had drawn approximately $24.2 million under these
facilities at rates ranging from 4.40% to 4.97%.
Terminations of revolving credit facilities and maturities of senior notes over
the next five years, assuming the exercise of extension options, would be $24.2
million in 2005 and $100.0 million in 2006. The Company may draw up to $140.0
million on its U.S. revolving credit facility that expires in 2003.
Certain of the Company's debt agreements contain financial covenant restrictions
related to, among others, liens, the issuance and disposition of stock of
restricted subsidiaries, minimum requirements of consolidated net worth ranging
from $600 million to $700 million, and minimum rating requirements. A material
ongoing covenant default could require immediate payment of the amount due,
including principal, under the various agreements. Additionally, the Company's
debt agreements contain cross-default covenants, which would make outstanding
borrowings immediately payable in the event of a material uncured covenant
default under any of the agreements, including, but not limited to, non-payment
of indebtedness when due for amounts greater than $10 million or $25 million
depending on the agreement, bankruptcy proceedings, and any other
67
event which results in the acceleration of the maturity of indebtedness. As of
December 31, 2001, the Company had $323.4 million in outstanding borrowings
under its debt agreements and was in compliance with all covenants under those
agreements. Of that amount, approximately $24.2 million is subject to immediate
payment upon a downgrade of the Company's senior long-term debt rating, unless a
waiver is obtained from the lenders. The ability of the Company to make debt
principal and interest payments depends on the earnings and surplus of
subsidiaries, investment earnings on undeployed capital proceeds, and the
Company's ability to raise additional funds. Interest paid on debt during 2001,
2000, and 1999 totaled $18.5 million, $16.9 million, and $9.6 million,
respectively.
Note 17 ISSUANCE OF TRUST PIERS UNITS
In December 2001, RGA, through its wholly-owned trust ("RGA Capital Trust I" or
"the Trust") issued $225.0 million in Preferred Income Equity Redeemable
Securities ("PIERS") Units.
Each PIERS unit consists of:
1) A preferred security issued by RGA Capital Trust I (the Trust), having a
stated liquidation amount of $50 per unit, representing an undivided beneficial
ownership interest in the assets of the Trust, which consist solely of junior
subordinated debentures issued by RGA which have a principal amount at maturity
of $50 and a stated maturity of March 18, 2051. The preferred securities and
subordinated debentures were issued at a discount (original issue discount) to
the face or liquidation value of $14.87 per security. The securities will
accrete to their $50 face/liquidation value over the life of the security on a
level yield basis. The interest rate on the preferred securities and the
subordinated debentures is 5.75% per annum of the face amount.
2) A warrant to purchase, at any time prior to December 15, 2050, 1.2508 shares
of RGA stock at an exercise price of $50. The fair market value of the warrant
on the issuance date is $14.87 and is detachable from the preferred security.
RGA fully and unconditionally guarantees, on a subordinated basis, the
obligations of the Trust under the preferred securities. The Trust exists for
the sole purpose of issuing the PIERS units. The discounted value of the
preferred securities ($158.1 million) and the market value of the warrants
($66.9 million) at the time of issuance are reflected in the balance sheet in
the line items "Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Company"
and "Warrants," respectively.
Associated with the issuance of the PIERS units, the Company capitalized
issuance expenses of $5.4 million to "Other assets" and recorded $2.3 million
directly to "Additional paid in capital."
Note 18 SEGMENT INFORMATION
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and Europe & South
Africa. The Asia Pacific, Latin America, and Europe & South Africa operational
segments are presented herein as one reportable segment, Other International.
The U.S. operations provide traditional life, asset-intensive, and financial
reinsurance to domestic clients. Asset-intensive products primarily include
reinsurance of corporate-owned life insurance and annuities. The Canada
operations provide insurers with traditional reinsurance as well as creditor and
critical illness products. Other International operations primarily provide
traditional life reinsurance, privatized pension plan reinsurance, which the
Company ceased renewing during 2001, and reinsurance of critical illness risks
primarily in Asia Pacific, Latin America, and Europe. The operational segment
results do not include the corporate investment activity, general corporate
expenses, interest expense of RGA, and the provision for income tax expense
(benefit). In addition, the Company's discontinued accident and health
operations are not reflected in the continuing operations of the Company. The
Company measures segment performance based on profit or loss from operations
before income taxes.
The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies in Note 2. The Company measures
segment performance based on profit or loss from operations before income taxes.
There are no intersegment transactions and the Company does not have any
material long-lived assets. Investment income is allocated to the segments based
upon average assets and related capital levels deemed appropriate to support the
segment business volumes.
The Company's reportable segments are strategic business units that are
segregated by geographic region. Information related to revenues, income (loss)
before income taxes, and assets of the Company's continuing operations are
summarized below.
68
2001 2000 1999
--------- --------- ---------
For the Years ended December 31,
(in thousands)
Revenues
U.S. $1,468,739 $1,271,629 $1,143,243
Canada 247,624 237,303 221,134
Other International:
Latin America 33,681 75,944 127,791
Asia Pacific 126,653 100,985 77,329
Europe & South Africa 96,455 35,288 25,649
Corporate (4,868) 4,586 11,936
----------- ---------- ----------
Total from continuing operations $1,968,284 $1,725,735 $1,607,082
=========== ========== ==========
2001 2000 1999
--------- --------- ---------
For the Years ended December 31,
(in thousands)
Income (loss) from continuing operations before income taxes
U.S. $ 125,711 $ 167,209 $ 70,537
Canada 51,516 39,858 37,879
Other International:
Latin America (79,097) (6,535) 2,360
Asia Pacific 3,007 1,205 (6,790)
Europe & South Africa (963) (2,380) (3,854)
Corporate (34,024) (24,299) (8,028)
--------- --------- --------
Total from continuing operations $ 66,150 $ 175,058 $ 92,104
========= ========= ========
Subsidiaries in which the Company has an ownership position less than or equal
to fifty percent, but greater than or equal to twenty percent are reported on
the equity basis of accounting. The equity in the net income of subsidiaries is
not material to the results of operations or financial position of individual
segments or the Company taken as a whole.
2001 2000 1999
--------- --------- ---------
For the Years ended December 31,
(in thousands)
Interest expense
Other International:
Asia Pacific $ 867 $ 980 $ 491
Europe & South Africa 681 502 -
Corporate 16,549 16,114 10,529
-------- ------- -------
Total from continuing operations $ 18,097 $17,596 $11,020
======== ======= =======
2001 2000 1999
--------- --------- ---------
For the Years ended December 31,
(in thousands)
Depreciation and amortization
U.S. $ 236,981 $ 178,490 $ 158,135
Canada 33,048 16,794 17,215
Other International:
Latin America 12,136 5,204 (5,615)
Asia Pacific 30,681 20,170 31,930
Europe & South Africa 15,621 4,001 8,819
--------- ---------- ---------
Total from continuing operations $ 328,467 $ 224,659 $ 210,484
========= ========== =========
The table above includes amortization of the Company's deferred acquisition
costs.
69
2001 2000 1999
---------- ---------- ----------
As of December 31,
(in thousands)
Assets
U.S. $ 4,364,488 $4,001,272 $ 2,987,710
Canada 1,432,986 1,384,768 1,245,243
Other International:
Latin America 152,586 140,610 340,502
Asia Pacific 238,788 236,031 160,785
Europe & South Africa 137,499 33,214 5,791
Corporate and discontinued operations 567,998 265,965 383,712
----------- ---------- -----------
Total assets $ 6,894,345 $6,061,860 $ 5,123,743
=========== ========== ===========
Capital expenditures of each reporting segment were immaterial in the periods
noted.
During 2001, two clients accounted for more than 10% of the Canada operation's
gross premiums, consisting of C$93.3 and C$39.9 million, or 30.1% and 12.9%,
respectively, of the Canada operation's gross premiums in 2001. During 2001, two
clients, one each in Australia and Hong Kong, generated approximately $54.1
million, or 39.9% of the total gross premiums for the Asia Pacific operations.
During 2001, two clients of the Company's UK operations generated approximately
$56.2 million, or 58.4% of the total gross premiums for the Europe & South
Africa operations.
Note 19 STOCK OPTIONS
The Company adopted the RGA Flexible Stock Plan (the "Plan") in February 1993
and the Flexible Stock Plan for Directors (the "Directors Plan") in January 1997
(collectively, the "Stock Plans"). The Stock Plans provide for the award of
benefits (collectively "Benefits") of various types, including stock options,
stock appreciation rights ("SARs"), restricted stock, performance shares, cash
awards, and other stock based awards, to key employees, officers, directors and
others performing significant services for the benefit of the Company or its
subsidiaries. In general, options granted under the Plan become exercisable over
vesting periods ranging from one to eight years while options granted under the
Directors Plan become exercisable after one year. As of December 31, 2001,
shares authorized for the granting of Benefits under the Plan and the Directors
Plan totaled 4,317,530 and 112,500, respectively. Options are generally granted
with an exercise price equal to the stock's fair value at the date of grant and
expire 10 years after the date of grant. Information with respect to option
grants under the Stock Plans follow.
2001 2000 1999
-------------------------- --------------------------- --------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise price Options Exercise price Options Exercise price
--------- ---------------- --------- ---------------- --------- ----------------
BALANCE AT BEGINNING OF YEAR 2,065,731 $22.03 1,653,137 $21.41 1,536,960 $19.07
Granted 493,037 $30.05 456,407 $23.38 220,124 $35.63
Exercised (224,892) $14.00 (43,058) $12.37 (65,476) $12.10
Forfeited (7,068) $34.37 (755) $35.33 (27,600) $21.01
Impact of exchange of voting for
non-voting grants - - - - (10,871) -
---------- ---------------- ------------- ---------------- ------------- ---------------
BALANCE AT END OF YEAR 2,326,808 $24.42 2,065,731 $22.03 1,653,137 $21.41
========== ================ ============= ================ ============= ===============
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Weighted-Average Weighted-Average Weighted-Average
Range of Outstanding as Remaining Exercise Exercisable as Exercise
Exercise Prices of 12/31/2001 Contractual Life Price of 12/31/2001 Price
---------------- -------------- ---------------- ---------------- -------------- ---------------
$10.00 - $14.99 325,395 1.9 $12.10 205,862 $12.02
$15.00 - $19.99 32,522 4.0 $15.61 22,268 $15.61
$20.00 - $24.99 937,990 5.2 $21.71 579,584 $20.99
$25.00 - $29.99 687,021 8.0 $28.79 137,312 $26.68
$30.00 - $34.99 22,500 6.6 $32.03 22,500 $32.03
$35.00 - $39.99 321,380 6.8 $35.81 147,481 $35.76
----------- ---------- ---------- ------------- ----------
TOTALS 2,326,808 5.8 $24.42 1,115,007 $22.10
=========== ========== ========== ============= ==========
70
The per share weighted-average fair value of stock options granted during 2001,
2000, and 1999 was $11.87, $9.40, and $11.24 on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 2001-expected dividend yield of 0.8%, risk-free interest rate of
5.04%, expected life of 5.8 years, and an expected rate of volatility of the
stock of 35% over the expected life of the options; 2000-expected dividend yield
of 0.8%, risk-free interest rate of 6.12%, expected life of 5.8 years, and an
expected rate of volatility of the stock of 33% over the expected life of the
options; 1999-expected dividend yield of 0.8%, risk-free interest rate of 5.64%,
expected life of 5.0 years, and an expected rate of volatility of the stock of
26% over the expected life of the options.
The Company applies APB Opinion No. 25 in accounting for its Stock Plans and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under Statement of
Financial Accounting Standards 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 Statement of Financial Accounting Standards No. 123 may not
be representative of the effects on reported net income for future years.
2001 2000 1999
------------ ------------ -------------
Net income (in thousands) As reported $ 33,046 $ 77,669 $ 40,858
Pro forma $ 29,827 $ 75,105 $ 38,953
Basic earnings per share As reported $ 0.67 $ 1.57 $ 0.89
Pro forma $ 0.60 $ 1.52 $ 0.85
Diluted earnings per share As reported $ 0.66 $ 1.56 $ 0.88
Pro forma $ 0.60 $ 1.50 $ 0.84
In January 1999, the Board approved restricted stock awards of 13,500 non-voting
shares under the Company's Flexible Stock Plan. During 1999, the non-voting
restricted stock awards were converted into 13,096 shares of voting restricted
stock. Compensation expense related to restricted stock awards is being
amortized over the individual agreements vesting periods. In January 2002, the
Board approved an additional 539,342 incentive stock options at $31.91 per share
under the Company's Flexible Stock Plan.
Note 20 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations (in thousands, except per share information):
2001 2000 1999
------------ ------------- --------------
Earnings:
Income from continuing operations (numerator for
basic and diluted calculations) $39,901 $105,787 $53,045
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 49,420 49,538 45,794
Equivalent shares from outstanding stock options 485 382 452
----------- ------------ --------------
Diluted shares (denominator for diluted calculation) 49,905 49,920 46,246
Earnings per share from continuing operations:
Basic $0.81 $2.14 $1.16
Diluted $0.80 $2.12 $1.15
----------- ------------ --------------
Diluted earnings per share exclude the antidilutive effect of 5.6 million shares
that would be issued upon exercise of the outstanding Warrants, as the Company
could repurchase more shares than it issues with the exercise proceeds.
71
Note 21 COMPREHENSIVE INCOME
The following table presents the components of the Company's other comprehensive
income for the years ended December 31, 2001, 2000 and 1999 (in thousands):
FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 2001:
BEFORE-TAX AMOUNT TAX (EXPENSE) BENEFIT AFTER-TAX AMOUNT
---------------------- ---------------------- ----------------------
Foreign currency translation adjustments
Change arising during year $ 15,045 $ (5,266) $ 9,779
Unrealized gains on securities:
Unrealized holding gains arising during the year (5,193) (136) (5,329)
Less: reclassification adjustment for losses realized
in net income (68,431) 21,185 (47,246)
Net unrealized gains 63,238 (21,321) 41,917
-------- ---------- --------
Other comprehensive income $ 78,283 $ (26,587) $ 51,696
======== ========== ========
FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 2000:
BEFORE-TAX AMOUNT TAX (EXPENSE) BENEFIT AFTER-TAX AMOUNT
---------------------- ---------------------- ----------------------
Foreign currency translation adjustments
Change arising during year $ (13,855) $ 4,849 $ (9,006)
Less: reclassification adjustment for losses
realized in net income (4,689) 1,641 (3,048)
------- --------- -------
Net currency translation adjustments (9,166) 3,208 (5,958)
-------- --------- -------
Unrealized gains on securities:
Unrealized holding gains arising during the year 117,141 (46,359) 70,782
Less: reclassification adjustment for losses realized
in net income (23,962) 5,407 (18,555)
-------- --------- --------
Net unrealized gains 141,103 (51,766) 89,337
-------- --------- --------
Other comprehensive income $ 131,937 $ (48,558) $ 83,379
========= ========= ========
FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 1999:
BEFORE-TAX AMOUNT TAX (EXPENSE) BENEFIT AFTER-TAX AMOUNT
---------------------- ---------------------- ----------------------
Foreign currency translation adjustments $ 7,761 $ (2,702) $ 5,059
Unrealized gains on securities:
Unrealized holding losses arising during the year (356,096) 130,117 (225,979)
Less: reclassification adjustment for losses realized
in net income (75,308) 25,943 (49,365)
-------- ------ --------
Net unrealized losses (280,788) 104,174 (176,614)
--------- ------- ---------
Other comprehensive loss $(273,027) $ 101,472 $ (171,555)
========== ========= ===========
72
A summary of the components of net unrealized appreciation (depreciation) of
balances carried at fair value is as follows (in thousands):
2001 2000 1999
-------------- ---------------- ------------
Years Ended December 31
Change in net unrealized appreciation (depreciation) on:
Fixed maturity securities available for sale $ 63,555 $ 147,598 $ (302,486)
Other investments 1,138 1,592 7,514
Effect of unrealized appreciation (depreciation) on:
Deferred policy acquisition costs (1,266) (8,716) 14,271
Other (189) 629 (87)
------ ------- ---------
Net unrealized appreciation (depreciation) $ 63,238 $ 141,103 $ (280,788)
====== ======= =========
Note 22 DISCONTINUED OPERATIONS
Since December 31, 1998, the Company has formally reported its accident and
health division as a discontinued operation. The accident and health business
was placed into run-off, and all treaties were terminated at the earliest
possible date. Notice was given to all cedants and retrocessionaires that all
treaties were being cancelled at the expiration of their terms. If a treaty was
continuous, a written Preliminary Notice of Cancellation was given, followed by
a final notice within 90 days of the expiration date. The nature of the
underlying risks is such that the claims may take several years to reach the
reinsurers involved. Thus, the Company expects to pay claims out of existing
reserves over a number of years as the level of business diminishes.
At the time it was accepting accident and health risks, the Company directly
underwrote certain business using its own staff of underwriters. Additionally,
it participated in pools of risks underwritten by outside managing general
underwriters, and offered high level common account and catastrophic protection
coverages to other reinsurers and retrocessionaires. Types of risks covered
included a variety of medical, disability, workers compensation carve-out,
personal accident, and similar coverages.
The reinsurance markets for several accident and health risks, most notably
involving workers' compensation carve-out and personal accident business, have
been quite volatile over the past several years. In particular, certain programs
are alleged to have been inappropriately underwritten by third party managers,
and some of the reinsurers and retrocessionaires involved have alleged material
misrepresentation and non-disclosures by the underwriting managers. As a result,
there have been a significant number of claims for rescission, arbitration, and
litigation among a number of the parties involved. This has had the effect of
significantly slowing the reporting of claims between parties, as the various
outcomes of a series of arbitrations and similar actions affects the extent to
which higher level reinsurers and retrocessionaires may ultimately have exposure
to claims.
While RGA did not underwrite workers' compensation carve-out business directly,
it did offer certain high-level common account coverages to other reinsurers and
retrocessionaires. To date, no such material exposures have been identified. If
any material exposure is identified at some point in the future, based upon the
experience of others involved in these markets, any exposures will potentially
be subject to claims for rescission, arbitration, or litigation. Thus,
resolution of any disputes will likely take several years. In any event, it is
management's opinion that future developments, if any, will not materially
adversely affect the Company's financial position.
Since April of 2000, RGA Reinsurance has been involved in a dispute with a
ceding company involving certain quota share reinsurance agreements covering
first dollar medical insurance policies. The dispute was subsequently referred
to an arbitration panel pursuant to the terms of these reinsurance agreements.
In the fourth quarter of 2001, the arbitration panel issued its final award,
which required RGA Reinsurance to make a payment to the ceding company. RGA
Reinsurance incurred a charge, after utilization of existing reserves, of
approximately $10.0 million on a pre-tax basis in the fourth quarter of 2001.
As of January 31, 2002, the Company is a party to arbitrations that involve four
separate medical reinsurance arrangements. The Company expects two of these
arbitrations to be completed during 2002 and 2003. The other two medical
reinsurance arbitrations have only recently been instituted and no final hearing
date has been set. Also, there are two arbitrations under way relative to the
Company's portfolio of personal accident business. Both of these personal
accident reinsurance arbitrations have only recently been instituted and no
final hearing date has been set. Finally, there is one recent lawsuit in
progress involving aviation bodily injury carve-out reinsurance coverage in
which no final hearing date has been set. As of
73
January 31, 2002, the ceding companies involved in these disputes have raised
claims which are $35.4 million in excess of the amounts held in reserve by the
Company. The Company believes it has substantial defenses upon which to contest
these claims, including but not limited to misrepresentation and breach of
contract by direct and indirect ceding companies.
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. The reserve balance
as of December 31, 2001 and 2000 was $55.3 million and $89.1 million,
respectively. 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, anticipated outcomes of arbitrations,
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. The consolidated statements of income for all periods
presented reflect this line of business as a discontinued operation. Revenues
associated with discontinued operations, which are not reported on a gross basis
in the Company's consolidated statements of income, totaled $3.0 million, $23.7
million, and $113.6 million for 2001, 2000, and 1999.
Note 23 SALE OF SUBSIDIARIES
As of April 1, 2000, the Company reached an agreement to sell its interest in
RGA Sudamerica, S.A. and its subsidiaries, RGA Reinsurance Company Chile, S.A.
and Bhif America Seguros de Vida, S.A. The transaction closed on April 27, 2000.
The Company received approximately $26.5 million in proceeds and recorded a loss
on the sale of approximately $8.6 million. The loss included $4.7 million of
accumulated foreign currency depreciation on the Company's net investment and
$1.4 million in previously unrealized depreciation of the investment portfolio.
During 2000, the Company also sold its interest in RGA Bermuda for nominal
consideration.
Note 24 TERRORIST ATTACKS
As a result of the September 11, 2001 terrorist attacks on the United States,
the Company has received in excess of 300 claims totaling approximately $33
million as of December 31, 2001. The Company has catastrophe insurance coverage
issued by 2 insurers rated "A" or higher by A.M. Best as of December 31, 2001,
that provides benefits of up to $100 million per occurrence for claims involving
three or more deaths in a single accident. The Company pays a deductible of $1.5
million per occurrence and 20% of the first $30 million of claims reported per
occurrence. The Company expects to recover amounts in excess of its deductible
and retention under its catastrophe insurance coverages. As of December 31,
2001, the amount recoverable is expected to be approximately $22 million. This
coverage is terminable annually in August with 90 days prior notice.
Note 25 SUBSEQUENT EVENTS
Devaluation of the Argentine Peso. Since 1991, the Argentine peso has been
pegged to the U.S. dollar at a rate of one Argentine peso to one U.S. dollar. In
early December 2001, restrictions were put in place that prohibited cash
withdrawals above a certain amount and foreign money transfers with certain
limited exceptions. While the legal exchange rate remained at one Argentine peso
to one U.S. dollar, financial institutions were allowed to conduct only limited
activity due to these restrictions, and currency exchange was effectively
halted.
In January 2002, the Argentine government announced its intent to
create a dual currency system with an official exchange rate of 1.4 Argentine
pesos to one U.S. dollar for import and export transactions and a free floating
rate for other transactions. On January 11, 2002, the Argentine peso began free
floating against the U.S. dollar and closed at rates ranging from 1.6 to 1.7
Argentine pesos to one U.S. dollar. Since that time, the Argentine economy has
remained volatile and the government has periodically suspended the
free-floating exchange rates.
In accordance with applicable accounting guidance, the Company
translated its Argentine peso functional currency balances as of December 31,
2001 using a floating rate of 1.65 Argentine pesos to one U.S. dollar, which was
the closing rate on January 11, 2002. As a result of that translation, the
Company reflected a net unrealized foreign currency gain of $38.5 million, which
has been reflected in accumulated other comprehensive income (loss) on the
consolidated balance sheets as of December 31, 2001.
74
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Reinsurance Group of America, Incorporated:
We have audited the accompanying consolidated balance sheets of Reinsurance
Group of America, Incorporated and subsidiaries (the Company) as of December 31,
2001 and 2000, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 2001. Our audits also included the financial statement schedules as of
December 31, 2001 and 2000, and for the years then ended listed in the index at
Item 14. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Reinsurance Group of
America, Incorporated and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/Deloitte & Touche LLP
St. Louis, Missouri
January 31, 2002
75
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Reinsurance Group of America, Incorporated:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Reinsurance Group of America,
Incorporated and subsidiaries for the year ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Reinsurance Group of America, Incorporated and subsidiaries for the year ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.
/s/KPMG LLP
KPMG LLP
St. Louis, Missouri
January 25, 2000
76
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Reinsurance Group of America, Incorporated:
Under date of January 25, 2000, we reported on the statement of income,
stockholders' equity and cash flows of Reinsurance Group of America,
Incorporated and subsidiaries (the Company) for the year ended December 31,
1999, as contained in the 2001 annual report to stockholders. These consolidated
financial statements and our report thereon appear in the annual report on Form
10-K for the year 2001. In connection with our audit of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules as listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audit.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/KPMG LLP
KPMG LLP
St. Louis, Missouri
January 25, 2000
77
Report of Management Responsibility for Financial Statements
The consolidated balance sheets of Reinsurance Group of America,
Incorporated and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, cash flows and stockholders' equity for the
years ended December 31, 2001, 2000 and 1999, have been prepared by management,
which is responsible for their integrity and objectivity. The statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America and include some amounts that are based upon
management's best estimates and judgments. The financial information contained
elsewhere in this annual report is consistent with that contained in the
financial statements.
Management is responsible for establishing and maintaining a system of
internal control designed to provide reasonable assurance as to the integrity
and reliability of financial reporting. The concept of reasonable assurance is
based on the recognition that there are inherent limitations in all systems of
internal control, and that the cost of such systems should not exceed the
benefits derived therefrom. A professional staff of internal auditors reviews,
on an ongoing basis, the related internal control system design, the accounting
policies and procedures supporting this system, and compliance therewith.
Management believes this system of internal control effectively meets its
objective of reliable financial reporting.
In connection with annual audits, independent certified public
accountants perform an audit in accordance with auditing standards generally
accepted in the United States of America, which includes the consideration of
the system of internal control to the extent necessary to form an independent
opinion on the financial statements prepared by management.
The Board of Directors, through its Audit Committee, which is composed
solely of directors who are not employees of the Company, is responsible for
overseeing the integrity and reliability of the Company's accounting and
financial reporting practices and the effectiveness of its system of internal
controls. The independent certified public accountants and internal auditors
meet regularly with, and have access to, this committee, with and without
management present, to discuss the results of their audit work.
/s/ A. Greig Woodring /s/ Jack B. Lay
A. Greig Woodring Jack B. Lay
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
/s/ Todd C. Larson
Todd C. Larson
Senior Vice President, Controller and Treasurer
78
Quarterly Data (Unaudited)
Years Ended December 31
(in thousands, except per share data)
First Second Third Fourth
------------------ ----------------- ----------------- -----------------
2001
Revenues from continuing operations $ 493,655 $ 465,527 $ 458,116 $ 550,986
Revenues from discontinued operations $ (428) $ 1,399 $ 635 $ 1,411
Income (loss) from continuing operations before income taxes $ 35,682 $ 50,138 $ 12,690 $ (32,360)
Income (loss) from continuing operations $ 21,642 $ 30,514 $ 8,985 $ (21,240)
Loss from discontinued operations -- -- -- (6,855)
----------- ----------- ----------- -----------
Net income (loss) $ 21,642 $ 30,514 $ 8,985 $ (28,095)
Total outstanding common shares - end of period 49,391 49,405 49,475 49,527
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.44 $ 0.62 $ 0.18 $ (0.43)
Discontinued operations -- -- -- (0.14)
----------- ----------- ----------- -----------
Net Income (loss) $ 0.44 $ 0.62 $ 0.18 $ (0.57)
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.43 $ 0.61 $ 0.18 $ (0.43)
Discontinued operations -- -- -- (0.14)
----------- ----------- ----------- -----------
Net Income $ 0.43 $ 0.61 $ 0.18 $ (0.57)
Dividends per share on common stock $ 0.06 $ 0.06 $ 0.06 $ 0.06
Market price of common stock
Quarter end $ 38.34 $ 37.77 $ 34.05 $ 33.28
Common stock price, high 41.93 39.53 39.36 36.23
Common stock price, low 29.23 32.33 27.95 27.90
First Second Third Fourth
----------- ----------- ----------- -----------
2000
Revenues from continuing operations $ 402,134 $ 419,275 $ 402,362 $ 501,964
Revenues from discontinued operations $ 18,196 $ 1,358 $ 2,837 $ 1,267
Income from continuing operations before income taxes $ 39,552 $ 39,494 $ 50,381 $ 45,631
Income from continuing operations $ 23,904 $ 21,410 $ 31,370 $ 29,103
Loss from discontinued operations (3,482) (2,506) (2,261) (19,869)
----------- ----------- ----------- -----------
Net income $ 20,422 $ 18,904 $ 29,109 $ 9,234
Total outstanding common shares - end of period 49,869 49,335 49,258 49,294
BASIC EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.48 $ 0.43 $ 0.64 $ 0.59
Discontinued operations (0.07) (0.05) (0.05) (0.40)
----------- ----------- ----------- -----------
Net Income $ 0.41 $ 0.38 $ 0.59 $ 0.19
DILUTED EARNINGS (LOSS) PER SHARE
Continuing operations $ 0.48 $ 0.43 $ 0.63 $ 0.58
Discontinued operations (0.07) (0.05) (0.04) (0.39)
----------- ----------- ----------- ----------
Net Income $ 0.41 $ 0.38 $ 0.59 $ 0.19
Dividends per share on common stock $ 0.06 $ 0.06 $ 0.06 $ 0.06
Market price of common stock
Quarter end $ 23.81 $ 30.13 $ 34.25 $ 35.50
Common stock price, high 30.25 35.13 34.50 38.38
Common stock price, low 15.38 22.00 26.25 31.88
Reinsurance Group of America, Incorporated common stock is traded on the New
York Stock Exchange (NYSE) under the symbol "RGA". There were 106 stockholders
of record of RGA's common stock on March 1, 2002.
79
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company is incorporated by
reference to the Proxy Statement under the captions "Nominees and Continuing
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance." The
Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the
end of the Company's fiscal year.
The following is certain additional information concerning each
executive officer of the Company who is not also a director. With the exception
of Mr. Watson and Mr. St-Amour, each individual holds the same position at RGA
and RGA Reinsurance.
David B. Atkinson, 48, became President and Chief Executive Officer of
RGA Reinsurance Company in January 1998. Mr. Atkinson also serves as Executive
Vice President and Chief Operating Officer of RGA, since January 1997. He served
as Executive Vice President and Chief Operating Officer, U.S. Operations of the
Company from 1994 to 1996 and Executive Vice President and Chief Financial
Officer from 1993 to 1994. Prior to the formation of RGA, Mr. Atkinson served as
Reinsurance Operations Vice President of General American. Mr. Atkinson joined
General American in 1987 as Second Vice President and was promoted to Vice
President later the same year. Prior to joining General American, he served as
Vice President and Actuary of Atlas Life Insurance Company from 1981 to 1987, as
Chief Actuarial Consultant at Cybertek Computer Products from 1979 to 1981, and
in a variety of actuarial positions with Occidental Life Insurance Company of
California from 1975 to 1979. Mr. Atkinson also serves as a director and officer
of certain RGA subsidiaries.
Todd C. Larson, 38, is Senior Vice President, Controller and Treasurer.
Mr. Larson previously was Assistant Controller at Northwestern Mutual Life
Insurance Company from 1994 through 1995 and prior to this position he was an
accountant for KPMG LLP from 1985 through 1993 (most recently as a Senior
Manager).
Jack B. Lay, 47, is Executive Vice President and Chief Financial
Officer. Prior to joining the Company in 1994, Mr. Lay served as Second Vice
President and Associate Controller at General American. In that position, he was
responsible for all external financial reporting as well as merger and
acquisition support. Before joining General American in 1991, Mr. Lay was a
partner in the financial services practice with the St. Louis office of KPMG
LLP. Mr. Lay also serves as a director and officer of certain RGA subsidiaries.
Andre St-Amour, 51, is Executive Vice President and Chief International
Operating Officer of RGA, and President and Chief Executive Officer of RGA
Canada. Mr. St-Amour joined RGA Canada in 1992 when the company acquired the
reinsurance business of National Re. Mr. St-Amour served as Executive Vice
President, Life Division, of National Re from 1989 to 1991. Prior to joining
National Re, Mr. St-Amour served in a variety of actuarial positions with
Canadian National Railways and Laurentian Mutual Insurance Company.
Paul A. Schuster, 48, is Executive Vice President, U. S. Division. He
served as Senior Vice President, U.S. Division from January 1997 to December
1998. Mr. Schuster was Reinsurance Actuarial Vice President in 1995 and Senior
Vice President & Chief Actuary of the Company in 1996. Prior to the formation of
RGA, Mr. Schuster served as Second Vice President and Reinsurance Actuary of
General American. Prior to joining General American in 1991, he served as Vice
President and Assistant Director of Reinsurance Operations of the ITT Lyndon
Insurance Group from 1988 to 1991 and in a variety of actuarial positions with
General Reassurance Corporation from 1976 to 1988.
James E. Sherman, 48, is Senior Vice President, General Counsel and
Secretary of the Company. Mr. Sherman joined General American in 1983, and
served as Associate General Counsel of General American since 1995. Mr. Sherman
is an officer of RCM as well as RGA Reinsurance.
80
Graham S. Watson, 52, is Executive Vice President and Chief Marketing
Officer of RGA. Upon joining RGA in 1996, Mr. Watson was President and CEO of
RGA Australia. Prior to joining RGA in 1996, Mr. Watson was the President and
CEO of Intercedent Limited in Canada and has held various positions of
increasing responsibility for other life insurance companies. Mr. Watson also
serves as a director and officer of certain RGA subsidiaries.
A. Greig Woodring, 50, is President, Chief Executive Officer, and
director. As President and CEO of the Company, Mr. Woodring is also an executive
officer of General American Life Insurance Company. Prior to the formation of
RGA, Mr. Woodring had headed General American's reinsurance business since 1986.
He also serves as a director and officer of a number of the Company's
subsidiaries. Before joining General American Life Insurance Company, Mr.
Woodring was an actuary at United Insurance Company.
Item 11. EXECUTIVE COMPENSATION
Information on this subject is found in the Proxy Statement under the
captions "Executive Compensation" and "Nominees and Continuing Directors" and is
incorporated herein by reference. The proxy Statement will be filed pursuant to
Regulation 14A within 120 days of the end of the Company's fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information of this subject is found in the Proxy Statement under the
captions "Common Stock Ownership of Certain Beneficial Owners" and "Nominees and
Continuing Directors" and is incorporated herein by reference. The Proxy
Statement will be filed pursuant to Regulations 14A within 120 days of the end
of the Company's fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on this subject is found in the Proxy Statement under the
caption "Certain Relationships and Related Transactions" and incorporated herein
by reference. The Proxy Statement will be filed pursuant to Regulation 14A
within 120 days of the end of the Company's fiscal year.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated statements are included within Item 8 under the
following captions:
Index Page
----- ----
Consolidated Balance Sheets 47
Consolidated Statements of Income 48
Consolidated Statements of Stockholders' Equity 49
Consolidated Statements of Cash Flows 50
Notes to Consolidated Financial Statements 51-74
Independent Auditors' Reports 75-77
Quarterly Data (unaudited) 79
2. Schedules, Reinsurance Group of America, Incorporated and Subsidiaries
Schedule Page
-------- ----
I Summary of Investments 83
II Condensed Financial Information of the Registrant 84
III Supplementary Insurance Information 85-86
IV Reinsurance 87
V Valuation and Qualifying Accounts 88
81
All other schedules specified in Regulation S-X are omitted for the reason that
they are not required, are not applicable, or that equivalent information has
been included in the consolidated financial statements, and notes thereto,
appearing in Item 8.
3. Exhibits
See the Index to Exhibits on page 90.
(b) The following report on Form 8-K was filed with the SEC during the three
months ended December 31, 2001:
The Company filed a Current Report on Form 8-K on December 10, 2001, dated as of
December 10, 2001, to comment under Item 5 on its intent to offer approximately
$225 million of Trust Preferred Income Equity Redeemable Securities (PIERS)
units and $200 million aggregate principal amount of its Senior Notes due 2011.
The Company additionally reported under Item 5 the status of its Argentine
Pension business, accident and health arbitrations, and potential exposure to
Enron Corp.
The Company filed a Current Report on Form 8-K on December 14, 2001,
dated as of December 14, 2001, to comment under Item 5 that in connection with
Rule 5b-3 under the Trust Indenture Act of 1939, The Bank of New York is
qualified to act as Trustee under the Senior Indenture between Reinsurance Group
of America, Incorporated and The Bank of New York, as Trustee, a form of which
was filed as Exhibit 4.1 to the Company's Registration Statement on S-3, as
amended (File No. 333-55304). A copy of the Form T-1 regarding such
qualification prepared by The Bank of New York was filed therewith as Exhibit
25.1.
The Company filed a Current Report on Form 8-K on December 18, 2001,
dated as of December 18, 2001, to comment under Item 5 that RGA and RGA Capital
Trust I entered into an underwriting agreement to issue and sell to Lehman
Brothers Inc. and Banc of America Securities LLC 4,500,000 units of Preferred
Income Equity Redeemable Securities (the "Units"). Also on December 12, 2001,
the Company entered into an underwriting agreement with Banc of America
Securities LLC and Lehman Brothers Inc., as lead underwriters, to issue and sell
to the underwriters $200 million principal amount of the Company's 6.75% Senior
Notes due 2011 (the "Senior Notes"). In connection with the offering, the
Company also announced it would issue $231,958,800 aggregate principal amount of
its 5.75% Junior Subordinated Deferrable Interest Debentures due 2051 to RGA
Capital Trust I. Various related documents are filed thereto as exhibits.
82
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001
(in millions)
Amount at
Which
Shown in
Fair the Balance
Type of Investment Cost Value (3) Sheets (1)(3)
------------------ ----- ---------- -------------
Fixed maturities:
Bonds:
United States government and government
agencies and authorities $ 165.4 $ 165.3 $ 165.3
Foreign governments (2) 512.1 557.7 557.7
Public utilities 260.9 264.4 264.4
All other corporate bonds 1,827.0 1,780.9 1,780.9
------- ------- -------
Total fixed maturities 2,765.4 2,768.3 2,768.3
------- ------- -------
Equity securities 14.2 XXX 14.2
Mortgage loans on real estate 163.9 164.9 163.9
Policy loans 774.7 XXX 774.7
Funds withheld at interest 1,142.6 1,133.80 1,142.6
Short-term investments 140.6 XXX 140.6
Preferred stock 75.7 75.9 75.9
Other invested assets 4.4 8.2 8.2
--- ---
Total investments $5,081.5 XXX $5,088.4
======== ========
(1) Fixed maturities are classified as available for sale and carried at
fair value.
(2) The following exchange rates have been used to convert foreign
securities to U.S. dollars:
Canadian dollar $0.6277/C$1.00
Argentina peso $0.6061/A$1.00
Australian dollar $0.5094/$1.00 Aus
Great British Pound $1.4546/(pound)1.00
(3) Fair value represents the closing sales prices of marketable
securities. Estimated fair values for private placement securities,
included in all other corporate bonds, are based on the credit quality
and duration of marketable securities deemed comparable by the Company,
which may be of another issuer.
83
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(IN THOUSANDS)
2001 2000 1999
--------- --------- ----------
CONDENSED BALANCE SHEETS
Assets:
Fixed maturity securities (available for sale) $ 322 $ 580
Short-term investments 10,502 7,485
Cash and cash equivalents 136,354 1,091
Investment in subsidiaries 1,103,589 883,988
Other assets 234,586 231,830
---------- -----------
Total assets $1,485,353 $ 1,124,974
========== ===========
Liabilities and stockholders' equity:
Long-term debt $ 464,006 $ 254,003
Other liabilities 15,759 8,048
Stockholders' equity 1,005,588 862,923
---------- -----------
Total liabilities and stockholders' equity $1,485,353 $ 1,124,974
========== ===========
CONDENSED STATEMENTS OF INCOME
Interest income $ 16,879 $ 14,334 $ 7,844
Dividend from subsidiary -- -- 50,000
Realized investments losses, net -- (8,981) (7,733)
Operating expenses (2,757) (1,985) (3,676)
Interest expense (16,977) (16,458) (10,779)
---------- ---------- ---------
(Loss) income before income tax and undistributed earnings of (2,855) (13,090) 35,656
subsidiaries
Income tax benefit 4,158 (472) (5,478)
---------- ---------- ---------
Net (loss) income before undistributed earnings of subsidiaries (7,013) (12,618) 41,134
Equity in undistributed earnings of subsidiaries 40,059 90,287 (276)
---------- ---------- ---------
Net income $ 33,046 $ 77,669 $ 40,858
========== ========== =========
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 33,046 $ 77,669 $ 40,858
Equity in earnings (losses) of subsidiaries (40,059) (90,287) 276
Other, net 2,782 1,276 5,290
---------- ---------- ---------
Net cash (used in) provided by operating activities (4,231) (11,342) 46,424
---------- ---------- ---------
Investing activities:
Proceeds from sale of subsidiaries -- 26,509 --
Purchase of business - net of cash received -- (21,850) --
Sales of fixed maturity securities available for sale -- -- 33,146
Change in short-term investments (3,017) 13,813 (20,448)
Purchases of subsidiary debt securities -- -- (100,000)
Capital contributions to subsidiaries (123,346) (58,375) (144,886)
---------- ---------- ---------
Net cash used in investing activities (126,363) (39,903) (232,188)
---------- ---------- ---------
Financing activities:
Dividends to stockholders (11,855) (11,900) (9,981)
Reissuance (acquisition) of treasury stock, net 4,684 (19,173) 229
Proceeds from long-term debt borrowings, net 206,113 80,000 75,000
Proceeds from warrant / private placement offering 66,915 -- 124,920
---------- ---------- ---------
Net cash provided by financing activities 265,857 48,927 190,168
---------- ---------- ---------
Net change in cash and cash equivalents 135,263 (2,318) 4,404
Cash and cash equivalents at beginning of year 1,091 3,409 (995)
---------- ---------- ---------
Cash and cash equivalents at end of year $ 136,354 $ 1,091 $ 3,409
========== ========== =========
84
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
As of December 31,
---------------------------------------------------------------------------------
Future Policy Benefits and
Deferred Policy Interest Sensitive Other Policy Claims and
Acquisition Costs Contract Liabilities Benefits Payable
-------------------------- ---------------------------- -------------------------
Assumed Ceded Assumed Ceded Assumed Ceded
------------ ------------- --------------- ------------ ----------- -------------
1999
U.S. operations $360,934 $(36,409) $2,503,361 $(210,387) $361,725 $(37,012)
Canada operations 71,394 - 652,609 (88,956) 70,276 (41,492)
Latin America operations 21,388 - 170,937 - 79,039 (5,240)
Asia Pacific operations 53,893 - 58,949 (319) 19,438 -
Europe & South Africa operations 7,917 (728) 10,261 (651) 9,888 -
Discontinued operations - - 19,874 (1,936) 41,700 (5,870)
------------ ------------- --------------- ------------ ----------- -------------
Total $515,526 $(37,137) $3,415,991 $(302,249) $582,066 $(89,614)
======== ========= ========== ========== ======== =========
2000
U.S. operations $464,773 $(67,512) $3,204,812 $(201,705) $333,453 $(25,050)
Canada operations 113,198 (22,972) 683,027 (59,056) 62,478 (44,257)
Latin America operations 29,216 (1) 32,293 334 72,543 (1,782)
Asia Pacific operations 81,518 (1,541) 72,662 (316) 31,020 (985)
Europe & South Africa operations 26,613 (1,817) 18,425 (201) 13,262 (7)
Discontinued operations - - 51,032 (1,837) 42,667 (2,801)
------------ ------------- --------------- ------------ ----------- -------------
Total $715,318 $(93,843) $4,062,251 $(262,781) $555,423 $(74,882)
======== ========= ========== ========== ======== =========
2001
U.S. operations $499,892 $(52,819) $3,504,098 $(197,836) $418,595 $(42,372)
Canada operations 139,144 (41,834) 726,812 (66,272) 64,076 (34,378)
Latin America operations 28,024 54 38,317 1,029 73,248 188
Asia Pacific operations 103,098 (6,724) 95,718 (4,699) 35,286 (3,780)
Europe & South Africa operations 131,551 (67) 34,686 7,349 27,327 3,927
Discontinued operations - - 27,410 (1,695) 31,550 (1,966)
------------ ------------- --------------- ------------ ----------- -------------
Total $901,709 $(101,390) $4,427,041 $(262,124) $650,082 $(78,381)
======== ========== ========== ========== ======== =========
85
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION (CONTINUED)
(IN THOUSANDS)
Year ended December 31,
-----------------------------------------------------------------------------
Net Benefits, Other
Premium Investment Claims and Amortization Operating
Income Income Losses of DAC Expenses
-------------- ------------- ---------------- --------------- ---------------
1999
U.S. operations $950,434 $250,458 $(891,232) $(142,216) $(39,258)
Canada operations 162,482 52,767 (155,993) (13,337) (13,925)
Latin America operations 104,167 23,753 (112,914) 5,826 (18,343)
Asia Pacific operations 73,887 2,182 (46,785) (28,926) (8,408)
Europe & South Africa operations 24,668 775 (13,305) (8,794) (7,404)
Corporate - 10,345 - - (19,964)
-------------- ------------- ---------------- --------------- ---------------
Total $1,315,638 $340,280 $(1,220,229) $(187,447) $(107,302)
========== ======== ============ ========== ==========
2000
U.S. operations $1,038,872 $228,652 $(895,850) $(155,558) $(53,012)
Canada operations 176,326 61,950 (172,180) (11,181) (14,084)
Latin America operations 64,897 19,782 (63,773) (2,197) (16,509)
Asia Pacific operations 94,282 4,628 (56,377) (15,788) (27,615)
Europe & South Africa operations 29,690 2,056 (20,151) (2,793) (14,724)
Corporate (1) 9,437 1 - (28,886)
-------------- ------------- ---------------- --------------- ---------------
Total $1,404,066 $326,505 $(1,208,330) $(187,517) $(154,830)
========== ======== ============ ========== ==========
2001
U.S. operations $1,222,922 $243,988 $(1,091,081) $(205,314) $(46,633)
Canada operations 173,269 65,006 (173,098) (26,625) 3,615
Latin America operations 51,069 14,684 (89,311) (9,102) (14,365)
Asia Pacific operations 119,702 3,935 (75,595) (24,514) (23,537)
Europe & South Africa operations 94,800 1,536 (59,429) (10,177) (27,812)
Corporate - 11,410 - - (29,156)
-------------- ------------- ---------------- --------------- ---------------
Total $1,661,762 $340,559 $(1,488,514) $(275,732) $(137,888)
========== ======== ============ ========== ==========
86
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE IV - REINSURANCE
(IN MILLIONS)
As of or for the Year ended December 31,
-------------------------------------------
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
------ --------- --------- ------ ------------
1999
Life insurance in force $81 $36,569 $446,943 $410,455 108.89%
Premiums
U.S. operations $2.7 $207.8 $1,155.5 $950.4 121.58%
Canada operations - 56.6 219.1 162.5 134.83%
Latin America operations 38.4 1.4 67.1 104.1 64.46%
Asia Pacific operations - 2.7 76.6 73.9 103.65%
Europe & South Africa operations 0.1 0.7 25.3 24.7 102.43%
----- ------ -------- --------
Total $41.2 $269.2 $1,543.6 $1,315.6 117.33%
===== ====== ======== ======== =======
2000
Life insurance in force $86 $78,226 $545,950 $467,810 116.70%
Premiums
U.S. operations $2.8 $172.0 $1,208.1 $1,038.9 116.29%
Canada operations - 41.7 218.0 176.3 123.65%
Latin America operations 23.2 1.2 42.9 64.9 66.10%
Asia Pacific operations - 6.4 100.7 94.3 106.79%
Europe & South Africa operations 0.1 0.8 30.4 29.7 102.36%
----- ------ -------- --------
Total $26.1 $222.1 $1,600.1 $1,404.1 113.96%
===== ====== ======== ======== =======
2001
Life insurance in force $73 $117,748 $615,990 $498,315 123.61%
Premiums
U.S. operations $2.9 $143.8 $1,363.8 $1,222.9 111.52%
Canada operations - 26.9 200.2 173.3 115.52%
Latin America operations 8.4 0.8 43.5 51.1 85.13%
Asia Pacific operations - 15.9 135.6 119.7 113.28%
Europe & South Africa operations
0.1 1.4 96.1 94.8 101.37%
----- ------ -------- --------
Total $11.4 $188.8 $1,839.2 $1,661.8 110.68%
===== ====== ======== ======== =======
87
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31,
(in millions)
Balance at Charges to Charged to Other
Beginning of Costs Accounts- Deductions- Balance at End
Description Period and Expenses Describe Describe of Period
--------------------------- --------------- ------------------ -------------------- ----------------- ----------------
1999
Mortgage loan valuation
allowance $0.7 - - - $0.7
==== === === === ===
2000
Mortgage loan valuation
allowance $0.7 - - 0.5 $0.2
==== === === === ===
2001
Mortgage loan valuation
allowance $0.2 - - 0.2 $0.0
==== === === === ===
The deductions during 2001 and 2000 represent normal activity associated with
the Company's underlying mortgage loan portfolio.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
----------------------
A. Greig Woodring
President and Chief Executive Officer
Date: March 18, 2002
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of
the registrant and in the capacities indicated on March 15, 2000.
Signatures Title
---------- -----
/s/ Stewart G. Nagler March 18, 2002 * Chairman of the Board and Director
------------------------------------------------------
Stewart G. Nagler
/s/ A. Greig Woodring March 18, 2002 President, Chief Executive
------------------------------------------------------ Officer, and Director
A. Greig Woodring (Principal Executive Officer)
/s/ Mary Ann Brown March 18, 2002 * Director
------------------------------------------------------
Mary Ann Brown
/s/ J. Cliff Eason March 18, 2002 * Director
------------------------------------------------------
J. Cliff Eason
/s/ Stuart I. Greenbaum March 18, 2002 * Director
-----------------------------------------------------
Stuart I. Greenbaum
/s/ Alan C. Henderson March 18, 2002 * Director
-----------------------------------------------------
Alan C. Henderson
/s/ Terence I. Lennon March 18, 2002 * Director
------------------------------------------------------
Terence I. Lennon
/s/ Richard A. Liddy March 18, 2002 * Director
------------------------------------------------------
Richard A. Liddy
/s/ William A. Peck, M.D. March 18, 2002 * Director
------------------------------------------------------
William A. Peck, M.D.
/s/ Joseph A. Reali March 18, 2002 * Director
------------------------------------------------------
Joseph A. Reali
/s/ H. Edwin Trusheim March 18, 2002 * Director
------------------------------------------------------
H Edwin Trusheim
/s/ Jack B. Lay March 18, 2002 * Executive Vice President and Chief
------------------------------------------------------ Financial Officer (Principal Financial
Jack B. Lay and Accounting Officer)
By: /s/ Jack B. Lay March 18, 2002
------------------------------------------------------
Jack B. Lay Attorney-in-fact
89
INDEX TO EXHIBITS
Source
Exhibit (See footnotes
Number Description that follow)
------- ----------- ---------------
2.1 Reinsurance Agreement dated as of December 31, 1992 2
between General American Life Insurance Company
("General American") and General American Life
Reinsurance Company of Canada ("RGA Canada")
2.2 Retrocession Agreement dated as of 2
July 1, 1990 between General American and
The National Reinsurance Company of Canada,
as amended between RGA Canada and General American
on December 31, 1992
2.3 Reinsurance Agreement dated as of 2
January 1, 1993 between RGA Reinsurance
Company ("RGA Reinsurance", formerly "Saint Louis
Reinsurance Company") and General American
3.1 Restated Articles of Incorporation of Reinsurance 1
Group of America, Incorporated ("RGA"), as amended
3.2 Bylaws of RGA, as amended, incorporated by reference to
Exhibit 3.2 to Form 10-Q for the quarter ended September 30,
2000 (No. 1-11848), filed on November 13, 2000
3.3 Certificate of Designations for Series A Junior 4
Participating Preferred Stock (included as Exhibit A
to Exhibit 4.2)
4.1 Form of Specimen Certificate for Common Stock of RGA 2
4.2 Rights Agreement dated as of May 4, 1993, between RGA 4
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent
4.3 Second Amendment to Rights Agreement, dated as of 9
April 22, 1998, between RGA and ChaseMellon Shareholder
Services, L.L.C. (as successor to Boatmen's Trust Company),
as Rights Agent
4.4 Third Amendment to Rights Agreement dated as of
August 12, 1999, between Reinsurance Group of
America, Incorporated and ChaseMellon Shareholder
Services, L.L.C. (as successor to Boatmen's Trust
Company), as Rights Agent, incorporated by
reference to Exhibit 4.4 to Form 8-K dated August
10, 1999 (No. 1-11848), filed August 25, 1999
4.5 Fourth Amendment to Rights Agreement dated as of
August 23, 1999, between Reinsurance Group of
America, Incorporated and ChaseMellon Shareholder
Services, L.L.C. (as successor to Boatmen's Trust
Company), as Rights Agent, incorporated by
reference to Exhibit 4.1 to Form 8-K dated August
26, 1999 (No. 1-11848), filed September 10, 1999
90
Source
Exhibit (See footnotes
Number Description that follow)
------ ----------- ---------------
4.6 Form of Unit Agreement among the Company and the Trust, as Issuers and The Bank of
New York, as Agent, Warrant Agent and Property Trustee, incorporated by reference
to Exhibit 4.1 to Registration Statement on Form 8-A12B (No. 1-11848) filed on
December 18, 2001
4.7 Form of Global Unit Certificate, incorporated by reference to Exhibit A of Exhibit
4.6 of this Report, incorporated by reference to Registration Statement on Form
8-A12B (No. 1-11848) filed on December 18, 2001
4.8 Form of Warrant Agreement between the Company and the Bank of New York, as Warrant
Agent, incorporated by reference to Exhibit 4.3 to Registration Statement on Form
8-A12B (No. 1-11848) filed on December 18, 2001
4.9 Form of Warrant Certificate, incorporated by reference to Exhibit A of Exhibit
4.8 of this Report
4.10 Trust Agreement of RGA Capital Trust I, incorporated by reference to Exhibit 4.11
to the Registration Statements on Form S-3 (File Nos. 333.55304, 333-55304-01 and
333-55304-02), previously filed with the SEC on February 9, 2001, as amended
(the "Original S-3")
4.11 Form of Amended and Restated Trust Agreement of RGA Capital Trust I, incorporated
by reference to Exhibit 4.7 to Registration Statement on Form 8-A12B (No. 1-11848)
filed on December 18, 2001
4.12 Form of Preferred Security Certificate for the Trust, included as Exhibit A to
Exhibit 4.11 to this Report
4.13 Form of Remarketing Agreement between the Company, as Guarantor, and The Bank of
New York, as Guarantee Trustee, incorporated by reference to Exhibit 4.12 to
Registration Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001
4.14 Form of Junior Subordinated Indenture, incorporated by reference to Exhibit 4.3 of
the Original S-3
4.15 Form of First Supplemental Junior Subordinated Indenture between the Company and
The Bank of New York, as Trustee, incorporated by reference to Exhibit 4.10 to
Registration Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001
4.16 Form of Guarantee Agreement between the Company, as Guarantor, and The Bank of New
York, as Guarantee Trustee, incorporated by reference to Exhibit 4.11 to Registration
Statement on Form 8-A12B (No. 1-11848) filed on December 18, 2001
4.17 Form of Senior Indenture between Reinsurance Group of America, Incorporated and The
Bank of New York, as Trustee, incorporated by reference to Exhibit 4.1 to the
Original S-3
4.18 Form of First Supplemental Indenture between Reinsurance Group of America,
Incorporated and The Bank of New York, as Trustee, relating to the 6 - 3/4 Senior
Notes Due 2011, incorporated by reference to Exhibit 4.8 to Form 8-K dated December
12, 2001 (No. 1-11848), filed December 18, 2001
10.1 Marketing Agreement dated as of January 1, 1993 3
between RGA Reinsurance and General American
91
Source
Exhibit (See footnotes
Number Description that follow)
------ ----------- ---------------
10.2 Administrative Services Agreement dated as of 3
January 1, 1993 between RGA and General American
10.3 Administrative Services Agreement dated as of January 1, 1993 3
between RGA Reinsurance and General American
10.4 Management Agreement dated as of January 1, 1993 2*
between RGA Canada and General American
10.5 Standard Form of General American Automatic Agreement 2
10.6 Standard Form of General American Facultative Agreement 2
10.7 Standard Form of General American Automatic and 2
Facultative YRT Agreement
10.8 Registration Rights Agreement dated as of April 15, 1993 2
between RGA and General American
10.9 RGA Reinsurance Management Incentive Plan, as amended 5*
and restated effective November 1, 1996
10.10 RGA Reinsurance Management Deferred 2*
Compensation Plan (ended January 1, 1995)
10.11 RGA Reinsurance Executive Deferred 2*
Compensation Plan (ended January 1, 1995)
10.12 RGA Reinsurance Executive Supplemental 2*
Retirement Plan (ended January 1, 1995)
10.13 RGA Reinsurance Augmented Benefit Plan 2*
(ended January 1, 1995)
10.14 RGA Flexible Stock Plan as amended and restated
effective November 1, 1996 5*
10.15 Form of Directors' Indemnification Agreement 2
10.16 RGA Executive Performance Share Plan as amended
and restated effective November 1, 1996 5*
10.17 RGA Flexible Stock Plan for Directors 6*
10.18 Employment Agreement dated April 6, 1992 between RGA
Canada and Andre St-Amour 7*
10.19 Restricted Stock Award to A. Greig Woodring dated
January 28, 1998 8*
92
Source
Exhibit (See footnotes
Number Description that follow)
------ ----------- ---------------
10.20 Credit Agreement dated as of May 24, 2000 between
Reinsurance Group of America, Incorporated, as
borrower, the financial institutions listed on the
signature pages thereof, The Bank of New York, as
Administrative Agent, Bank of America, N.A., as
Syndication Agent, Fleet National Bank, as
Documentation Agent and Royal Bank of Canada, as
Co-Agent, incorporated by reference to Exhibit 10.1
to Form 10-Q for the quarter ended June 30, 2000
(No. 1-11848), filed August 11, 2000.
16.1 Letter from KPMG LLP pursuant to Item 304 of Regulation
S-K, incorporated by reference to Form 8-K (No. 1-11848)
filed on April 6, 2000, at the corresponding exhibit
21.1 Subsidiaries of RGA __
23.1 Consent of Deloitte & Touche LLP __
23.2 Consent of KPMG LLP __
24.1 Powers of Attorney for Ms. Brown and Messrs. Eason, Greenbaum,
Henderson, Lennon, Liddy, Nagler, Peck, Reali, and Trusheim __
1 Documents incorporated by reference to Form 10-Q for the
quarter ended September 30, 1999 (No. 1-11848) filed on
November 12, 1999 at the corresponding exhibit.
2 Documents incorporated by reference to Amendment No. 1 to
Registration Statement on Form S-1 (No. 33-58960), filed on 14
April 1993 at the corresponding exhibit.
3 Documents incorporated by reference to Amendment No. 2 to
Registration Statement Form S-1 (No. 33-58960), filed on 29
April 1993 at the corresponding exhibit.
4 Documents incorporated by reference to Amendment No. 1 to Form
10-Q for the quarter ended March 31, 1997 (No. 1-11848) filed
on 21 May 1997 at the corresponding exhibit.
5 Documents incorporated by reference to Form 10-K for the year
ended December 31, 1996 (No. 1-11848) filed on 24 March 1997
at the corresponding exhibit.
6 Documents incorporated by reference to Registration Statement
on Form S-8 (No. 333-27167) filed on 15 May 1997 at the
corresponding exhibit.
7 Documents incorporated by reference to Form 10-K for the year
ended December 31, 1997 (No. 1-11848) filed on 25 March 1998
at the corresponding exhibit.
8 Documents incorporated by reference to Form 10-Q/A Amendment
No. 1 for the quarter ended March 31, 1998 (No. 1-11848)
filed on 14 May 1998 at the corresponding exhibit.
9 Documents incorporated by reference to Registration Statement
on Form S-3 (No. 333-51777) filed on 4 June 1998 at the
corresponding exhibit.
* Represents a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to Item 14(c)
of this Part IV.
93