UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: August 25, 2003
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact Name of Registrant as Specified in its Charter)
MISSOURI 1-11848 43-1627032
(State or Other Jurisdiction of (Commission (IRS Employer
Incorporation) File Number) Identification Number)
1370 Timberlake Manor Parkway, Chesterfield, Missouri 63017
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (636) 736-7000
EXPLANATORY NOTE
In anticipation of the filing of a Registration Statement on Form S-3
which incorporates by reference information contained in the Annual Report on
Form 10-K of Reinsurance Group of America, Incorporated (the "Company") for the
year ended December 31, 2002 (the "Annual Report"), the Company is filing this
Current Report on Form 8-K to adjust the presentation in the Annual Report of
the Company's operating segment financial information for fiscal years 2002 and
2001 to reflect the change in operating segment structure effective as of the
first quarter of 2003, discussed below, and to disclose certain other items.
Prior to January 1, 2003, the Company reported the results of its
operations in five main operational segments segregated primarily by geographic
region: U.S., Canada, Latin America, Asia Pacific, and Europe & South Africa.
The Latin America, Asia Pacific, and Europe & South Africa segments were
previously presented as one reportable segment, Other International. Effective
January 1, 2003, as a result of the Company's declining presence in Argentina
and changes in management responsibilities for part of the Latin America region,
the Other International reportable segment no longer includes Latin America
operations. Latin America results relating to the Argentine privatized pension
business as well as direct insurance operations in Argentina are now reported in
the Corporate and Other segment. The results for all other Latin America
business, primarily traditional reinsurance business in Mexico, are reported as
part of U.S. operations in the Traditional sub-segment. The Asia Pacific and
Europe & South Africa operational segments are presented as one reportable
segment, Other International.
This report conforms certain information contained in "Business" and
"Properties," included in Items 1 and 2, respectively, of Part I, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Statements and Supplementary Data," included in Items 7 and 8,
respectively, of Part II and "Exhibits, Financial Statement Schedules and
Reports on Form 8-K," included in Item 15 of Part IV of the Annual Report to
give effect to the new roll-up of segment results as currently used by
management. The prior-period segment information has been reclassified to
conform to this new presentation. Except for Note 17 - Segment Information, the
consolidated financial statements are not affected by this change in segment
reporting. No attempt has been made in this report to modify or update other
disclosures presented in the Annual Report except as required to reflect the
effects of those items described below and except as otherwise expressly
addressed in paragraphs B(i), B(ii), B(iii) and B(iv) of Item 5 of this report.
The changes to the information referenced above and contained in
"Business," "Properties," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Financial Statements and Supplementary
Data" and "Exhibits, Financial Statement Schedules and Reports on Form 8-K,"
included in the Annual Report are limited to (i) reclassifications to reflect a
change in business segment reporting and (ii) removal of certain non-GAAP
financial measures from the Annual Report. No changes have been made to the
sub-sections entitled "Intercorporate Relationships," "Ratings," "Regulation,"
"Risk Management," "Underwriting," "Competition," "Employees," or "Available
Information," included in Item 1 of Part I of the Annual Report. References in
our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
2003 and June 30, 2003 to the section of the Annual Report affected hereby are
references to the corresponding sections of this report.
TABLE OF CONTENTS
Description Page
----------- ----
Item 5. Other Events.................................................................................. 1
A. Adjustments to Presentation of Operating Segment Information.................................. 1
(i) Business....................................................................... 1
(ii) Properties..................................................................... 11
(iii) Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 12
(iv) Financial Statements and Supplementary Data..................................... 40
Consolidated Balance Sheets..................................................... 40
Consolidated Statements of Income............................................... 41
Consolidated Statements of Stockholders' Equity................................. 42
Consolidated Statements of Cash Flows........................................... 43
Notes to Consolidated Financial Statements...................................... 44
Independent Auditor's Report.................................................... 69
(iii) Financial Statement Schedules................................................... 70
Schedule I - Summary of Investments - Other Than Investments in Related
Parties....................................................................... 70
Schedule II - Condensed Financial Information of the Registrant................. 71
Schedule III - Supplementary Insurance Information.............................. 72
Schedule IV - Reinsurance....................................................... 74
Schedule V - Valuation and Qualifying Accounts.................................. 75
B. Other Items.................................................................................... 76
Item 7. Financial Statements and Exhibits.............................................................. 76
ITEM 5. OTHER EVENTS
A. Adjustments to Presentation of Operating Segment Information.
BUSINESS
OVERVIEW
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company formed December 31, 1992. On December 31, 2002, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
48.8% 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 59.1%
of the outstanding shares of common stock of RGA as of December 31, 2002.
During 2002, MetLife Inc. purchased 327,600 additional common shares of
RGA. The purchases were 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, 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.
The Company is primarily engaged in traditional life, asset-intensive,
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 80.4% of the Company's 2002 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 Asia Pacific, including Australia,
Latin America, Europe and South Africa. 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, 2002, the Company had approximately $8.9
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 in
meeting 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
1
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 the
binding limits specified in their automatic reinsurance 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. 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, which 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
its benefit to support reserve credits, in the event of a downgrade of the
Company's ratings to specified levels. As of December 31, 2002, these treaties
had approximately $294.7 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 $532.8 million were held
in trust for the benefit of certain subsidiaries of the Company to satisfy
collateral requirements for reinsurance business at December 31, 2002.
Additionally, securities with an amortized cost of $931.6 million, as of
December 31, 2002, were held in trust to satisfy collateral requirements under
certain third-party 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
2
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 considered 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.
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 wholly-owned
subsidiaries, subject to an ownership position greater than 50%. The primary
sources of funds for RGA to make dividend distributions and to fund debt service
obligations 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 operations
were placed into run-off and all treaties (contracts) were terminated at the
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 over a number of
years as the level of business diminishes. The Company will report a loss to the
extent claims exceed established reserves.
Prior to January 1, 2003, the Company reported the results of its
operations in five main operational segments segregated primarily by geographic
region: U.S., Canada, Latin America, Asia Pacific, and Europe & South Africa.
The Latin America, Asia Pacific, and Europe & South Africa segments were
previously presented as one reportable segment, Other International. Effective
January 1, 2003, as a result of the Company's declining presence in Argentina
and changes in management responsibilities for part of the Latin America region,
the Other International reportable segment no longer includes Latin America
operations. Latin America results relating to the Argentine privatized pension
business as well as direct insurance operations in Argentina are now reported in
the Corporate and Other segment. The results for all other Latin America
business, primarily traditional reinsurance business in Mexico, are reported as
part of U.S. operations in the Traditional sub-segment. The Asia Pacific and
Europe & South Africa operational segments are presented herein as one
reportable segment, Other International. Prior period segment information has
been reclassified to conform to this new presentation. The Company's
discontinued accident and health operations are not reflected in the continuing
operations of the Company. The Company measures segment performance primarily
based on profit or loss from operations before income taxes.
The U.S. operations represented 71.3% of the Company's consolidated net
premiums in 2002. The U.S. operations market life reinsurance, reinsurance of
asset-intensive products, and financial reinsurance primarily through RGA
Reinsurance, principally to the largest life insurance companies in the U.S.
Asset-
3
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.
The Company's Canada operations, which represented 9.1% of consolidated
net premiums in 2002, 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.
The Company's Europe & South Africa operations represented 11.5% of
consolidated net premiums in 2002. This segment provides life and critical
illness reinsurance to clients throughout Europe and South Africa through yearly
renewable term and coinsurance agreements. These agreements may be either
facultative or automatic agreements covering primarily individual products but
also some group contracts. The Company conducts reinsurance through its
wholly-owned United Kingdom subsidiary, RGA Reinsurance (UK) Limited ("RGA UK"),
a South African wholly-owned subsidiary, RGA Reinsurance Company of South
Africa, Limited ("RGA South Africa") and a representative office in Spain. Also
in 2002, the Company opened a representative office in India to focus on the
Indian market.
The Company's Asia Pacific operations represented 8.1% of the Company's
consolidated net premiums in 2002. The Company conducts reinsurance business in
the Asia Pacific region through branch operations in Hong Kong and New Zealand,
and representative offices in Japan, Taiwan, and South Korea. In January 1996,
RGA formed RGA Australian Holdings Pty, Limited, a wholly-owned holding company,
and RGA Reinsurance Company of Australia Limited ("RGA Australia"), a
wholly-owned reinsurance company of RGA Australian Holdings Pty, Limited,
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 reinsurance. Superannuation funds accumulate retirement funds for
employees, and in addition, offer life and disability insurance coverage.
Corporate and Other operations include investment income on invested
assets not allocated to support segment operations and undeployed proceeds from
the Company's capital raising efforts, in addition to unallocated realized
investment gains or losses. General corporate expenses consist of unallocated
overhead and executive costs and interest expense related to debt and the $225.0
million, 5.75% mandatorily redeemable trust preferred securities. Additionally,
the Corporate and Other operations segment includes results from the Company's
Argentine privatized pension business, which is currently in run-off, and an
insignificant amount of direct insurance operations in Argentina.
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.
4
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, morbidity, and
lapse risks associated with such products. With respect to asset-intensive
products, the Company has also provided reinsurance for investment-related
risks. The following table sets forth the Company's premiums attributable to
each of its segments for the periods indicated on both a gross assumed basis and
net of premiums ceded to third-parties:
GROSS AND NET PREMIUMS BY SEGMENT
(in millions)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
GROSS PREMIUMS:
U.S. $ 1,671.7 71.7 $ 1,382.4 74.7 $ 1,224.4 75.3
Canada 210.2 9.0 200.2 10.8 218.0 13.4
Europe & South Africa 272.0 11.7 96.2 5.2 30.5 1.9
Asia Pacific 175.4 7.5 135.6 7.3 100.7 6.2
Corporate and Other 1.1 0.1 36.2 2.0 52.6 3.2
---------- ----- ---------- ----- ---------- -----
Total $ 2,330.4 100.0 $ 1,850.6 100.0 $ 1,626.2 100.0
========== ===== ========== ===== ========== =====
NET PREMIUMS:
U.S. $ 1,411.5 71.3 $ 1,238.1 74.5 $ 1,051.2 74.9
Canada 181.2 9.1 173.3 10.4 176.3 12.6
Europe & South Africa 226.9 11.5 94.8 5.7 29.7 2.1
Asia Pacific 160.2 8.1 119.7 7.2 94.3 6.7
Corporate and Other 0.9 - 35.9 2.2 52.6 3.7
---------- ----- ---------- ----- ---------- -----
Total $ 1,980.7 100.0 $ 1,661.8 100.0 $ 1,404.1 100.0
========== ===== ========== ===== ========== =====
The following table sets forth selected information concerning assumed
reinsurance business in force by segment for the indicated periods. (The term
"in force" refers to insurance policy face amounts or net amounts at risk.)
REINSURANCE BUSINESS IN FORCE BY SEGMENT
(in billions)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
U.S. $ 544.7 71.8 $ 475.6 77.2 $ 425.1 77.9
Canada 64.5 8.5 55.8 9.1 54.3 10.0
Europe & South Africa 92.7 12.2 40.5 6.6 2.4 0.4
Asia Pacific 57.0 7.5 44.1 7.1 31.9 5.8
Corporate and Other - - - - 32.2 5.9
-------- ----- -------- ----- -------- -----
Total $ 758.9 100.0 $ 616.0 100.0 $ 545.9 100.0
======== ===== ======== ===== ======== =====
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, and 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 $91.3 billion, $98.0 billion,
and $59.3 billion were released in 2002, 2001, and 2000, respectively.
5
The following table sets forth selected information concerning assumed
new business volume by segment for the indicated periods. (The term "volume"
refers to insurance policy face amounts or net amounts at risk.)
NEW BUSINESS VOLUME BY SEGMENT
(in billions)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
-------- ------- -------- ----- -------- -----
U.S. $ 150.3 65.4 $ 109.7 64.1 $ 125.3 77.8
Canada 11.3 4.9 8.5 5.0 13.8 8.6
Europe & South Africa 56.3 24.4 33.6 19.6 0.6 0.4
Asia Pacific 12.1 5.3 19.3 11.3 9.7 6.0
Corporate and Other - - - - 11.7 7.2
-------- ------- -------- ----- -------- -----
Total $ 230.0 100.0 $ 171.1 100.0 $ 161.1 100.0
======== ======= ======== ===== ======== =====
Additional information regarding the operations of the Company's
segments and geographic operations is contained in Note 17 to the Consolidated
Financial Statements.
U.S. Operations
The U.S. operations represented 71.3%, 74.5%, and 74.9% of the
Company's net premiums in 2002, 2001, and 2000, 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, 2002, reinsurance of such
policies was reflected in interest-sensitive contract reserves of approximately
$896.6 million and policy loans of $841.1 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 also serves as an
effective means of expanding the U.S. operation's automatic business. In 2002,
2001, and 2000, approximately 21.6%, 21.8%, and 28.9%, 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
6
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.
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 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, 2002, reinsurance of such policies was reflected
in interest-sensitive contract liabilities of approximately $2.5 billion.
Asset-intensive business that does not produce mortality risk
(annuities) is normally limited by size of the deposit, from any one depositor.
Business that does produce mortality risks (corporate-owned and bank-owned life
insurance) 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. A significant amount of this
business is written on a modified coinsurance or coinsurance with funds withheld
basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Investments" and Note 5 to the Consolidated Financial
Statements for additional information.
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.
7
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 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 2002, 53 clients generated annual gross premiums
of $5 million or more for the Company and the aggregate gross premiums from
these clients represented approximately 74.5% of 2002 U.S. life gross premiums.
For the purpose of this disclosure, companies that are within the same holding
company structure are combined.
In 2002, no single non-affiliated U.S. client accounted for more than
10% of the Company's consolidated gross premiums; however, one non-affiliated
U.S. client ceded more than 5% of U.S. life gross premiums. The client ceded
$92.1 million or 5.5% of U.S. operations gross premiums in 2002.
MetLife and its affiliates generated approximately $262.8 million or
15.7% of U.S. operation's gross premium for 2002.
Operations
During 2002, 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
8
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 operations represented 9.1%, 10.4%, and 12.6% of the
Company's net premiums in 2002, 2001, and 2000, respectively. In 2002, the
Canadian life operations assumed $11.3 billion in new business, all of which
resulted from recurring new business. Approximately 88% of the 2002 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
primarily engaged in traditional individual life reinsurance, including
preferred underwriting products, as well as creditor and critical illness
products. Approximately 90% of RGA Canada's premium income is derived from life
reinsurance products.
Clients include most of the life insurers in Canada. During 2002, two
clients accounted for more than 10% of the Canada operation's gross premiums,
consisting of $62.5 million and $26.5 million, or 29.7% and 12.6%, respectively.
Six other clients, including General American, a related party, individually
accounted for more than 5% of Canada's gross premiums. The Canada operations
compete 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 seventy-three
people at the Montreal office and seventeen people at the office in Toronto. RGA
Canada employs its own underwriting, actuarial, claims, pricing, accounting,
systems, marketing and administrative staff.
Europe & South Africa Operations
The Europe & South Africa operations represented 11.5%, 5.7%, and 2.1%
of the Company's net premiums in 2002, 2001, and 2000, 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
accelerated critical illness coverage (pays on the earlier of death or diagnosis
of a pre-defined critical illness). These agreements may be either facultative
or automatic agreements. During 2002, two clients of the Company's UK operations
generated approximately $156.4 million, or 57.5% 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 the United Kingdom, an increasing
number of insurers are ceding the mortality and accelerated critical illness
covers of individual life products on a quota share basis creating reinsurance
9
opportunities. The reinsurers present in the market include the main global
players with which RGA competes in other markets as well.
In 1998, the Company established RGA South Africa, with offices in Cape
Town and Johannesburg to promote life reinsurance in South Africa. In South
Africa, the Company's subsidiary has managed to establish a substantial position
in the individual facultative market, through excellent service and competitive
pricing as well as gaining an increasing share in the automatic market. Also,
life reinsurance is provided to Group Covers. 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. In
2002, RGA opened a representative office in India.
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 eleven people, operations in the United Kingdom maintains a staff of
twenty-six people, RGA South Africa maintains a staff of thirty-two people, five
people are on staff in the Spain office and four in the India office.
Asia Pacific Operations
The Asia Pacific operations represented 8.1%, 7.2%, and 6.7% of the
Company's net premiums in 2002, 2001, and 2000, respectively. The Company has a
presence in the Asia Pacific region with licensed branch offices in Hong Kong
and New Zealand and representative offices in Tokyo, Taiwan, and South Korea,
and a regional office in Sydney. The Company also established a reinsurance
subsidiary in Australia in January 1996. During 2002, two clients, one each in
Australia and Hong Kong, generated approximately $52.9 million, or 30.2% of the
total gross premiums for the Asia Pacific operations.
Within the Asia Pacific segment, eight people are on staff in the Hong
Kong office, thirteen people are on staff in the Japan office, seven people are
on staff in the Taiwan office, four people are on staff in the South Korean
Office, five people are on staff in the Sydney regional office and RGA
Australian Holdings maintains a staff of twenty-five people. The Hong Kong,
Tokyo, Taiwan, and South Korea offices primarily provide marketing and
underwriting services to the direct life insurance companies with other service
support provided directly by the Company's St. Louis and Sydney regional
operations. RGA Australia directly maintains its own underwriting, actuarial,
claims, pricing, accounting, systems, marketing, and administration service with
additional support provided by the Company's St. Louis and Sydney regional
operations.
Corporate and Other
Corporate and Other operations include investment income on invested
assets not allocated to support segment operations and undeployed proceeds from
the Company's capital raising efforts, in addition to unallocated realized
investment gains or losses. General corporate expenses consist of unallocated
overhead and executive costs and interest expense related to debt and the $225.0
million, 5.75% mandatorily redeemable trust preferred securities. Additionally,
the Corporate and Other operations segment includes results from the Company's
Argentine privatized pension business, which is currently in run-off, and an
insignificant amount of direct insurance operations in Argentina. Since 1999,
the Company has reduced its participation in privatized pension products and
effective July 1, 2001, the Company ceased renewal of reinsurance treaties
associated with privatized pension contracts in Argentina because of adverse
experience
10
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.
The Company's net investment in its Argentinean subsidiary was approximately
$7.2 million as of December 31, 2002.
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 21 to
the Consolidated Financial Statements.
FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS
The Company's foreign operations are primarily in Canada, the Asia
Pacific region (including Australia) and Europe & South Africa. 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 17 to the Consolidated Financial
Statements.
PROPERTIES
U.S. segment and Corporate and Other segment
RGA Reinsurance houses its employees and the majority of RGA's officers
in approximately 136,000 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 $2,500,000 to $2,800,000. RGA
Reinsurance also conducts business from approximately 1,400 square feet of
office space in Norwalk, Connecticut and North Palm Beach, Florida. These
premises are leased through December 2003, at an annual rent of approximately
$36,000. RGA Reinsurance also leases approximately 2,000 square feet of office
space in Mexico at an annual rent of approximately $60,000. GA Argentina, part
of the Corporate and Other segment, conducts business from approximately 5,400
square feet of office space in Buenos Aires. These premises are leased through
July 2005, at annual rents of approximately $19,000.
Canada segment
RGA Canada conducts business from approximately 29,000 square feet of
office space in Montreal and Toronto, Canada. These premises are leased through
November 2016, at annual rents ranging from approximately $345,000 to $490,000.
Other International segment
RGA Reinsurance also conducts business from a total of approximately
14,000 square feet of office space in Madrid, Hong Kong, Tokyo, Taipei, Seoul,
and Mumbai. These premises are leased through October 2005, at annual rents of
approximately $799,000. RGA International conducts business from approximately
9,800 square feet of office space in Toronto. These premises are leased through
August 2007, at annual rents of approximately $338,000. RGA UK conducts business
from approximately 3,000 square feet of office space in London. These premises
are leased through September 2009, at annual rents of approximately $290,000.
RGA South Africa conducts business from approximately 10,900 square feet of
office space in Cape Town and Johannesburg. These premises are leased through
September 2004, at annual rents of approximately $144,000. RGA Australia
conducts business from approximately 9,000 square feet of office space in
Sydney. These premises are leased through July 2009, at annual rents of
approximately $219,000.
11
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.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This report 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 and its subsidiaries (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 conditions 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
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 or values 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
and distribution opportunities, (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").
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. 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. For a discussion of
these risks and uncertainties that 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 Registration Statement on
Form S-3 filed with the SEC on August 25, 2003.
12
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, 2002, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
48.8% 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 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 59.1% of the outstanding shares of common stock
of RGA at December 31, 2002.
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").
Critical Accounting Policies
The Company's accounting policies are described in Note 2 to the
Consolidated Financial Statements. 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,
other policy claims and benefits, including incurred but not reported claims,
the valuation of investment impairments, and the establishment of arbitration or
litigation reserves. The balances of these accounts are significant to 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 or features
that delay the timely reimbursement of claims. If the Company determines that a
contract exposes it to a reasonable possibility of a significant loss from
insurance risk only under remote circumstances, 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.
Deferred policy acquisition costs ("DAC") reflect our expectations about the
future experience of the business in force and include commissions and
allowances as well as certain costs of policy issuance and underwriting. Some of
the assumptions that can affect the carrying value of DAC include mortality,
interest spreads and policy lapse rates. The Company performs periodic tests to
determine that DAC remains recoverable, and the cumulative amortization is
re-estimated and, if necessary, adjusted by a cumulative charge or credit to
current operations. For the years ended December 31, 2002 and 2001, the Company
reflected charges of $1.0 million and $3.1 million, respectively, for
unrecoverable deferred policy acquisition costs. No such charges were reflected
in 2000 results. As of December 31, 2002, the Company estimates that
approximately 50 percent of its DAC balance is collateralized by surrender fees
due to the Company and the reduction of policy liabilities, in excess of
termination values, upon surrender or lapse of a policy.
13
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.
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 primarily invests in fixed maturity securities. The Company
monitors its fixed maturity securities to determine impairments in value. In
conjunction with its external investment managers, the Company evaluates factors
such as the financial condition of the issuer, payment performance, the extent
to which the market value has been below amortized cost, compliance with
covenants, general market conditions and industry sector, the intent and ability
to hold securities, and various other subjective factors. Securities, based on
management's judgments, with an other than temporary impairment in value are
written down to management's estimate of net realizable value.
Differences in actual experience compared with the assumptions and
estimates utilized in the justification of the recoverability of deferred
acquisition costs, in establishing reserves for future policy benefits and claim
liabilities, or in the determination of other than temporary impairments to
investment securities can have a material impact on the Company's results of
operations and financial condition.
The Company is currently a party to various litigation and
arbitrations. While it is not feasible to predict or determine the ultimate
outcome of the pending litigation or arbitrations or provide reasonable ranges
of potential losses, it is the opinion of management, after consultation with
counsel, that their outcomes, after consideration of the provisions made in the
Company's consolidated financial statements, would not have a material adverse
effect on its consolidated financial position. See Note 21 to the Consolidated
Financial Statements.
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 individuals insured, with premiums earned typically
over a period of 10 to 30 years. Each year, however, a portion of the business
under existing treaties terminates due to, among other things, lapses or
surrenders of underlying policies, deaths of policyholders, and the exercise of
recapture options by the ceding companies.
Assumed insurance in force for the Company increased $142.9 billion to
$758.9 billion at December 31, 2002. Assumed new business production for 2002
totaled $230.0 billion compared to $171.1 billion in 2001 and $161.1 billion in
2000.
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.
14
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 significant fluctuation from quarter to quarter and year to year.
The Company maintains catastrophe insurance as described below in paragraph B(i)
of this Item 5.
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 most significant foreign operations are in Canada. The
exchange rate from Canadian to U.S. currency was 0.6362, 0.6277, and 0.6676 at
December 31, 2002, 2001, and 2000, respectively. 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 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 over a
number of years as the level of business diminishes. The Company will report a
loss to the extent claims exceed established reserves. During 2002, the accident
and health division reported a net loss of $5.7 million due to claim payments in
excess of established reserves and legal fees. See Note 21 to the Consolidated
Financial Statements.
Prior to January 1, 2003, the Company reported the results of its
operations in five main operational segments segregated primarily by geographic
region: U.S., Canada, Latin America, Asia Pacific, and Europe & South Africa.
The Latin America, Asia Pacific, and Europe & South Africa segments were
previously presented as one reportable segment, Other International. Effective
January 1, 2003, as a result of the Company's declining presence in Argentina
and changes in management responsibilities for part of the Latin America region,
the Other International reportable segment no longer includes Latin America
operations. Latin America results relating to the Argentine privatized pension
business as well as direct insurance operations in Argentina are now reported in
the Corporate and Other segment. The results for all other Latin America
business, primarily traditional reinsurance business in Mexico, are reported as
part of U.S. operations in the Traditional sub-segment. The Asia Pacific and
Europe & South Africa operational segments are presented herein as one
reportable segment, Other International. Prior period segment information has
been reclassified to conform to this new presentation. 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 reinsurance of traditional life products as well as reinsurance of
creditor and critical illness products. 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 life reinsurance and critical illness
business from Europe & South Africa, in addition to other markets being
developed by the Company. The Company's discontinued accident and health
operations are not reflected in the continuing operations of the Company. The
Company measures segment performance based on profit or loss from operations
before income taxes.
Consolidated income from continuing operations increased 222.1% in 2002
to $128.5 million and decreased 62.3% in 2001 to $39.9 million. Diluted earnings
per share from continuing operations were $2.59 for 2002 compared to $0.80 for
2001 and $2.12 for 2000. 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, 2001, investment
losses on sales and impairments of investment
15
securities, the accrual of additional reserves to support the Company's
reinsurance of Argentine pension business, and higher than expected mortality
results in the U.S. operations.
Consolidated investment income increased 10.0% during 2002 and
increased 4.3% during 2001. The increase in 2002 and 2001 was related to an
increase in the invested asset base due to positive cash flows from operations
and deposits from several new annuity reinsurance treaties, offset, in part, by
a drop in the invested asset yield primarily due to a decline in prevailing
interest rates. Investment income during 2001 was affected by the write-off of
accrued investment income associated with the write-down of impaired securities
as well as the general decline in interest rates. The cost basis of invested
assets increased by $1.4 billion, or 27.5% in 2002 and increased $0.6 billion,
or 13.0% in 2001. 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 average
yield earned on investments was 6.51% in 2002, compared with 6.79% in 2001, and
7.30% in 2000. 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 33.8%, 39.7%, and 39.6% of pre-tax income for 2002,
2001, and 2000, respectively. The effective tax rate for 2002 includes the
effect of a $2.0 million reduction in tax liabilities subsequent to a settlement
of an IRS audit. 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 $3.1 million, $3.7 million, and $15.1
million related to the discontinued operations in 2002, 2001, and 2000,
respectively. The effective tax rate on the discontinued operations was 35.1% in
2002 and 35.0% in 2001 and 2000.
Further discussion and analysis of the results for 2002 compared to
2001 and 2000 are presented by segment. Certain prior year amounts have been
reclassified to conform to the current year presentation.
16
U.S. Operations
FOR THE YEAR ENDED DECEMBER 31, 2002
(in thousands) ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------------------------------------------------------------
REVENUES:
Net premiums $ 1,407,751 $ 3,786 $ - $ 1,411,537
Investment income, net of related expenses 161,869 110,019 191 272,079
Realized investment losses, net (6,194) (4,135) - (10,329)
Other revenues 2,802 7,277 26,586 36,665
----------------------------------------------------------------
Total revenues 1,566,228 116,947 26,777 1,709,952
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,097,998 17,376 - 1,115,374
Interest credited 56,675 65,504 - 122,179
Policy acquisition costs and other insurance expenses 228,800 18,560 8,196 255,556
Other operating expenses 30,505 1,242 9,295 41,042
----------------------------------------------------------------
Total benefits and expenses 1,413,978 102,682 17,491 1,534,151
Income before income taxes $ 152,250 $ 14,265 $ 9,286 $ 175,801
----------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2002
(in thousands) ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
---------------------------------------------------------------
REVENUES:
Net premiums $ 1,234,817 $ 3,248 $ - $ 1,238,065
Investment income, net of related expenses 152,068 93,252 474 245,794
Realized investment gains (losses), net (30,764) 1,193 - (29,571)
Other revenues 2,344 2,379 25,958 30,681
---------------------------------------------------------------
Total revenues 1,358,465 100,072 26,432 1,484,969
BENEFITS AND EXPENSES:
Claims and other policy benefits 983,460 4,658 - 988,118
Interest credited 52,428 58,087 - 110,515
Policy acquisition costs and other insurance expenses 187,422 21,632 9,925 218,979
Other operating expenses 34,056 740 7,980 42,776
---------------------------------------------------------------
Total benefits and expenses 1,257,366 85,117 17,905 1,360,388
Income before income taxes $ 101,099 $ 14,955 $ 8,527 $ 124,581
---------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
(in thousands) ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
-----------------------------------------------------------------
REVENUES:
Net premiums $ 1,048,926 $ 2,216 $ - $ 1,051,142
Investment income, net of related expenses 141,036 89,001 (37) 230,000
Realized investment losses, net (12,227) (1,066) - (13,293)
Other revenues 317 686 16,370 17,373
----------------------------------------------------------------
Total revenues 1,178,052 90,837 16,333 1,285,222
BENEFITS AND EXPENSES:
Claims and other policy benefits 800,791 (95) - 800,696
Interest credited 48,573 55,006 - 103,579
Policy acquisition costs and other insurance expenses 152,320 23,446 5,457 181,223
Other operating expenses 28,285 802 3,274 32,361
-----------------------------------------------------------------
Total benefits and expenses 1,029,969 79,159 8,731 1,117,859
Income before income taxes $ 148,083 $ 11,678 $ 7,602 $ 167,363
-----------------------------------------------------------------
17
Income before taxes for the U. S. operations segment totaled $175.8
million for 2002 compared to $124.6 million in 2001 and $167.4 million in 2000.
Strong growth in revenue in the traditional sub-segment contributed to the
increase in income for 2002. Income was down in 2001 due primarily to
unfavorable claims experience, higher realized net investment losses, and claims
arising from the terrorist attacks of September 11, 2001.
Traditional Reinsurance
The U.S. traditional 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 agreements. These reinsurance arrangements
may be either facultative or automatic agreements. During 2002 production
totaled $150.3 billion face amount of new business, compared to $109.7 billion
in 2001 and $125.3 billion in 2000. The strong growth in production was realized
on both new and existing treaties. Management believes industry consolidation,
demutualizations, and the trend toward reinsuring mortality risks should
continue to provide opportunities for growth.
Income before income taxes for U.S. traditional reinsurance increased
50.6% in 2002 and decreased 31.7% in 2001. The variances in income for the
comparable periods are primarily due to $16.1 million in net claims associated
with the terrorist attacks on September 11, 2001, higher realized losses on
investment securities in 2001, and generally higher mortality. Also contributing
to the increase in 2002 was the continued growth in premiums.
Net premiums for U.S. traditional reinsurance increased 14.0% in 2002
and 17.7% in 2001. New premiums from facultative and automatic treaties and
renewal premiums on existing blocks of business all contributed to the growth.
The increased premium reflects the growth of total U.S. business in force, which
grew to $544.7 billion in 2002, a 14.5% increase over the prior year. 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 6.4% and 7.8% in 2002 and 2001,
respectively. The increase in both years is due to growth in the invested asset
base, primarily due to increased operating cash flows on traditional
reinsurance, which was partially offset by lower yields, primarily as a result
of a general decline in interest rates.
Realized investment losses of $6.2 million were reported in 2002
compared to $30.8 million and $12.2 million in 2001 and 2000, respectively.
Claims and other policy benefits, as a percentage of net premiums, were
78.0%, 79.6%, and 76.3% in 2002, 2001, and 2000, respectively. The decrease in
2002 and the increase in the 2001 loss ratios, were affected by $16.1 million in
claims related to the events of September 11, 2001. The lower percentage in 2000
is the result of favorable mortality experience. In 2002, liabilities
established in 2001 for claims related to the terrorists attacks of September
11, 2001 were adjusted down $1.9 million as reported claims from this event are
lower than originally projected. The Company's catastrophe coverage program has
limited its net losses related to the terrorist attack. As of December 31, 2002,
the amount recoverable from catastrophe coverage was approximately $2.9 million.
Death claims are reasonably predictable over a period of many years, but are
less predictable over shorter periods and are subject to significant
fluctuation.
Interest credited relates to amounts credited on the Company's cash
value products in this segment, which have a significant mortality component.
This amount fluctuates with the changes in deposit levels, cash surrender
values, and investment performance.
18
The amount of policy acquisition costs and other insurance expenses, as
a percentage of net premiums, was 16.3%, 15.2%, and 14.5% in 2002, 2001, and
2000, respectively. The increase in this ratio for the comparable periods can be
attributed to the proportional increase in the volume of coinsurance business
written versus yearly renewable term business. These percentages will fluctuate
due to variations in the mixture of business being written.
Other operating expenses, as a percentage of net premiums, were 2.2%,
2.8%, and 2.7% in 2002, 2001, and 2000, respectively. The improvement in this
ratio can be attributed to continued growth in premiums and a decline in
operating expenses for 2002. The decrease in operating expenses for 2002 is the
result of lower overhead costs being allocated to this sub-segment as the
international operations have grown. This percentage will fluctuate based on
premium levels and the mix of fixed versus variable operating expenses.
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.
Income before income taxes decreased in 2002 to $14.3 million from
$15.0 million in 2001, a 4.6% decrease over prior year. The decrease for the
year is the result of a $5.3 million increase in realized losses on investment
securities in 2002 and a $3.1 million pre-tax loss on an existing annuity
treaty, due primarily to high policy lapses. This decrease was partially offset
by an increase in income attributed to the completion of several new annuity
transactions that added over $700.0 million of invested assets to the balance
sheet in 2002 for this sub-segment. Income before income taxes increased 28.1%
in 2001 compared to the prior year. Contributing to this increase was the
completion of a new annuity treaty in 2001 with assets of approximately $200.0
million and increased gains on the sale of investment securities of $2.3
million.
Total revenues, which is comprised primarily of investment income,
increased 16.9% and 10.2% in 2002 and 2001, respectively. The increase in 2002
can primarily be attributed to the new annuity transactions, which significantly
increased the investment asset base for this sub-segment. The average invested
asset balance was $1.9 billion, $1.3 billion, and $1.0 billion for 2002, 2001
and 2000, respectively. Invested assets outstanding as of December 31, 2002, and
2001 were $2.4 billion and $1.4 billion, of which $1.4 billion and $0.6 billion
were funds withheld at interest, respectively.
Total expenses, which is comprised primarily of interest credited,
policy benefits and acquisition costs increased 20.6% and 7.5% in 2002 and 2001,
respectively. The increase in 2002 can be attributed to the increase in policy
benefits and interest credited. The higher policy benefits can be attributed to
an increase in the option cost associated with an existing treaty while the
growth in interest credited is primarily the result of the new annuity
transactions.
Financial Reinsurance
The U.S. financial reinsurance sub-segment includes net fees earned on
financial reinsurance and the Company's investment in RGA Financial Group.
During 2000, the Company increased its ownership of RGA Financial Group from 40%
to 100%. The majority of the financial reinsurance transactions assumed by the
Company are retroceded to other insurance companies. Financial reinsurance
agreements represent low risk 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.
19
Income before income taxes increased 8.9% and 12.2% in 2002 and 2001,
respectively. The increase for 2002 can be attributed to higher net fees
retained as a result of the continued growth in financial reinsurance. The
growth in fees was somewhat offset by higher operating expenses allocated to
this sub-segment in 2002. At December 31, 2002, 2001 and 2000, the amount of
reinsurance assumed from client companies, as measured by pre-tax statutory
surplus, was $872.7 million, $547.8 million and $498.4 million, respectively.
Canada Operations
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
(in thousands)
REVENUES:
Net premiums $ 181,224 $ 173,269 $ 176,326
Investment income, net of related expenses 70,518 65,006 61,950
Realized investment gains (losses), net (163) 9,148 (1,291)
Other revenues 136 201 318
----------------------------------------
Total revenues 251,715 247,624 237,303
BENEFITS AND EXPENSES:
Claims and other policy benefits 186,398 172,799 171,417
Interest credited 1,070 299 763
Policy acquisition costs and other insurance
Expenses 16,136 14,101 16,563
Other operating expenses 9,480 8,909 8,702
----------------------------------------
Total benefits and expenses 213,084 196,108 197,445
Income before income taxes $ 38,631 $ 51,516 $ 39,858
----------------------------------------
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
non-guaranteed critical illness products. The Canadian operation is one of the
leading life reinsurers in Canada. RGA Canada's reinsurance inforce totals
approximately $64.5 billion and $55.8 billion at December 31, 2002 and 2001,
respectively. At December 31, 2002, RGA Canada includes most of the life
insurance companies in Canada as clients.
Income before income taxes decreased 25.0% in 2002 and increased 29.2%
in 2001. The decrease in 2002 was the result of a $9.3 million decrease in
realized investment gains and below-average mortality experience in the current
year, primarily due to two treaties, and favorable mortality experience in the
prior year. The increase in 2001 was primarily driven by favorable mortality
experience.
Net premiums increased by 4.6% to $181.2 million in 2002 and decreased
by 1.7% to $173.3 million in 2001. In original currency, net premiums increased
by 6.5% in 2002 and 2.4% in 2001. The decline in the strength of the Canadian
dollar had an adverse effect on the amount of net premiums reported of $2.1
million, or 1.2%, in 2002 and $7.6 million, or 4.4%, in 2001. 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 8.5% and 4.9% during 2002 and 2001,
respectively. Investment income is allocated to the segments based upon average
assets and related capital levels deemed appropriate to support business
volumes. The investment income allocation to the Canadian operations was $4.0
million and $5.3 million in 2002 and 2001, respectively. 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
20
offset by the effects of changes in the foreign currency exchange rates. In 2002
and 2001, 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 one treaty.
Claims and other policy benefits, as a percentage of net premiums, were
102.9% of total 2002 net premiums compared to 99.7% in 2001 and 97.2% in 2000.
The increased percentages 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 increase 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. Additionally, the increased
percentages experienced are the result of unfavorable mortality experience in
2002 as compared to more favorable experience in 2001 and 2000. Claims and other
policy benefits as a percentage of net premiums and investment income were 74.0%
of total 2002 net premiums compared to 72.5% in 2001 and 71.9% in 2000. The
Company expects mortality to fluctuate somewhat from period to period but
believes it is fairly constant over longer periods of time.
Policy acquisition costs and other insurance expenses as a percentage
of net premiums totaled 8.9% in 2002, 8.1% in 2001, and 9.4% in 2000. The
fluctuation in this ratio is primarily due to the changing mix of business. In
2002, more business was derived from coinsurance agreements than yearly
renewable term agreements. The coinsurance agreements tend to have higher
commission costs compared to yearly renewable term agreements. The decrease in
the percentage in 2001 is the result of the mix of business which was higher in
yearly renewable term agreements compared to 2000.
Other operating expenses increased $0.6 million in 2002 and $0.2
million in 2001 compared to their respective prior-year periods. The overall
increase in operating expenses was attributed to planned increases in costs
associated with the ongoing growth of the business.
Other International Operations
FOR THE YEAR ENDED DECEMBER 31, 2002
(in thousands)
----------------------------------------------
TOTAL
EUROPE & SOUTH OTHER
AFRICA ASIA PACIFIC INTERNATIONAL
----------------------------------------------
REVENUES:
Net premiums $ 226,846 $ 160,197 $ 387,043
Investment income, net of related expenses 1,009 7,059 8,068
Realized investment gains (losses), net 894 (268) 626
Other revenues 2,064 2,363 4,427
------------------------------------------
Total revenues 230,813 169,351 400,164
BENEFITS AND EXPENSES:
Claims and other policy benefits 130,975 110,806 241,781
Policy acquisition costs and other insurance expenses 82,700 36,660 119,360
Other operating expenses 13,049 14,727 27,776
Interest expense 680 842 1,522
------------------------------------------
Total benefits and expenses 227,404 163,035 390,439
Income before income taxes $ 3,409 $ 6,316 $ 9,725
------------------------------------------
21
FOR THE YEAR ENDED DECEMBER 31, 2001
(in thousands)
----------------------------------------------
TOTAL
EUROPE & SOUTH OTHER
AFRICA ASIA PACIFIC INTERNATIONAL
----------------------------------------------
REVENUES:
Net premiums $ 94,800 $ 119,702 $ 214,502
Investment income, net of related expenses 1,536 3,935 5,471
Realized investment gains (losses), net (137) 113 (24)
Other revenues 256 2,903 3,159
----------------------------------------
Total revenues 96,455 126,653 223,108
BENEFITS AND EXPENSES:
Claims and other policy benefits 59,429 75,595 135,024
Policy acquisition costs and other insurance expenses 26,753 36,103 62,856
Other operating expenses 10,555 11,081 21,636
Interest expense 681 867 1,548
----------------------------------------
Total benefits and expenses 97,418 123,646 221,064
Income (loss) before income taxes $ (963) $ 3,007 $ 2,044
----------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
(in thousands)
----------------------------------------------
TOTAL
EUROPE & SOUTH OTHER
AFRICA ASIA PACIFIC INTERNATIONAL
----------------------------------------------
REVENUES:
Net premiums $ 29,690 $ 94,282 $ 123,972
Investment income, net of related expenses 2,056 4,628 6,684
Realized investment gains (losses), net 365 (191) 174
Other revenues 3,177 2,266 5,443
-----------------------------------------
Total revenues 35,288 100,985 136,273
BENEFITS AND EXPENSES:
Claims and other policy benefits 20,151 56,377 76,528
Policy acquisition costs and other insurance expenses 7,473 32,484 39,957
Other operating expenses 9,542 9,939 19,481
Interest expense 502 980 1,482
-----------------------------------------
Total benefits and expenses 37,668 99,780 137,448
Income (loss) before income taxes $ (2,380) $ 1,205 $ (1,175)
-----------------------------------------
The Other International reportable segment generates business from
reinsurance operations in Europe, South Africa, and the Asia Pacific regions.
The Europe & South Africa segment provides life reinsurance for a variety of
products through yearly renewable term and coinsurance agreements, and
reinsurance of accelerated critical illness coverage (pays on the earlier of
death or diagnosis of a pre-defined critical illness). These agreements may be
either facultative or automatic agreements covering primarily individual risks
and, in some markets, group risks.
The Company conducts reinsurance business in the Asia Pacific region
through branch operations in Hong Kong and New Zealand and representative
offices in Japan, South Korea 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
22
government mandated compulsory retirement savings program. Superannuation funds
accumulate retirement funds for employees, and in addition, offer life and
disability insurance coverage.
Income before income taxes for the Other International reportable
segment totaled $9.7 million and $2.0 million for 2002 and 2001, respectively,
compared to a loss of $1.2 million for 2000. Both segments reported stronger
pre-tax results during 2002 compared to 2001. Europe & South Africa reported
income before income taxes of $3.4 million for 2002, an increase of $4.4 million
compared to 2001, primarily due to a significant increase in premium volume
during 2002. Asia Pacific reported income before income taxes of $6.3 million
for 2002, a $3.3 million improvement over 2001. Improvements in profitability
for 2002 were predominantly due to additional premium volume and further
persistency. For 2001, Asia Pacific income before income taxes increased $1.8
million compared to 2000. The improvement in profitability in 2001 over 2000 was
caused by a combination of better persistency and additional premium volume.
Other International net premiums increased 80.4% to $387.0 million in
2002, and 73.0% to $214.5 million in 2001. The increases were 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 from this coverage totaled $118.5 million,
$43.3 million and $9.8 million in 2002, 2001 and 2000, respectively. The
Company's operations in South Africa also contributed to the 2002 net premium
growth mainly through the facultative and automatic market. The Company's
representative office in Spain also contributed 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.
Net investment income increased $2.6 million or 47.5% in 2002, and
decreased $1.2 million or 18.1% in 2001. Asia Pacific reported a 79.4% increase
in investment income in 2002, predominantly due to an increase in the investment
assets, particularly in Australia. 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 2002 and 2001 primarily represented profit and
fees associated with financial reinsurance in Taiwan and Japan. The Taiwanese
treaty commenced in late 1999, with a full year in 2002, 2001 and 2000. Fees
paid to retrocessionaires that were included in policy acquisition costs and
other insurance expenses partially offset the fees earned for these years.
Claims and other policy benefits as a percentage of net premiums were
relatively stable for this reportable segment and totaled 62.5%, 62.9% and 61.7%
for 2002, 2001 and 2000, respectively. Mortality may fluctuate somewhat from
period to period, but is expected to be fairly constant over longer periods of
time.
Policy acquisition costs and other insurance expenses as a percentage
of net premiums represented 30.8%, 29.3% and 32.2% for 2002, 2001, and 2000,
respectively. The percentages fluctuate due to timing of client company
reporting and variations in the mixture of business being reinsured. Policy
acquisition costs are capitalized and charged to expense in proportion to
premium revenue recognized. Acquisition costs, as a percentage of premiums,
associated with some treaties in the United Kingdom are typically higher than
those experienced in the Company's other segments. Future recoverability of the
capitalized policy acquisition costs on this business is primarily sensitive to
mortality and morbidity experience. If actual experience suggests higher
mortality and morbidity rates going forward than currently contemplated in
management's estimates, the Company would record a charge to income, due to a
reduction in the DAC asset and, to the extent there are no unamortized
acquisition costs, an increase in future policy benefits. The Company
23
estimates that a 10 percent increase in anticipated mortality and morbidity
experience would result in a pre-tax income statement charge of approximately
$8.3 million while a 15 percent increase would result in a pre-tax charge of
approximately $55.7 million.
Other operating expenses increased 28.4% during 2002 and 11.1% for
2001. These increases related to growth in the Europe & South Africa and Asia
Pacific segments. As a percentage of premiums, other operating expenses
decreased to 7.2% in 2002 from 10.1% in 2001 and 15.7% in 2000, respectively.
The Company believes that sustained growth in premiums should lessen the burden
of start-up expenses and expansion costs over time.
Corporate and Other Operations
FOR THE YEAR ENDED DECEMBER 31, 2002 2001 2000
(in thousands)
REVENUES:
Net premiums $ 862 $ 35,926 $ 52,626
Investment income, net of related expenses 23,847 24,288 27,871
Realized investment gains (losses), net (4,785) (47,984) (14,241)
Other revenues 208 353 681
--------------------------------------
Total revenues 20,132 12,583 66,937
BENEFITS AND EXPENSES:
Claims and other policy benefits (4,089) 80,861 54,907
Interest credited 3,466 898 440
Policy acquisition costs and other insurance expenses 452 8,281 5,799
Other operating expenses 16,488 17,985 20,665
Interest expense 33,994 16,549 16,114
--------------------------------------
Total benefits and expenses 50,311 124,574 97,925
Income before income taxes $ (30,179) $ (111,991) $ (30,988)
--------------------------------------
Corporate and Other operations include investment income on invested
assets not allocated to support segment operations and undeployed proceeds from
the Company's capital raising efforts, in addition to unallocated realized
investment gains or losses. General corporate expenses consist of unallocated
overhead and executive costs and interest expense related to debt and the $225.0
million, 5.75% mandatorily redeemable trust preferred securities. Additionally,
the Corporate and Other operations segment includes results from the Company's
Argentine privatized pension business, which is currently in run-off, and an
insignificant amount of direct insurance operations in Argentina.
Corporate and Other revenues increased $7.5 million in 2002, primarily
a result of a $43.2 million decrease in realized investment losses, offset in
part by a decrease in premiums of $35.1 million, primarily a result of the exit
from the privatized pension business and declining sales of direct insurance in
Argentina. A $54.4 million decrease in revenues for 2001 resulted primarily from
a $33.7 million increase in realized investment losses and a $16.7 million
decrease in net premiums due to the sale of the Company's Chilean operations
during 2000.
Claims and other policy benefits decreased in 2002 and increased in
2001 primarily due to an increase in reserves for the Argentine privatized
pension business during the fourth quarter of 2001. The Company ceased renewal
of reinsurance treaties associated with privatized pension contracts in
Argentina during 2001 because of adverse experience on this business, as several
aspects of the pension fund claims flow did not develop as was contemplated when
the reinsurance programs were initially priced. 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. As the underlying reserves for
the privatized pension business are in Argentine
24
pesos, the functional currency of this business, the devaluation of the peso
during 2002 is not expected to have an impact on earnings until actual claims
settlement or adjustment to the underlying peso-denominated reserves occur.
Transaction gains/losses on the claims settlements are included in the claims
and other policy benefits total. During 2002, the Company recorded $32.0 million
in transaction gains related to claims settlements. These gains were generally
offset by increases in reserves associated with the Argentine pension contracts.
The impact of fluctuating exchange rates will continue to be closely monitored
by the Company's management and is expected to be volatile over the near term.
Claims and other policy benefits include claims paid, claims in the course of
payment and establishment of additional reserves to provide for unreported
claims. The level of claims may fluctuate from period to period, but exhibits
less volatility over the long term. The Company monitors claims trends to
evaluate the appropriateness of reserve levels and adjusts the reserve levels on
a periodic basis.
Corporate interest expense was $34.0 million in 2002, compared to $16.5
million in 2001 and $16.1 million in 2000. The substantial increase during 2002
was primarily a result of the addition of the Preferred Securities (See Note 16,
"Issuance of Trust PIERS Units" of the Notes to Consolidated Financial
Statements) and the 2001 Senior Notes, both of which were issued near the end of
2001. The Company essentially swapped variable rate debt for fixed rate debt by
using the proceeds of the 2001 Senior Notes to pay down its U.S. Credit
Agreement and to prepay and terminate the affiliate note. The U.S. Credit
Agreement and the MetLife Note had a combined weighted average interest rate of
5.0% during 2001. As expected, interest expense during 2002 on the 2001 Senior
Notes, fixed at 6.75%, exceeded the combined interest expense on the U.S. Credit
Agreement and the MetLife Note during 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 and MetLife Note 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 over a
number of years as the level of business diminishes. The Company will report a
loss to the extent claims exceed established reserves.
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. 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. In
particular, over the past several years a number of disputes have arisen in the
accident and health reinsurance markets with respect to London market personal
accident excess of loss ("LMX") reinsurance programs that involved alleged
"manufactured" claims spirals designed to transfer claims losses to higher-level
reinsurance layers. The Company is currently a party to arbitrations that
involve some of these LMX reinsurance programs. The Company and other involved
reinsurers and retrocessionaires have raised substantial defenses upon which to
contest these claims, including defenses based upon the failure of the ceding
company to disclose the existence of manufactured claims spirals. As a result,
there have been a significant number of claims for rescission, arbitration, and
litigation among a number of the parties involved
25
in these various coverages. 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 indirect high-level common account coverages to
other reinsurers and retrocessionaires. To date, no such direct material
exposures have been identified. If any direct 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.
While it is not feasible to predict the ultimate outcome of pending
arbitrations and litigation involving LMX reinsurance programs, any indirect
workers' compensation carve-out exposure, or other accident and health risks, or
provide reasonable ranges of potential losses, it is the opinion of management,
after consultation with counsel, that their outcomes, after consideration of the
provisions made in the Company's consolidated financial statements, would not
have a material adverse effect on its consolidated financial position.
The Company is currently a party to various litigation and arbitrations
that involve medical reinsurance arrangements, personal accident business, and
aviation bodily injury carve-out business. As of January 31, 2003, the ceding
companies involved in these disputes have raised claims that are $41.7 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. In addition, the Company is in the process of auditing ceding
companies which have indicated that they anticipate asserting claims in the
future against the Company that are $8.5 million in excess of the amounts held
in reserve by the Company. Depending upon the audit findings in these cases,
they could result in litigation or arbitrations in the future. While it is not
feasible to predict or determine the ultimate outcome of the pending litigation
or arbitrations or provide reasonable ranges of potential losses, it is the
opinion of management, after consultation with counsel, that their outcomes,
after consideration of the provisions made in the Company's consolidated
financial statements, would not have a material adverse effect on its
consolidated financial position.
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, 2002 and 2001 was $50.9 million and $55.3 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 $3.3 million, $3.0
million, and $23.7 million for 2002, 2001, and 2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Holding Company
RGA is a holding company whose primary uses of liquidity include, but
are not limited to, the immediate capital needs of its operating companies
associated with the Company's primary businesses, dividends paid by RGA to its
shareholders, interest payments on its indebtedness (See Notes 15, "Long-Term
Debt," and 16, "Issuance of Trust PIERS Units," of the Notes to Consolidated
Financial Statements), and
26
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.
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 2003 would be $63.4 million. However, the applicable
statutory provisions only permit an insurer to pay a shareholder dividend from
unassigned surplus. As of December 31, 2002, RGA Reinsurance had unassigned
surplus of $67.8 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, 2003, RCM could pay a maximum dividend,
without prior approval, to RGA equal to its unassigned surplus, approximately
$28.9 million. The maximum amount available for dividends by RGA Canada to RGA
under the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR")
is $33.4 million. Dividend payments from other subsidiaries and joint ventures
are subject to regulations in the country of domicile. RGA Americas and RGA
Barbados do not have material restrictions on their ability to pay dividends out
of retained earnings.
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 Generally
Accepted Accounting Principles ("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. In 2001, the Board of
Directors approved a repurchase program authorizing RGA to purchase up to $50
million of its shares of stock, as conditions warrant. As of December 31, 2002,
RGA purchased approximately 0.2 million shares of treasury stock under the
program at an aggregate cost of $6.6 million. The Company did not purchase
treasury stock during 2001. The Company purchased approximately 0.7 million
shares of treasury stock in 2000, under a prior repurchase program approved by
the Board, at an aggregate cost of $20.0 million.
The Company's $140.0 million U.S. credit facility expires in May 2003.
No amount was outstanding under this facility as of December 31, 2002; however,
the Company is currently planning on renewing this facility. The Company can
give no assurances that it will be successful in negotiating the renewal, and if
successful, that the terms, including cost, will be comparable to the current
terms.
Historically, RGA has paid quarterly dividends ranging from $0.027 per
share in 1993 to $0.06 per share in 2002. 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
$600.0 million to $700.0 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
27
any of the agreements, including, but not limited to, non-payment of
indebtedness when due for amounts greater than $10.0 million or $25.0 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, 2002, the Company had
$327.8 million in outstanding borrowings under its debt agreements and was in
compliance with all covenants under those agreements. Of that amount,
approximately $28.4 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 16, "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. If on any date
after December 18, 2004, the closing price of RGA common stock exceeds and has
exceeded a price per share equal to $47.97 for at least 20 trading days within
the immediately preceding 30 consecutive trading days, the Company may redeem
the warrants in whole for cash, RGA common stock, or a combination of cash and
RGA common stock.
Consolidated interest expense increased significantly in 2002 due to
the addition, in December 2001, 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 $120.0 million on its U.S. revolving
credit facility and to prepay and terminate the $75.0 million term loan with
MetLife Credit Corp. Interest rates on the U.S. revolving credit facility and
$75.0 million term loan ranged from 2.6% to 7.1% in 2001. As of December 31,
2002, the average interest rate on long-term debt outstanding, excluding the
PIERS, was 6.74%.
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 concern 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 premiums ceded prior to
28
the recapture of such business, but would reduce premiums in subsequent periods.
Additionally, some treaties give the ceding companies 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, 2002, these treaties had approximately $294.7 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 $532.8 million were held in trust for the benefit of
certain subsidiaries of the Company to satisfy collateral requirements for
reinsurance business at December 31, 2002. Additionally, securities with an
amortized cost of $931.6 million, as of December 31, 2002, were held in trust to
satisfy collateral requirements under certain third-party 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. RGA has issued guarantees of its
subsidiaries' performance for the payment of amounts due under certain
reinsurance treaties, whereby if the subsidiary fails to meet its obligations,
RGA or one of its other subsidiaries will make the payment. These guarantees are
granted to ceding companies in order to provide them additional security,
particularly in cases where RGA's subsidiary is relatively new or not of a
significant size, relative to the ceding company. Total liabilities supported by
the guarantees, before consideration for any legally offsetting amounts due from
the guaranteed party, totaled $126.6 million as of December 31, 2002 and are
reflected on the Company's consolidated balance sheet as future policy benefits.
The Company's principal cash inflows from its investing activities
result 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 inflows include selling short-term investments or fixed
maturity securities and drawing additional funds under existing credit
facilities, under which the Company had availability of $155.4 million as of
December 31, 2002. As previously mentioned, the Company is currently planning to
renew its $140.0 million U.S. credit facility that expires in May 2003. No
amount was outstanding under this facility as of December 31, 2002.
The Company's principal cash outflows primarily relate to the payment
of claims liabilities, interest credited, operating expenses, income taxes, and
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 provided by operating activities for the
years ended December 31, 2002, 2001, and 2000, were $161.9 million, $243.9
million, and $192.8 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.
29
The following table displays the Company's contractual obligations
identified in the table, 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 $ 327.8 $ 28.4 $ 99.5 $ 199.9
Operating Leases 28.8 13.2 7.5 8.1
Trust Preferred Securities of Subsidiary 225.0 - - 225.0
----------------------------------------------------
Total $ 581.6 $ 41.6 $ 107.0 $ 433.0
====================================================
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, 2002, there were approximately $39.7
million of outstanding bank letters of credit in favor of third parties.
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, 2002, $339.4
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 11,
"Related Party Transactions," of the Notes to Consolidated Financial
Statements).
Net cash used in investing activities was $582.5 million, $576.4
million, and $712.5 million in 2002, 2001, and 2000, respectively. Changes in
cash used in investing activities primarily relate to the management of the
Company's investment portfolios and the investment of excess capital generated
by operating and financing activities.
Net cash provided by financing activities was $285.5 million, $487.9
million, and $565.5 million in 2002, 2001, and 2000, respectively. Changes in
cash provided by financing activities primarily relate to the issuance of equity
or debt securities, borrowings or payments under the Company's existing credit
agreements, treasury stock activity, and excess deposits under investment type
contracts.
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. Certain of these asset-intensive agreements,
primarily in the U.S. operating segment, are generally funded by fixed maturity
securities that are withheld by the ceding company. As of December 31, 2002,
funds withheld at interest on these transactions totaled approximately $1.4
billion.
Additionally, deferred costs related to interest-sensitive life and
investment-type contracts are amortized over the lives of the contracts, in
relation to the present value of estimated gross profits (EGP) from mortality,
investment income, and expense margins. The EGP for asset-intensive products
include the following components: (1) estimates of fees charged to policyholders
to cover mortality, surrenders and maintenance costs; (2) expected interest rate
spreads between income earned and amounts credited to policyholder accounts; and
(3) estimated costs of administration. EGP is also reduced by our estimate of
future losses due to defaults in fixed maturity securities. Deferred policy
acquisition costs ("DAC") are sensitive to changes in assumptions regarding
these EGP components, and any change in such an assumption could have an impact
on our profitability.
30
The Company continuously reviews the EGP valuation model and
assumptions so that the assumptions reflect a reasonable view of the future. Two
assumptions are considered to be most significant: (1) estimated interest
spread, and (2) estimated future policy lapses. The following table reflects the
possible change that would occur in a given year, if assumptions are changed as
illustrated, as a percentage of current deferred policy acquisition costs
related to asset-intensive products:
ONE-TIME
ONE-TIME DECREASE IN
QUANTITATIVE CHANGE IN SIGNIFICANT ASSUMPTIONS INCREASE IN DAC DAC
---------------------------------------------- --------------- ---------------
Estimated interest spread increasing (decreasing) 25 basis 0.8% (1.0)%
points from the current spread
Estimated policy lapse rates decreasing (increasing) 20% on 0.7% (1.4)%
a permanent basis (including surrender charges)
In general, a change in assumption that improves our expectations
regarding EGP is going to have the impact of deferring the amortization of DAC
into the future, thus increasing earnings and the current DAC balance.
Conversely, a change in assumption that decreases EGP will have the effect of
speeding up the amortization of DAC, thus reducing earnings and lowering the DAC
balance. We also adjust DAC to reflect changes in the unrealized gains and
losses on available for sale fixed maturity securities since this impacts EGP.
This adjustment to DAC is reflected in accumulated other comprehensive income
(loss).
The DAC associated with the Company's non asset-intensive business is
less sensitive to changes in estimates for investment yields, mortality and
lapses. In accordance with Statement of Financial Accounting Standards No. 60,
"Accounting and Reporting by Insurance Enterprises", the estimates include
provisions for the risk of adverse deviation and are not adjusted unless
experience significantly deteriorates to the point where a premium deficiency
exists.
The following table displays DAC balances for asset-intensive business
and non-asset-intensive business by segment as of December 31, 2002:
ASSET-INTENSIVE NON-ASSET-INTENSIVE TOTAL
(IN THOUSANDS) DAC DAC DAC
-------------- --- --- ---
U.S. $ 183,696 $ 432,274 $ 615,970
Canada - 113,447 113,447
Other International:
Asia Pacific - 130,797 130,797
Europe & S.A. - 219,553 219,553
Corporate and Other - 5,169 5,169
--------------- --------------- ---------------
Total $ 183,696 $ 901,240 $ 1,084,936
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, 2002, 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 jurisdictions.
Investments
The Company had total cash and invested assets of $6.7 billion and $5.3
billion at December 31, 2002 and 2001, respectively. All investments made by RGA
and its subsidiaries conform to the qualitative and
31
quantitative limits prescribed by the applicable jurisdiction's insurance laws
and regulations. In addition, the operating companies' Boards of Directors
periodically review the investment portfolios of the international subsidiaries.
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 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 6.51% in 2002, compared with
6.79% in 2001, and 7.30% in 2000. See "Note 5 - Investments" in the Notes to
Consolidated Financial Statements for additional information regarding the
Company's investments.
Fixed maturity securities available for sale
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, 2002,
approximately 97% 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 32.2% of
fixed maturity securities as of December 31, 2002, an increase from 30.6% as of
December 31, 2001. A majority of these securities were classified as corporate
securities, with an average Standard and Poor's ("S&P") rating of A at December
31, 2002. The Company owns floating rate securities that represent approximately
2.8% of fixed maturity securities at December 31, 2002, compared to 6.1% at
December 31, 2001. 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 $165.4 million in asset-backed securities at December 31, 2002,
which include credit card and automobile receivables, home equity loans and
collateralized bond obligations. The Company's asset-backed securities are
diversified by issuer and contain both floating and fixed rate securities.
Approximately 33.0%, or $54.5 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 marketplace.
The Company monitors its fixed maturity securities to determine
impairments in value. In conjunction with its external investment managers, the
Company evaluates factors such as financial condition of the issuer, payment
performance, the length of time and the extent to which the market value has
been below amortized cost, compliance with covenants, general market conditions
and industry sector, intent and ability to hold securities, and various other
subjective factors. As of December 31, 2002, the Company held fixed maturities
with a cost basis of $23.1 million and a market value of $22.9 million, or 0.7%
of fixed maturities, that were non-income producing. 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. The Company
recorded other than temporary write-downs of $33.9 million, $43.4 million, and
$10.1 million in 2002, 2001, and 2000, respectively. The circumstances that gave
rise to these impairments were bankruptcy
32
proceedings and deterioration in collateral value supporting certain
asset-backed securities. During 2002, the Company sold fixed maturity securities
with a fair value of $466.1 million at a loss of $44.4 million.
The following table presents the total gross unrealized losses for
fixed maturity securities where the estimated fair value had declined and
remained below amortized cost by the indicated amount (in thousands):
At December 31, 2002
----------------------------
Gross Unrealized
Losses % of Total
---------------- ----------
Less than 20% $ 27,460 49.1%
20% or more for less than six months 21,727 38.8%
20% or more for six months or greater 6,741 12.1%
---------- ----------
Total $ 55,928 100.0%
While all of these securities are monitored for potential impairment,
the Company's experience indicates that the first two categories do not present
as great a risk of impairment, and often, fair values recover over time. These
securities have generally been adversely affected by the downturn in the
financial markets, overall economic conditions, and continuing effects of the
September 11, 2001 tragedies. Substantially all of the $6.7 million in
unrealized losses on fixed maturity securities whose book has exceeded market
20% or more for six months or longer were related to Canadian zero coupon bonds
whose maturities are long term. Small movements in interest rates can have a
significant impact on the fair value of these securities due to their long-term
duration. The issuers of these bonds are substantially all highly rated Canadian
corporations or government agencies.
The following table presents the total gross unrealized losses for
fixed maturity securities as of December 31, 2002, by class of security, and
broken out between investment and non-investment grade investments whose market
value has been below amortized cost for the length of time indicated (in
thousands):
Number of months
----------------------------------------------------
More than
Less than six, but less Over
six than twelve twelve Total
--- ----------- ------ -----
Investment grade securities:
Commercial and industrial $ 1,563 $ 244 $ 17,276 $ 19,083
Public utilities 16 110 6,176 6,302
Asset-backed securities 3,502 5 11,426 14,933
Canadian and Canadian provincial governments 450 - 3,160 3,610
Mortgage-backed securities 145 672 7 824
Finance 125 245 2,338 2,708
U.S. government and agencies 15 - 9 24
---------- ---------- ---------- ----------
Investment grade securities 5,816 1,276 40,392 47,484
---------- ---------- ---------- ----------
Non-investment grade securities:
Commercial and industrial 609 603 1,693 2,905
Public utilities - 586 2,151 2,737
Asset-backed securities 1,713 - 1,069 2,782
Mortgage-backed securities 1 - - 1
Finance 19 - - 19
---------- ---------- ---------- ----------
Non-investment grade securities 2,342 1,189 4,913 8,444
---------- ---------- ---------- ----------
Total $ 8,158 $ 2,465 $ 45,305 $ 55,928
========== ========== ========== ==========
33
Approximately $35.6 million of the total unrealized losses were related
to securities issued by the airline, financial, automotive, telecommunication,
and utility sectors. These securities have generally been adversely affected by
the downturn in the financial markets, overall economic conditions, and
continuing effects of the September 11, 2001 tragedies. The Company believes
that the analysis of each such security whose price has been below market for
greater than twelve months indicated that the financial strength, liquidity,
leverage, future outlook and/or recent management actions support the view that
the security was not other-than-temporarily impaired as of December 31, 2002.
Mortgage loans on real estate
Mortgage loans represented approximately 3.4% and 3.2% of the Company's
investments as of December 31, 2002 and 2001, respectively. As of December 31,
2002, 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 $11.5 million, with the average
mortgage loan investment as of December 31, 2002, totaling approximately $3.8
million. The mortgage loan portfolio was diversified by geographic region and
property type as discussed further in Note 5 of the Notes to Consolidated
Financial Statements. Substantially all mortgage loans are performing and no
valuation allowance has been established as of December 31, 2002.
Policy loans
Policy loans comprised approximately 12.6% and 15.2% of the Company's
investments as of December 31, 2002 and 2001, 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.
34
Funds withheld at interest
Funds withheld at interest comprised approximately 29.7% and 22.5% of
the Company's investments as of December 31, 2002 and 2001, respectively. For
agreements written on a modified coinsurance basis and certain agreements
written on a coinsurance basis, assets equal to the net statutory reserves are
withheld and legally owned and managed by the ceding company, and are reflected
as funds withheld at interest on RGA's balance sheet. In the event of a ceding
company's insolvency, RGA would need to assert a claim on the assets supporting
its reserve liabilities. However, the risk of loss to RGA is mitigated by its
ability to offset amounts it owes the ceding company for claims or allowances
with amounts owed to RGA from the ceding company. Interest accrues to these
assets at rates defined by the treaty terms. The Company is subject to the
investment performance on the withheld assets, although it does not directly
control them. These assets are primarily fixed maturity investment securities
and pose risks similar to the fixed maturity securities the Company owns. To
mitigate this risk, the Company helps set the investment guidelines followed by
the ceding company and monitors compliance. Ceding companies with funds withheld
at interest had an average A.M. Best rating of "A-". Certain ceding companies
maintain segregated portfolios for the benefit of the Company. Based on data
provided by ceding companies as of December 31, 2002, funds withheld at interest
were approximately (in thousands):
At December 31, 2002
--------------------------------------------
Underlying Security Type: Book Value Market Value % of Total
------------------------ ---------- ------------ ----------
Investment grade U.S. corporate securities $ 1,229,881 $ 1,280,210 87.0%
Below investment grade U.S. corporate securities 42,981 41,321 2.8%
Unrated securities 137,207 144,489 9.8%
Other 6,290 6,312 0.4%
------------ ------------ -----
Total segregated portfolios 1,416,359 1,472,332 100.0%
Funds withheld at interest associated with
non-segregated portfolios 558,712 558,712
------------ ------------
Total funds withheld at interest $ 1,975,071 $ 2,031,044
============ ============
Based on data provided by the ceding companies as of December 31, 2002,
the maturity distribution of the segregated portfolio portion of funds withheld
at interest was approximately (in thousands):
At December 31, 2002
--------------------------------------------
Maturity: Book Value Market Value % of Total
-------- ---------- ------------ ----------
Within one year $ 19,176 $ 19,363 1.3%
More than one, less than five years 251,090 258,807 17.6%
More than five, less than ten years 466,445 496,331 33.7%
Ten years or more 679,648 697,831 47.4%
------------ ------------ -----
Total all years $ 1,416,359 $ 1,472,332 100.0%
============ ============ =====
The Company utilizes derivative financial instruments on a very limited
basis, primarily to improve the management of the investment-related risks
associated with the reinsurance of equity-indexed annuities. The Company invests
primarily in exchange-traded and customized Standard and Poor's equity index
options. The Company 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, 2002, the majority of the Company's invested assets
were managed by third-party companies; however, the Company's chief investment
officer has the primary responsibility for the day-to-day oversight of all the
Company's investments.
35
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 manages its exposure to interest
rates principally by matching floating rate liabilities with corresponding
floating rate assets and by matching fixed rate liabilities with corresponding
fixed rate assets. On a limited basis, the Company uses equity options to
minimize its exposure to movements in equity markets that have a direct
correlation with certain of its reinsurance products.
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 in 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% unfavorable change in market interest rates at
its fiscal years ended December 31, 2002 and 2001 was $78.4 million and $61.0
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, 2002, 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
36
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% unfavorable change in market interest rates at its fiscal years
ended December 31, 2002 and 2001 was $0.3 million and $6.0 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, 2002, 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 manages its exposure to currency
principally by matching invested assets with the underlying reinsurance
liabilities, but 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
business. Those net contract liabilities totaled approximately 65.1 million
Argentine pesos as of December 31, 2002. The net unrealized foreign currency
gain of $45.7 million is reflected in accumulated other comprehensive income on
the consolidated balance sheet as of December 31, 2002. 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. 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.
37
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 February 2003, the Financial Accounting Standards Board ("FASB")
issued for comment Statement of Financial Accounting Standards ("SFAS") No. 133
Implementation Issue No. B36, "Embedded Derivatives: Bifurcation of a Debt
Instrument That Incorporates Both Interest Rate Risk and Credit Risk Exposures
That are Unrelated or Only Partially Related to the Creditworthiness of the
Issuer of That Instrument" ("FASB B36"). In this tentative guidance, the FASB
has concluded that funds withheld by a ceding company, for modified coinsurance
and coinsurance with funds withheld contracts, may contain an embedded
derivative which should be bifurcated and valued. The effective date of the
implementation guidance, as currently proposed, is the first day of the first
fiscal quarter beginning after June 15, 2003. As of December 31, 2002, the
Company has not separately reported any potential embedded derivatives
associated with these contracts, which it believes is consistent with industry
practice. At this time, the Company cannot estimate the impact, if any, of the
FASB B36 proposed guidance.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. All variable interests acquired before February 1, 2003 must follow the
new rule in accounting periods beginning after June 15, 2003. The Company does
not believe the implementation of FIN 46 will have a material effect on its
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123." Effective January 1, 2003, the Company will prospectively
adopt the fair value-based employee stock-based compensation expense recognition
provisions of SFAS No. 123, as amended by SFAS No. 148. The Company currently
applies the intrinsic value-based expense provisions set forth in APB Opinion
No. 25, Accounting for Stock Issued to Employees, ("APB 25"). The estimated
impact of the adoption of the fair value-based method on 2003 net income is
estimated at approximately $1.1 million, net of tax. This amount represents
estimated compensation cost associated with stock option grants expected to be
issued in 2003.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 identifies
characteristics of certain guarantee contracts and requires that a liability be
recognized at fair value at the inception of such guarantees for the obligations
undertaken by the guarantor. Additional disclosures also are prescribed for
certain guarantee contracts. The initial recognition and initial measurement
provisions of FIN 45 are effective for these guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for the
Company for its fiscal year ended December 31, 2002. The Company does not
believe the implementation of FIN 45 will have a material effect on its
consolidated financial statements.
38
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Under SFAS No. 146, costs
associated with an exit or disposal activity shall be recognized at fair value
in the period in which the liability is incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of the statement will be
effective for exit or disposal activities that are initiated after December 31,
2002.
In July 2001, the FASB issued 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 reported using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate 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
are not amortized into results of operations, but instead are reviewed for
impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. During the first quarter of 2002, the company completed the
transitional impairment test of goodwill. The results of the impairment test did
not have a material impact to the Company's results of operations. During 2002,
there were no changes to goodwill as a result of acquisitions or disposals.
Goodwill as of December 31, 2002 totaled $7.0 million and was related to the
Company's purchase of RGA Financial Group L.L.C. in 2000. Goodwill amortization
in the comparable prior-year periods was not material to the Company's results
of operations.
39
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
------------ ------------
(dollars in thousands)
ASSETS
Fixed maturity securities available for sale, at fair value $ 3,477,916 $ 2,768,285
Mortgage loans on real estate 227,492 163,948
Policy loans 841,120 774,660
Funds withheld at interest 1,975,071 1,142,643
Short-term investments 4,269 140,573
Other invested assets 124,327 98,315
------------ ------------
Total investments 6,650,195 5,088,424
Cash and cash equivalents 88,101 226,670
Accrued investment income 35,514 30,454
Premiums receivable 253,892 161,436
Funds withheld
Reinsurance ceded receivables 452,220 410,947
Deferred policy acquisition costs 1,084,936 800,319
Other reinsurance balances 288,833 268,133
Other assets 38,906 29,668
------------ ------------
Total assets $ 8,892,597 $ 7,016,051
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 2,430,042 $ 2,101,777
Interest sensitive contract liabilities 3,413,462 2,325,264
Other policy claims and benefits 760,166 650,082
Other reinsurance balances 233,286 169,393
Deferred income taxes 291,980 162,092
Other liabilities 55,235 120,374
Other debt 0 0
Long-term debt 327,787 323,396
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company 158,176 158,085
------------ ------------
Total liabilities 7,670,134 6,010,463
Commitments and contingent liabilities (Note 14) - -
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, 2002 and 2001) 511 511
Warrants 66915 66915
Additional paid-in-capital 613042 611806
Retained earnings 480301 369349
Accumulated other comprehensive income (loss):
Accumulated currency translation adjustment, net of income taxes 715 -6088
Unrealized appreciation (depreciation) of securities, net of income taxes 102768 -87
------------ ------------
Total stockholders' equity before treasury stock 1,264,252 1,042,406
Less treasury shares held of 1,596,629 and 1,526,730 at cost at
December 31, 2002 and 2001, respectively (41,789) (36,818)
------------ ------------
Total stockholders' equity 1,222,463 1,005,588
------------ ------------
Total liabilities and stockholders' equity $ 8,892,597 $ 7,016,051
============ ============
See accompanying notes to consolidated financial statements.
40
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
(in thousands, except per share data)
REVENUES:
Net premiums $ 1,980,666 $ 1,661,762 $ 1,404,066
Investment income, net of related expenses 374,512 340,559 326,505
Realized investment losses, net (14,651) (68,431) (28,651)
Other revenues 41,436 34,394 23,815
------------ ------------ ------------
Total revenues 2,381,963 1,968,284 1,725,735
------------ ------------ ------------
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,539,464 1,376,802 1,103,548
Interest credited 126,715 111,712 104,782
Policy acquisition costs and other insurance expenses 391,504 304,217 243,542
Other operating expenses 94,786 91,306 81,209
Interest expense 35,516 18,097 17,596
------------ ------------ ------------
Total benefits and expenses 2,187,985 1,902,134 1,550,677
------------ ------------ ------------
Income from continuing operations
before income taxes 193,978 66,150 175,058
Provision for income taxes 65,515 26,249 69,271
------------ ------------ ------------
Income from continuing operations 128,463 39,901 105,787
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (5,657) (6,855) (28,118)
------------ ------------ ------------
Net income $ 122,806 $ 33,046 $ 77,669
============ ============ ============
Earnings per share from continuing operations:
Basic earnings per share $ 2.60 $ 0.81 $ 2.14
============ ============ ============
Diluted earnings per share $ 2.59 $ 0.80 $ 2.12
============ ============ ============
Earnings per share from net income:
Basic earnings per share $ 2.49 $ 0.67 $ 1.57
============ ============ ============
Diluted earnings per share $ 2.47 $ 0.66 $ 1.56
============ ============ ============
Weighted average number of diluted shares outstanding
(in thousands) 49,648 49,905 49,920
============ ============ ============
See accompanying notes to consolidated financial statements.
41
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Additional
Preferred Common Paid In Retained
Stock Stock Warrants Capital Earnings
------------ ------------ ------------ ------------ ------------
Balance, January 1, 2000 $ - $ 511 $ - $ 611,016 $ 282,389
Comprehensive income:
Net income 77,669
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 (11,900)
Purchase of treasury stock
Reissuance of treasury stock 333
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 - 511 - 611,349 348,158
------------ ------------ ------------ ------------ ------------
Comprehensive income:
Net income 33,046
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 (11,855)
Issuance of warrants 66,915
Reissuance of treasury stock 457
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 - 511 66,915 611,806 369,349
------------ ------------ ------------ ------------ ------------
Comprehensive income:
Net income 122,806
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 (11,854)
Purchase of treasury stock
Reissuance of treasury stock 1,236
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 $ - $ 511 $ 66,915 $ 613,042 $ 480,301
============ ============ ============ ============ ============
Accumulated
Other
Comprehensive Comprehensive Treasury
Income (Loss) Income (Loss) Stock Total
------------- ------------- ------------ -----------
Balance, January 1, 2000 $ (141,250) $ (19,718) $ 732,948
Comprehensive income:
Net income $ 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)
Purchase of treasury stock (20,000) (20,000)
Reissuance of treasury stock 494 827
------------ ------------ -----------
Balance, December 31, 2000 (57,871) (39,224) 862,923
------------ ------------ -----------
Comprehensive income:
Net income $ 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)
Issuance of warrants 66,915
Reissuance of treasury stock 2,406 2,863
------------ ------------ -----------
Balance, December 31, 2001 (6,175) (36,818) 1,005,588
------------ ------------ -----------
Comprehensive income:
Net income $ 122,806 122,806
Other comprehensive income, net of income tax
Currency translation adjustments 6,803 6,803
Unrealized investment gains, net of related
offsets and reclassification adjustment 102,855 102,855
------------
Other comprehensive income 109,658 109,658
------------
Comprehensive income $ 232,464
============
Dividends to stockholders (11,854)
Purchase of treasury stock (6,594) (6,594)
Reissuance of treasury stock 1,623 2,859
------------ ------------ -----------
Balance, December 31, 2002 $ 103,483 $ (41,789) $ 1,222,463
============ ============ ===========
See accompanying notes to consolidated financial statements.
42
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2002 2001 2000
------------ ------------ ------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 122,806 $ 33,046 $ 77,669
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (4,958) 7,101 (379)
Premiums receivable (95,989) 64,929 68,407
Deferred policy acquisition costs (274,033) (180,110) (154,229)
Reinsurance ceded balances (41,273) (114,579) (908)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 460,601 357,840 188,595
Deferred income taxes 73,793 (32,901) 57,210
Other assets and other liabilities (74,576) 70,139 (24,958)
Amortization of net investment discounts, goodwill and other (35,902) (38,985) (35,884)
Realized investment losses, net 14,651 68,431 28,651
Other, net 16,731 9,020 (11,375)
------------ ------------ ------------
Net cash provided by operating activities 161,851 243,931 192,799
------------ ------------ ------------
CASH FLOWS FROM 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 2,204,813 1,129,263 576,240
Maturities of fixed maturity securites - available for sale 22,863 12,410 20,153
Purchases of fixed maturity securities - available for sale (2,749,069) (1,211,104) (1,352,647)
Cash invested in mortgage loans on real estate (78,605) (51,050) (21,951)
Cash invested in policy loans (70,240) (67,784) (63,812)
Cash invested in funds withheld at interest (41,828) (257,101) (64,394)
Principal payments on mortgage loans on real estate 15,069 15,376 9,525
Principal payments on policy loans 3,780 1 16,997
Change in short-term investments and other invested assets 110,717 (146,388) 162,746
------------ ------------ ------------
Net cash used in investing activities (582,500) (576,377) (712,484)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (11,854) (11,855) (11,900)
Proceeds from PIERS units offering, net - 217,340 -
Debt issuance and borrowings under credit agreements, net 1,610 49,029 88,303
Purchase of treasury stock (6,594) - (20,000)
Exercise of stock options 1,623 4,684 827
Excess deposits on universal life and other
investment type policies and contracts 300,761 228,667 508,259
------------ ------------ ------------
Net cash provided by financing activities 285,546 487,865 565,489
Effect of exchange rate changes (3,466) 454 677
------------ ------------ ------------
Change in cash and cash equivalents (138,569) 155,873 46,481
Cash and cash equivalents, beginning of year 226,670 70,797 24,316
------------ ------------ ------------
Cash and cash equivalents, end of year $ 88,101 $ 226,670 $ 70,797
============ ============ ============
Supplementary disclosure of cash flow information:
Amount of interest paid $ 34,687 $ 18,483 $ 16,900
Amount of income taxes paid $ 17,403 $ 26,418 $ 6,521
43
Note 1 ORGANIZATION
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company formed December 31, 1992. On December 31, 2002, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
48.8% 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 59.1%
of the outstanding shares of common stock of RGA as of December 31, 2002.
During 2002, MetLife purchased 327,600 additional common shares of RGA.
The purchases were 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 wholly-owned
subsidiaries, 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, including
incurred but not reported claims, 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.
44
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 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 investment 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 investment
managers, the Company evaluates factors such as financial condition of the
issuer, payment performance, the length of time and the extent to which the
market value has been below amortized cost, compliance with covenants, general
market conditions and industry sector, intent and ability to hold securities,
and various other subjective factors. The actual value at which such financial
instruments could actually be sold or settled with a willing buyer may differ
from such estimated realizable values.
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 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
established after management considers, among other things, the value of
underlying collateral and payment capabilities of debtors.
Short-term investments represent investments with original maturities
of greater than three months but less than twelve months and are stated at
amortized cost, which approximates fair value.
Policy loans are reported at the unpaid principal balance.
Funds withheld at interest 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. 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 include derivative contracts, common stocks and
preferred stocks, carried at fair value, and limited partnership interests,
carried at cost. Changes in fair value are recorded through accumulated other
comprehensive income (loss). 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-
45
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 $6.8 million. Changes in the fair value of these derivatives are
recorded as investment income on the consolidated statements of income. It is
the Company's policy to enter into derivative contracts primarily with highly
rated companies.
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 investments where declines in value are deemed to be other
than temporary in nature. The cost of investments sold is determined based upon
the specific identification method. Unrealized gains and losses on marketable
equity securities and fixed maturity securities classified as available for
sale, 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.
Premiums Receivable. Premiums are accrued for when due from the ceding
company, as adjusted for management estimates for lapsed premiums given
historical experience, financial health of specific ceding companies, collateral
value, and the legal right of offset on related amounts owed to the ceding
company.
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. For the years ended December
31, 2002 and 2001, the Company reflected charges of $1.0 million and $3.1
million, respectively, for unrecoverable deferred policy acquisition costs. No
such charges were reflected in 2000 results.
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.
Effective January 1, 2002, the Company accounts for goodwill pursuant to the
provisions of SFAS No. 142. Accordingly, goodwill and certain intangibles are
not amortized into results of
46
operations, but instead are reviewed for impairment and written down and charged
to results of operations only in the periods in which the recorded value of
goodwill and certain intangibles is more than its fair value. During the first
quarter of 2002, the Company completed the transitional impairment test of
goodwill. The results of the impairment test did not have a material impact to
the Company's results of operations. During 2002, there were no changes to
goodwill as a result of acquisitions or disposals. Goodwill as of December 31,
2002 totaled $7.0 million and was related to the purchase by the Company's U.S.
Operations of RGA Financial Group L.L.C. in 2000. Goodwill amortization in the
comparable prior-year periods was not material to the Company's results of
operations. 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. The value of business acquired was
approximately $7.5 million and $9.8 million, including accumulated amortization
of $5.9 million and $3.6 million, as of December 31, 2002 and 2001,
respectively. The value of business acquired amortization expense for the years
ended December 31, 2002, 2001, and 2000 was $2.2 million, $2.9 million, and $0.8
million, respectively. These amortized balances are included in other assets on
the consolidated balance sheet. Amortization of the value of business acquired
is estimated to be $1.7 million, $1.3 million, $1.0 million, $0.8 million, and
$0.6 million during 2003, 2004, 2005, 2006 and 2007, respectively.
Other Assets. In addition to the goodwill and value of business
acquired previously discussed, other assets primarily includes separate
accounts, unamortized debt issuance costs, capitalized software, and other
capitalized assets. Capitalized software, is stated at cost, less accumulated
amortization. Purchased software costs, as well as internal and external costs
incurred to develop internal-use computer software during the application
development stage, are capitalized. As of December 31, 2002, the Company has
capitalized approximately $11.2 million of internally developed software, which
is not yet in production.
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 (lapse) rates, and other assumptions. These assumptions include a
margin for adverse deviation and vary with the characteristics of the plan of
insurance, year of issue, age of insured, and other appropriate factors.
Interest rates range from 3.0% to 8.0%. 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.
47
The Company reinsures asset-intensive products, including annuities and
corporate-owned life insurance. The investment portfolios for these products are
segregated for management purposes within the general account of RGA Reinsurance
Company ("RGA Reinsurance"). The liabilities under 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.
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 the
caption "Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Company."
Warrants. During December 2001, the Trust sold 4.5 million 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 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.
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 losses on any single insured and to recover a portion of benefits
paid by ceding reinsurance to other insurance enterprises or
48
reinsurers under excess coverage and coinsurance (quota share) 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, RGA Barbados, and RGA Americas.
Retrocessions are arranged through RGA Reinsurance's retrocession pools for
amounts in excess of its retention limit. As of December 31, 2002, all rated
retrocession pool participants followed by the A.M. Best Company were rated B++
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. Life and health premiums
are recognized as revenue when due from the insured, and are reported net of
amounts retroceded. Benefits and expenses are reported net of amounts retroceded
and 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. Initial reserve changes are netted against premiums when
an in force block of business is reinsured.
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 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 4.2%, 6.1% and
6.7%, during 2002, 2001 and 2000, respectively. Interest crediting rates for
U.S. dollar-denominated investment-type contracts ranged from 2.8% to 6.8%
during 2002, 3.6% to 7.3% during 2001 and 5.3% to 7.2% during 2000. Weighted
average interest crediting rates for Mexican peso-denominated investment-type
contracts were 15.9%, 12.8% and 26.0% for 2002, 2001 and 2000, 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.
New Accounting Pronouncements. In February 2003, the Financial
Accounting Standards Board ("FASB") issued for comment Statement of Financial
Accounting Standards ("SFAS") No. 133 Implementation Issue No. B36, "Embedded
Derivatives: Bifurcation of a Debt Instrument That Incorporates Both Interest
Rate Risk and Credit Risk Exposures That are Unrelated or Only Partially Related
to the Creditworthiness of the Issuer of That Instrument" ("FASB B36"). In this
tentative guidance, the FASB has concluded that funds withheld by a ceding
company, for modified coinsurance and coinsurance with funds withheld contracts,
may contain an embedded derivative which should be bifurcated and valued. The
effective date of the implementation guidance, as currently proposed, is the
first day of the first fiscal quarter beginning after June 15, 2003. As of
December 31, 2002, the Company has not separately reported any
49
potential embedded derivatives associated with these contracts, which it
believes is consistent with industry practice. At this time, the Company cannot
estimate the impact, if any, of the FASB B36 proposed guidance.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("FIN 46"). This interpretation clarifies the
application of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN No. 46 applies
immediately to variable interest entities created after January 31, 2003, and to
variable interest entities in which an enterprise obtains an interest after that
date. All variable interests acquired before February 1, 2003 must follow the
new rule in accounting periods beginning after June 15, 2003. The Company does
not believe the implementation of FIN 46 will have a material effect on its
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB
Statement No. 123." Effective January 1, 2003, the Company will prospectively
adopt the fair value-based employee stock-based compensation expense recognition
provisions of SFAS No. 123, as amended by SFAS No. 148. The Company currently
applies the intrinsic value-based expense provisions set forth in APB Opinion
No. 25, Accounting for Stock Issued to Employees, ("APB 25"). The estimated
impact of the adoption of the fair value-based method on 2003 net income is
estimated at approximately $1.1 million, net of tax. This amount represents
estimated compensation cost associated with stock option grants expected to be
issued in 2003.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 identifies
characteristics of certain guarantee contracts and requires that a liability be
recognized at fair value at the inception of such guarantees for the obligations
undertaken by the guarantor. Additional disclosures also are prescribed for
certain guarantee contracts. The initial recognition and initial measurement
provisions of FIN 45 are effective for these guarantees issued or modified after
December 31, 2002. The disclosure requirements of FIN 45 are effective for the
Company for its fiscal year ended December 31, 2002. The Company does not
believe the implementation of FIN 45 will have a material impact on its
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." Under SFAS No. 146, costs
associated with an exit or disposal activity shall be recognized at fair value
in the period in which the liability is incurred rather than at the date of a
commitment to an exit or disposal plan. The provisions of the statement will be
effective for exit or disposal activities that are initiated after December 31,
2002.
In July 2001, the FASB issued 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 reported using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate 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
are not amortized into results of operations, but instead are reviewed for
impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. During the first quarter of 2002, the company completed the
transitional impairment test of goodwill. The results of the impairment test did
not have a material impact to the Company's results of operations. During 2002,
there were no changes to goodwill as a result of acquisitions or disposals.
Goodwill as of December 31, 2002 totaled $7.0 million and was related to the
Company's purchase of RGA Financial Group L.L.C. in 2000. Goodwill amortization
in the comparable prior-year periods was not material to the Company's results
of operations.
Reclassification. The Company has reclassified the presentation of
certain prior period information to conform to the 2002 presentation.
50
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, 2002, the Company purchased 225,500 shares of treasury stock
under this program at an aggregate cost of $6.6 million. All purchases were made
during 2002. The Company generally uses treasury shares to support the future
exercise of options granted under its stock option plans.
Note 4 DIVIDENDS
RGA paid cash dividends on common shares of $0.24 per share in 2002,
2001, and 2000.
Note 5 INVESTMENTS
Major categories of net investment income consist of the following (in
thousands):
Years Ended December 31, 2002 2001 2000
---- ---- ----
Fixed maturity securities $203,534 $192,685 $189,750
Mortgage loans on real estate 14,385 11,569 10,003
Policy loans 59,058 54,713 44,712
Funds withheld at interest 89,831 72,753 69,715
Short-term investments 3,393 6,513 11,129
Other invested assets 7,290 5,092 3,497
-------- -------- --------
Investment revenue 377,491 343,325 328,806
Investment expense 2,979 2,766 2,301
-------- -------- --------
Net investment income $374,512 $340,559 $326,505
======== ======== ========
The amortized cost, gross unrealized gains and losses, and estimated fair values
of investments in fixed maturity securities at December 31, 2002 and 2001 are as
follows (in thousands):
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
---- ----- ------ -----
Available for sale:
Commercial and industrial $1,092,373 $ 50,439 $ 21,930 $1,120,882
Public utilities 341,934 40,255 8,960 373,229
Asset-backed securities 178,988 4,733 18,309 165,412
Canadian and Canadian provincial governments 457,077 75,109 3,160 529,026
Mortgage-backed securities 423,505 24,287 824 446,968
Finance 337,119 19,561 2,726 353,954
U.S. government and agencies 410,143 11,883 19 422,007
Other foreign government securities 65,180 1,258 - 66,438
---------- ---------- ---------- ----------
$3,306,319 $ 227,525 $ 55,928 $3,477,916
========== ========== ========== ==========
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 securities 67,093 238 1,667 65,664
---------- ---------- ---------- ----------
$2,765,422 $ 124,857 $ 121,994 $2,768,285
========== ========== ========== ==========
51
There were no investments in any entity in excess of 10% of
stockholders' equity at December 31, 2002 or 2001, 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, primarily preferred stocks,
at December 31, 2002 and 2001 was approximately $103.9 million and $78.6
million, respectively. The cost basis of the derivative financial instruments at
December 31, 2002 and 2001 was approximately $4.4 million.
The amortized cost and estimated fair value of fixed maturity
securities available for sale at December 31, 2002 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, 2002, 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 $ 40,187 $ 41,162
Due after one year through five years 428,849 447,510
Due after five years through ten years 686,545 722,914
Due after ten years 1,145,862 1,240,271
Asset and mortgage-backed securities 1,004,876 1,026,059
---------- ----------
$3,306,319 $3,477,916
========== ==========
Net realized investment gains or losses consist of the following (in thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Fixed maturities and equity securities available for sale:
Realized gains $ 64,060 $ 34,108 $ 2,487
Realized losses (79,005) (101,854) (23,142)
Other, net 294 (685) (7,996)
--------- --------- ---------
Net losses $ (14,651) $ (68,431) $ (28,651)
========= ========= =========
Included in net realized losses are other than temporary write-downs of
fixed maturity securities of approximately $33.9 million, $43.4 million, and
$10.1 million in 2002, 2001, and 2000, respectively. The Company incurred $24.2
million in realized losses due to the other than temporary impairment in value
of collateralized bond obligations during 2002. The Company also incurred
approximately $9.6 million in realized losses due to the sale of World Com/MCI
fixed maturity holdings during 2002. The Company incurred approximately $9.1
million in realized losses associated with the other than temporary write-down
and sale of Enron securities during 2001. Also during 2001, the Company incurred
approximately $27.0 million in realized investment 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. Losses during
2000 include $8.9 million in realized losses associated with the sale of
subsidiaries.
At December 31, 2002, fixed maturity securities held by the Company
that were below investment grade had an estimated fair value of approximately
$123.9 million. At December 31, 2002, the Company owned non-income producing
securities with an amortized cost of $23.1 million and a market value of $22.9
million.
52
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):
2002 2001
---- ----
Carrying Percentage Carrying Percentage
Value Of Total Value Of Total
----- -------- ----- --------
Property Type:
Apartment $ 15,080 6.63% $ 705 0.43%
Retail 61,395 26.99% 49,153 29.98%
Office building 89,765 39.46% 72,958 44.50%
Industrial 59,279 26.05% 39,037 23.81%
Other commercial 1,973 0.87% 2,095 1.28%
-------- -------- -------- --------
Total $227,492 100.00% $163,948 100.00%
======== ======== ======== ========
All the Company's mortgage loans are amortizing loans. As of December 31, 2002
and 2001, the Company's mortgage loans were distributed as follows (in
thousands):
2002 2001
---- ----
Carrying Percentage Carrying Percentage
Value Of Total Value Of Total
----- -------- ----- --------
United States:
Arizona $ 7,023 3.09% $ 9,102 5.55%
California 59,186 26.02% 38,178 23.29%
Colorado 8,467 3.72% 7,998 4.88%
Florida 19,294 8.48% 7,944 4.85%
Georgia 23,619 10.38% 21,258 12.97%
Illinois 11,736 5.16% 12,187 7.43%
Indiana 11,745 5.16% 5,363 3.27%
Kansas 7,169 3.15% 7,379 4.50%
Maryland 4,164 1.83% 4,436 2.71%
Missouri 14,440 6.35% 7,301 4.45%
Nevada 1,259 0.55% 1,340 0.81%
New Mexico 3,965 1.74% - -
North Carolina 15,885 6.99% 16,301 9.94%
Pennsylvania 5,569 2.45% 5,668 3.46%
Rhode Island 5,355 2.35% - -
South Dakota 7,480 3.29% - -
Texas 9,376 4.12% 2,159 1.32%
Virginia 3,396 1.49% 3,442 2.10%
Washington 8,364 3.68% 13,892 8.47%
-------- -------- -------- --------
Total $227,492 100.00% $163,948 100.00%
======== ======== ======== ========
Substantially all mortgage loans are performing and no valuation allowance has
been established as of December 31, 2002.
53
The maturities of the mortgage loans are as follows (in thousands):
2002 2001
---- ----
DUE ONE YEAR THROUGH FIVE YEARS $ 40,924 $ 8,609
Due after five years 108,337 84,839
Due after ten years 78,231 70,500
-------- --------
Total $227,492 $163,948
======== ========
Policy loans comprised approximately 12.6% and 15.2% of the Company's
investments as of December 31, 2002 and 2001, 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.
Funds withheld at interest comprised approximately 29.7% and 22.5% of
the Company's investments as of December 31, 2002 and 2001, respectively. For
agreements written on a modified coinsurance basis and certain agreements
written on a coinsurance basis, assets equal to the net statutory reserves are
withheld and legally owned and managed by the ceding company and are reflected
as funds withheld at interest on RGA'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. In most cases, the Company is
subject to the investment performance on the funds 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.
Note 6 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, 2002 and 2001.
SFAS No. 107, "Disclosures about 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):
2002 2001
---- ----
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
Assets:
Fixed maturity securities $3,477,916 $3,477,916 $2,768,285 $2,768,285
Mortgage loans on real estate 227,492 248,483 163,948 164,904
Policy loans 841,120 841,120 774,660 774,660
Funds withheld at interest 1,975,071 2,031,044 1,142,643 1,133,781
Short-term investments 4,269 4,269 140,573 140,573
Other invested assets 124,327 124,327 98,315 98,315
Liabilities:
Interest-sensitive contract liabilities $3,413,462 $3,223,005 $2,325,264 $2,264,432
Long-term debt 327,787 347,179 323,396 328,905
Company-obligated mandatorily
redeemable preferred securities 158,176 177,401 158,085 158,839
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
54
funds withheld at interest approximates fair value except where the funds
withheld are specifically identified in the agreement. The carrying value of
short-term investments at December 31, 2002 and 2001 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 7 REINSURANCE
Retrocession reinsurance treaties 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, 2002 and 2001, no allowances were deemed necessary. The Company regularly
evaluates the financial condition of its reinsurers / retrocessionaires.
The effect of reinsurance on net premiums and amounts earned is as
follows (in thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Direct $ 4,986 $ 11,471 $ 26,077
Reinsurance assumed 2,325,512 1,839,083 1,600,106
Reinsurance ceded (349,832) (188,792) (222,117)
----------- ----------- -----------
Net premiums and amounts earned $ 1,980,666 $ 1,661,762 $ 1,404,066
=========== =========== ===========
The effect of reinsurance on policyholder claims and other policy benefits is as
follows (in thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Direct $ 3,330 $ 6,104 $ 27,327
Reinsurance assumed 1,744,630 1,525,248 1,290,175
Reinsurance ceded (208,496) (154,550) (213,954)
----------- ----------- -----------
Net policyholder claims and benefits $ 1,539,464 $ 1,376,802 $ 1,103,548
=========== =========== ===========
At December 31, 2002 and 2001, 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, 2002 $ 75 $758,875 $162,395 $596,555 127.21%
December 31, 2001 73 615,990 117,748 498,315 123.61%
December 31, 2000 86 545,950 78,226 467,810 116.70%
At December 31, 2002, the Company has provided approximately $872.7
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. 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
55
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, 2002, these
treaties had approximately $294.7 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 $532.8
million were held in trust to satisfy collateral requirements for reinsurance
business for the benefit of certain subsidiaries of the company at December 31,
2002. Additionally, securities with an amortized cost of $931.6 million, as of
December 31, 2002, were held in trust to satisfy collateral requirements under
certain third-party 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 8 DEFERRED POLICY ACQUISITION COSTS
The following reflects the amounts of policy acquisition costs deferred
and amortized (in thousands):
Years Ended December 31 2002 2001 2000
----------------------- ---- ---- ----
Deferred policy acquisition costs
Assumed $ 1,162,255 $ 860,971 $ 692,345
Retroceded (77,319) (60,652) (70,870)
----------- ----------- -----------
Net $ 1,084,936 $ 800,319 $ 621,475
=========== =========== ===========
Years Ended December 31 2002 2001 2000
----------------------- ---- ---- ----
Beginning of year $ 800,319 $ 621,475 $ 478,389
Capitalized
Assumed 620,050 481,697 379,126
Retroceded (16,331) (11,377) (22,490)
Amortized
Assumed (331,873) (324,641) (230,415)
Retroceded 12,771 33,165 16,865
----------- ----------- -----------
End of year $ 1,084,936 $ 800,319 $ 621,475
=========== =========== ===========
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 9 INCOME TAX
The provision for income tax expense attributable to income from
continuing operations consists of the following (in thousands):
Years Ended December 31 2002 2001 2000
----------------------- ---- ---- ----
Current income tax expense (benefit) $(14,412) $ 49,738 $ 12,789
Deferred income tax expense (benefit) 57,221 (31,866) 46,494
Foreign current tax expense (benefit) 6,134 9,412 (728)
Foreign deferred tax expense (benefit) 16,572 (1,035) 10,716
-------- -------- --------
Provision for income taxes $ 65,515 $ 26,249 $ 69,271
======== ======== ========
56
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):
Years Ended December 31 2002 2001 2000
----------------------- ---- ---- ----
Tax provision at U.S. statutory rate $ 67,892 $ 23,153 $ 61,371
Increase (decrease) in income taxes resulting from:
Foreign tax rate differing from U.S. tax rate (124) (784) 1,049
Settlement of IRS audit (2,000) - -
Travel and entertainment 129 32 134
Intangible amortization 199 65 215
Deferred tax valuation allowance (211) 3,501 2,369
Basis differential on sale of Chilean subsidiaries - - 2,447
Other, net (370) 282 1,686
-------- -------- --------
Total provision for income taxes $ 65,515 $ 26,249 $ 69,271
======== ======== ========
Total income taxes were as follows (in thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Income tax from continuing operations: $ 65,515 $ 26,249 $ 69,271
Tax benefit on discontinued operations (3,066) (3,691) (15,140)
Income tax from stockholders' equity:
Unrealized holding gain on debt and equity securities
recognized for financial reporting purposes 51,591 21,320 51,766
Exercise of stock options (1,943) (1,653) (344)
Foreign currency translation (3,664) (5,266) 3,208
--------- --------- ---------
Total income tax provided $ 108,433 $ 36,959 $ 108,761
========= ========= =========
57
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liabilities at December 31, 2002
and 2001, are presented in the following tables (in thousands):
Years Ended December 31 2002 2001
---- ----
Deferred income tax assets:
Nondeductible accruals $ 21,120 $ 19,433
Differences in foreign currency translation - 3,824
Deferred acquisition costs capitalized for tax 33,561 28,103
Net operating loss carryforward 148,803 122,852
Foreign tax & AMT credit carryforward 9,494 7,540
Capital loss carryforward 4,831 4,748
--------- ---------
Subtotal 217,809 186,500
Valuation allowance (12,458) (13,748)
--------- ---------
Total deferred income tax assets 205,351 172,752
--------- ---------
Deferred income tax liabilities:
Deferred acquisition costs capitalized for financial reporting 386,953 296,290
Differences between tax and financial reporting amounts concerning
certain reinsurance transactions and future policy benefits 69,521 22,661
Differences in foreign currency translation 385 -
Differences in the tax basis of cash and invested assets 40,472 15,893
--------- ---------
Total deferred income tax liabilities 497,331 334,844
--------- ---------
Net deferred income tax liabilities $ 291,980 $ 162,092
========= =========
As of December 31, 2002 and 2001, a valuation allowance for deferred
tax assets of approximately $12.5 million and $13.7 million, respectively, was
provided on the foreign tax credits, 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 cannot assume, based on the weight
of the available evidence, that the deferred income taxes will 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 2002, 2001, and 2000, the Company received federal income tax
refunds of approximately $5.2 million, $5.0 million and $44.8 million,
respectively. The Company made federal income tax payments of approximately
$17.4 million, $26.4 million and $6.5 million in 2002, 2001 and 2000,
respectively. At December 31, 2002 and 2001, the Company recognized deferred tax
assets associated with net operating losses of approximately $391.9 million and
$313.9 million, respectively, that will expire between 2011 and 2017. However,
these net operating losses are expected to be utilized in the normal course of
business during the period allowed for carryforwards and, in any event, are not
expected to be lost given tax planning strategies available to the Company.
The Company's tax returns have been audited by the relevant taxing
authorities for all years through 1999. The Company believes that any
adjustments that might be required for subsequent years will not have a material
effect on the Company's financial statements.
Note 10 EMPLOYEE BENEFIT PLANS
Most of the Company's U.S. employees participate in a non-contributory
qualified 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
58
deductible for federal income tax purposes when the benefits are paid. The
Company recorded net benefits expense of approximately $1.5 million, $1.1
million, and $0.9 million for 2002, 2001 and 2000, respectively, related to
these plans. The unfunded benefit liability related to these plans as of
December 31, 2002 and 2001 was approximately $8.4 million and $6.5 million,
respectively. The weighted-average discount rate and long-term rate of return
assumptions used were 7.25% and 9.00% for 2002, and 7.5% and 9.0% for both 2001
and 2000, respectively. The weighted-average discount rate and long-term rate of
return assumptions to be used in 2003 are 6.75% and 8.75%, respectively. The
impact of the change in assumptions is not expected to be material to the
Company's results of operations in 2003.
The Company's full time U.S. employees may participate in a defined
contribution 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 $1.2 million and $1.3 million in 2002 and 2001, respectively.
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 $0.6 million, $0.5 million, and $0.3
million for 2002, 2001 and 2000, respectively, related to these postretirement
plans. The projected obligation was approximately $4.5 million and $3.5 million
as of December 31, 2002 and 2001, respectively.
The 2002 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 2002 net periodic
benefit cost by approximately $0.1 million and the 2002 postretirement benefit
obligation by approximately $0.9 million.
Note 11 RELATED PARTY TRANSACTIONS
General American and MetLife have historically provided certain
administrative services to RGA and RGA Reinsurance. Such services have included
legal, risk management and corporate travel. The cost for the years ended
December 31, 2002, 2001 and 2000 was approximately $1.2 million, $1.1 million
and $2.6 million respectively.
The Company also has direct policies and reinsurance agreements with
MetLife and certain of its subsidiaries. As of December 31, 2002 and 2001, the
Company had assets and liabilities related to these agreements totaling $78.5
million and $183.1 million, and $112.5 million and $109.0 million, respectively.
Additionally, the Company reflected net premiums of approximately $172.1
million, $149.3 million, and $144.0 million in 2002, 2001, and 2000,
respectively. The premiums reflect the net of business assumed from and ceded to
MetLife and its subsidiaries. The pre-tax gain on this business was
approximately $25.9 million, $26.1 million, and $17.8 million in 2002, 2001, and
2000, respectively.
Note 12 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, 2002 are as follows:
2003 $4.9 million
2004 $4.5 million
2005 $3.8 million
2006 $3.8 million
2007 $3.7 million
Thereafter $8.1 million
59
Rent expenses amounted to approximately $6.0 million, $5.3 million, and
$4.7 million for the years ended December 31, 2002, 2001, and 2000,
respectively.
Note 13 FINANCIAL CONDITION AND NET INCOME ON A STATUTORY BASIS - SIGNIFICANT
SUBSIDIARIES
The following table presents selected statutory financial information
for the Company's primary life reinsurance legal entities, as of December 31,
2002 and 2001 (in thousands):
Statutory Statutory
Capital & Surplus Net Income
2002 2001 2002 2001 2000
---- ---- ---- ---- ----
RCM $639,809 $544,522 $ 1,922 $ 4,025 $ (7,348)
RGA Reinsurance $633,557 $540,543 $ 13,640 $(84,633) $ 80,575
RGA Canada $181,830 $179,289 $ 229 $ 12,285 $ 6,646
RGA Barbados $101,077 $ 78,276 $ 17,481 $ 22,986 $ 11,037
RGA Americas $ 79,635 $ 41,458 $ 14,611 $ 800 $ 5,129
Other reinsurance $ 67,138 $ 53,466 $ 490 $ 1,197 $(20,288)
subsidiaries
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 2003 would be $63.4 million. However, the applicable
statutory provisions only permit an insurer to pay a shareholder dividend from
unassigned surplus. As of December 31, 2002, RGA Reinsurance had unassigned
surplus of $67.8 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, 2003, RCM could pay a maximum dividend,
without prior approval, to RGA equal to its unassigned surplus, approximately
$28.9 million. The maximum amount available for dividends by RGA Canada to RGA
under the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR")
is $33.4 million. Dividend payments from other subsidiaries and joint ventures
are subject to regulations in the country of domicile. RGA Americas and RGA
Barbados do not have material restrictions on their ability to pay dividends out
of retained earnings
Note 14 COMMITMENTS AND CONTINGENT LIABILITIES
The Company is currently a party to various litigation and arbitrations
that involve medical reinsurance arrangements, personal accident business, and
aviation bodily injury carve-out business. As of January 31, 2003, the ceding
companies involved in these disputes have raised claims that are $41.7 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. In addition, the Company is in the process of auditing ceding
companies which have indicated that they anticipate asserting claims in the
future against the Company that are $8.5 million in excess of the amounts held
in reserve by the Company. Depending upon the audit findings in these cases,
they could result in litigation or arbitrations in the future. See Note 21,
"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
litigation or arbitrations or provide reasonable ranges of potential losses, it
is the opinion of management, after consultation with
60
counsel, that their outcomes, after consideration of the provisions made in the
Company's consolidated financial statements, would not have a material adverse
effect on its consolidated financial position.
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, 2002, there were approximately $39.7
million of outstanding letters of credit in favor of third-party entities.
Additionally, the Company utilizes letters of credit to secure reserve credits
when it retrocedes business to its offshore subsidiaries, including RGA Americas
and RGA Barbados. As of December 31, 2002, $339.4 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 for periods in
excess of one year and are based on the Company's ratings and the general
availability of these instruments in the marketplace.
RGA has issued guarantees of its subsidiaries' performance for the
payment of amounts due under certain reinsurance treaties, whereby if the
subsidiary fails to meet its obligations, RGA or one of its other subsidiaries
will make the payment. These guarantees are granted to ceding companies in order
to provide them additional security, particularly in cases where RGA's
subsidiary is relatively new or not of a significant size, relative to the
ceding company. Total liabilities supported by the guarantees, before
consideration for any legally offsetting amounts due from the guaranteed party,
totaled $126.6 million as of December 31, 2002 and are reflected on the
Company's consolidated balance sheet as future policy benefits.
Note 15 LONG-TERM DEBT
The Company's long-term debt consists of the following (in millions):
2002 2001
---- ----
Senior Notes @ 6.75% due 2011 $199.9 $199.8
Senior Notes @ 7.25% due 2006 99.5 99.4
Revolving Credit Facilities 28.4 24.2
------ ------
Total $327.8 $323.4
====== ======
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 a $75 million term loan with MetLife Credit Corp. Capitalized
issuance costs, recorded in other assets, relate to the issuance of the 6.75%
Senior Notes were $2.1 million.
The Company has revolving credit facilities in the United States, the
United Kingdom, and Australia, under which it may borrow up to approximately
$183.8 million. As of December 31, 2002, the Company had drawn approximately
$28.4 million under these facilities at rates ranging from 4.39% to 5.57%. The
Company increased its borrowings under the United Kingdom credit facility by
$1.6 million during 2002. Terminations of revolving credit facilities and
maturities of senior notes over the next five years, assuming the exercise of
extension options, would be $28.4 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 May 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 event
which results in the acceleration of the maturity of indebtedness. As of
December 31, 2002, the Company had $327.8 million in outstanding borrowings
under its debt agreements and was in
61
compliance with all covenants under those agreements. Of that amount,
approximately $28.4 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 2002, 2001 and 2000 totaled $34.7 million,
$18.5 million and $16.9 million, respectively.
RGA guarantees the payment of amounts outstanding under the credit
facilities maintained by its subsidiary operations in the United Kingdom and
Australia. The guarantees were granted to the banks providing the facilities in
order to enhance their security. The total amount of debt outstanding, subject
to the guarantees, as of December 31, 2002 was $28.4 million and is reflected on
the Company's consolidated balance sheet under long-term debt. These lines of
credit provide for additional borrowings of up to $15.4 million, which if drawn,
would also be subject to the guarantees.
Note 16 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.
If on any date after December 18, 2004, the closing price of RGA common
stock exceeds and has exceeded a price per share equal to $47.97 for at least 20
trading days within the immediately preceding 30 consecutive trading days, the
Company may redeem the warrants in whole for cash, RGA common stock, or a
combination of cash and RGA common stock.
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 17 SEGMENT INFORMATION
Prior to January 1, 2003, the Company reported the results of its
operations in five main operational segments segregated primarily by geographic
region: U.S., Canada, Latin America, Asia Pacific, and Europe & South Africa.
The Latin America, Asia Pacific, and Europe & South Africa segments were
previously presented as one reportable segment, Other International. Effective
January 1, 2003, as a result of the Company's declining presence in Argentina
and changes in management responsibilities for part of the Latin America region,
the Other International reportable segment no longer includes Latin America
operations. Latin America results relating to the Argentine privatized pension
business as well as direct insurance
62
operations in Argentina are now reported in the Corporate and Other segment. The
results for all other Latin America business, primarily traditional reinsurance
business in Mexico, are now reported as part of U.S. operations in the
Traditional sub-segment. The Asia Pacific and Europe & South Africa operational
segments are presented herein as one reportable segment, Other International.
Prior period segment information has been reclassified to conform to this new
presentation. 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 reinsurance of traditional life products as
well as reinsurance of creditor and critical illness products. 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 life reinsurance and
critical illness business from Europe & South Africa, in addition to other
markets being developed by the Company. 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 primarily 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
primarily segregated by geographic region. Information related to revenues,
income (loss) before income taxes, interest expense, depreciation and
amortization, and assets of the Company's continuing operations are summarized
below (in thousands).
For the Years ended December 31, 2002 2001 2000
---- ---- ----
Revenues
U.S. $1,709,952 $1,484,969 $1,285,222
Canada 251,715 247,624 237,303
Other International:
Europe & South Africa 230,813 96,455 35,288
Asia Pacific 169,351 126,653 100,985
Corporate and Other 20,132 12,583 66,937
------------------------------------
Total from continuing operations $2,381,963 $1,968,284 $1,725,735
====================================
For the Years ended December 31, 2002 2001 2000
(in thousands) ---- ---- ----
Income (loss) from continuing operations before income taxes
U.S. $ 175,801 $ 124,581 $ 167,363
Canada 38,631 51,516 39,858
Other International:
Europe & South Africa 3,409 (963) (2,380)
Asia Pacific 6,316 3,007 1,205
Corporate and Other (30,179) (111,991) (30,988)
-----------------------------------
Total from continuing operations $ 193,978 $ 66,150 $ 175,058
===================================
Subsidiaries in which the Company has an ownership position greater
than twenty percent, but less than or equal to fifty percent are reported on the
equity basis of accounting. The equity in the net income of such subsidiaries is
not material to the results of operations or financial position of individual
segments or the Company taken as a whole.
63
For the Years ended December 31, 2002 2001 2000
(in thousands) ---- ---- ----
Interest expense
Other International:
Europe & South Africa $ 680 $ 681 $ 502
Asia Pacific 842 867 980
Corporate and Other 33,994 16,549 16,114
------------------------------
Total from continuing operations $ 35,516 $ 18,097 $ 17,596
==============================
For the Years ended December 31, 2002 2001 2000
(in thousands) ---- ---- ----
Depreciation and amortization
U.S. $274,201 $242,795 $181,993
Canada 22,537 33,048 16,794
Other International:
Europe & South Africa 33,251 15,621 4,001
Asia Pacific 37,937 35,236 29,844
Corporate and Other 5,327 6,322 1,701
------------------------------
Total from continuing operations $373,253 $333,022 $234,333
==============================
The table above includes amortization of the Company's deferred acquisition
costs.
As of December 31, 2002 2001
(in thousands) ---- ----
Assets
U.S $6,302,237 $4,503,436
Canada 1,533,339 1,432,986
Other International:
Europe & South Africa 263,136 137,499
Asia Pacific 273,503 238,788
Corporate and other and discontinued 520,382 703,342
operations
-----------------------
Total assets $8,892,597 $7,016,051
=======================
Capital expenditures of each reporting segment were immaterial in the
periods noted.
During 2002, two clients accounted for more than 10% of the Canada
operation's gross premiums, consisting of $62.5 million and $26.5 million, or
29.7% and 12.6%, respectively. During 2002, two clients, one each in Australia
and Hong Kong, generated approximately $52.9 million, or 30.2% of the total
gross premiums for the Asia Pacific operations. During 2002, two clients of the
Company's UK operations generated approximately $156.4 million, or 57.5% of the
total gross premiums for the Europe & South Africa operations.
Note 18 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, 2002, shares authorized for the granting of Benefits under the Plan
and
64
the Directors Plan totaled 4,533,407 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 follows.
2002 2001 2000
---- ---- ----
Weighted-Average Weighted-Average Weighted-Average
Options Exercise price Options Exercise price Options Exercise price
------- ---------------- ------- ---------------- ------- ----------------
BALANCE AT BEGINNING OF YEAR 2,326,808 $24.42 2,065,731 $22.03 1,653,137 $21.41
Granted 554,233 $31.90 493,037 $30.05 456,407 $23.38
Exercised (147,927) $15.59 (224,892) $14.00 (43,058) $12.37
Forfeited (32,781) $29.63 (7,068) $34.37 (755) $35.33
---------------------------------------------------------------------------------------
BALANCE AT END OF YEAR 2,700,333 $26.36 2,326,808 $24.42 2,065,731 $22.03
Options Outstanding Options Exercisable
------------------------------------------------ ----------------------------
Weighted- Weighted-
Outstanding Average Weighted- Exercisable as Average
Range of Exercise as of Remaining Average of Exercise
Prices 12/31/2002 Contractual Life Exercise Price 12/31/2002 Price
------ ---------- ---------------- -------------- ---------- -----
$10.00 - $14.99 235,931 0.9 $12.10 235,931 $12.10
$15.00 - $19.99 32,522 3.0 $15.61 29,247 $15.61
$20.00 - $24.99 879,845 4.3 $21.76 647,801 $21.25
$25.00 - $29.99 669,618 7.0 $28.80 264,650 $27.75
$30.00 - $34.99 567,141 8.9 $31.90 22,500 $32.03
$35.00 - $39.99 315,276 5.6 $35.81 222,107 $35.78
------------------------------------------- -------------------------
TOTALS 2,700,333 5.8 $26.36 1,422,236 $23.27
=========================================== =========================
The per share weighted-average fair value of stock options granted
during 2002, 2001, and 2000 was $11.71, $11.87, and $9.40 on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions: 2002-expected dividend yield of 0.8%, risk-free interest rate of
5.00%, expected life of 5.0 years, and an expected rate of volatility of the
stock of 35% over the expected life of the options; 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.
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. See Note 2 regarding New Accounting Pronouncements and
the Company's prospective adoption of SFAS No. 148.
2002 2001 2000
---- ---- ----
Net income (in thousands) As reported $ 122,806 $ 33,046 $ 77,669
Pro forma $ 119,824 $ 29,827 $ 75,105
Basic earnings per share As reported $ 2.49 $ 0.67 $ 1.57
Pro forma $ 2.43 $ 0.60 $ 1.52
Diluted earnings per share As reported $ 2.47 $ 0.66 $ 1.56
Pro forma $ 2.41 $ 0.60 $ 1.50
65
In January 2003, the Board approved an additional 735,655 incentive
stock options at $27.29 per share under the Company's Stock Plans.
Note 19 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):
2002 2001 2000
---- ---- ----
Earnings:
Income from continuing operations (numerator for
basic and diluted calculations) $128,463 $ 39,901 $105,787
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 49,381 49,420 49,538
Equivalent shares from outstanding stock options 267 485 382
------------------------------
Diluted shares (denominator for diluted calculation) 49,648 49,905 49,920
Earnings per share from continuing operations:
Basic $ 2.60 $ 0.81 $ 2.14
Diluted $ 2.59 $ 0.80 $ 2.12
------------------------------
The calculation of equivalent shares from outstanding stock options
does not include the impact of options having a strike price that exceeds the
average stock price for the earnings period, as the result would be
antidilutive. Approximately 1.4 million, 0.2 million and 0.4 million outstanding
stock options were not included in the calculation of common equivalent shares
during 2002, 2001 and 2000, respectively. Diluted earnings per share exclude the
antidilutive effect of 5.6 million shares that would be issued upon exercise of
the outstanding warrants associated with the PIERS units (See Note 16), as the
Company could repurchase more shares than it issues with the exercise proceeds.
Note 20 COMPREHENSIVE INCOME
The following table presents the components of the Company's
accumulated other comprehensive income (loss) for the years ended December 31,
2002, 2001 and 2000 (in thousands):
FOR THE YEAR ENDED DECEMBER 31, 2002:
TAX (EXPENSE)
BEFORE-TAX AMOUNT BENEFIT AFTER-TAX AMOUNT
-------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustments:
Change arising during year $ 10,467 $ (3,664) $ 6,803
Unrealized gains on securities:
Unrealized holding gains arising during the year 139,795 (47,698) 92,097
Less: reclassification adjustment for losses realized in
net income (14,651) 3,893 (10,758)
--------- --------- ---------
Net unrealized gains 154,446 (51,591) 102,855
--------- --------- ---------
Other comprehensive income $ 164,913 $ (55,255) $ 109,658
========= ========= =========
FOR THE YEAR ENDED DECEMBER 31, 2001:
TAX (EXPENSE)
BEFORE-TAX AMOUNT 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
======== ======== ========
66
FOR THE YEAR ENDED DECEMBER 31, 2000:
TAX (EXPENSE)
BEFORE-TAX AMOUNT 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
========= ========= =========
A summary of the components of net unrealized appreciation (depreciation) of
balances carried at fair value is as follows (in thousands):
Years Ended December 31 2002 2001 2000
---- ---- ----
Change in net unrealized appreciation (depreciation) on:
Fixed maturity securities available for sale $ 168,732 $ 63,555 $ 147,598
Other investments (541) 1,138 1,592
Effect of unrealized appreciation (depreciation) on:
Deferred policy acquisition costs (13,739) (1,266) (8,716)
Other (6) (189) 629
--------- --------- ---------
Net unrealized appreciation (depreciation) $ 154,446 $ 63,238 $ 141,103
========= ========= =========
Note 21 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 over a number of
years as the level of business diminishes. The Company will report a loss to the
extent claims exceed established reserves.
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. 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. In
particular, over the past several years a number of disputes have arisen in the
accident and health reinsurance markets with respect to London market personal
accident excess of loss ("LMX") reinsurance programs that involved alleged
"manufactured" claims spirals designed to transfer claims losses to higher-level
reinsurance layers. The Company is currently a party to arbitrations that
involve some of these LMX reinsurance programs. The Company and other involved
reinsurers and retrocessionaires have raised substantial defenses upon which to
contest these claims, including defenses based upon the failure of the ceding
company to disclose the existence of manufactured claims spirals. As a result,
there have been a
67
significant number of claims for rescission, arbitration, and litigation among a
number of the parties involved in these various coverages. 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 indirect high-level common account coverages to
other reinsurers and retrocessionaires. To date, no such direct material
exposures have been identified. If any direct 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.
While it is not feasible to predict the ultimate outcome of pending
arbitrations and litigation involving LMX reinsurance programs, any indirect
workers' compensation carve-out exposure, or other accident and health risks, or
provide reasonable ranges of potential losses, it is the opinion of management,
after consultation with counsel, that their outcomes, after consideration of the
provisions made in the Company's consolidated financial statements, would not
have a material adverse effect on its consolidated financial position.
The Company is currently a party to various litigation and arbitrations
that involve medical reinsurance arrangements, personal accident business, and
aviation bodily injury carve-out business. As of January 31, 2003, the ceding
companies involved in these disputes have raised claims that are $41.7 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. In addition, the Company is in the process of auditing ceding
companies which have indicated that they anticipate asserting claims in the
future against the Company that are $8.5 million in excess of the amounts held
in reserve by the Company. Depending upon the audit findings in these cases,
they could result in litigation or arbitrations in the future. While it is not
feasible to predict or determine the ultimate outcome of the pending litigation
or arbitrations or provide reasonable ranges of potential losses, it is the
opinion of management, after consultation with counsel, that their outcomes,
after consideration of the provisions made in the Company's consolidated
financial statements, would not have a material adverse effect on its
consolidated financial position.
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, 2002 and 2001 was $50.9 million and $55.3 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 $3.3 million, $3.0
million, and $23.7 million for 2002, 2001, and 2000, respectively.
Note 22 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.
68
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, 2002 and 2001, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also included the financial statement
schedules included in this Current Report on Form 8-K. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Reinsurance Group of America,
Incorporated and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002, 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
February 3, 2003
(August 13, 2003 as to Note 17 and Schedules III and IV)
69
FINANCIAL STATEMENT SCHEDULES
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002
(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 $ 410.1 $ 422.0 $ 422.0
Foreign governments (2) 522.3 595.5 595.5
Public utilities 341.9 373.2 373.2
All other corporate bonds 2,032.0 2,087.2 2,087.2
--------------- --------------- ---------------
Total fixed maturities 3,306.3 3,477.9 3,477.9
--------------- --------------- ---------------
Equity securities 4.2 3.7 3.7
Preferred stock 99.7 99.9 99.9
Mortgage loans on real estate 227.5 XXX 227.5
Policy loans 841.1 XXX 841.1
Funds withheld at interest 1,975.1 XXX 1,975.1
Short-term investments 4.3 XXX 4.3
Other invested assets 18.3 20.7 20.7
--------------- ---------------
Total investments $ 6,476.5 XXX $ 6,650.2
=============== ===============
(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 $0.6362/C$1.00
Argentina peso $0.2976/A$1.00
Australian dollar $0.5616/$1.00 Aus
Great British Pound $1.6100/Pound Sterling 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.
70
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(in thousands)
2002 2001 2000
CONDENSED BALANCE SHEETS
Assets:
Fixed maturity securities (available for sale) $ 7,544 $ 322
Short-term investments -- 10,502
Cash and cash equivalents 10,719 136,354
Investment in subsidiaries 1,457,791 1,103,589
Other assets 219,806 234,586
----------- -----------
Total assets $ 1,695,860 $ 1,485,353
=========== ===========
Liabilities and stockholders' equity:
Long-term debt $ 464,333 $ 464,006
Other liabilities 9,064 15,759
Stockholders' equity 1,222,463 1,005,588
----------- -----------
Total liabilities and stockholders' equity $ 1,695,860 $ 1,485,353
=========== ===========
CONDENSED STATEMENTS OF INCOME
Interest income $ 20,412 $ 16,879 $ 14,334
Realized investments gains (losses), net 2,942 -- (8,981)
Operating expenses (3,107) (2,757) (1,985)
Interest expense (34,685) (16,977) (16,458)
----------- ----------- -----------
Loss before income tax and undistributed earnings of
subsidiaries (14,438) (2,855) (13,090)
Income tax expense (benefit) (7,471) 4,158 (472)
----------- ----------- -----------
Net loss before undistributed earnings of subsidiaries (6,967) (7,013) (12,618)
Equity in undistributed earnings of subsidiaries 129,773 40,059 90,287
----------- ----------- -----------
Net income $ 122,806 $ 33,046 $ 77,669
=========== =========== ===========
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income $ 122,806 $ 33,046 $ 77,669
Equity in earnings (losses) of subsidiaries (129,773) (40,059) (90,287)
Other, net 7,195 2,782 1,276
----------- ----------- -----------
Net cash provided by (used in) operating activities 228 (4,231) (11,342)
----------- ----------- -----------
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 278,744 -- --
Purchases of fixed maturity securities available for sale (283,759) -- --
Change in short-term investments 10,502 (3,017) 13,813
Capital contributions to subsidiaries (115,761) (123,346) (58,375)
----------- ----------- -----------
Net cash used in investing activities (110,274) (126,363) (39,903)
----------- ----------- -----------
Financing activities:
Dividends to stockholders (11,854) (11,855) (11,900)
Reissuance (acquisition) of treasury stock, net (3,735) 4,684 (19,173)
Proceeds from long-term debt borrowings, net -- 206,113 80,000
Proceeds from warrant / private placement offering -- 66,915 --
----------- ----------- -----------
Net cash provided by financing activities (15,589) 265,857 48,927
----------- ----------- -----------
Net change in cash and cash equivalents (125,635) 135,263 (2,318)
Cash and cash equivalents at beginning of year 136,354 1,091 3,409
----------- ----------- -----------
Cash and cash equivalents at end of year $ 10,719 $ 136,354 $ 1,091
=========== =========== ===========
71
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
As of December 31,
----------------------------------------------------------------------------------
Future Policy Benefits and
Deferred Policy Interest-Sensitive Contract Other Policy Claims
Acquisition Costs Liabilities and Benefits Payable
----------------------------------------------------------------------------------
Assumed Ceded Assumed Ceded Assumed Ceded
-----------------------------------------------------------------------------------------------------------------------
2001
U.S. operations $ 510,594 $ (52,765) $3,518,533 $ (196,807) $421,477 $(40,501)
Canada operations 98,406 (1,096) 726,812 (66,272) 64,076 (34,378)
Europe & South Africa operations 131,551 (67) 34,686 7,349 27,327 3,927
Asia Pacific operations 103,098 (6,724) 95,718 (4,699) 35,286 (3,780)
Corporate and Other 17,322 - 23,882 - 70,366 (1,683)
Discontinued operations - - 27,410 (1,695) 31,550 (1,966)
--------------------------------------------------------------------------------
Total $ 860,971 $ (60,652) $4,427,041 $ (262,124) $650,082 $(78,381)
========== ========= ========== ========== ======== ========
2002
U.S. operations $664,545 $ (48,575) $4,741,836 $ (214,754) $491,386 $(28,702)
Canada operations 114,359 (912) 846,768 (78,167) 33,421 (2,081)
Europe & South Africa operations 237,731 (18,178) 100,458 (5,548) 90,472 (3,869)
Asia Pacific operations 140,451 (9,654) 119,376 (9,717) 73,790 (8,969)
Corporate and Other 5,169 - 8,432 - 43,184 (343)
Discontinued operations - - 26,634 (1,489) 27,913 (2,202)
------------- ------------- --------------- ------------ ----------- -----------
Total $1,162,255 $ (77,319) $5,843,504 $ (309,675) $760,166 $(46,166)
========== ========= ========== ========== ======== ========
72
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
-----------------------------------------------------------------------------
2000
U.S. OPERATIONS $1,051,142 $230,000 $ (904,275) $(156,353) $ (57,231)
Canada operations 176,326 61,950 (172,180) (11,181) (14,084)
Europe & South Africa operations 29,690 2,056 (20,151) (2,793) (14,724)
Asia Pacific operations 94,282 4,628 (56,377) (33,105) (10,298)
Corporate and Other 52,626 27,871 (55,347) (1,402) (41,176)
---------------------------------------------------------------------------
Total $1,404,066 $326,505 $(1,208,330) $(204,834) $(137,513)
========== ======== =========== ========= =========
2001
U.S. operations $1,238,065 $245,794 $(1,098,633) $(210,478) $(51,277)
Canada operations 173,269 65,006 (173,098) (26,625) 3,615
Europe & South Africa operations 94,800 1,536 (59,429) (10,177) (27,812)
Asia Pacific operations 119,702 3,935 (75,595) (38,991) (9,060)
Corporate and Other 35,926 24,288 (81,759) (3,938) (38,877)
---------------------------------------------------------------------------
Total $1,661,762 $340,559 $(1,488,514) $(290,209) $(123,411)
========== ======== =========== ========= =========
2002
U.S. operations $1,411,537 $272,079 $(1,237,553) $(233,958) $(62,640)
Canada operations 181,224 70,518 (187,468) (15,427) (10,189)
Europe & South Africa operations 226,846 1,009 (130,975) (22,096) (74,333)
Asia Pacific operations 160,197 7,059 (110,806) (29,317) (22,912)
Corporate and Other 862 23,847 623 (4,564) (46,370)
---------------------------------------------------------------------------
Total $1,980,666 $374,512 $(1,666,179) $(305,362) $(216,444)
========== ======== =========== ========= =========
73
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
------ --------- --------- ------ ---
2000
Life insurance in force $ 86 $ 78,226 $545,950 $467,810 116.70%
Premiums
U.S. operations $ 2.8 $ 173.2 $1,221.6 $1,051.2 116.21%
Canada operations - 41.7 218.0 176.3 123.65%
Europe & South Africa operations 0.1 0.8 30.4 29.7 102.36%
Asia Pacific operations - 6.4 100.7 94.3 106.79%
Corporate and Other 23.2 - 29.4 52.6 55.89%
---------------------------------------------------------
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 $ 144.3 $1,379.5 $1,238.1 111.42%
Canada operations - 26.9 200.2 173.3 115.52%
Europe & South Africa operations
0.1 1.4 96.1 94.8 101.37%
Asia Pacific operations - 15.9 135.6 119.7 113.28%
Corporate and Other 8.4 0.3 27.8 35.9 77.44%
--------------------------------------------------------
Total $11.4 $ 188.8 $1,839.2 $1,661.8 110.68%
===== ======== ======== ======== ======
2002
Life insurance in force $ 75 $162,395 $758,875 $596,555 127.21%
Premiums
U.S. operations $ 2.9 $ 260.2 $1,668.8 $1,411.5 118.23%
Canada operations - 29.0 210.2 181.2 116.00%
Europe & South Africa operations - 45.2 272.0 226.8 119.93%
Asia Pacific operations - 15.2 175.4 160.2 109.49%
Corporate and Other 2.1 0.2 (1.0) 0.9 (111.11)%
--------------------------------------------------------
Total $ 5.0 $ 349.8 $2,325.4 $1,980.6 117.41%
===== ======== ======== ======== ======
74
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31,
(in millions)
Balance at
Beginning of Charges to Costs Charged to Other Deductions- Balance at End
Description Period and Expenses Accounts-Describe Describe of Period
------------------------- ------------------ ------------------ ------------------ ------------------ ------------------
2000
Mortgage loan valuation
allowance $ 0.7 -- -- 0.5 $ 0.2
Allowance on income taxes $ 3.7 2.5 -- -- $ 6.2
2001
Mortgage loan valuation
allowance $ 0.2 -- -- 0.2 $ 0.0
Allowance on income taxes $ 6.2 7.5 -- -- $ 13.7
2002
Mortgage loan valuation
allowance $ -- -- -- -- $ --
Allowance on income taxes $ 13.7 -- -- 1.2 $ 12.5
Deductions represent normal activity associated with the Company's underlying
mortgage loan portfolio and the release of income tax valuation allowances.
75
B. Other Items.
(i) RGA Reinsurance maintains catastrophe insurance under a
program that renews on August 13th of each year. The current program, which
began August 13, 2003 and expires August 12, 2004, provides up to $50 million of
coverage per occurrence for events involving 40 or more deaths. Under this
program, RGA Reinsurance retains the first $50 million in claims, the
catastrophe program covers the next $50 million in claims, and RGA retains all
claims in excess of $100 million. Acts of terrorism are covered except when
arising from the use of nuclear, chemical, or biological weapons. The insurance
is provided through seven insurance companies and seven Lloyds Syndicates with
no single insurer providing more than $10 million of coverage
(ii) On July 1, 2003, RGA Reinsurance increased its retention limit
for U.S. business from $4 million to $6 million. The retention limit is the
maximum amount of coverage per life that RGA Reinsurance will retain as its own
risk. If the insured amount for a life exceeds the retention limit, the excess
amount is ceded to retrocessionaires through a retrocession program. The
increased retention limit applies only to the extent that risks are eligible for
recapture from retrocessionaires. In January 2001, RGA Reinsurance had increased
its retention limit from $2.5 million to $4 million. Since January 2001, RGA
Reinsurance has grown in size and increased the amount of mortality risk
assumed. Management has analyzed the retrocession program costs and retention
levels to achieve a desirable balance between profitability and claim variance.
(iii) At the annual meeting of shareholders of RGA held on May 28,
2003, the shareholders approved (a) an amendment to the Flexible Stock Plan, (b)
the Amended and Restated Flexible Stock Plan for Directors, (c) the amended
Phantom Stock Plan for Directors and (d) the amended Management Incentive Plan,
copies of which have been included as exhibits to this report.
(iv) In June 2003, Mary Ann Brown resigned as a member of the
board of directors of RGA. The board of directors has not yet filled the vacancy
created by Ms. Brown's resignation.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Items (a) and (b) are inapplicable.
(c) Exhibits
Exhibit No. Exhibit
10.1 * Second Amendment to the Reinsurance Group of America,
Incorporated Flexible Stock Plan as amended and restated
effective July 1, 1998 (incorporated by reference to the copy
of the amendment filed as an appendix to the registrant's
definitive proxy statement filed on April 10, 2003).
10.2 * Reinsurance Group of America, Incorporated Flexible Stock Plan
for Directors effective May 28, 2003 (incorporated by
reference to the copy of the plan filed as an appendix to the
registrant's definitive proxy statement filed on April 10,
2003).
10.3 * Phantom Stock Plan for Directors of Reinsurance Group of
America, Incorporated, as amended and restated effective
January 1, 2003 (incorporated by reference to the copy of the
plan filed as an appendix to the registrant's definitive proxy
statement filed on April 10, 2003).
10.4 * Reinsurance Group of America, Incorporated Management
Incentive Plan, as amended and restated effective January 1,
2003 (incorporated by reference to the copy of the plan filed
as an appendix to the registrant's definitive proxy statement
filed on April 10, 2003).
76
23.1 Consent of Deloitte & Touche LLP.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Represents a management contract or compensatory plan or arrangement.
77
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
REINSURANCE GROUP OF AMERICA,
INCORPORATED
Date: August 25, 2003 By: /s/ Jack B. Lay
------------------------------------
Jack B. Lay
Executive Vice President and Chief
Financial Officer
78
EXHIBIT INDEX
Exhibit No. Exhibit
10.1 * Second Amendment to the Reinsurance Group of America,
Incorporated Flexible Stock Plan as amended and restated
effective July 1, 1998 (incorporated by reference to the copy
of the amendment filed as an appendix to the registrant's
definitive proxy statement filed on April 10, 2003).
10.2 * Reinsurance Group of America, Incorporated Flexible Stock Plan
for Directors effective May 28, 2003 (incorporated by
reference to the copy of the plan filed as an appendix to the
registrant's definitive proxy statement filed on April 10,
2003).
10.3 * Phantom Stock Plan for Directors of Reinsurance Group of
America, Incorporated, as amended and restated effective
January 1, 2003 (incorporated by reference to the copy of the
plan filed as an appendix to the registrant's definitive proxy
statement filed on April 10, 2003).
10.4 * Reinsurance Group of America, Incorporated Management
Incentive Plan, as amended and restated effective January 1,
2003 (incorporated by reference to the copy of the plan filed
as an appendix to the registrant's definitive proxy statement
filed on April 10, 2003).
23.1 Consent of Deloitte & Touche LLP.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Represents a management contract or compensatory plan or arrangement.
79