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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact name of Registrant as specified in its charter)
| MISSOURI | 43-1627032 | |
| (State or other jurisdiction of incorporation or organization) |
(IRS employer identification number) |
1370 Timberlake Manor Parkway
Chesterfield, Missouri 63017
(Address of principal executive offices)
(636) 736-7000
(Registrant’s telephone number, including area code)
Chesterfield, Missouri 63017
(Address of principal executive offices)
(636) 736-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of July 30, 2010, 73,156,938 shares of the registrant’s common stock were outstanding.
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands, except per share data) | ||||||||
Assets |
||||||||
Fixed maturity securities: |
||||||||
Available-for-sale at fair value (amortized cost of $12,381,638 and
$11,616,957 at June 30, 2010 and December 31, 2009, respectively) |
$ | 13,077,607 | $ | 11,763,358 | ||||
Mortgage loans on real estate (net of allowances of $8,179 and $5,784 at
at June 30, 2010 and December 31, 2009, respectively) |
838,827 | 791,668 | ||||||
Policy loans |
1,173,016 | 1,136,564 | ||||||
Funds withheld at interest |
5,257,929 | 4,895,356 | ||||||
Short-term investments |
63,962 | 121,060 | ||||||
Other invested assets |
637,827 | 516,086 | ||||||
Total investments |
21,049,168 | 19,224,092 | ||||||
Cash and cash equivalents |
557,756 | 512,027 | ||||||
Accrued investment income |
144,658 | 107,447 | ||||||
Premiums receivable and other reinsurance balances |
898,522 | 850,096 | ||||||
Reinsurance ceded receivables |
721,830 | 716,480 | ||||||
Deferred policy acquisition costs |
3,597,865 | 3,698,972 | ||||||
Other assets |
250,807 | 140,387 | ||||||
Total assets |
$ | 27,220,606 | $ | 25,249,501 | ||||
Liabilities and Stockholders’ Equity |
||||||||
Future policy benefits |
$ | 8,518,817 | $ | 7,748,480 | ||||
Interest-sensitive contract liabilities |
7,781,407 | 7,666,002 | ||||||
Other policy claims and benefits |
2,387,579 | 2,229,083 | ||||||
Other reinsurance balances |
143,723 | 106,706 | ||||||
Deferred income taxes |
977,873 | 613,222 | ||||||
Other liabilities |
742,940 | 792,775 | ||||||
Long-term debt |
1,216,230 | 1,216,052 | ||||||
Collateral finance facility |
850,030 | 850,037 | ||||||
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company |
159,316 | 159,217 | ||||||
Total liabilities |
22,777,915 | 21,381,574 | ||||||
Commitments and contingent liabilities (See Note 8) |
||||||||
Stockholders’ Equity: |
||||||||
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) |
— | — | ||||||
Common stock (par value $.01 per share; 140,000,000 shares authorized;
shares issued: 73,363,523 at June 30, 2010 and December 31, 2009) |
734 | 734 | ||||||
Warrants |
66,912 | 66,912 | ||||||
Additional paid-in-capital |
1,473,305 | 1,463,101 | ||||||
Retained earnings |
2,282,968 | 2,055,549 | ||||||
Treasury stock, at cost; 209,962 and 373,861 shares at
June 30, 2010 and December 31, 2009, respectively |
(9,570 | ) | (17,578 | ) | ||||
Accumulated other comprehensive income (loss): |
||||||||
Accumulated currency translation adjustment, net of income taxes |
173,985 | 210,878 | ||||||
Unrealized appreciation of securities, net of income taxes |
470,365 | 104,457 | ||||||
Pension and postretirement benefits, net of income taxes |
(16,008 | ) | (16,126 | ) | ||||
Total stockholders’ equity |
4,442,691 | 3,867,927 | ||||||
Total liabilities and stockholders’ equity |
$ | 27,220,606 | $ | 25,249,501 | ||||
See accompanying notes to condensed consolidated financial statements (unaudited).
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 1,582,017 | $ | 1,375,181 | $ | 3,210,481 | $ | 2,721,228 | ||||||||
Investment income, net of related expenses |
291,671 | 284,636 | 595,929 | 507,832 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(3,489 | ) | (36,942 | ) | (10,919 | ) | (71,337 | ) | ||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
(139 | ) | 16,135 | 2,205 | 16,135 | |||||||||||
Other investment related gains (losses), net |
26,620 | 98,995 | 162,891 | 61,128 | ||||||||||||
Total investment related gains (losses), net |
22,992 | 78,188 | 154,177 | 5,926 | ||||||||||||
Other revenues |
35,197 | 75,161 | 71,475 | 109,020 | ||||||||||||
Total revenues |
1,931,877 | 1,813,166 | 4,032,062 | 3,344,006 | ||||||||||||
Benefits and Expenses: |
||||||||||||||||
Claims and other policy benefits |
1,307,239 | 1,123,696 | 2,682,419 | 2,293,440 | ||||||||||||
Interest credited |
79,169 | 72,897 | 136,103 | 109,806 | ||||||||||||
Policy acquisition costs and other insurance expenses |
237,149 | 308,403 | 603,451 | 507,204 | ||||||||||||
Other operating expenses |
83,147 | 71,095 | 174,346 | 137,844 | ||||||||||||
Interest expense |
25,141 | 19,595 | 40,590 | 41,712 | ||||||||||||
Collateral finance facility expense |
1,960 | 2,057 | 3,766 | 4,371 | ||||||||||||
Total benefits and expenses |
1,733,805 | 1,597,743 | 3,640,675 | 3,094,377 | ||||||||||||
Income before income taxes |
198,072 | 215,423 | 391,387 | 249,629 | ||||||||||||
Provision for income taxes |
71,053 | 62,244 | 141,929 | 73,160 | ||||||||||||
Net income |
$ | 127,019 | $ | 153,179 | $ | 249,458 | $ | 176,469 | ||||||||
Earnings per share: |
||||||||||||||||
Basic earnings per share |
$ | 1.74 | $ | 2.11 | $ | 3.41 | $ | 2.43 | ||||||||
Diluted earnings per share |
$ | 1.70 | $ | 2.10 | $ | 3.34 | $ | 2.42 | ||||||||
Dividends declared per share |
$ | 0.12 | $ | 0.09 | $ | 0.24 | $ | 0.18 | ||||||||
See accompanying notes to condensed consolidated financial statements (unaudited).
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Six months ended June 30, | ||||||||
| 2010 | 2009 | |||||||
| (Dollars in thousands) | ||||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 249,458 | $ | 176,469 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Change in operating assets and liabilities: |
||||||||
Accrued investment income |
(38,770 | ) | (29,934 | ) | ||||
Premiums receivable and other reinsurance balances |
(118,265 | ) | (55,706 | ) | ||||
Deferred policy acquisition costs |
37,995 | 50,801 | ||||||
Reinsurance ceded balances |
(5,351 | ) | (3,771 | ) | ||||
Future policy benefits, other policy claims and benefits, and
other reinsurance balances |
1,176,366 | 437,355 | ||||||
Deferred income taxes |
105,285 | 46,667 | ||||||
Other assets and other liabilities, net |
(190,883 | ) | 32,908 | |||||
Amortization of net investment premiums, discounts and other |
(64,779 | ) | (59,792 | ) | ||||
Investment related gains, net |
(154,177 | ) | (5,926 | ) | ||||
Gain on repurchase of long-term debt |
— | (38,875 | ) | |||||
Excess tax benefits from share-based payment arrangement |
(782 | ) | (1,452 | ) | ||||
Other, net |
39,116 | (9,527 | ) | |||||
Net cash provided by operating activities |
1,035,213 | 539,217 | ||||||
Cash Flows from Investing Activities: |
||||||||
Sales of fixed maturity securities available-for-sale |
1,490,869 | 1,268,318 | ||||||
Maturities of fixed maturity securities available-for-sale |
72,758 | 26,117 | ||||||
Purchases of fixed maturity securities available-for-sale |
(2,372,035 | ) | (1,994,477 | ) | ||||
Cash invested in mortgage loans |
(61,676 | ) | — | |||||
Cash invested in policy loans |
(38,864 | ) | (9,508 | ) | ||||
Cash invested in funds withheld at interest |
(74,093 | ) | (37,140 | ) | ||||
Principal payments on mortgage loans on real estate |
12,500 | 14,367 | ||||||
Principal payments on policy loans |
2,412 | 20,470 | ||||||
Change in short-term investments and other invested assets |
91,175 | 4,771 | ||||||
Net cash used in investing activities |
(876,954 | ) | (707,082 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Dividends to stockholders |
(17,561 | ) | (13,085 | ) | ||||
Repurchase of long-term debt |
— | (39,960 | ) | |||||
Net repayments under credit agreements |
— | (22,539 | ) | |||||
Purchases of treasury stock |
(718 | ) | (1,607 | ) | ||||
Excess tax benefits from share-based payment arrangement |
782 | 1,452 | ||||||
Exercise of stock options, net |
8,008 | 532 | ||||||
Change in cash collateral for derivative positions |
72,894 | (143,353 | ) | |||||
Net withdrawals on universal life and
other investment type policies and contracts |
(170,776 | ) | (82,242 | ) | ||||
Net cash used in financing activities |
(107,371 | ) | (300,802 | ) | ||||
Effect of exchange rate changes on cash |
(5,159 | ) | 10,211 | |||||
Change in cash and cash equivalents |
45,729 | (458,456 | ) | |||||
Cash and cash equivalents, beginning of period |
512,027 | 875,403 | ||||||
Cash and cash equivalents, end of period |
$ | 557,756 | $ | 416,947 | ||||
Supplementary information: |
||||||||
Cash paid for interest |
$ | 48,353 | $ | 37,871 | ||||
Cash paid for income taxes, net of refunds |
$ | 32,981 | $ | 13,009 | ||||
See accompanying notes to condensed consolidated financial statements (unaudited).
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed
Consolidated Financial Statements
(Unaudited)
(Unaudited)
1. Organization and Basis of Presentation
Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed
on December 31, 1992. The accompanying unaudited condensed consolidated financial statements of
RGA and its subsidiaries (collectively, the “Company”) have been prepared in conformity with
accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the three and six
months ended June 30, 2010 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2010. The Company has determined that there were no subsequent events
that would require disclosure or adjustments to the accompanying condensed consolidated financial
statements through the date the financial statements were issued. These unaudited condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company’s 2009 Annual Report on Form 10-K (“2009
Annual Report”) filed with the Securities and Exchange Commission on March 2, 2010.
The accompanying unaudited condensed consolidated financial statements include the accounts of RGA
and its subsidiaries. All intercompany accounts and transactions have been eliminated. The
Company has reclassified the presentation of certain prior-period information to conform to the
current presentation.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share on net
income (in thousands, except per share information):
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Earnings: |
||||||||||||||||
Net income (numerator for basic and diluted calculations) |
$ | 127,019 | $ | 153,179 | $ | 249,458 | $ | 176,469 | ||||||||
Shares: |
||||||||||||||||
Weighted average outstanding shares (denominator for
basic calculation) |
73,141 | 72,770 | 73,094 | 72,740 | ||||||||||||
Equivalent shares from outstanding stock options(1) |
1,580 | 169 | 1,556 | 172 | ||||||||||||
Denominator for diluted calculation |
74,721 | 72,939 | 74,650 | 72,912 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 1.74 | $ | 2.11 | $ | 3.41 | $ | 2.43 | ||||||||
Diluted |
$ | 1.70 | $ | 2.10 | $ | 3.34 | $ | 2.42 | ||||||||
| (1) | Year-to-date amounts are weighted average of the individual quarterly amounts. |
The calculation of common equivalent shares does not include the impact of options or warrants
having a strike or conversion price that exceeds the average stock price for the earnings period,
as the result would be antidilutive. The calculation of common equivalent shares also excludes the
impact of outstanding performance contingent shares, as the conditions necessary for their issuance
have not been satisfied as of the end of the reporting period. For the three months ended June 30,
2010, approximately 0.7 million stock options and approximately 0.7 million performance contingent
shares were excluded from the calculation. For the three months ended June 30, 2009, approximately
1.5 million stock options and approximately 0.6 million performance contingent shares were excluded
from the calculation.
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3. Comprehensive Income
The following table presents the components of the Company’s other comprehensive income (loss)
(dollars in thousands):
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 127,019 | $ | 153,179 | $ | 249,458 | $ | 176,469 | ||||||||
Other comprehensive income (loss), net of income tax: |
||||||||||||||||
Unrealized investment gains, net of reclassification
adjustment for gains included in net income |
217,369 | 377,336 | 367,341 | 235,673 | ||||||||||||
Reclassification adjustment for other-than-temporary
impairments |
91 | (10,488 | ) | (1,433 | ) | (10,488 | ) | |||||||||
Currency translation adjustments |
(63,564 | ) | 108,681 | (36,893 | ) | 85,837 | ||||||||||
Unrealized pension and postretirement benefit adjustment |
58 | 83 | 118 | 285 | ||||||||||||
Comprehensive income |
$ | 280,973 | $ | 628,791 | $ | 578,591 | $ | 487,776 | ||||||||
The balance of and changes in each component of accumulated other comprehensive income (loss) for the six months ended June 30, 2010 are as
follows (dollars in thousands):
| Accumulated Other Comprehensive Income (Loss), Net of Income Tax | ||||||||||||||||
| Accumulated | ||||||||||||||||
| Currency | Unrealized | Pension and | ||||||||||||||
| Translation | Appreciation | Postretirement | ||||||||||||||
| Adjustments | of Securities | Benefits | Total | |||||||||||||
Balance, December 31, 2009 |
$ | 210,878 | $ | 104,457 | $ | (16,126 | ) | $ | 299,209 | |||||||
Change in component during the period |
(36,893 | ) | 365,908 | 118 | 329,133 | |||||||||||
Balance, June 30, 2010 |
$ | 173,985 | $ | 470,365 | $ | (16,008 | ) | $ | 628,342 | |||||||
4. Investments
The Company had total cash and invested assets of $21.6 billion and $19.7 billion at June 30, 2010
and December 31, 2009, respectively, as illustrated below (dollars in thousands):
| June 30, 2010 | December 31, 2009 | |||||||
Fixed maturity securities, available-for-sale |
$ | 13,077,607 | $ | 11,763,358 | ||||
Mortgage loans on real estate |
838,827 | 791,668 | ||||||
Policy loans |
1,173,016 | 1,136,564 | ||||||
Funds withheld at interest |
5,257,929 | 4,895,356 | ||||||
Short-term investments |
63,962 | 121,060 | ||||||
Other invested assets |
637,827 | 516,086 | ||||||
Cash and cash equivalents |
557,756 | 512,027 | ||||||
Total cash and invested assets |
$ | 21,606,924 | $ | 19,736,119 | ||||
All investments held by the Company are monitored for conformance to the qualitative and
quantitative limits prescribed by the applicable jurisdiction’s insurance laws and regulations. In
addition, the operating companies’ boards of directors periodically review their respective
investment portfolios. The Company’s investment strategy is to maintain a predominantly
investment-grade, fixed maturity portfolio, which will provide adequate liquidity for expected
reinsurance obligations and maximize total return through prudent asset management. The Company’s
asset/liability duration matching differs between operating segments. Based on Canadian reserve
requirements, the Canadian liabilities are matched with long-duration Canadian assets. The
duration of the Canadian portfolio exceeds twenty years. The average duration for all the
Company’s portfolios, when consolidated, ranges between eight and ten years.
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Investment Income, Net of Related Expenses
Major categories of investment income, net of related expenses consist of the following (dollars in thousands):
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Fixed maturity securities available-for-sale |
$ | 175,638 | $ | 150,916 | $ | 353,130 | $ | 290,097 | ||||||||
Mortgage loans on real estate |
11,954 | 11,379 | 24,160 | 22,956 | ||||||||||||
Policy loans |
18,037 | 16,938 | 37,879 | 33,349 | ||||||||||||
Funds withheld at interest |
84,392 | 102,524 | 175,573 | 152,986 | ||||||||||||
Short-term investments |
1,130 | 1,283 | 2,378 | 2,001 | ||||||||||||
Other invested assets |
6,256 | 5,967 | 14,767 | 15,165 | ||||||||||||
Investment revenue |
297,407 | 289,007 | 607,887 | 516,554 | ||||||||||||
Investment expense |
(5,736 | ) | (4,371 | ) | (11,958 | ) | (8,722 | ) | ||||||||
Investment income, net of related expenses |
$ | 291,671 | $ | 284,636 | $ | 595,929 | $ | 507,832 | ||||||||
Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands):
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Fixed maturity and equity securities available for sale: |
||||||||||||||||
Other-than-temporary impairment losses on fixed maturities |
$ | (3,489 | ) | $ | (36,942 | ) | $ | (10,919 | ) | $ | (71,337 | ) | ||||
Portion of loss recognized in accumulated other
comprehensive income (before taxes) |
(139 | ) | 16,135 | 2,205 | 16,135 | |||||||||||
Net other-than-temporary impairment losses on fixed
maturities recognized in earnings |
(3,628 | ) | (20,807 | ) | (8,714 | ) | (55,202 | ) | ||||||||
Impairment losses on equity securities |
(10 | ) | — | (32 | ) | (5,430 | ) | |||||||||
Gain on investment activity |
19,363 | 25,281 | 35,462 | 37,511 | ||||||||||||
Loss on investment activity |
(5,662 | ) | (18,828 | ) | (14,194 | ) | (38,477 | ) | ||||||||
Other impairment losses |
(1,165 | ) | (1,268 | ) | (2,395 | ) | (2,965 | ) | ||||||||
Derivatives and other, net |
14,094 | 93,810 | 144,050 | 70,489 | ||||||||||||
Net gains |
$ | 22,992 | $ | 78,188 | $ | 154,177 | $ | 5,926 | ||||||||
The net other-than-temporary impairment losses on fixed maturity securities recognized in
earnings of $3.6 million and $8.7 million in the second quarter and first six months of 2010,
respectively, were primarily due to a decline in value of structured securities with exposure to
commercial mortgages. The much larger other-than-temporary impairments in 2009 were primarily due
to the turmoil in the U.S. and global financial markets which resulted in bankruptcies, credit
defaults, consolidations and government interventions. Those conditions had moderated considerably
by the beginning of 2010. The volatility in derivatives and other is primarily due to changes in
the fair value of embedded derivative liabilities associated with modified coinsurance and funds
withheld treaties and guaranteed minimum benefit riders.
During the three months ended June 30, 2010 and 2009, the Company sold fixed maturity securities
and equity securities with fair values of $159.2 million and $214.2 million at gross losses of $5.7
million and $18.8 million, respectively, or at 96.6% and 91.9% of amortized cost, respectively.
During the six months ended June 30, 2010 and 2009, the Company sold fixed maturity securities and
equity securities with fair values of $399.3 million and $322.6 million at gross losses of $14.2
million and $38.5 million, respectively, or at 96.6% and 89.3% of amortized cost, respectively.
The Company generally does not engage in short-term buying and selling of securities.
Other-Than-Temporary Impairments
The Company has a process in place to identify fixed maturity and equity securities that could
potentially have credit impairments that are other-than-temporary. This process involves
monitoring market events that could impact issuers’ credit ratings, business climates, management
changes, litigation, government actions and other similar factors. This process also involves
monitoring late payments, pricing levels, rating agency actions, key financial ratios, financial
statements, revenue forecasts and cash flow projections as indicators of credit issues.
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The Company reviews all securities to determine whether an other-than-temporary decline in value
exists and whether losses should be recognized. The Company considers relevant facts and
circumstances in evaluating whether a credit or interest rate-related impairment of a security is
other-than-temporary. Relevant facts and circumstances considered include: (1) the extent and
length of time the fair value has been below cost; (2) the reasons for the decline in fair value;
(3) the issuer’s financial position and access to capital and (4) for fixed maturity securities,
the Company’s intent to sell a security or whether it is more likely than not it will be required
to sell the security before the recovery of its amortized cost which, in some cases, may extend to
maturity and for equity securities, its ability and intent to hold the security for a period of
time that allows for the recovery in value. To the extent the Company determines that a security is
deemed to be other-than-temporarily impaired, an impairment loss is recognized.
On April 1, 2009, (“Date of Adoption”), the Company adopted the amended general accounting
principles for Investments as it relates to the recognition and presentation of
other-than-temporary impairments. See Note 12 — “New Accounting Standards” for further discussion
of the adoption. The amended recognition provisions apply only to fixed maturity securities
classified as available-for-sale and held-to-maturity, while the presentation and disclosure
requirements apply to both fixed maturity and equity securities.
Impairment losses on equity securities are recognized in net income. Recognition of impairment
losses on fixed maturity securities is dependent on the facts and circumstances related to a
specific security. If the Company intends to sell a security or it is more likely than not that it
would be required to sell a security before the recovery of its amortized cost, it recognizes an
other-than-temporary impairment in net income for the difference between amortized cost and fair
value, less any current period credit loss. If the Company does not expect to recover the
amortized cost basis, it does not plan to sell the security and if it is not more likely than not
that it would be required to sell a security before the recovery of its amortized cost, less any
current period credit loss, the recognition of the other-than-temporary impairment is bifurcated.
The Company recognizes the credit loss portion in net income and the non-credit loss portion in
accumulated other comprehensive income (“AOCI”).
For the three and six months ended June 30, 2010, the Company recognized $3.6 million and $8.7
million, respectively, of credit related losses, primarily in various mortgage-backed securities
and to a lesser extent, U.S. corporate securities. For the three-month period between the Date of
Adoption and June 30, 2009, the Company recognized $20.8 million of credit related losses in
mortgage-backed securities and U.S. corporate securities combined. The Company estimates the
amount of the credit loss component of a fixed maturity security impairment as the difference
between amortized cost and the present value of the expected cash flows of the security. The
present value is determined using the best estimate cash flows discounted at the effective interest
rate implicit to the security at the date of purchase or the current yield to accrete an
asset-backed or floating-rate security. The techniques and assumptions for establishing the best
estimate cash flows vary depending on the type of security. The asset-backed securities’ cash flow
estimates are based on security-specific facts and circumstances that may include collateral
characteristics, expectations of delinquency and default rates, loss severity and prepayment speeds
and structural support, including subordination and guarantees. The corporate fixed maturity
security cash flow estimates are derived from scenario-based outcomes of expected corporate
restructurings or the disposition of assets using security specific facts and circumstances
including timing, security interests and loss severity.
The following tables set forth the amount of credit loss impairments on fixed maturity securities
held by the Company as of the dates indicated, for which a portion of the other-than-temporary
impairment (“OTTI”) loss was recognized in AOCI, and the corresponding changes in such amounts
(dollars in thousands):
| Three months ended | ||||||||
| June 30, | ||||||||
| 2010 | 2009 | |||||||
Balance, beginning of period |
$ | (51,578 | ) | $ | (17,132 | ) | ||
Initial impairments — credit loss OTTI recognized on securities not previously impaired |
(1,152 | ) | (3,242 | ) | ||||
Additional impairments — credit loss OTTI recognized on securities previously impaired |
(3,303 | ) | (3,562 | ) | ||||
Sales during the period of securities previously credit loss OTTI impaired |
2,685 | — | ||||||
Balance, end of period |
$ | (53,348 | ) | $ | (23,936 | ) | ||
| Three months | ||||||||
| Six months ended | ended(1) | |||||||
| June 30, 2010 | June 30, 2009 | |||||||
Balance, beginning of period |
$ | (47,905 | ) | $ | (17,132 | ) | ||
Initial impairments — credit loss OTTI recognized on securities not previously impaired |
(2,724 | ) | (3,242 | ) | ||||
Additional impairments — credit loss OTTI recognized on securities previously impaired |
(5,404 | ) | (3,562 | ) | ||||
Sales during the period of securities previously credit loss OTTI impaired |
2,685 | — | ||||||
Balance, end of period |
$ | (53,348 | ) | $ | (23,936 | ) | ||
| (1) | Shortened period due to adoption of amended general accounting principles on April 1, 2009. |
9
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Fixed Maturity and Equity Securities Available-for-Sale
As mentioned above, the amended general accounting principles for Investments change how an entity
recognizes an other-than-temporary impairment for a fixed maturity security by separating the
other-than-temporary impairment loss between the amount representing the credit loss and the amount
relating to other factors, such as an increase in interest rates, if the Company does not have the
intent to sell or it more likely than not will not be required to sell prior to recovery of the
amortized cost less any current period credit loss. Credit losses are recognized in net income and
losses relating to other non-credit factors are recognized in AOCI and included in unrealized
losses in the tables below. The following tables provide information relating to investments in
fixed maturity securities and equity securities by sector as of June 30, 2010 and December 31, 2009
(dollars in thousands):
| Other-than- | ||||||||||||||||||||||||
| Estimated | temporary | |||||||||||||||||||||||
| June 30, 2010: | Amortized | Unrealized | Unrealized | Fair | % of | impairments | ||||||||||||||||||
| Cost | Gains | Losses | Value | Total | in AOCI | |||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 4,269,575 | $ | 309,130 | $ | 118,585 | $ | 4,460,120 | 34.1 | % | $ | — | ||||||||||||
Canadian and Canadian provincial
governments |
2,032,471 | 489,262 | 6,312 | 2,515,421 | 19.2 | — | ||||||||||||||||||
Residential mortgage-backed securities |
1,554,585 | 57,289 | 38,514 | 1,573,360 | 12.0 | (3,227 | ) | |||||||||||||||||
Foreign corporate securities |
1,895,573 | 113,455 | 19,097 | 1,989,931 | 15.2 | — | ||||||||||||||||||
Asset-backed securities |
496,652 | 14,093 | 61,122 | 449,623 | 3.5 | (3,404 | ) | |||||||||||||||||
Commercial mortgage-backed securities |
1,229,237 | 56,477 | 118,777 | 1,166,937 | 8.9 | (12,114 | ) | |||||||||||||||||
U.S. government and agencies |
443,024 | 25,546 | — | 468,570 | 3.6 | — | ||||||||||||||||||
State and political subdivisions |
106,978 | 404 | 9,295 | 98,087 | 0.8 | — | ||||||||||||||||||
Other foreign government securities |
353,543 | 6,231 | 4,216 | 355,558 | 2.7 | — | ||||||||||||||||||
Total fixed maturity securities |
$ | 12,381,638 | $ | 1,071,887 | $ | 375,918 | $ | 13,077,607 | 100.0 | % | $ | (18,745 | ) | |||||||||||
Non-redeemable preferred stock |
$ | 111,566 | $ | 2,574 | $ | 9,550 | $ | 104,590 | 63.1 | % | ||||||||||||||
Other equity securities |
54,800 | 7,638 | 1,185 | 61,253 | 36.9 | |||||||||||||||||||
Total equity securities |
$ | 166,366 | $ | 10,212 | $ | 10,735 | $ | 165,843 | 100.0 | % | ||||||||||||||
| Other-than- | ||||||||||||||||||||||||
| Estimated | temporary | |||||||||||||||||||||||
| December 31, 2009: | Amortized | Unrealized | Unrealized | Fair | % of | impairments | ||||||||||||||||||
| Cost | Gains | Losses | Value | Total | in AOCI | |||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 3,689,797 | $ | 180,635 | $ | 147,384 | $ | 3,723,048 | 31.7 | % | $ | — | ||||||||||||
Canadian and Canadian provincial
governments |
1,984,475 | 394,498 | 25,746 | 2,353,227 | 20.0 | — | ||||||||||||||||||
Residential mortgage-backed securities |
1,494,021 | 32,538 | 70,015 | 1,456,544 | 12.4 | (7,018 | ) | |||||||||||||||||
Foreign corporate securities |
1,627,806 | 77,340 | 33,398 | 1,671,748 | 14.2 | — | ||||||||||||||||||
Asset-backed securities |
522,760 | 9,307 | 80,131 | 451,936 | 3.8 | (2,194 | ) | |||||||||||||||||
Commercial mortgage-backed securities |
1,177,621 | 20,670 | 169,427 | 1,028,864 | 8.7 | (13,690 | ) | |||||||||||||||||
U.S. government and agencies |
540,001 | 1,085 | 15,027 | 526,059 | 4.5 | — | ||||||||||||||||||
State and political subdivisions |
107,233 | 273 | 17,744 | 89,762 | 0.8 | — | ||||||||||||||||||
Other foreign government securities |
473,243 | 2,198 | 13,271 | 462,170 | 3.9 | — | ||||||||||||||||||
Total fixed maturity securities |
$ | 11,616,957 | $ | 718,544 | $ | 572,143 | $ | 11,763,358 | 100.0 | % | $ | (22,902 | ) | |||||||||||
Non-redeemable preferred stock |
$ | 123,648 | $ | 1,878 | $ | 12,328 | $ | 113,198 | 66.0 | % | ||||||||||||||
Other equity securities |
58,008 | 760 | 409 | 58,359 | 34.0 | |||||||||||||||||||
Total equity securities |
$ | 181,656 | $ | 2,638 | $ | 12,737 | $ | 171,557 | 100.0 | % | ||||||||||||||
As of June 30, 2010, the Company held securities with a fair value of $802.8 million that were
issued by the Canadian province of Ontario and $707.5 million in one entity that were guaranteed by
the Canadian province of Quebec, all of which exceeded 10% of consolidated stockholders’ equity.
As of December 31, 2009, the Company held securities with a fair value of $448.3 million issued by
the Federal National Mortgage Corporation, $482.6 million that were issued by the United States
Treasury, $895.7 million that were issued by the Canadian province of Ontario, and $679.9 million
in one entity that were
10
Table of Contents
guaranteed by the Canadian province of Quebec, all of which exceeded 10% of consolidated
stockholders’ equity.
The amortized cost and estimated fair value of fixed maturity securities available-for-sale at June
30, 2010 are shown by contractual maturity for all securities except certain U.S. government agency
securities, which are distributed by 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
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 penalties. At June 30, 2010, the contractual maturities of investments
in fixed maturity securities were as follows (dollars in thousands):
| Amortized | Fair | |||||||
| Cost | Value | |||||||
Available-for-sale: |
||||||||
Due in one year or less |
$ | 294,029 | $ | 297,722 | ||||
Due after one year through five years |
1,462,074 | 1,516,916 | ||||||
Due after five year through ten years |
3,234,623 | 3,455,137 | ||||||
Due after ten years |
4,110,438 | 4,617,912 | ||||||
Asset and mortgage-backed securities |
3,280,474 | 3,189,920 | ||||||
Total |
$ | 12,381,638 | $ | 13,077,607 | ||||
The table below includes major industry types and weighted average credit ratings of the
Company’s U.S. and foreign corporate fixed maturity holdings as of June 30, 2010 and December 31,
2009 (dollars in thousands):
| Estimated | Average Credit | |||||||||||||||
| June 30, 2010: | Amortized Cost | Fair Value | % of Total | Ratings | ||||||||||||
Finance |
$ | 1,510,575 | $ | 1,510,087 | 23.4 | % | A- | |||||||||
Industrial |
2,102,396 | 2,247,318 | 34.8 | BBB+ | ||||||||||||
Foreign (1) |
1,895,573 | 1,989,931 | 30.9 | A+ | ||||||||||||
Utility |
652,785 | 698,450 | 10.8 | BBB+ | ||||||||||||
Other |
3,819 | 4,265 | 0.1 | A+ | ||||||||||||
Total |
$ | 6,165,148 | $ | 6,450,051 | 100.0 | % | A- | |||||||||
| Estimated | Average Credit | |||||||||||||||
| December 31, 2009: | Amortized Cost | Fair Value | % of Total | Ratings | ||||||||||||
Finance |
$ | 1,411,464 | $ | 1,358,925 | 25.2 | % | A- | |||||||||
Industrial |
1,670,610 | 1,735,522 | 32.2 | BBB+ | ||||||||||||
Foreign (1) |
1,627,352 | 1,671,090 | 30.9 | A | ||||||||||||
Utility |
603,958 | 624,710 | 11.6 | BBB+ | ||||||||||||
Other |
4,219 | 4,549 | 0.1 | A | ||||||||||||
Total |
$ | 5,317,603 | $ | 5,394,796 | 100.0 | % | A- | |||||||||
| (1) | Includes U.S. dollar-denominated debt obligations of foreign obligors and other foreign investments. |
11
Table of Contents
At June 30, 2010 and December 31, 2009, the Company had $386.7 million and $584.9 million,
respectively, of gross unrealized losses related to its fixed maturity and equity securities. The
distribution of the gross unrealized losses related to these securities is shown below.
| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
Sector: |
||||||||
U.S. corporate securities |
33 | % | 26 | % | ||||
Canadian and Canada provincial governments |
2 | 4 | ||||||
Residential mortgage-backed securities |
10 | 12 | ||||||
Foreign corporate securities |
5 | 7 | ||||||
Asset-backed securities |
16 | 14 | ||||||
Commercial mortgage-backed securities |
31 | 29 | ||||||
State and political subdivisions |
2 | 3 | ||||||
U.S. government and agencies |
— | 3 | ||||||
Other foreign government securities |
1 | 2 | ||||||
Total |
100 | % | 100 | % | ||||
Industry: |
||||||||
Finance |
26 | % | 25 | % | ||||
Asset-backed |
16 | 13 | ||||||
Industrial |
10 | 7 | ||||||
Mortgage-backed |
41 | 41 | ||||||
Government |
5 | 12 | ||||||
Utility |
2 | 2 | ||||||
Total |
100 | % | 100 | % | ||||
The following table presents total gross unrealized losses, including other-than-temporary
impairment losses reported in AOCI, for 900 and 1,316 fixed maturity securities and equity
securities as of June 30, 2010 and December 31, 2009, respectively, where the estimated fair value
had declined and remained below amortized cost by the indicated amount (dollars in thousands):
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||
| Number of | Unrealized | Number of | Unrealized | |||||||||||||||||||||
| Securities | Losses | % of Total | Securities | Losses | % of Total | |||||||||||||||||||
Less than 20% |
765 | $ | 137,788 | 35.6 | % | 1,112 | $ | 254,075 | 43.4 | % | ||||||||||||||
20% or more for less than six months |
30 | 56,428 | 14.6 | 38 | 69,322 | 11.9 | ||||||||||||||||||
20% or more for six months or greater |
105 | 192,437 | 49.8 | 166 | 261,483 | 44.7 | ||||||||||||||||||
Total |
900 | $ | 386,653 | 100.0 | % | 1,316 | $ | 584,880 | 100.0 | % | ||||||||||||||
As of June 30, 2010 and December 31, 2009, respectively, 58.7% and 71.4% of these securities
were investment grade. The Company has experienced a higher recovery of market value for
investment-grade securities in recent periods. The amount of the unrealized loss on these
securities was primarily attributable to a widening of credit default spreads since the time
securities were purchased.
While all of these securities are monitored for potential impairment, the Company believes due to
fluctuating market conditions and liquidity concerns, and the relatively recent high levels of
price volatility, the extent and duration of a decline in value have become less indicative of when
there has been credit deterioration with respect to an issuer. The Company’s determination of
whether a decline in value is other-than-temporary includes analysis of the underlying credit and
the extent and duration of a decline in value. The Company’s credit analysis of an investment
includes determining whether the issuer is current on its contractual payments, evaluating whether
it is probable that the Company will be able to collect all amounts due according to the
contractual terms of the security and analyzing the overall ability of the Company to recover the
amortized cost of the investment. The Company continues to consider valuation declines as a
potential indicator of credit deterioration.
The following tables present the estimated fair values and gross unrealized losses, including
other-than-temporary impairment losses reported in AOCI, for the 900 and 1,316 fixed maturity
securities and equity securities that have estimated fair values below amortized cost as of June
30, 2010 and December 31, 2009, respectively (dollars in thousands). These investments are
presented by class and grade of security, as well as the length of time the related market value
has remained below amortized cost.
12
Table of Contents
| Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
| June 30, 2010: | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 172,127 | $ | 28,320 | $ | 356,979 | $ | 63,781 | $ | 529,106 | $ | 92,101 | ||||||||||||
Canadian and Canadian provincial
governments |
110,191 | 2,321 | 129,393 | 3,991 | 239,584 | 6,312 | ||||||||||||||||||
Residential mortgage-backed securities |
220,187 | 8,692 | 158,173 | 10,059 | 378,360 | 18,751 | ||||||||||||||||||
Foreign corporate securities |
166,246 | 4,036 | 168,247 | 11,562 | 334,493 | 15,598 | ||||||||||||||||||
Asset-backed securities |
12,037 | 1,360 | 137,569 | 35,303 | 149,606 | 36,663 | ||||||||||||||||||
Commercial mortgage-backed securities |
60,812 | 7,503 | 160,272 | 31,513 | 221,084 | 39,016 | ||||||||||||||||||
State and political subdivisions |
23,443 | 921 | 53,484 | 5,693 | 76,927 | 6,614 | ||||||||||||||||||
Other foreign government securities |
28,355 | 176 | 89,826 | 4,040 | 118,181 | 4,216 | ||||||||||||||||||
Total investment grade securities |
793,398 | 53,329 | 1,253,943 | 165,942 | 2,047,341 | 219,271 | ||||||||||||||||||
Non-investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
91,934 | 9,278 | 133,958 | 17,206 | 225,892 | 26,484 | ||||||||||||||||||
Asset-backed securities |
11,174 | 2,158 | 29,522 | 22,301 | 40,696 | 24,459 | ||||||||||||||||||
Foreign corporate securities |
3,017 | 3,446 | 597 | 53 | 3,614 | 3,499 | ||||||||||||||||||
Residential mortgage-backed securities |
397 | 551 | 67,120 | 19,212 | 67,517 | 19,763 | ||||||||||||||||||
Commercial mortgage-backed securities |
— | — | 60,956 | 79,761 | 60,956 | 79,761 | ||||||||||||||||||
State and political subdivisions |
— | — | 5,432 | 2,681 | 5,432 | 2,681 | ||||||||||||||||||
Total non-investment grade securities |
106,522 | 15,433 | 297,585 | 141,214 | 404,107 | 156,647 | ||||||||||||||||||
Total fixed maturity securities |
$ | 899,920 | $ | 68,762 | $ | 1,551,528 | $ | 307,156 | $ | 2,451,448 | $ | 375,918 | ||||||||||||
Non-redeemable preferred stock |
$ | 29,219 | $ | 1,755 | $ | 35,596 | $ | 7,795 | $ | 64,815 | $ | 9,550 | ||||||||||||
Other equity securities |
12,927 | 909 | 1,352 | 276 | 14,279 | 1,185 | ||||||||||||||||||
Total equity securities |
$ | 42,146 | $ | 2,664 | $ | 36,948 | $ | 8,071 | $ | 79,094 | $ | 10,735 | ||||||||||||
Total number of securities in an
unrealized loss position |
371 | 529 | 900 | |||||||||||||||||||||
| Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
| December 31, 2009: | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 373,049 | $ | 27,625 | $ | 679,908 | $ | 89,711 | $ | 1,052,957 | $ | 117,336 | ||||||||||||
Canadian and Canadian provincial
governments |
494,718 | 15,374 | 135,315 | 10,372 | 630,033 | 25,746 | ||||||||||||||||||
Residential mortgage-backed securities |
402,642 | 23,671 | 197,320 | 20,185 | 599,962 | 43,856 | ||||||||||||||||||
Foreign corporate securities |
362,406 | 5,262 | 182,300 | 24,693 | 544,706 | 29,955 | ||||||||||||||||||
Asset-backed securities |
48,651 | 1,927 | 166,603 | 57,262 | 215,254 | 59,189 | ||||||||||||||||||
Commercial mortgage-backed securities |
177,360 | 10,312 | 425,793 | 79,297 | 603,153 | 89,609 | ||||||||||||||||||
U.S. government and agencies |
496,514 | 15,027 | — | — | 496,514 | 15,027 | ||||||||||||||||||
State and political subdivisions |
34,612 | 3,397 | 40,945 | 11,437 | 75,557 | 14,834 | ||||||||||||||||||
Other foreign government securities |
240,216 | 8,370 | 30,321 | 4,901 | 270,537 | 13,271 | ||||||||||||||||||
Total investment grade securities |
2,630,168 | 110,965 | 1,858,505 | 297,858 | 4,488,673 | 408,823 | ||||||||||||||||||
Non-investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
35,477 | 11,293 | 168,375 | 18,755 | 203,852 | 30,048 | ||||||||||||||||||
Asset-backed securities |
6,738 | 3,256 | 24,408 | 17,686 | 31,146 | 20,942 | ||||||||||||||||||
Foreign corporate securities |
1,755 | 17 | 3,771 | 3,426 | 5,526 | 3,443 | ||||||||||||||||||
Residential mortgage-backed securities |
10,657 | 1,909 | 66,756 | 24,250 | 77,413 | 26,159 | ||||||||||||||||||
Commercial mortgage-backed securities |
— | — | 57,179 | 79,818 | 57,179 | 79,818 | ||||||||||||||||||
State and political subdivisions |
— | — | 5,170 | 2,910 | 5,170 | 2,910 | ||||||||||||||||||
Total non-investment grade securities |
54,627 | 16,475 | 325,659 | 146,845 | 380,286 | 163,320 | ||||||||||||||||||
Total fixed maturity securities |
$ | 2,684,795 | $ | 127,440 | $ | 2,184,164 | $ | 444,703 | $ | 4,868,959 | $ | 572,143 | ||||||||||||
Non-redeemable preferred stock |
$ | 8,320 | $ | 1,263 | $ | 68,037 | $ | 11,065 | $ | 76,357 | $ | 12,328 | ||||||||||||
Other equity securities |
5 | 15 | 7,950 | 394 | 7,955 | 409 | ||||||||||||||||||
Total equity securities |
$ | 8,325 | $ | 1,278 | $ | 75,987 | $ | 11,459 | $ | 84,312 | $ | 12,737 | ||||||||||||
Total number of securities in an
unrealized loss position |
582 | 734 | 1,316 | |||||||||||||||||||||
13
Table of Contents
As of June 30, 2010, the Company does not intend to sell these fixed maturity securities and
does not believe it is more likely than not that it will be required to sell these fixed maturity
securities before the recovery of the fair value up to the current amortized cost of the
investment, which may be maturity. However, as facts and circumstances change, the Company may
sell fixed maturity securities in the ordinary course of managing its portfolio to meet certain
diversification, credit quality, asset-liability management and liquidity guidelines. As of June
30, 2010, the Company has the ability and intent to hold the equity securities until the recovery
of the fair value up to the current cost of the investment. However, from time to time, if facts
and circumstances change, the Company may sell equity securities in the ordinary course of managing
its portfolio to meet certain diversification, credit quality and liquidity guidelines.
5. Derivative Instruments
The following table presents the notional amounts and fair value of derivative instruments as of
June 30, 2010 and December 31, 2009 (dollars in thousands):
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Notional | Carrying Value/Fair Value | Notional | Carrying Value/Fair Value | |||||||||||||||||||||
| Amount | Assets | Liabilities | Amount | Assets | Liabilities | |||||||||||||||||||
Derivatives not designated as
hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps(1) |
$ | 1,973,016 | $ | 59,861 | $ | — | $ | 1,388,570 | $ | 17,962 | $ | 47,061 | ||||||||||||
Financial futures(1) |
305,125 | — | — | 200,436 | — | — | ||||||||||||||||||
Foreign currency forwards(1) |
40,500 | 2,939 | — | 40,500 | 2,200 | — | ||||||||||||||||||
Consumer Price index (“CPI”) swaps(1) |
137,800 | 1,848 | — | 124,034 | 1,631 | — | ||||||||||||||||||
Credit default swaps(1) |
317,500 | — | 3,166 | 367,500 | 2,363 | 249 | ||||||||||||||||||
Equity options(1) |
6,710 | 1,654 | — | — | — | — | ||||||||||||||||||
Embedded derivatives in: |
||||||||||||||||||||||||
Modified coinsurance or funds
withheld arrangements(2) |
— | — | 279,348 | — | — | 434,494 | ||||||||||||||||||
Indexed annuity products(3) |
— | 70,154 | 602,093 | — | 68,873 | 584,906 | ||||||||||||||||||
Variable annuity products(3) |
— | — | 157,511 | — | — | 23,748 | ||||||||||||||||||
Total non-hedging derivatives |
2,780,651 | 136,456 | 1,042,118 | 2,121,040 | 93,029 | 1,090,458 | ||||||||||||||||||
Derivatives designated as
hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps(1) |
21,783 | — | 1,877 | 21,783 | — | 677 | ||||||||||||||||||
Foreign currency swaps(1) |
397,580 | 2,499 | 1,538 | 226,715 | — | 9,008 | ||||||||||||||||||
Total hedging derivatives |
419,363 | 2,499 | 3,415 | 248,498 | — | 9,685 | ||||||||||||||||||
Total derivatives |
$ | 3,200,014 | $ | 138,955 | $ | 1,045,533 | $ | 2,369,538 | $ | 93,029 | $ | 1,100,143 | ||||||||||||
| (1) | Carried on the Company’s condensed consolidated balance sheets in other invested assets or other liabilities, at fair value. | |
| (2) | Embedded liability is included on the condensed consolidated balance sheets with the host contract in funds withheld at interest, at fair value. | |
| (3) | Embedded liability is included on the condensed consolidated balance sheets with the host contract in interest-sensitive contract liabilities, at fair value. Embedded asset is included on the condensed consolidated balance sheets in reinsurance ceded receivables. |
Accounting for Derivative Instruments and Hedging Activities
The Company does not enter into derivative instruments for speculative purposes. As of June 30,
2010 and December 31, 2009, the Company held interest rate swaps that were designated and qualified
as fair value hedges of interest rate risk. As of June 30, 2010 and December 31, 2009, the Company
held foreign currency swaps that were designated and qualified as fair value hedges of a portion of
its net investment in its foreign operations. Gains of $50.0 million related to foreign currency
swaps terminated in the second quarter of 2009 continue to be reflected in AOCI. As of June 30,
2010 and December 31, 2009, the Company also had derivative instruments that were not designated as
hedging instruments. See Note 2 — “Summary of Significant Accounting Policies” of the Company’s
2009 annual report on Form 10-K for a detailed discussion of the accounting treatment for
derivative instruments, including embedded derivatives. Derivative instruments are carried at fair
value and generally require an insignificant amount of cash at inception of the contracts.
Fair Value Hedges
The Company designates and accounts for certain interest rate swaps that convert fixed rate
investments to floating rate investments as fair value hedges when they meet the requirements of
the general accounting principles for Derivatives and
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Hedging. The gain or loss on the hedged item attributable to the hedged benchmark interest rate
and the offsetting gain or loss on the related interest rate swaps for the three and six months
ended June 30, 2010 and 2009 were (dollars in thousands):
| Type of Fair | Derivative Gain | Hedge Gain (Loss) | Hedged Item Gain | Hedged Item Gain | ||||||||||||||||
| Value Hedge | (Loss) Location | Recognized | Hedged Item | (Loss) Location | (Loss) Recognized | |||||||||||||||
| For the three months ended June 30, 2010: | ||||||||||||||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | (877 | ) | Fixed rate fixed maturity securities | Investment related gains (losses), net | $ | 1,046 | ||||||||||||
| For the three months ended June 30, 2009: | ||||||||||||||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | 982 | Fixed rate fixed maturity securities | Investment related gains (losses), net | $ | (934 | ) | ||||||||||||
| For the six months ended June 30, 2010: | ||||||||||||||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | (1,200 | ) | Fixed rate fixed maturity securities | Investment related gains (losses), net | $ | 1,500 | ||||||||||||
| For the six months ended June 30, 2009: | ||||||||||||||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | 1,465 | Fixed rate fixed maturity securities | Investment related gains (losses), net | $ | (1,456 | ) | ||||||||||||
The Company’s investment related gains (losses), net representing the ineffective portion of
all fair value hedges was immaterial for the three and six months ended June 30, 2010 and 2009.
All components of each derivative’s gain or loss were included in the assessment of hedge
effectiveness. There were no instances in which the Company discontinued fair value hedge
accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
Hedges of Net Investments in Foreign Operations
The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign
operations against adverse movements in exchange rates. The following table illustrates the
Company’s net investments in foreign operations (“NIFO”) hedges for the three and six months ended
June 30, 2010 and 2009 (dollars in thousands):
| Location of Gain | Gain (Loss) | Income Statement | ||||||||||||||||||
| Type of NIFO | Derivative Gain | (Loss) Reclassified | Reclassified from | Location of Gain | Ineffective Gain | |||||||||||||||
| Hedge | (Loss) in OCI | From AOCI | AOCI into income | (Loss) | (Loss) in Income | |||||||||||||||
| For the three months ended June 30, 2010: | ||||||||||||||||||||
Foreign currency
swaps |
$ | 16,846 | None | $ | — | Investment income | $ | — | ||||||||||||
| For the three months ended June 30, 2009: | ||||||||||||||||||||
Foreign currency
swaps |
$ | (6,491 | ) | None | $ | — | Investment income | $ | — | |||||||||||
| For the six months ended June 30, 2010: | ||||||||||||||||||||
Foreign currency
swaps |
$ | 8,766 | None | $ | — | Investment income | $ | — | ||||||||||||
| For the six months ended June 30, 2009: | ||||||||||||||||||||
Foreign currency
swaps |
$ | 1,644 | None | $ | — | Investment income | $ | — | ||||||||||||
Ineffectiveness on the foreign currency swaps is based upon the change in forward rates.
There was no ineffectiveness recorded in the periods presented herein.
The Company’s other comprehensive income for the three months ended June 30, 2010 and 2009,
includes gains (losses) of $16.8 million and ($6.5) million, respectively, and $8.8 million and
$1.6 million for the six months ended June 30, 2010 and 2009, respectively, related to foreign
currency swaps used to hedge a portion of its net investment in its foreign operations. The
cumulative foreign currency translation gain recorded in AOCI related to these hedges was $49.3
million and $40.5 million at June 30, 2010 and December 31, 2009, respectively. If a foreign
operation was sold or substantially liquidated, the
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amounts in AOCI would be reclassified to the consolidated statements of income. A pro rata
portion would be reclassified upon partial sale of a foreign operation.
Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company uses various other derivative instruments for risk management purposes that either do
not qualify or have not been qualified for hedge accounting treatment, including derivatives used
to economically hedge changes in the fair value of liabilities associated with the reinsurance of
variable annuities with guaranteed living benefits. The gain or loss related to the change in fair
value for these derivative instruments is recognized in investment related gains (losses), in the
consolidated statements of income, except where otherwise noted. For the three months ended June
30, 2010 and 2009, the Company recognized investment related gains (losses) of $117.6 million and
($136.1) million, respectively, and $118.0 million and ($156.3) million for the six months ended
June 30, 2010 and 2009, respectively, related to derivatives that do not qualify or have not been
qualified for hedge accounting.
Interest Rate Swaps
Interest rate swaps are used by the Company primarily to reduce market risks from changes in
interest rates and to alter interest rate exposure arising from mismatches between assets and
liabilities (duration mismatches). With an interest rate swap, the Company agrees with another
party to exchange, at specified intervals, the difference between fixed-rate and floating-rate
interest amounts tied to an agreed-upon notional principal amount. These transactions are executed
pursuant to master agreements that provide for a single net payment or individual gross payments at
each due date.
Financial Futures
Exchange-traded equity futures are used primarily to economically hedge liabilities embedded in
certain variable annuity products. With exchange-traded equity futures transactions, the Company
agrees to purchase or sell a specified number of contracts, the value of which is determined by the
relevant stock indices, and to post variation margin on a daily basis in an amount equal to the
difference between the daily estimated fair values of those contracts. The Company enters into
exchange-traded equity futures with regulated futures commission merchants that are members of the
exchange.
Foreign Currency Swaps
Foreign currency swaps are used by the Company to reduce the risk from fluctuations in foreign
currency exchange rates associated with its assets and liabilities denominated in foreign
currencies. With a foreign currency swap transaction, the Company agrees with another party to
exchange, at specified intervals, the difference between one currency and another at a forward
exchange rate calculated by reference to an agreed upon principal amount. The principal amount of
each currency is exchanged at the inception and termination of the currency swap by each party. The
Company may also use foreign currency swaps to economically hedge the foreign currency risk
associated with certain of its net investments in foreign operations.
Foreign Currency Forwards
Foreign currency forwards are used by the Company to reduce the risk from fluctuations in foreign
currency exchange rates associated with its assets and liabilities denominated in foreign
currencies. With a foreign currency forward transaction, the Company agrees with another party to
deliver a specified amount of an identified currency at a specified future date. The price is
agreed upon at the time of the contract and payment for such a contract is made in a different
currency at the specified future date.
CPI Swaps
CPI swaps are used by the Company primarily to economically hedge liabilities embedded in certain
insurance products where value is directly affected by changes in a designated benchmark consumer
price index. With a CPI swap transaction, the Company agrees with another party to exchange the
actual amount of inflation realized over a specified period of time for a fixed amount of inflation
determined at inception. These transactions are executed pursuant to master agreements that
provide for a single net payment or individual gross payments to be made by the counterparty at
each due date. Most of these swaps will require a single payment to be made by one counterparty at
the maturity date of the swap.
Credit Default Swaps
The Company invests in credit default swaps to diversify its credit risk exposure in certain
portfolios. These credit default swaps are over-the-counter instruments in which the Company
receives payments at specified intervals to insure credit risk on a portfolio of 125 U.S.
investment-grade securities. Generally, if a credit event, as defined by the contract, occurs, the
contract will require the swap to be settled gross by the delivery of par quantities or value of
the referenced investment
securities equal to the specified swap notional amount in exchange for the payment of cash amounts
by the Company equal to the par value of the investment security surrendered.
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The Company also purchases credit default swaps to reduce its risk against a drop in bond prices
due to credit concerns of certain bond issuers. If a credit event, as defined by the contract,
occurs, the Company is able to put the bond back to the counterparty at par.
Equity Options
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in
certain variable annuity products. To hedge against adverse changes in equity indices volatility,
the Company enters into contracts to sell the equity index options within a limited time at a
contracted price. The contracts are net settled in cash based on differentials in the indices at
the time of exercise and the strike price.
Embedded Derivatives
The Company has certain embedded derivatives which are required to be separated from their host
contracts and reported as derivatives. Host contracts include reinsurance treaties structured on a
modified coinsurance or funds withheld basis. Additionally, the Company reinsures equity-indexed
annuity and variable annuity contracts with benefits that are considered embedded derivatives,
including guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, and
guaranteed minimum income benefits. The related gains (losses) for the three and six months ended
June 30, 2010 and 2009 are reflected in the following table (dollars in thousands):
| Three months ended | Six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Embedded derivatives in modified coinsurance or funds withheld
arrangements and variable annuity contracts included in investment
related gains (losses) |
$ | (108,422 | ) | $ | 225,574 | $ | 21,383 | $ | 220,362 | |||||||
After the associated amortization of DAC and taxes, the related
amounts included in net income |
(7,172 | ) | (5,517 | ) | 13,407 | (32,596 | ) | |||||||||
Amounts related to embedded derivatives in equity-indexed annuities
included in benefits and expenses |
(14,950 | ) | (10,232 | ) | (3,222 | ) | 11,465 | |||||||||
After the associated amortization of DAC and taxes, the related
amounts included in net income |
(3,952 | ) | (11,948 | ) | (5,184 | ) | (753 | ) | ||||||||
Non-hedging Derivatives
A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Company’s income statement for the three and six months ended June 30,
2010 and 2009 is as follows (dollars in thousands):
| Gain (Loss) for the Three Months Ended | ||||||||||||
| June 30, | ||||||||||||
| Type of Non-hedging Derivative | Income Statement Location of Gain (Loss) | 2010 | 2009 | |||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | 87,115 | $ | (99,017 | ) | ||||||
Financial futures |
Investment related gains (losses), net | 32,823 | (48,059 | ) | ||||||||
Foreign currency forwards |
Investment related gains (losses), net | 1,447 | 1,164 | |||||||||
CPI swaps |
Investment related gains (losses), net | 108 | 544 | |||||||||
Credit default swaps |
Investment related gains (losses), net | (4,060 | ) | 9,288 | ||||||||
Equity options |
Investment related gains (losses), net | 127 | — | |||||||||
Embedded derivatives in: |
||||||||||||
Modified coinsurance or funds withheld
arrangements |
Investment related gains (losses), net | 32,512 | 64,337 | |||||||||
Indexed annuity products |
Policy acquisition costs and other insurance expenses | 2,596 | 161 | |||||||||
Indexed annuity products |
Interest credited | (17,546 | ) | (10,393 | ) | |||||||
Variable annuity products |
Investment related gains (losses), net | (140,934 | ) | 161,238 | ||||||||
Total non-hedging derivatives |
$ | (5,812 | ) | $ | 79,263 | |||||||
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| Gain (Loss) for the Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| Type of Non-hedging Derivative | Income Statement Location of Gain (Loss) | 2010 | 2009 | |||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | 98,455 | $ | (137,881 | ) | ||||||
Financial futures |
Investment related gains (losses), net | 21,077 | (25,748 | ) | ||||||||
Foreign currency forwards |
Investment related gains (losses), net | 618 | (878 | ) | ||||||||
CPI swaps |
Investment related gains (losses), net | 1,032 | 854 | |||||||||
Credit default swaps |
Investment related gains (losses), net | (3,284 | ) | 7,377 | ||||||||
Equity options |
Investment related gains (losses), net | 127 | — | |||||||||
Embedded derivatives in: |
||||||||||||
Modified coinsurance or funds withheld
arrangements |
Investment related gains (losses), net | 155,147 | 23,912 | |||||||||
Indexed annuity products |
Policy acquisition costs and other insurance expenses | 1,161 | (2,496 | ) | ||||||||
Indexed annuity products |
Interest credited | (4,383 | ) | 13,960 | ||||||||
Variable annuity products |
Investment related gains (losses), net | (133,763 | ) | 196,450 | ||||||||
Total non-hedging derivatives |
$ | 136,187 | $ | 75,550 | ||||||||
Credit Risk
The Company may be exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments. Generally, the current credit exposure of the
Company’s derivative contracts is limited to the fair value at the reporting date. The credit
exposure of the Company’s derivative transactions is represented by the fair value of contracts
after consideration of any collateral received with a net positive fair value at the reporting
date.
The Company manages its credit risk related to over-the-counter derivatives by entering into
transactions with creditworthy counterparties, maintaining collateral arrangements and through the
use of master agreements that provide for a single net payment to be made by one counterparty to
another at each due date and upon termination. As exchange-traded futures are affected through
regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal
exposure to credit-related losses in the event of nonperformance by counterparties to such
derivative instruments.
The Company enters into various collateral arrangements, which require both the posting and
accepting of collateral in connection with its derivative instruments. Collateral agreements
contain attachment thresholds that vary depending on the posting party’s financial strength
ratings. Additionally, a decrease in the Company’s financial strength rating to a specified level
results in potential settlement of the derivative positions under the Company’s agreements with its
counterparties. As of June 30, 2010, the Company held cash collateral under its control of $56.9
million. This unrestricted cash collateral is included in cash and cash equivalents and the
obligation to return it is included in other liabilities in the condensed consolidated balance
sheets. No cash collateral was held as of December 31, 2009. As of June 30, 2010 the Company had
no cash collateral pledged to counterparties. As of December 31, 2009, the Company had pledged
collateral to counterparties on swaps of $16.0 million. The receivable related to cash collateral
is included in other assets, in the condensed consolidated balance sheets. From time to time, the
Company has both accepted and posted collateral consisting of various securities. As of June 30,
2010, the Company posted a U.S. Treasury security as collateral to a counterparty with a book value
and market value of $10.3 million and $10.8 million, respectively, which is included in other
invested assets. There were no securities posted as collateral at December 31, 2009. There were
no securities held as collateral as of June 30, 2010 and December 31, 2009. In addition, the
Company has exchange-traded futures, which require the maintenance of a margin account, which is
included in cash and cash equivalents. The Company’s margin account totaled $27.3 million and
$17.1 million as of June 30, 2010 and December 31, 2009, respectively.
6. Fair Value of Financial Instruments
Fair values of financial instruments have been determined by using available market information and
the valuation techniques described below. Considerable judgment is often required in interpreting
market data to develop estimates of fair value. Accordingly, the estimates presented herein may
not necessarily be indicative of amounts that could be realized in a current market exchange. The
following table presents the carrying amounts and estimated fair values of the Company’s financial
instruments at June 30, 2010 and December 31, 2009 (dollars in thousands). The use of different
assumptions or valuation techniques may have a material effect on the estimated fair value amounts.
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| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Estimated Fair | Estimated Fair | |||||||||||||||
| Carrying Value | Value | Carrying Value | Value | |||||||||||||
Assets: |
||||||||||||||||
Fixed maturity securities |
$ | 13,077,607 | $ | 13,077,607 | $ | 11,763,358 | $ | 11,763,358 | ||||||||
Mortgage loans on real estate |
838,827 | 895,020 | 791,668 | 792,331 | ||||||||||||
Policy loans |
1,173,016 | 1,173,016 | 1,136,564 | 1,136,564 | ||||||||||||
Funds withheld at interest |
5,257,929 | 5,546,802 | 4,895,356 | 5,201,569 | ||||||||||||
Short-term investments |
63,962 | 63,962 | 121,060 | 121,060 | ||||||||||||
Other invested assets |
637,827 | 633,368 | 516,086 | 509,618 | ||||||||||||
Cash and cash equivalents |
557,756 | 557,756 | 512,027 | 512,027 | ||||||||||||
Accrued investment income |
144,658 | 144,658 | 107,447 | 107,447 | ||||||||||||
Reinsurance ceded receivables |
100,744 | 81,279 | 106,396 | 173,309 | ||||||||||||
Liabilities: |
||||||||||||||||
Interest-sensitive contract liabilities |
$ | 5,802,045 | $ | 5,587,732 | $ | 5,929,134 | $ | 6,196,420 | ||||||||
Long-term and short-term debt |
1,216,230 | 1,204,150 | 1,216,052 | 1,180,712 | ||||||||||||
Collateral finance facility |
850,030 | 510,000 | 850,037 | 510,000 | ||||||||||||
Company-obligated mandatorily
redeemable preferred securities |
159,316 | 231,845 | 159,217 | 205,655 | ||||||||||||
Publicly traded fixed maturity securities are valued based upon quoted market prices or
estimates from independent pricing services, independent broker quotes and pricing matrices.
Private placement fixed maturity 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 adjusted annually based on a market
index and therefore carrying value approximates fair value. The carrying value of funds withheld
at interest approximates fair value except where the funds withheld are specifically identified in
the agreement. When funds withheld are specifically identified in the agreement, the fair value is
based on the fair value of the underlying assets which are held by the ceding company. The
carrying values of cash and cash equivalents and short-term investments approximates fair values
due to the short-term maturities of these instruments. Common and preferred equity investments and
derivative financial instruments included in other invested assets are reflected at fair value on
the condensed consolidated balance sheets based primarily on quoted market prices, while limited
partnership interests are carried at cost. The fair value of limited partnerships is based on net
asset values. The carrying value for accrued investment income approximates fair value.
The carrying and fair values of interest-sensitive contract liabilities reflected in the table
above exclude contracts with significant mortality risk. The fair value of the Company’s
interest-sensitive contract liabilities and related reinsurance ceded receivables is based on the
cash surrender value of the liabilities, adjusted for recapture fees. The fair value of the
Company’s long-term debt is estimated based on either quoted market prices or quoted market prices
for the debt of corporations with similar credit quality. The fair values of the Company’s
collateral finance facility and company-obligated mandatorily redeemable preferred securities are
estimated using discounted cash flows.
General accounting principles for Fair Value Measurements and Disclosures define fair value as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. In accordance with these principles,
valuation techniques utilized by management for invested assets and embedded derivatives reported
at fair value are generally categorized into three types:
Market Approach. Market approach valuation techniques use prices and other relevant information
from market transactions involving identical or comparable assets or liabilities. Valuation
techniques consistent with the market approach include comparables and matrix pricing. Comparables
use market multiples, which might lie in ranges with a different multiple for each comparable. The
selection of where within the range the appropriate multiple falls requires judgment, considering
both quantitative and qualitative factors specific to the measurement. Matrix pricing is a
mathematical technique used principally to value certain securities without relying exclusively on
quoted prices for the specific securities but comparing the securities to benchmark or comparable
securities.
Income Approach. Income approach valuation techniques convert future amounts, such as cash flows
or earnings, to a single present amount, or a discounted amount. These techniques rely on current
expectations of future amounts. Examples of income approach valuation techniques include present
value techniques, option-pricing models and binomial or lattice models that incorporate present
value techniques.
Cost Approach. Cost approach valuation techniques are based upon the amount that, at present,
would be required to replace
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the service capacity of an asset, or the current replacement cost.
That is, from the perspective of a market participant (seller),
the price that would be received for the asset is determined based on the cost to a market
participant (buyer) to acquire or construct a substitute asset of comparable utility.
The three approaches described above are consistent with generally accepted valuation techniques.
While all three approaches are not applicable to all assets or liabilities reported at fair value,
where appropriate and possible, one or more valuation techniques may be used. The selection of the
valuation technique(s) to apply considers the definition of an exit price and the nature of the
asset or liability being valued and significant expertise and judgment is required. The Company
performs regular analysis and review of the various techniques utilized in determining fair value
to ensure that the valuation approaches utilized are appropriate and consistently applied, and that
the various assumptions are reasonable. The Company also utilizes information from third parties,
such as pricing services and brokers, to assist in determining fair values for certain assets and
liabilities; however, management is ultimately responsible for all fair values presented in the
Company’s financial statements. The Company performs analysis and review of the information and
prices received from third parties to ensure that the prices represent a reasonable estimate of the
fair value. This process involves quantitative and qualitative analysis and is overseen by the
Company’s investment and accounting personnel. Examples of procedures performed include, but are
not limited to, initial and ongoing review of third party pricing services and techniques, review
of pricing trends and monitoring of recent trade information. In addition, the Company utilizes
both internal and external cash flow models to analyze the reasonableness of fair values utilizing
credit spread and other market assumptions, where appropriate. As a result of the analysis, if the
Company determines there is a more appropriate fair value based upon the available market data, the
price received from the third party is adjusted accordingly.
For invested assets reported at fair value, when available, fair values are based on quoted prices
in active markets that are regularly and readily obtainable. Generally, these are very liquid
investments and the valuation does not require management judgment. When quoted prices in active
markets are not available, fair value is based on the market valuation techniques described above,
primarily a combination of the market approach, including matrix pricing and the income approach.
The assumptions and inputs used by management in applying these techniques include, but are not
limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the
issuer, coupon rate, call provisions, sinking fund requirements, maturity, estimated duration and
assumptions regarding liquidity and future cash flows.
The significant inputs to the market standard valuation techniques for certain types of securities
with reasonable levels of price transparency are inputs that are observable in the market or can be
derived principally from or corroborated by observable market data. Such observable inputs include
benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are
not active and observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation techniques for determining
the estimated fair value of certain types of securities that trade infrequently, and therefore have
little or no price transparency, rely on inputs that are significant to the estimated fair value
that are not observable in the market or cannot be derived principally from or corroborated by
observable market data. These unobservable inputs can be based in large part on management
judgment or estimation, and cannot be supported by reference to market activity. Even though
unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and
are believed to be consistent with what other market participants would use when pricing such
securities.
The use of different techniques, assumptions and inputs may have a material effect on the estimated
fair values of the Company’s securities holdings.
For embedded derivative liabilities associated with the underlying products in reinsurance
treaties, primarily equity-indexed and variable annuity treaties, the Company utilizes a market
standard technique, which includes an estimate of future equity option purchases and an adjustment
for the Company’s own credit risk that takes into consideration the Company’s financial strength
rating, also commonly referred to as a claims paying rating. The capital market inputs to the
model, such as equity indexes, equity volatility, interest rates and the Company’s credit
adjustment, are generally observable. However, the valuation models also use inputs requiring
certain actuarial assumptions such as future interest margins, policyholder behavior, including
future equity participation rates, and explicit risk margins related to non-capital market inputs,
that are generally not observable and may require use of significant management judgment. Changes
in interest rates, equity indices, equity volatility, the Company’s own credit risk, and actuarial
assumptions regarding policyholder behavior may result in significant fluctuations in the value of
embedded derivatives liabilities associated with equity-indexed annuity reinsurance treaties.
The fair value of embedded derivatives associated with funds withheld reinsurance treaties is
determined based upon a total return swap technique with reference to the fair value of the
investments held by the ceding company that support the Company’s funds withheld at interest asset.
The fair value of the underlying assets is generally based on market observable inputs using
market standard valuation techniques. However, the valuation also requires certain significant
inputs based on
20
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actuarial assumptions about policyholder behavior, which are generally not
observable.
For the quarter ended June 30, 2010, the application of market standard valuation techniques
applied to similar assets and liabilities has been consistent.
General accounting principles for Fair Value Measurements and Disclosures also establish a fair
value hierarchy which requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
| Level 1 | Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities include investment securities and derivative contracts that are traded in exchange markets. | |
| Level 2 | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or market standard valuation techniques and assumptions with significant inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Such observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in the market. The Company’s Level 2 assets and liabilities include investment securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using market standard valuation techniques. This category primarily includes U.S. and foreign corporate securities, Canadian and Canadian provincial government securities, and residential and commercial mortgage-backed securities, among others. Level 2 valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities or through the use of valuation methodologies using observable market inputs. Prices from services are validated through analytical reviews and assessment of current market activity. | |
| Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the related assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using market standard valuation techniques described above. When observable inputs are not available, the market standard techniques for determining the estimated fair value of certain securities that trade infrequently, and therefore have little transparency, rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation and cannot be supported by reference to market activity. Even though unobservable, management believes these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing similar assets and liabilities. For the Company’s invested assets, this category generally includes U.S. and foreign corporate securities (primarily private placements), asset-backed securities (including those with exposure to subprime mortgages), and to a lesser extent, certain residential and commercial mortgage-backed securities, among others. Prices are determined using valuation methodologies such as discounted cash flow models and other similar techniques. Non-binding broker quotes, which are utilized when pricing service information is not available, are reviewed for reasonableness based on the Company’s understanding of the market, and are generally considered Level 3. Under certain circumstances, based on its observations of transactions in active markets, the Company may conclude the prices received from independent third party pricing services or brokers are not reasonable or reflective of market activity. In those instances, the Company would apply internally developed valuation techniques to the related assets or liabilities. Additionally, the Company’s embedded derivatives, all of which are associated with reinsurance treaties, are classified in Level 3 since their values include significant unobservable inputs associated with actuarial assumptions regarding policyholder behavior. Embedded derivatives are reported with the host instruments on the condensed consolidated balance sheet. |
When inputs used to measure fair value fall within different levels of the hierarchy, the level
within which the fair value measurement is categorized is based on the lowest priority level input
that is significant to the fair value measurement in its entirety. For example, a Level 3 fair
value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level
3). Therefore, gains and losses for such assets and liabilities categorized within Level 3 may
include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and
unobservable inputs (Level 3). Assets and liabilities measured at fair value on a recurring basis
as of June 30, 2010 and December 31, 2009 are summarized below (dollars in thousands).
21
Table of Contents
| Fair Value Measurements Using: | ||||||||||||||||
| June 30, 2010: | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Fixed maturity securities – available-for-sale: |
||||||||||||||||
U.S. corporate securities |
$ | 4,460,120 | $ | 261 | $ | 3,646,819 | $ | 813,040 | ||||||||
Canadian and Canadian provincial governments |
2,515,421 | — | 2,515,421 | — | ||||||||||||
Residential mortgage-backed securities |
1,573,360 | — | 1,360,579 | 212,781 | ||||||||||||
Foreign corporate securities |
1,989,931 | 7,873 | 1,906,129 | 75,929 | ||||||||||||
Asset-backed securities |
449,623 | — | 220,190 | 229,433 | ||||||||||||
Commercial mortgage-backed securities |
1,166,937 | — | 1,016,231 | 150,706 | ||||||||||||
U.S. government and agencies securities |
468,570 | 458,599 | 9,971 | — | ||||||||||||
State and political subdivision securities |
98,087 | 7,148 | 78,423 | 12,516 | ||||||||||||
Other foreign government securities |
355,558 | 2,353 | 346,902 | 6,303 | ||||||||||||
Total fixed maturity securities – available-for-sale |
13,077,607 | 476,234 | 11,100,665 | 1,500,708 | ||||||||||||
Funds withheld at interest – embedded derivatives |
(279,348 | ) | — | — | (279,348 | ) | ||||||||||
Short-term investments |
3,979 | 2,282 | 431 | 1,266 | ||||||||||||
Other invested assets — non-redeemable preferred stock |
104,590 | 79,612 | 23,352 | 1,626 | ||||||||||||
Other invested assets — other equity securities |
61,253 | 23,917 | 20,936 | 16,400 | ||||||||||||
Other invested assets – derivatives |
68,801 | — | 68,801 | — | ||||||||||||
Other invested assets – collateral |
10,787 | 10,787 | — | — | ||||||||||||
Reinsurance ceded receivable – embedded derivatives |
70,154 | — | — | 70,154 | ||||||||||||
Total |
$ | 13,117,823 | $ | 592,832 | $ | 11,214,185 | $ | 1,310,806 | ||||||||
Liabilities: |
||||||||||||||||
Interest sensitive contract liabilities – embedded derivatives |
$ | (759,604 | ) | $ | — | $ | — | $ | (759,604 | ) | ||||||
Other liabilities – derivatives |
(6,581 | ) | — | (6,581 | ) | — | ||||||||||
Total |
$ | (766,185 | ) | $ | — | $ | (6,581 | ) | $ | (759,604 | ) | |||||
| Fair Value Measurements Using: | ||||||||||||||||
| December 31, 2009: | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Fixed maturity securities – available-for-sale: |
||||||||||||||||
U.S. corporate securities |
$ | 3,723,048 | $ | — | $ | 2,901,535 | $ | 821,513 | ||||||||
Canadian and Canadian provincial governments |
2,353,227 | — | 2,353,227 | — | ||||||||||||
Residential mortgage-backed securities |
1,456,544 | — | 1,312,087 | 144,457 | ||||||||||||
Foreign corporate securities |
1,671,748 | 5,447 | 1,450,923 | 215,378 | ||||||||||||
Asset-backed securities |
451,936 | — | 189,169 | 262,767 | ||||||||||||
Commercial mortgage-backed securities |
1,028,864 | — | 699,304 | 329,560 | ||||||||||||
U.S. government and agencies securities |
526,059 | 517,929 | 8,130 | — | ||||||||||||
State and political subdivision securities |
89,762 | 6,251 | 71,431 | 12,080 | ||||||||||||
Other foreign government securities |
462,170 | 1,079 | 443,788 | 17,303 | ||||||||||||
Total fixed maturity securities – available-for-sale |
11,763,358 | 530,706 | 9,429,594 | 1,803,058 | ||||||||||||
Funds withheld at interest – embedded derivatives |
(434,494 | ) | — | — | (434,494 | ) | ||||||||||
Short-term investments |
12,937 | 2,714 | 9,780 | 443 | ||||||||||||
Other invested assets — non-redeemable preferred stock |
113,198 | 85,016 | 21,407 | 6,775 | ||||||||||||
Other invested assets — other equity securities |
58,359 | 17,523 | 30,400 | 10,436 | ||||||||||||
Other invested assets – derivatives |
24,156 | — | 24,156 | — | ||||||||||||
Reinsurance ceded receivable – embedded derivatives |
68,873 | — | — | 68,873 | ||||||||||||
Total |
$ | 11,606,387 | $ | 635,959 | $ | 9,515,337 | $ | 1,455,091 | ||||||||
Liabilities: |
||||||||||||||||
Interest sensitive contract liabilities – embedded derivatives |
$ | (608,654 | ) | $ | — | $ | — | $ | (608,654 | ) | ||||||
Other liabilities – derivatives |
(56,995 | ) | — | (56,995 | ) | — | ||||||||||
Total |
$ | (665,649 | ) | $ | — | $ | (56,995 | ) | $ | (608,654 | ) | |||||
As of June 30, 2010 and December 31, 2009, respectively, the Company classified approximately
11.5% and 15.3% of its fixed maturity securities in the Level 3 category. These securities
primarily consist of private placement corporate
securities with an inactive trading market. Additionally, the Company has included asset-backed
securities with sub-prime exposure in
22
Table of Contents
the Level 3 category due to the current market uncertainty associated with these securities
and the Company’s utilization of information from third parties for the valuation of these
securities. Other invested assets — derivatives and other liabilities — derivatives include
amounts with fair values included in Level 2 at June 30, 2010 and December 31, 2009. See Note 5 —
“Derivative Instruments” for additional information regarding these derivatives.
The tables below present reconciliations for all assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the three and six months ended
June 30, 2010 and 2009 (dollars in thousands). The amount reported within purchases, sales,
issuances and settlements is the purchase/issuance price (for purchases and issuances) and the
sales/settlement proceeds (for sales and settlements) based upon the actual date purchased/issued
or sold/settled. Items purchased/issued and sold/settled in the same period are excluded from the
rollforward. The Company’s policy is to recognize transfers into and out of levels within the
fair value hierarchy at the beginning of the quarter in which the actual event or change in
circumstances that caused the transfer occurs. Transfers into Level 3, in the amounts
of $119.4 million and $217.2 million for the three and six months ended June 30, 2010,
respectively, are due to a lack of observable market data for these securities or, in accordance
with company policy, when the ratings of certain asset classes fall below investment grade.
Transfers out of Level 3, in the amounts of $50.4 million and $610.1 million for the
three and six months ended June 30, 2010, respectively, are due to an increase in observable market
data or when the underlying inputs are evaluated and determined to be market observable. Transfers
between Level 1 and Level 2 were not significant for the three and six months ended June 30, 2010
and 2009.
| Total gains/losses | ||||||||||||||||||||||||
| (realized/unrealized) included in: | Purchases, | |||||||||||||||||||||||
| sales, | ||||||||||||||||||||||||
| Balance | Other | issuances | Transfers in | Balance | ||||||||||||||||||||
| For the three months ended | April 1, | Earnings, | comprehensive | and | and/or out of | June 30, | ||||||||||||||||||
| June 30, 2010: | 2010 | net | income | settlements | Level 3 | 2010 | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 748,518 | $ | (2,170 | ) | $ | 12,284 | $ | 49,843 | $ | 4,565 | $ | 813,040 | |||||||||||
Residential mortgage-backed securities |
210,615 | (3,632 | ) | 14,005 | (26,010 | ) | 17,803 | 212,781 | ||||||||||||||||
Foreign corporate securities |
80,759 | 306 | 304 | (6,376 | ) | 936 | 75,929 | |||||||||||||||||
Asset-backed securities |
206,220 | 957 | 8,838 | (5,907 | ) | 19,325 | 229,433 | |||||||||||||||||
Commercial mortgage-backed securities |
117,709 | (2,682 | ) | 11,218 | (135 | ) | 24,596 | 150,706 | ||||||||||||||||
State and political subdivision securities |
11,486 | 8 | (778 | ) | (20 | ) | 1,820 | 12,516 | ||||||||||||||||
Other foreign government securities |
2,174 | (11 | ) | 36 | 4,104 | — | 6,303 | |||||||||||||||||
Sub-total |
1,377,481 | (7,224 | ) | 45,907 | 15,499 | 69,045 | 1,500,708 | |||||||||||||||||
Funds withheld at interest —
embedded derivatives |
(311,859 | ) | 32,511 | — | — | — | (279,348 | ) | ||||||||||||||||
Short-term investments |
— | — | (1 | ) | 1,267 | — | 1,266 | |||||||||||||||||
Other invested assets —
non-redeemable preferred stock |
4,098 | 550 | (22 | ) | (3,000 | ) | — | 1,626 | ||||||||||||||||
Other invested assets — other equity securities |
12,836 | — | 3,564 | — | — | 16,400 | ||||||||||||||||||
Reinsurance ceded receivable —
embedded derivatives |
67,911 | 2,690 | — | (447 | ) | — | 70,154 | |||||||||||||||||
Total |
$ | 1,150,467 | $ | 28,527 | $ | 49,448 | $ | 13,319 | $ | 69,045 | $ | 1,310,806 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities —
embedded derivatives |
$ | (594,532 | ) | $ | (158,641 | ) | $ | — | $ | (6,431 | ) | $ | — | $ | (759,604 | ) | ||||||||
Total |
$ | (594,532 | ) | $ | (158,641 | ) | $ | — | $ | (6,431 | ) | $ | — | $ | (759,604 | ) | ||||||||
23
Table of Contents
| Total gains/losses | Purchases, | |||||||||||||||||||||||
| (realized/unrealized) included in: | sales, | |||||||||||||||||||||||
| Balance | Other | issuances | Transfers in | Balance | ||||||||||||||||||||
| For the three months ended | April 1, | Earnings, | comprehensive | and | and/or out of | June 30, | ||||||||||||||||||
| June 30, 2009: | 2009 | net | income | settlements | Level 3 | 2009 | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 806,557 | $ | (9,381 | ) | $ | 75,776 | $ | (28,809 | ) | $ | 1,382 | $ | 845,525 | ||||||||||
Canadian and Canadian provincial
governments |
4,783 | — | 5 | 402 | — | 5,190 | ||||||||||||||||||
Residential mortgage-backed securities |
78,927 | (3,745 | ) | (7,948 | ) | (15,752 | ) | 2,171 | 53,653 | |||||||||||||||
Foreign corporate securities |
275,337 | (441 | ) | 7,047 | 48,380 | (35,612 | ) | 294,711 | ||||||||||||||||
Asset-backed securities |
248,042 | (1,990 | ) | (13,540 | ) | (4,897 | ) | 162 | 227,777 | |||||||||||||||
Commercial mortgage-backed securities |
51,975 | 142 | 21,280 | (9,304 | ) | 46,729 | 110,822 | |||||||||||||||||
State and political subdivision securities |
28,822 | 10 | 13,599 | 1,782 | 40,120 | 84,333 | ||||||||||||||||||
Other foreign government securities |
87,623 | 405 | (2,807 | ) | 60,947 | (1,035 | ) | 145,133 | ||||||||||||||||
Sub-total |
1,582,066 | (15,000 | ) | 93,412 | 52,749 | 53,917 | 1,767,144 | |||||||||||||||||
Funds withheld at interest —
embedded derivatives |
(553,313 | ) | 64,336 | — | — | — | (488,977 | ) | ||||||||||||||||
Short-term investments |
1,705 | 109 | (24 | ) | (1,102 | ) | — | 688 | ||||||||||||||||
Other invested assets —
non-redeemable preferred stock |
4,292 | 116 | 2,965 | (181 | ) | 2,156 | 9,348 | |||||||||||||||||
Other invested assets — other equity securities |
13,043 | 303 | (131 | ) | 73 | (21 | ) | 13,267 | ||||||||||||||||
Reinsurance ceded receivable —
embedded derivatives |
61,544 | 1,040 | — | (2,509 | ) | — | 60,075 | |||||||||||||||||
Total |
$ | 1,109,337 | $ | 50,904 | $ | 96,222 | $ | 49,030 | $ | 56,052 | $ | 1,361,545 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities —
embedded derivatives |
$ | (733,864 | ) | $ | 149,339 | $ | — | $ | 9,300 | $ | — | $ | (575,225 | ) | ||||||||||
Total |
$ | (733,864 | ) | $ | 149,339 | $ | — | $ | 9,300 | $ | — | $ | (575,225 | ) | ||||||||||
| Total gains/losses | Purchases, | |||||||||||||||||||||||
| (realized/unrealized) included in: | sales, | |||||||||||||||||||||||
| Balance | Other | issuances | Transfers in | Balance | ||||||||||||||||||||
| For the six months ended | January 1, | Earnings, | comprehensive | and | and/or out of | June 30, | ||||||||||||||||||
| June 30, 2010: | 2010 | net | income | settlements | Level 3 | 2010 | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 821,513 | $ | (61 | ) | $ | 28,404 | $ | 46,185 | $ | (83,001 | ) | $ | 813,040 | ||||||||||
Canadian and Canadian provincial |
||||||||||||||||||||||||
Residential mortgage-backed securities |
144,457 | (4,802 | ) | 14,526 | (7,449 | ) | 66,049 | 212,781 | ||||||||||||||||
Foreign corporate securities |
215,378 | 308 | 1,361 | (8,970 | ) | (132,148 | ) | 75,929 | ||||||||||||||||
Asset-backed securities |
262,767 | 1,021 | 19,275 | (13,921 | ) | (39,709 | ) | 229,433 | ||||||||||||||||
Commercial mortgage-backed securities |
329,560 | (2,216 | ) | 10,274 | 4,229 | (191,141 | ) | 150,706 | ||||||||||||||||
State and political subdivision securities |
12,080 | 16 | 500 | (40 | ) | (40 | ) | 12,516 | ||||||||||||||||
Other foreign government securities |
17,303 | (10 | ) | 30 | 1,258 | (12,278 | ) | 6,303 | ||||||||||||||||
Sub-total |
1,803,058 | (5,744 | ) | 74,370 | 21,292 | (392,268 | ) | 1,500,708 | ||||||||||||||||
Funds withheld at interest —
embedded derivatives |
(434,494 | ) | 155,146 | — | — | — | (279,348 | ) | ||||||||||||||||
Short-term investments |
443 | — | (1 | ) | 997 | (173 | ) | 1,266 | ||||||||||||||||
Other invested assets —
non-redeemable preferred stock |
6,775 | 550 | (141 | ) | (5,146 | ) | (412 | ) | 1,626 | |||||||||||||||
Other invested assets — other equity securities |
10,436 | — | 5,339 | 625 | — | 16,400 | ||||||||||||||||||
Reinsurance ceded receivable —
embedded derivatives |
68,873 | 1,557 | — | (276 | ) | — | 70,154 | |||||||||||||||||
Total |
$ | 1,455,091 | $ | 151,509 | $ | 79,567 | $ | 17,492 | $ | (392,853 | ) | $ | 1,310,806 | |||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities —
embedded derivatives |
$ | (608,654 | ) | $ | (138,826 | ) | $ | — | $ | (12,124 | ) | $ | — | $ | (759,604 | ) | ||||||||
Total |
$ | (608,654 | ) | $ | (138,826 | ) | $ | — | $ | (12,124 | ) | $ | — | $ | (759,604 | ) | ||||||||
24
Table of Contents
| Total gains/losses | Purchases, | |||||||||||||||||||||||
| (realized/unrealized) included in: | sales, | |||||||||||||||||||||||
| Balance | Other | issuances | Transfers in | Balance | ||||||||||||||||||||
| For the six months ended | January 1, | Earnings, | comprehensive | and | and/or out of | June 30, | ||||||||||||||||||
| June 30, 2009: | 2009 | net | income | settlements | Level 3 | 2009 | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 816,285 | $ | (27,801 | ) | $ | 71,334 | $ | (4,597 | ) | $ | (9,696 | ) | $ | 845,525 | |||||||||
Canadian and Canadian provincial
governments |
9,965 | — | (34 | ) | 4,321 | (9,062 | ) | 5,190 | ||||||||||||||||
Residential mortgage-backed securities |
30,424 | (10,309 | ) | 12,195 | (11,443 | ) | 32,786 | 53,653 | ||||||||||||||||
Foreign corporate securities |
176,608 | (2,113 | ) | 2,355 | 143,121 | (25,260 | ) | 294,711 | ||||||||||||||||
Asset-backed securities |
231,869 | (12,678 | ) | (8,649 | ) | 11,686 | 5,549 | 227,777 | ||||||||||||||||
Commercial mortgage-backed securities |
59,041 | 53 | 19,186 | (9,887 | ) | 42,429 | 110,822 | |||||||||||||||||
State and political subdivision securities |
32,487 | 19 | 10,025 | 1,682 | 40,120 | 84,333 | ||||||||||||||||||
Other foreign government securities |
105,439 | 1,277 | (4,578 | ) | 56,786 | (13,791 | ) | 145,133 | ||||||||||||||||
Sub-total |
1,462,118 | (51,552 | ) | 101,834 | 191,669 | 63,075 | 1,767,144 | |||||||||||||||||
Funds withheld at interest —
embedded derivatives |
(512,888 | ) | 23,911 | — | — | — | (488,977 | ) | ||||||||||||||||
Short-term investments |
352 | (457 | ) | 611 | 182 | — | 688 | |||||||||||||||||
Other invested assets —
non-redeemable preferred stock |
5,393 | (4,789 | ) | 7,448 | (930 | ) | 2,226 | 9,348 | ||||||||||||||||
Other invested assets — other equity securities |
12,056 | (564 | ) | (220 | ) | 1,900 | 95 | 13,267 | ||||||||||||||||
Reinsurance ceded receivable —
embedded derivatives |
66,716 | (590 | ) | — | (6,051 | ) | — | 60,075 | ||||||||||||||||
Total |
$ | 1,033,747 | $ | (34,041 | ) | $ | 109,673 | $ | 186,770 | $ | 65,396 | $ | 1,361,545 | |||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities —
embedded derivatives |
$ | (807,431 | ) | $ | 207,144 | $ | — | $ | 25,062 | $ | — | $ | (575,225 | ) | ||||||||||
Total |
$ | (807,431 | ) | $ | 207,144 | $ | — | $ | 25,062 | $ | — | $ | (575,225 | ) | ||||||||||
The tables below summarize gains and losses due to changes in fair value, including both
realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities
for the three and six months ended June 30, 2010 and 2009 (dollars in thousands).
| Policy | ||||||||||||||||||||||||
| acquisition | ||||||||||||||||||||||||
| Investment | costs and | |||||||||||||||||||||||
| income, net | Investment | Claims & | other | |||||||||||||||||||||
| of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
| For the three months ended June 30, 2010: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 102 | $ | (2,272 | ) | $ | — | $ | — | $ | — | $ | (2,170 | ) | ||||||||||
Residential mortgage-backed securities |
505 | (4,137 | ) | — | — | — | (3,632 | ) | ||||||||||||||||
Foreign corporate securities |
74 | 232 | — | — | — | 306 | ||||||||||||||||||
Asset-backed securities |
997 | (40 | ) | — | — | — | 957 | |||||||||||||||||
Commercial mortgage-backed securities |
1,117 | (3,799 | ) | — | — | — | (2,682 | ) | ||||||||||||||||
State and political subdivision securities |
12 | (4 | ) | — | — | — | 8 | |||||||||||||||||
Other foreign government securities |
1 | (12 | ) | — | — | — | (11 | ) | ||||||||||||||||
Sub-total |
2,808 | (10,032 | ) | — | — | — | (7,224 | ) | ||||||||||||||||
Funds withheld at interest — embedded derivatives |
— | 32,511 | — | — | — | 32,511 | ||||||||||||||||||
Other invested assets — non-redeemable preferred stock |
— | 550 | — | — | — | 550 | ||||||||||||||||||
Reinsurance ceded receivable — embedded derivatives |
— | — | — | — | 2,690 | 2,690 | ||||||||||||||||||
Total |
$ | 2,808 | $ | 23,029 | $ | — | $ | — | $ | 2,690 | $ | 28,527 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities — embedded derivatives |
$ | — | $ | (140,934 | ) | $ | (570 | ) | $ | (17,137 | ) | $ | — | $ | (158,641 | ) | ||||||||
Total |
$ | — | $ | (140,934 | ) | $ | (570 | ) | $ | (17,137 | ) | $ | — | $ | (158,641 | ) | ||||||||
25
Table of Contents
| Policy | ||||||||||||||||||||||||
| acquisition | ||||||||||||||||||||||||
| Investment | costs and | |||||||||||||||||||||||
| income, net | Investment | Claims & | other | |||||||||||||||||||||
| of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
| For the three months ended June 30, 2009: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 544 | $ | (9,925 | ) | $ | — | $ | — | $ | — | $ | (9,381 | ) | ||||||||||
Residential mortgage-backed securities |
368 | (4,113 | ) | — | — | — | (3,745 | ) | ||||||||||||||||
Foreign corporate securities |
48 | (489 | ) | — | — | — | (441 | ) | ||||||||||||||||
Asset-backed securities |
1,901 | (3,891 | ) | — | — | — | (1,990 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
245 | (103 | ) | — | — | — | 142 | |||||||||||||||||
State and political subdivision securities |
13 | (3 | ) | — | — | — | 10 | |||||||||||||||||
Other foreign government securities |
(217 | ) | 622 | — | — | — | 405 | |||||||||||||||||
Sub-total |
2,902 | (17,902 | ) | — | — | — | (15,000 | ) | ||||||||||||||||
Funds withheld at interest — embedded derivatives |
— | 64,336 | — | — | — | 64,336 | ||||||||||||||||||
Short-term investments |
234 | (125 | ) | — | — | — | 109 | |||||||||||||||||
Other invested assets — non-redeemable preferred stock |
2 | 114 | — | — | — | 116 | ||||||||||||||||||
Other invested assets — other equity securities |
303 | — | — | — | — | 303 | ||||||||||||||||||
Reinsurance ceded receivable — embedded derivatives |
— | — | — | — | 1,040 | 1,040 | ||||||||||||||||||
Total |
$ | 3,441 | $ | 46,423 | $ | — | $ | — | $ | 1,040 | $ | 50,904 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities — embedded derivatives |
$ | — | $ | 161,239 | $ | 606 | $ | (12,506 | ) | $ | — | $ | 149,339 | |||||||||||
Total |
$ | — | $ | 161,239 | $ | 606 | $ | (12,506 | ) | $ | — | $ | 149,339 | |||||||||||
| Policy | ||||||||||||||||||||||||
| acquisition | ||||||||||||||||||||||||
| Investment | costs and | |||||||||||||||||||||||
| income, net | Investment | Claims & | other | |||||||||||||||||||||
| of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
| For the six months ended June 30, 2010: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 245 | $ | (306 | ) | $ | — | $ | — | $ | — | $ | (61 | ) | ||||||||||
Residential mortgage-backed securities |
906 | (5,708 | ) | — | — | — | (4,802 | ) | ||||||||||||||||
Foreign corporate securities |
152 | 156 | — | — | — | 308 | ||||||||||||||||||
Asset-backed securities |
1,533 | (512 | ) | — | — | — | 1,021 | |||||||||||||||||
Commercial mortgage-backed securities |
1,777 | (3,993 | ) | — | — | — | (2,216 | ) | ||||||||||||||||
State and political subdivision securities |
23 | (7 | ) | — | — | — | 16 | |||||||||||||||||
Other foreign government securities |
1 | (11 | ) | — | — | — | (10 | ) | ||||||||||||||||
Sub-total |
4,637 | (10,381 | ) | — | — | — | (5,744 | ) | ||||||||||||||||
Funds withheld at interest — embedded derivatives |
— | 155,146 | — | — | — | 155,146 | ||||||||||||||||||
Other invested assets — non-redeemable preferred stock |
— | 550 | — | — | — | 550 | ||||||||||||||||||
Reinsurance ceded receivable — embedded derivatives |
— | — | — | — | 1,557 | 1,557 | ||||||||||||||||||
Total |
$ | 4,637 | $ | 145,315 | $ | — | $ | — | $ | 1,557 | $ | 151,509 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities — embedded derivatives |
$ | — | $ | (133,763 | ) | $ | (114 | ) | $ | (4,949 | ) | $ | — | $ | (138,826 | ) | ||||||||
Total |
$ | — | $ | (133,763 | ) | $ | (114 | ) | $ | (4,949 | ) | $ | — | $ | (138,826 | ) | ||||||||
26
Table of Contents
| Policy | ||||||||||||||||||||||||
| acquisition | ||||||||||||||||||||||||
| Investment | costs and | |||||||||||||||||||||||
| income, net | Investment | Claims & | other | |||||||||||||||||||||
| of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
| For the six months ended June 30, 2009: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 813 | $ | (28,614 | ) | $ | — | $ | — | $ | — | $ | (27,801 | ) | ||||||||||
Residential mortgage-backed securities |
440 | (10,749 | ) | — | — | — | (10,309 | ) | ||||||||||||||||
Foreign corporate securities |
90 | (2,203 | ) | — | — | — | (2,113 | ) | ||||||||||||||||
Asset-backed securities |
3,002 | (15,680 | ) | — | — | — | (12,678 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
156 | (103 | ) | — | — | — | 53 | |||||||||||||||||
State and political subdivision securities |
21 | (2 | ) | — | — | — | 19 | |||||||||||||||||
Other foreign government securities |
(302 | ) | 1,579 | — | — | — | 1,277 | |||||||||||||||||
Sub-total |
4,220 | (55,772 | ) | — | — | — | (51,552 | ) | ||||||||||||||||
Funds withheld at interest — embedded derivatives |
— | 23,911 | — | — | — | 23,911 | ||||||||||||||||||
Short-term investments |
241 | (698 | ) | — | — | — | (457 | ) | ||||||||||||||||
Other invested assets — non-redeemable preferred stock |
(60 | ) | (4,729 | ) | — | — | — | (4,789 | ) | |||||||||||||||
Other invested assets — other equity securities |
(142 | ) | (422 | ) | — | — | — | (564 | ) | |||||||||||||||
Reinsurance ceded receivable — embedded derivatives |
— | — | — | — | (590 | ) | (590 | ) | ||||||||||||||||
Total |
$ | 4,259 | $ | (37,710 | ) | $ | — | $ | — | $ | (590 | ) | $ | (34,041 | ) | |||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities — embedded derivatives |
$ | — | $ | 196,451 | $ | (962 | ) | $ | 11,655 | $ | — | $ | 207,144 | |||||||||||
Total |
$ | — | $ | 196,451 | $ | (962 | ) | $ | 11,655 | $ | — | $ | 207,144 | |||||||||||
The tables below summarize changes in unrealized gains or losses recorded in earnings for the
three and six months ended June 30, 2010 and 2009 for Level 3 assets and liabilities that were
still held at June 30, 2010 and 2009 (dollars in thousands).
| Policy | ||||||||||||||||||||||||
| acquisition | ||||||||||||||||||||||||
| Investment | costs and | |||||||||||||||||||||||
| income, net | Investment | Claims & | other | |||||||||||||||||||||
| of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
| For the three months ended June 30, 2010: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 64 | $ | — | $ | — | $ | — | $ | — | $ | 64 | ||||||||||||
Residential mortgage-backed securities |
496 | (1,650 | ) | — | — | — | (1,154 | ) | ||||||||||||||||
Foreign corporate securities |
74 | — | — | — | — | 74 | ||||||||||||||||||
Asset-backed securities |
997 | (452 | ) | — | — | — | 545 | |||||||||||||||||
Commercial mortgage-backed securities |
1,117 | (1,525 | ) | — | — | — | (408 | ) | ||||||||||||||||
State and political subdivision securities |
12 | — | — | — | — | 12 | ||||||||||||||||||
Other foreign government securities |
1 | — | — | — | — | 1 | ||||||||||||||||||
Sub-total |
2,761 | (3,627 | ) | — | — | — | (866 | ) | ||||||||||||||||
Funds withheld at interest — embedded derivatives |
— | 32,512 | — | — | — | 32,512 | ||||||||||||||||||
Other invested assets — non-redeemable preferred stock |
— | (3 | ) | — | — | — | (3 | ) | ||||||||||||||||
Reinsurance ceded receivable — embedded derivatives |
— | — | — | — | 4,246 | 4,246 | ||||||||||||||||||
Total |
$ | 2,761 | $ | 28,882 | $ | — | $ | — | $ | 4,246 | $ | 35,889 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities — embedded derivatives |
$ | — | $ | (140,934 | ) | $ | (731 | ) | $ | (28,020 | ) | $ | — | $ | (169,685 | ) | ||||||||
Total |
$ | — | $ | (140,934 | ) | $ | (731 | ) | $ | (28,020 | ) | $ | — | $ | (169,685 | ) | ||||||||
27
Table of Contents
| Policy | ||||||||||||||||||||||||
| acquisition | ||||||||||||||||||||||||
| Investment | costs and | |||||||||||||||||||||||
| income, net | Investment | Claims & | other | |||||||||||||||||||||
| of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
| For the three months ended June 30, 2009: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 509 | $ | (7,045 | ) | $ | — | $ | — | $ | — | $ | (6,536 | ) | ||||||||||
Residential mortgage-backed securities |
366 | (5,756 | ) | — | — | — | (5,390 | ) | ||||||||||||||||
Foreign corporate securities |
45 | (328 | ) | — | — | — | (283 | ) | ||||||||||||||||
Asset-backed securities |
1,454 | (7,451 | ) | — | — | — | (5,997 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
258 | (227 | ) | — | — | — | 31 | |||||||||||||||||
State and political subdivision securities |
13 | — | — | — | — | 13 | ||||||||||||||||||
Other foreign government securities |
(213 | ) | — | — | — | — | (213 | ) | ||||||||||||||||
Sub-total |
2,432 | (20,807 | ) | — | — | — | (18,375 | ) | ||||||||||||||||
Funds withheld at interest — embedded derivatives |
— | 64,337 | — | — | — | 64,337 | ||||||||||||||||||
Short-term investments |
234 | — | — | — | — | 234 | ||||||||||||||||||
Other invested assets — non-redeemable preferred stock |
2 | — | — | — | — | 2 | ||||||||||||||||||
Other invested assets —other equity securities |
303 | — | — | — | — | 303 | ||||||||||||||||||
Reinsurance ceded receivable — embedded derivatives |
— | — | — | — | 4,006 | 4,006 | ||||||||||||||||||
Total |
$ | 2,971 | $ | 43,530 | $ | — | $ | — | $ | 4,006 | $ | 50,507 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities — embedded derivatives |
$ | — | $ | 161,238 | $ | (1,627 | ) | $ | (23,779 | ) | $ | — | $ | 135,832 | ||||||||||
Total |
$ | — | $ | 161,238 | $ | (1,627 | ) | $ | (23,779 | ) | $ | — | $ | 135,832 | ||||||||||
| Policy | ||||||||||||||||||||||||
| acquisition | ||||||||||||||||||||||||
| Investment | costs and | |||||||||||||||||||||||
| income, net | Investment | Claims & | other | |||||||||||||||||||||
| of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
| For the six months ended June 30, 2010: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 186 | $ | (585 | ) | $ | — | $ | — | $ | — | $ | (399 | ) | ||||||||||
Residential mortgage-backed securities |
838 | (3,685 | ) | — | — | — | (2,847 | ) | ||||||||||||||||
Foreign corporate securities |
107 | — | — | — | — | 107 | ||||||||||||||||||
Asset-backed securities |
1,522 | (452 | ) | — | — | — | 1,070 | |||||||||||||||||
Commercial mortgage-backed securities |
1,759 | (3,992 | ) | — | — | — | (2,233 | ) | ||||||||||||||||
State and political subdivision securities |
23 | — | — | — | — | 23 | ||||||||||||||||||
Other foreign government securities |
1 | — | — | — | — | 1 | ||||||||||||||||||
Sub-total |
4,436 | (8,714 | ) | — | — | — | (4,278 | ) | ||||||||||||||||
Funds withheld at interest — embedded derivatives |
— | 155,147 | — | — | — | 155,147 | ||||||||||||||||||
Other invested assets — non-redeemable preferred stock |
(1 | ) | (3 | ) | — | — | — | (4 | ) | |||||||||||||||
Reinsurance ceded receivable — embedded derivatives |
— | — | — | — | 4,904 | 4,904 | ||||||||||||||||||
Total |
$ | 4,435 | $ | 146,430 | $ | — | $ | — | $ | 4,904 | $ | 155,769 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities — embedded derivatives |
$ | — | $ | (133,763 | ) | $ | (750 | ) | $ | (25,330 | ) | $ | — | $ | (159,843 | ) | ||||||||
Total |
$ | — | $ | (133,763 | ) | $ | (750 | ) | $ | (25,330 | ) | $ | — | $ | (159,843 | ) | ||||||||
28
Table of Contents
| Policy | ||||||||||||||||||||||||
| acquisition | ||||||||||||||||||||||||
| Investment | costs and | |||||||||||||||||||||||
| income, net | Investment | Claims & | other | |||||||||||||||||||||
| of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
| For the six months ended June 30, 2009: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities — available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 777 | $ | (19,855 | ) | $ | — | $ | — | $ | — | $ | (19,078 | ) | ||||||||||
Residential mortgage-backed securities |
439 | (12,981 | ) | — | — | — | (12,542 | ) | ||||||||||||||||
Foreign corporate securities |
86 | (1,305 | ) | — | — | — | (1,219 | ) | ||||||||||||||||
Asset-backed securities |
2,550 | (20,835 | ) | — | — | — | (18,285 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
169 | (227 | ) | — | — | — | (58 | ) | ||||||||||||||||
State and political subdivision securities |
21 | — | — | — | — | 21 | ||||||||||||||||||
Other foreign government securities |
(271 | ) | — | — | — | — | (271 | ) | ||||||||||||||||
Sub-total |
3,771 | (55,203 | ) | — | — | — | (51,432 | ) | ||||||||||||||||
Funds withheld at interest — embedded derivatives |
— | 23,912 | — | — | — | 23,912 | ||||||||||||||||||
Short-term investments |
241 | (409 | ) | — | — | — | (168 | ) | ||||||||||||||||
Other invested assets — non-redeemable preferred stock |
(60 | ) | (3,858 | ) | — | — | — | (3,918 | ) | |||||||||||||||
Other invested assets — other equity securities |
(142 | ) | (425 | ) | — | — | — | (567 | ) | |||||||||||||||
Reinsurance ceded receivable — embedded derivatives |
— | — | — | — | 4,499 | 4,499 | ||||||||||||||||||
Total |
$ | 3,810 | $ | (35,983 | ) | $ | — | $ | — | $ | 4,499 | $ | (27,674 | ) | ||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities — embedded derivatives |
$ | — | $ | 196,451 | $ | (4,956 | ) | $ | (7,366 | ) | $ | — | $ | 184,129 | ||||||||||
Total |
$ | — | $ | 196,451 | $ | (4,956 | ) | $ | (7,366 | ) | $ | — | $ | 184,129 | ||||||||||
7. Segment Information
The accounting policies of the segments are the same as those described in the Summary of
Significant Accounting Policies in Note 2 of the consolidated financial statements accompanying the
2009 Annual Report. The Company measures segment performance primarily based on profit or loss
from operations before income taxes. There are no intersegment reinsurance transactions and the
Company does not have any material long-lived assets. Investment income is allocated to the
segments based upon average assets and related capital levels deemed appropriate to support the
segment business volumes.
The Company allocates capital to its segments based on an internally developed economic capital
model, the purpose of which is to measure the risk in the business and to provide a basis upon
which capital is deployed. The economic capital model considers the unique and specific nature of
the risks inherent in the Company’s businesses. As a result of the economic capital allocation
process, a portion of investment income and investment related gains and losses are credited to the
segments based on the level of allocated capital. In addition, the segments are charged for excess
capital utilized above the allocated economic capital basis. This charge is included in policy
acquisition costs and other insurance expenses. Information related to total revenues, income
(loss) before income taxes, and total assets of the Company for each reportable segment are
summarized below (dollars in thousands).
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| Total revenues: | 2010 | 2009 | 2010 | 2009 | ||||||||||||
U.S. |
$ | 1,187,111 | $ | 1,109,382 | $ | 2,473,702 | $ | 2,011,658 | ||||||||
Canada |
221,256 | 195,743 | 474,027 | 365,547 | ||||||||||||
Europe & South Africa |
219,743 | 188,661 | 446,524 | 369,348 | ||||||||||||
Asia Pacific |
282,181 | 249,633 | 592,037 | 512,220 | ||||||||||||
Corporate and Other |
21,586 | 69,747 | 45,772 | 85,233 | ||||||||||||
Total |
$ | 1,931,877 | $ | 1,813,166 | $ | 4,032,062 | $ | 3,344,006 | ||||||||
Income (loss) before income taxes: |
||||||||||||||||
U.S. |
$ | 120,775 | $ | 106,226 | $ | 252,347 | $ | 119,075 | ||||||||
Canada |
33,748 | 25,514 | 52,721 | 41,700 | ||||||||||||
Europe & South Africa |
22,326 | 12,363 | 32,983 | 20,898 | ||||||||||||
Asia Pacific |
23,761 | 25,520 | 50,206 | 29,093 | ||||||||||||
Corporate and Other |
(2,538 | ) | 45,800 | 3,130 | 38,863 | |||||||||||
Total |
$ | 198,072 | $ | 215,423 | $ | 391,387 | $ | 249,629 | ||||||||
29
Table of Contents
| Total Assets: | June 30, 2010 | December 31, 2009 | ||||||
U.S. |
$ | 17,144,963 | $ | 15,569,263 | ||||
Canada |
3,311,028 | 3,026,515 | ||||||
Europe & South Africa |
1,429,992 | 1,400,580 | ||||||
Asia Pacific |
2,058,141 | 2,060,425 | ||||||
Corporate and Other |
3,276,482 | 3,192,718 | ||||||
Total |
$ | 27,220,606 | $ | 25,249,501 | ||||
8. Commitments and Contingent Liabilities
The Company had commitments to fund investments in limited partnerships, commercial mortgage loans
and private placement investments in the amounts of $124.4 million, $18.7 million and $8.5 million,
respectively, at June 30, 2010. The Company had commitments to fund investments in limited
partnerships, commercial mortgage loans and private placement investments in the amounts of $86.6
million, $12.6 million and $7.0 million, respectively, at December 31, 2009. The Company
anticipates that the majority of its current commitments will be invested over the next five years;
however, these commitments could become due any time at the request of the counterparties.
Investments in limited partnerships are carried at cost and included in other invested assets in
the condensed consolidated balance sheets.
A legal reserve is established when the Company is notified of an arbitration demand or litigation
or is notified that an arbitration demand or litigation is imminent, it is probable that the
Company will incur a loss as a result and the amount of the probable loss is reasonably capable of
being estimated. The Company is subject to litigation in the normal course of its business. The
Company currently has no material litigation. However, if such material litigation did arise, it
is possible that an adverse outcome on any particular arbitration or litigation situation could
have a material adverse effect on the Company’s condensed consolidated financial position and/or
net income in a particular reporting period.
The Company has obtained letters of credit, issued by banks, in favor of various affiliated and
unaffiliated insurance companies from which the Company assumes business. These letters of credit
represent guarantees of performance under the reinsurance agreements and allow ceding companies to
take statutory reserve credits. At June 30, 2010 and December 31, 2009, there were approximately
$18.0 million and $21.4 million, respectively, 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 subsidiaries, including Parkway Reinsurance Company, Timberlake
Financial, L.L.C., RGA Americas Reinsurance Company, Ltd., RGA Reinsurance Company (Barbados) Ltd.
and RGA Atlantic Reinsurance Company, Ltd. The Company cedes business to its affiliates to help
reduce the amount of regulatory capital required in certain jurisdictions, such as the U.S. and the
United Kingdom. The capital required to support the business in the affiliates reflects more
realistic expectations than the original jurisdiction of the business, where capital requirements
are often considered to be quite conservative. As of June 30, 2010 and December 31, 2009, $646.8
million and $617.5 million, respectively, in letters of credit from various banks were outstanding,
backing reinsurance between various subsidiaries of the Company. The banks providing letters of
credit to the Company are included on the National Association of Insurance Commissioners (“NAIC”)
list of approved banks. The Company maintains a syndicated revolving credit facility with an
overall capacity of $750.0 million, which is scheduled to mature in September 2012. The Company
may borrow cash and obtain letters of credit in multiple currencies under this facility. As of
June 30, 2010, the Company had $402.6 million in issued, but undrawn, letters of credit under this
facility, which is included in the total above. Applicable letter of credit fees and fees payable
for the credit facility depend upon the Company’s senior unsecured long-term debt rating. The
Company also maintains a $200.0 million letter of credit facility which is scheduled to mature in
September 2019. This letter of credit is expected to be fully utilized though 2016 and then
amortize to zero by 2019. As of June 30, 2010, the Company had $200.0 million in issued, but
undrawn, letters of credit under this facility, which is included in the total above. Letter of
credit fees for this facility are fixed for the term of the facility. Fees associated with the
Company’s other 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 to third parties on behalf of its subsidiaries for the payment of amounts
due under certain credit facilities, reinsurance treaties and office lease obligations, whereby, if
a subsidiary fails to meet an obligation, RGA or one of its other subsidiaries will make a payment
to fulfill the obligation. In limited circumstances, treaty guarantees are granted to ceding
companies in order to provide them additional security, particularly in cases where RGA’s
subsidiary is relatively new, unrated, or not of a significant size. Liabilities supported by the
treaty guarantees, before consideration for any legally offsetting amounts due from the guaranteed
party, totaled $335.5 million and $330.3 million as of June 30, 2010 and December 31, 2009,
respectively, and are reflected on the Company’s condensed consolidated balance sheets in future
policy benefits. Potential guaranteed amounts of future payments will vary depending on production
levels and underwriting results. Guarantees related to trust preferred securities and credit
facilities provide additional security to third parties should a
30
Table of Contents
subsidiary fail to make principal and/or interest payments when due. As of June 30, 2010, RGA’s
exposure related to these guarantees was $159.3 million.
In addition, the Company indemnifies its directors and officers as provided in its charters and
by-laws. Since this indemnity generally is not subject to limitation with respect to duration or
amount, the Company does not believe that it is possible to determine the maximum potential amount
due under this indemnity in the future.
9. Income Tax
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the six months
ended June 30, 2010 and 2009 are as follows (dollars in thousands):
| Unrecognized Tax Benefits | ||||||||||||||||
| That, If Recognized, | ||||||||||||||||
| Total Unrecognized | Would Affect The | |||||||||||||||
| Tax Benefits | Effective Tax Rate | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance, beginning of year |
$ | 221,040 | $ | 206,665 | $ | 17,332 | $ | 28,106 | ||||||||
Additions for tax positions of prior years |
— | 16,842 | — | — | ||||||||||||
Reductions for tax positions of prior years |
(42,628 | ) | (11,572 | ) | — | (11,572 | ) | |||||||||
Additions for tax positions of current year |
1,973 | 1,969 | 1,973 | 1,969 | ||||||||||||
Reductions for tax positions of current year |
— | — | — | — | ||||||||||||
Settlements with tax authorities |
— | — | — | — | ||||||||||||
Balance, end of period |
$ | 180,385 | $ | 213,904 | $ | 19,305 | $ | 18,503 | ||||||||
During the first quarter of 2010, the Company reduced its accrual for uncertain tax positions
that are timing in nature and have no impact on the Company’s effective tax rate by approximately
$47.7 million, including after-tax interest. The Company also increased its uncertain tax
positions that would impact the effective tax rate by approximately $1.0 million. During the
second quarter of 2010, the Company increased its uncertain tax positions that would impact the
effective tax rate by approximately $1.0 million.
During the second quarter of 2009, the Company recognized a tax benefit of approximately $12.0
million, including after-tax interest, related to the release of an uncertain tax position.
Following the evaluation of new information the Company believed this position to be highly
certain.
10. Employee Benefit Plans
The components of net periodic benefit costs for the three and six months ended June 30, 2010 and
2009 were as follows (dollars in thousands):
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Net periodic pension benefit cost: |
||||||||||||||||
Service cost |
$ | 1,406 | $ | 912 | $ | 2,492 | $ | 1,824 | ||||||||
Interest Cost |
810 | 745 | 1,723 | 1,490 | ||||||||||||
Expected return on plan assets |
(803 | ) | (547 | ) | (1,289 | ) | (1,095 | ) | ||||||||
Amortization of prior service cost |
8 | 8 | 15 | 15 | ||||||||||||
Amortization of prior actuarial gain (loss) |
(64 | ) | 124 | 375 | 249 | |||||||||||
Total |
$ | 1,357 | $ | 1,242 | $ | 3,316 | $ | 2,483 | ||||||||
Net periodic other benefits cost: |
||||||||||||||||
Service cost |
$ | 149 | $ | 158 | $ | 298 | $ | 316 | ||||||||
Interest Cost |
168 | 160 | 337 | 319 | ||||||||||||
Expected return on plan assets |
— | — | — | — | ||||||||||||
Amortization of prior service cost |
— | — | — | — | ||||||||||||
Amortization of prior actuarial gain (loss) |
5 | 23 | 10 | 46 | ||||||||||||
Total |
$ | 322 | $ | 341 | $ | 645 | $ | 681 | ||||||||
The Company made pension contributions in the amount of $1.5 million during the second quarter
of 2010 and expects to make total pension contributions of $2.3 million in 2010.
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11. Equity Based Compensation
Equity compensation expense was $3.3 million and $2.9 million in the second quarter of 2010 and
2009, respectively, and $9.9 million and $6.5 million in the first six months of 2010 and 2009,
respectively. In the first quarter of 2010, the Company granted 0.5 million stock options at
$47.10 weighted average per share and 0.3 million performance contingent units to employees.
Additionally, non-employee directors were granted a total of 10,600 shares of common stock. As of
June 30, 2010, 1.8 million share options at $39.03 weighted average per share were vested and
exercisable with a remaining weighted average exercise period of 3.5 years. As of June 30, 2010,
the total compensation cost of non-vested awards not yet recognized in the financial statements was
$25.7 million. It is estimated that these costs will vest over a weighted average period of 2.7
years.
12. New Accounting Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued “The FASB Accounting
Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles”. Effective
July 1, 2009, FASB Accounting Standards Codification™ (“Codification”) has become the source of
authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the Securities and Exchange Commission for public companies. This statement is
effective for financial statements issued for interim and annual periods ending after September 15,
2009. The Company adopted Codification on September 30, 2009 and has updated all disclosures to
reference Codification herein.
Changes to the general accounting principles are established by the FASB in the form of accounting
standards updates to the FASB’s Codification. Accounting standards updates not listed below were
assessed and determined to be either not applicable or are expected to have minimal impact on the
Company’s condensed consolidated financial statements.
Consolidation and Business Combinations
In February 2010, the FASB amended the general accounting principles for Consolidation as it
relates to the assessment of a variable interest entity for potential consolidation. The amendment
defers the effective date of the Consolidation amendment made in June 2009 for certain variable
interest entities. This update also clarifies how a related party’s interest should be considered
when evaluating variable interests. The amendment is effective for fiscal years and interim periods
beginning after January 31, 2010. The adoption of this amendment did not have an impact on the
Company’s condensed consolidated financial statements.
In January 2010, the FASB amended the general accounting principles for Consolidation as it relates
to decreases in ownership of a subsidiary. This amendment clarifies the scope of the decrease in
ownership provisions. This amendment also requires additional disclosures about the deconsolidation
of a subsidiary or derecognition of a group of assets. The amendment is effective for fiscal years
and interim periods beginning after December 15, 2009. The adoption of this amendment did not have
an impact on the Company’s condensed consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Consolidation as it relates to
the assessment of a variable interest entity for potential consolidation. This amendment also
requires additional disclosures to provide transparent information regarding the involvement in a
variable interest entity. The amendment is effective for fiscal years and interim periods beginning
after November 15, 2009. The adoption of this amendment did not have a material impact on the
Company’s condensed consolidated financial statements.
In December 2007, the FASB amended the general accounting principles for Business Combinations.
This amendment establishes principles and requirements for how an acquirer recognizes and measures
certain items in a business combination, as well as disclosures about the nature and financial
effects of a business combination. The FASB also amended the general accounting principles for
Consolidation as it relates to noncontrolling interests in consolidated financial statements. This
amendment establishes accounting and reporting standards surrounding noncontrolling interest, or
minority interests, which are the portions of equity in a subsidiary not attributable, directly or
indirectly, to a parent. The amendments are effective for fiscal years beginning on or after
December 15, 2008 and apply prospectively to business combinations. Presentation and disclosure
requirements related to noncontrolling interests must be retrospectively applied. The adoption of
these amendments did not have a material impact on the Company’s condensed consolidated financial
statements.
Investments
In July 2010, the FASB amended the general accounting principles for Receivables as it relates to
the disclosures about the credit quality of financing receivables and the allowance for credit
losses. This amendment requires additional disclosures that provide a greater level of
disaggregated information about the credit quality of financing receivables and the allowance
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for credit losses. It also requires the disclosure of credit quality indicators, past due information,
and modifications of financing receivables. The amendment is effective for interim and annual reporting periods ending
on or after December 15, 2010, except for disclosures about activity that occurs during the
reporting period. Those disclosures are effective for interim and annual reporting periods
beginning after December 15, 2010. The Company is currently evaluating the impact of this amendment
on its condensed consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Investments as it relates to
the recognition and presentation of other-than-temporary impairments. This amendment updates the
other-than-temporary impairment guidance for fixed maturity securities to make it more operational
and to improve the presentation and disclosure of other-than-temporary impairments (“OTTI”) on
fixed maturity and equity securities in the financial statements. The recognition provisions apply
only to fixed maturity securities classified as available-for-sale and held-to-maturity, while the
presentation and disclosure requirements apply to both fixed maturity and equity securities. An
impaired fixed maturity security will be considered other-than-temporarily impaired if the Company
has the intent to sell or it more likely than not will be required to sell prior to recovery of the
amortized cost. If the holder of a fixed maturity security does not expect recovery of the entire
cost basis, even if there is no intention to sell the security, an OTTI has occurred. This
amendment also changes how an entity recognizes an OTTI for a fixed maturity security by separating
the loss between the amount representing the credit loss and the amount relating to other factors,
if the Company does not have the intent to sell or it more likely than not will not be required to
sell prior to recovery of the amortized cost less any current period credit loss. Credit losses
will be recognized in net income and losses relating to other factors will be recognized in
accumulated other comprehensive income (“AOCI”). If the Company has the intent to sell or it more
likely than not will be required to sell before its recovery of amortized cost less any current
period credit loss, the entire OTTI will be recognized in net income. This amendment is effective
for interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment
resulted in a net after-tax increase to retained earnings and a decrease to accumulated other
comprehensive income of $4.4 million, as of April 1, 2009. The required disclosures are provided in
Note 4 — “Investments”.
Transfers and Servicing
In June 2009, the FASB amended the general accounting principles for Transfers and Servicing as it
relates to the transfers of financial assets. This amendment also requires additional disclosures
to address concerns regarding the transparency of transfers of financial assets. The amendment is
effective for fiscal years and interim periods beginning after November 15, 2009. The adoption of
this amendment did not have a material impact on the Company’s condensed consolidated financial
statements.
In February 2008, the FASB amended the general accounting principles for Transfers and Servicing as
it relates to the accounting for transfers of financial assets and repurchase financing
transactions. This amendment provides guidance for evaluating whether to account for a transfer of
a financial asset and repurchase financing as a single transaction or as two separate transactions.
The amendment is effective prospectively for financial statements issued for fiscal years beginning
after November 15, 2008. The adoption of this amendment did not have a material impact on the
Company’s condensed consolidated financial statements.
Derivatives and Hedging
In March 2010, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to embedded derivatives. This amendment clarifies the scope exception for embedded credit
derivative features related to the transfer of credit risk in the form of subordination of a
financial instrument to another. The amendment is effective for financial statements issued for
fiscal years and interim periods beginning after June 15, 2010. The adoption of this amendment did
not have a material impact on the Company’s condensed consolidated financial statements.
In March 2008, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to the disclosures about derivative instruments and hedging activities. This amendment
requires enhanced qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. The amendment is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company adopted this amendment in the first quarter
of 2009. The required disclosures are provided in Note 5 — “Derivative Instruments”.
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Fair Value Measurements and Disclosures
In January 2010, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to the disclosures about fair value measurements. This amendment requires
new disclosures about the transfers in and out of Level 1 and 2 measurements and also enhances
disclosures about the activity within the Level 3 measurements. It also clarifies the required
level of disaggregation and the disclosures regarding valuation techniques and inputs to fair value
measurements. The amendment is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the enhanced Level 3 disclosures. Those disclosures are effective for
interim and annual reporting periods beginning after December 15, 2010. The Company adopted the
effective portions of this amendment in the first quarter of 2010 and is evaluating the impact of
the enhanced Level 3 disclosures. The required disclosures are provided in Note 6 — “Fair Value of
Financial Instruments”.
In September 2009, the FASB amended the general accounting principles for Fair Value Measurements
and Disclosures as it relates to the fair value measurement of investments in certain entities that
calculate net asset value per share. This amendment allows the fair value of certain investments to
be measured on the basis of the net asset value. It also requires disclosure, by major category
type, of the attributes of those investments, such as the nature of any restrictions on redemption,
any unfunded commitments, and the investment strategies of the investees. The amendment is
effective for interim and annual reporting periods ending after December 15, 2009. The adoption of
this amendment did not have a material impact on the Company’s condensed consolidated financial
statements.
In August 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to measuring liabilities at fair value. This amendment provides guidance
for measuring liabilities at fair value when a quoted price in an active market for the identical
liability is not available. It also clarifies that the inclusion of a separate input, used in the
fair value measurement, relating to the existence of a restriction that prevents the transfer of a
liability is not necessary. The amendment is effective for interim and annual reporting beginning
after issuance. The adoption of this amendment did not have a material impact on the Company’s
condensed consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining fair value when the volume and level of activity for asset
or liability have significantly decreased and identifying transactions that are not orderly. This
amendment provides additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased in relation to normal market
activity for the asset or liability and clarifies that the use of multiple valuation techniques may
be appropriate. It also provides additional guidance on circumstances that may indicate a
transaction is not orderly. Further, it requires additional disclosures about fair value
measurements in annual and interim reporting periods. This amendment is effective prospectively for
interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment did
not have a material impact on the Company’s condensed consolidated financial statements. The
required disclosures are provided in Note 6 — “Fair Value of Financial Instruments”.
In October 2008, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining the fair value of a financial asset when the market for
that asset is not active. This amendment clarifies the application of fair value in a market that
is not active and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not active. The amendment
was effective upon issuance on October 10, 2008, including prior periods for which financial
statements had not been issued. The Company did not consider it necessary to change any valuation
techniques as a result of the amendment. The Company also adopted an amendment that delayed the
effective date of fair value measurement for certain nonfinancial assets and liabilities that are
recorded at fair value on a nonrecurring basis. The effective date was delayed until January 1,
2009 and impacts balance sheet items including nonfinancial assets and liabilities in a business
combination and the impairment testing of goodwill and long-lived assets. The adoption of this
amendment did not have a material impact on the Company’s condensed consolidated financial
statements.
Compensation
In April 2010, the FASB amended the general accounting principles for Compensation as it relates to
stock compensation. This amendment clarifies that an employee share-based payment award with an
exercise price denominated in the currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a condition that is not a
market, performance, or service condition. Therefore, such an award should not be classified as a
liability if it otherwise qualifies as equity. The amendment is effective for fiscal years and
interim periods beginning after December 15, 2010. The adoption of this amendment is not expected
to have an impact on the Company’s condensed consolidated financial statements.
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In December 2008, the FASB amended the general accounting principles for Compensation as it relates
to employers disclosures about postretirement benefit plan assets. This amendment provides guidance
for disclosure of the types of assets and associated risks in retirement plans. The new disclosures
are designed to provide additional insight into the major categories of plan assets, the inputs and
valuation techniques used to measure the fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in plan assets for the period,
significant concentrations of risk within plan assets and how investment decisions are made,
including factors necessary to understanding investment policies and strategies. The disclosures
about plan assets required by this amendment is effective for financial statements with fiscal
years ending after December 15, 2009. The adoption of this amendment did not have a material impact
on the Company’s condensed consolidated financial statements.
Debt
In October 2009, the FASB amended the general accounting principles for Debt as it relates to the
accounting for own-share lending arrangements entered into in contemplation of a convertible debt
issuance or other financing. This amendment provides accounting and disclosure guidance for
own-share lending arrangements issued in contemplation of convertible debt issuance. The amendment
is effective for fiscal years and interim periods beginning after December 15, 2009. The adoption
of this amendment did not have an impact on the Company’s condensed consolidated financial
statements.
Equity
In January 2010, the FASB amended the general accounting principles for Equity as it relates to
distributions to shareholders with components of stock and cash. This amendment clarifies that the
stock portion of a distribution to shareholders, which allows them to elect to receive cash or
stock with a limitation on the total amount of cash that shareholders can receive, is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
The amendment is effective for fiscal years and interim periods beginning after December 15, 2009.
The adoption of this amendment did not have an impact on the Company’s condensed consolidated
financial statements.
13. Business Acquisition
Effective January 1, 2010, the Company completed its acquisition of ReliaStar Life Insurance
Company’s U.S. and Canadian group life, accident and health reinsurance business. ReliaStar Life
Insurance Company is a subsidiary of ING Groep N.V. The acquisition was structured as an indemnity
coinsurance agreement and resulted in an intangible asset of $129 million, which is reported in
other assets in the condensed consolidated balance sheets. The acquisition is
expected to enhance the Company’s expertise and product offerings in the North American market, but
is expected to contribute less than five percent to the Company’s consolidated assets, liabilities
and income in 2010.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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
strategies, earnings, revenues, income or loss, ratios, future financial performance, and growth
potential of the Company. The words “intend,” “expect,” “project,” “estimate,” “predict,”
“anticipate,” “should,” “believe,” and other similar expressions also are intended to identify
forward-looking statements. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events and actual results,
performance, and achievements could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements.
Numerous important factors could cause actual results and events to differ materially from those
expressed or implied by forward-looking statements including, without limitation, (1) adverse
capital and credit market conditions and their impact on the Company’s liquidity, access to capital
and cost of capital, (2) the impairment of other financial institutions and its effect on the
Company’s business, (3) requirements to post collateral or make payments due to declines in market
value of assets subject to the Company’s collateral arrangements, (4) the fact that the
determination of allowances and impairments taken on the Company’s investments is highly
subjective, (5) adverse changes in mortality, morbidity, lapsation or claims experience, (6)
changes in the Company’s financial strength and credit ratings and the effect of such changes on
the Company’s future results of operations and financial condition, (7) inadequate risk analysis
and underwriting, (8) general economic conditions or a prolonged economic downturn affecting the
demand for insurance and reinsurance in the Company’s current and planned markets, (9) the
availability and cost of collateral necessary for regulatory reserves and capital, (10) market or
economic conditions that adversely affect the value of the Company’s investment securities or
result in the impairment of all or a portion of the value of certain of the Company’s investment
securities, that in turn could affect regulatory capital, (11) market or economic conditions that
adversely affect the Company’s ability to make timely sales of investment securities, (12) risks
inherent in the Company’s risk management and investment strategy, including changes in investment
portfolio yields due to interest rate or credit quality changes, (13) fluctuations in U.S. or
foreign currency exchange rates, interest rates, or securities and real estate markets, (14)
adverse litigation or arbitration results, (15) the adequacy of reserves, resources and accurate
information relating to settlements, awards and terminated and discontinued lines of business, (16)
the stability of and actions by governments and economies in the markets in which the Company
operates, (17) competitive factors and competitors’ responses to the Company’s initiatives, (18)
the success of the Company’s clients, (19) successful execution of the Company’s entry into new
markets, (20) successful development and introduction of new products and distribution
opportunities, (21) the Company’s ability to successfully integrate and operate reinsurance
business that the Company acquires, (22) regulatory action that may be taken by state Departments
of Insurance with respect to the Company, (23) the Company’s dependence on third parties, including
those insurance companies and reinsurers to which the Company cedes some reinsurance, third-party
investment managers and others, (24) the threat of natural disasters, catastrophes, terrorist
attacks, epidemics or pandemics anywhere in the world where the Company or its clients do business,
(25) changes in laws, regulations, and accounting standards applicable to the Company, its
subsidiaries, or its business, (26) the effect of the Company’s status as an insurance holding
company and regulatory restrictions on its ability to pay principal of and interest on its debt
obligations, and (27) other risks and uncertainties described in this document and in the Company’s
other filings with the Securities and Exchange Commission (“SEC”).
Forward-looking statements should be evaluated together with the many risks and uncertainties that
affect the Company’s business, including those mentioned in this document and the cautionary
statements described in the periodic reports the Company files with the SEC. These forward-looking
statements speak only as of the date on which they are made. The Company does not undertake any
obligations to update these forward-looking statements, even though the Company’s situation may
change in the future. The Company qualifies all of its 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 see Item 1A – “Risk Factors” in the 2009 Annual Report.
Overview
RGA, an insurance holding company that was formed on December 31, 1992, is primarily engaged in the
life reinsurance business, which involves reinsuring life insurance policies that are often in
force for the remaining lifetime of the underlying individuals insured, with premiums earned
typically over a period of 10 to 30 years. Each year, however, a portion of the business under
existing treaties terminates due to, among other things, lapses or surrenders of underlying
policies, deaths of policyholders, and the exercise of recapture options by ceding companies.
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 from financial reinsurance
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transactions. The Company believes that industry trends have not changed materially from those
discussed in its 2009 Annual Report.
The Company’s long-term profitability primarily depends on the volume and amount of claims incurred
and its ability to adequately price the risks it assumes. While claims are reasonably predictable
over a period of years, claims become less predictable over shorter periods and are subject to
significant fluctuation from quarter to quarter and year to year. The maximum amount of individual
life coverage the Company retains per life can be up to $8 million. Claims in excess of this
retention amount are retroceded to retrocessionaires; however, the Company remains fully liable to
the ceding company for the entire amount of risk it assumes. The Company believes its sources of
liquidity are sufficient to cover potential claims payments on both a short-term and long-term
basis.
The Company measures performance based on income or loss before income taxes for each of its five
segments. The Company’s U.S., Canada, Europe & South Africa and Asia Pacific operations provide
traditional life reinsurance to clients. The Company’s U.S. operations also provide long-term
care, group life and health reinsurance, annuity and financial reinsurance products. The Company
also provides insurers with critical illness reinsurance in its Canada, Europe & South Africa and
Asia Pacific operations. Additionally, Europe and South Africa operations provide reinsurance of
longevity risk on payout annuities and Asia Pacific operations provide financial reinsurance. The
Corporate and Other segment results include among other things, the corporate investment activity,
general corporate expenses, interest expense of RGA, operations of RGA Technology Partners, Inc., a
wholly-owned subsidiary that develops and markets technology solutions for the insurance industry,
investment income and expense associated with the Company’s collateral finance facility and the
provision for income taxes.
The Company allocates capital to its segments based on an internally developed economic capital
model, the purpose of which is to measure the risk in the business and to provide a basis upon
which capital is deployed. The economic capital model considers the unique and specific nature of
the risks inherent in the Company’s businesses. As a result of the economic capital allocation
process, a portion of investment income and investment related gains and losses are credited to the
segments based on the level of allocated capital. In addition, the segments are charged for excess
capital utilized above the allocated economic capital basis. This charge is included in policy
acquisition costs and other insurance expenses.
Results of Operations
Consolidated
Consolidated income before income taxes decreased $17.4 million, or 8.1%, and increased $141.8
million, or 56.8%, for the three and six months ended June 30, 2010, as compared to the same
periods in 2009. The decrease in the second quarter is primarily due to the recognition of a gain
on the repurchase of long-term debt of $38.9 million, recorded in other revenues in 2009, offset in
part by a decrease in investment impairments and increased net premiums. The increase for the
first six months is primarily due to a decrease in investment impairments and a favorable change in
the value of embedded derivatives within the U.S. segment due to the impact of tightening credit
spreads in the U.S. debt markets. Also contributing to the favorable results for the first six
months were increased net premiums and investment income, partially offset by the gain on the
repurchase of long-term debt in 2009. Foreign currency fluctuations relative to the prior year
favorably affected income before income taxes by approximately $5.7 million and $16.5 million for
the second quarter and first six months of 2010, respectively, as compared to the same periods in
2009.
The Company recognizes in consolidated income, changes in the value of embedded derivatives on
modified coinsurance or funds withheld treaties, equity-indexed annuity treaties (“EIAs”) and
variable annuity products. The change in the value of embedded derivatives related to reinsurance
treaties written on a modified coinsurance or funds withheld basis are subject to the general
accounting principles for Derivatives and Hedging related to embedded derivatives. The unrealized
gains and losses associated with these embedded derivatives, after adjustment for deferred
acquisition costs, affected income before income taxes unfavorably by $10.4 million in the second
quarter and favorably by $28.3 million for the first six months of 2010, respectively, as compared
to the same periods in 2009. Changes in risk free rates used in the fair value estimates of
embedded derivatives associated with EIAs affect the amount of unrealized gains and losses the
Company recognizes. The unrealized gains and losses associated with EIAs, after adjustment for
deferred acquisition costs and retrocession, adversely affected income before income taxes by $7.5
million and $4.3 million in the second quarter and first six months of 2010, respectively, as
compared to the same periods in 2009. The change in the Company’s liability for variable annuities
associated with guaranteed minimum living benefits affects the amount of unrealized gains and
losses the Company recognizes. The unrealized gains and losses associated with guaranteed minimum
living benefits, after adjustment for deferred acquisition costs, affected income before income
taxes favorably by $7.9 million and $42.5 million in the second quarter and first six months of
2010, respectively, as compared to the same periods in 2009.
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The combined changes in these three types of embedded derivatives, after adjustment for deferred
acquisition costs and retrocession, resulted in a decrease of approximately $10.0 million and an
increase of approximately $66.5 million in consolidated income before income taxes in the second
quarter and first six months of 2010, respectively, as compared to the same periods in 2009. These
fluctuations do not affect current cash flows, crediting rates or spread performance on the
underlying treaties. Therefore, management believes it is helpful to distinguish between the
effects of changes in these embedded derivatives, net of related hedging activity, and the primary
factors that drive profitability of the underlying treaties, namely investment income, fee income,
and interest credited.
Consolidated net premiums increased $206.8 million, or 15.0%, and $489.3 million, or 18.0%, for the
three and six months ended June 30, 2010, as compared to the same periods in 2009, primarily due to
growth in life reinsurance in force and the acquisition of Reliastar Life Insurance Company’s group
life and health reinsurance business, effective January 1, 2010. Foreign currency fluctuations
favorably affected net premiums by approximately $40.4 million and $144.4 million for the three and
six months ended June 30, 2010, as compared to the same periods in 2009. Consolidated assumed
insurance in force increased to $2,367.3 billion as of June 30, 2010 from $2,219.3 billion as of
June 30, 2009 due to new business production. The Company added new business production, measured
by face amount of insurance in force, of $90.4 billion and $61.4 billion during the second quarter
of 2010 and 2009, respectively, and $169.2 billion and $146.6 billion during the first six months
of 2010 and 2009, respectively. Management believes industry consolidation and the established
practice of reinsuring mortality risks should continue to provide opportunities for growth, albeit
at rates less than historically experienced in some markets.
Consolidated investment income, net of related expenses, increased $7.0 million, or 2.5%, and $88.1
million, or 17.3%, for the three and six months ended June 30, 2010, as compared to the same
periods in 2009, primarily due to a larger average invested asset base offset by lower effective
investment portfolio yields. The increase in the second quarter was largely offset by a $26.1
million decrease from market value changes related to the Company’s funds withheld at interest
investment associated with the reinsurance of certain EIAs, which are substantially offset by a
corresponding change in interest credited to policyholder account balances resulting in a
negligible effect on net income. Average invested assets at amortized cost at June 30, 2010
totaled $15.1 billion, an 18.9% increase over June 30, 2009. The average yield earned on
investments, excluding funds withheld, decreased to 5.51%, for the second quarter of 2010 from
5.79% for the second quarter of 2009. The average yield earned on investments, excluding funds
withheld, decreased to 5.67% for the first six months of 2010 from 5.70% for the first six months
of 2009. The average yield will vary from quarter to quarter and year to year depending on a
number of variables, including the prevailing interest rate and credit spread environment, changes
in the mix of the underlying investments and cash balances, and the timing of dividends and
distributions on certain investments.
Total investment related gains (losses), net reflect an unfavorable change of $55.2 million and a
favorable change of $148.3 million, for the three and six months ended June 30, 2010, as compared
to the same periods in 2009. The unfavorable change for the second quarter was primarily due to
unfavorable changes in the embedded derivatives related to guaranteed minimum living benefits of
$302.2 million and reinsurance treaties written on a modified coinsurance or funds withheld basis
of $31.8 million, largely offset by an increase in net hedging gains related to the liabilities
associated with guaranteed minimum living benefits of $263.1 million and a decrease in investment
impairments, net of non-credit related adjustments, of $17.2 million. The improvement for the
first six months is primarily due to an increase in net hedging gains related to the liabilities
associated with guaranteed minimum living benefits of $277.6 million, favorable changes in the
value of embedded derivatives associated with reinsurance treaties written on a modified
coinsurance or funds withheld basis of $131.2 million, a decrease in investment impairments, net of
non-credit related adjustments, of $46.6 million, largely offset by unfavorable changes in the
embedded derivatives related to guaranteed minimum living benefits of $330.2 million. See Note 4 –
“Investments” and Note 5 – “Derivative Instruments” in the Notes to Condensed Consolidated
Financial Statements for additional information on the impairment losses and derivatives.
Investment income and investment related gains and losses are allocated to the operating segments
based upon average assets and related capital levels deemed appropriate to support segment
operations.
The effective tax rate on a consolidated basis was 35.9% and 28.9% for the second quarter of 2010
and 2009, respectively, and 36.3% and 29.3% for the first six months of 2010 and 2009,
respectively. The second quarter and first six months of 2010 effective tax rates were affected by
the expiration of the active financing exception tax rules on December 31, 2009. Since the U.S.
Congress did not pass an extender package by June 30, 2010, the Company reflected an additional tax
provision for the second quarter and first six months of 2010 of approximately $5.0 million and
$9.9 million, respectively. It is possible that the U.S. Congress will pass the extender package
during 2010, at which time the Company would reverse these accruals. The 2009 effective tax rates
were affected by the reduction of an account liability for a previously uncertain tax position and
by the earnings of non-U.S. subsidiaries in which the Company is permanently reinvested whose
statutory tax rates are less than the U.S. statutory tax rate.
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Critical Accounting Policies
The Company’s accounting policies are described in the Summary of Significant Accounting Policies
in Note 2 of the consolidated financial statements accompanying the 2009 Annual Report. The
Company believes its most critical accounting policies include the capitalization and amortization
of deferred acquisition costs (“DAC”); the establishment of liabilities for future policy benefits,
other policy claims and benefits, including incurred but not reported claims; the valuation of
fixed maturity investments and investment impairments, if any; embedded derivatives; accounting for
income taxes; and the establishment of arbitration or litigation reserves. The balances of these
accounts require extensive use of assumptions and estimates, particularly related to the future
performance of the underlying business.
Additionally, for each of the Company’s reinsurance contracts, it 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 the possibility of a
significant loss from insurance risk will occur only under remote circumstances, it records the
contract under a deposit method of accounting with the net amount receivable or payable reflected
in premiums receivable and other reinsurance balances or other reinsurance liabilities on the
condensed consolidated balance sheets. Fees earned on the contracts are reflected as other
revenues, as opposed to net premiums, on the condensed consolidated statements of income.
Differences in experience compared with the assumptions and estimates utilized in the justification
of the recoverability of DAC, in establishing reserves for future policy benefits and claim
liabilities, or in the determination of other-than-temporary impairments to investment securities
can have a material effect on the Company’s results of operations and financial condition.
Deferred Acquisition Costs (“DAC”)
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. DAC amounts reflect the Company’s expectations about the future
experience of the business in force and include commissions and allowances as well as certain costs
of policy issuance and underwriting. Some of the factors that can affect the carrying value of DAC
include mortality assumptions, interest spreads and policy lapse rates. For traditional life and
related coverages, the Company performs periodic tests to determine that DAC remains recoverable at
all times, including at issue, and the cumulative amortization is re-estimated and, if necessary,
adjusted by a cumulative charge to current operations. For its asset-intensive business, the
Company updates the estimated gross profits with actual gross profits each reporting period,
resulting in an increase or decrease to DAC to reflect the difference in the actual gross profits
versus the previously estimated gross profits.
Liabilities for Future Policy Benefits and Other Policy Liabilities
Liabilities for future policy benefits under long-term life insurance policies (policy reserves)
are computed based upon expected investment yields, mortality and withdrawal (lapse) rates, and
other assumptions, including a provision for adverse deviation from expected claim levels. The
Company primarily relies on its own valuation and administration systems to establish policy
reserves. The policy reserves established by the Company may differ from those established by the
ceding companies due to the use of different mortality and other assumptions. However, the Company
relies upon its ceding company clients to provide accurate data, including policy-level
information, premiums and claims, which is the primary information used to establish reserves. The
Company’s administration departments work directly with its clients to help ensure information is
submitted by them in accordance with the reinsurance contracts. Additionally, the Company performs
periodic audits of the information provided by ceding companies. The Company establishes reserves
for processing backlogs with a goal of clearing all backlogs within a ninety-day period. The
backlogs are usually due to data errors the Company discovers or computer file compatibility
issues, since much of the data reported to the Company is in electronic format and is uploaded to
its computer systems.
The Company periodically reviews actual historical experience and relative anticipated experience
compared to the assumptions used to establish aggregate policy reserves. Further, the Company
establishes premium deficiency reserves if actual and anticipated experience indicates that
existing aggregate policy reserves, together with the present value of future gross premiums, are
not sufficient to cover the present value of future benefits, settlement and maintenance costs and
to recover unamortized acquisition costs. The premium deficiency reserve is established through a
charge to income, as well as a reduction to unamortized acquisition costs and, to the extent there
are no unamortized acquisition costs, an increase to future policy benefits. Because of the many
assumptions and estimates used in establishing reserves and the long-term nature of the Company’s
reinsurance contracts, the reserving process, while based on actuarial science, is inherently
uncertain. If the Company’s assumptions, particularly on mortality, are inaccurate, its reserves
may be inadequate to pay claims and there could be a material adverse effect on its results of
operations and financial condition.
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Other policy claims and benefits include claims payable for incurred but not reported losses, which
are determined using case-basis estimates and lag studies of past experience. These estimates are
periodically reviewed and any adjustments to such estimates, if necessary, are reflected in current
operations. The time lag from the date of the claim or death to the date when the ceding company
reports the claim to the Company can be several months and can vary significantly by ceding company
and business segment. The Company updates its analysis of incurred but not reported claims,
including lag studies, on a periodic basis and adjusts its claim liabilities accordingly. The
adjustments in a given period are generally not significant relative to the overall policy
liabilities.
Valuation of Fixed Maturity Securities
The Company primarily invests in fixed maturity securities, including bonds and redeemable
preferred stocks. These securities are classified as available-for-sale and accordingly are
carried at fair value on the condensed consolidated balance sheets. The difference between
amortized cost and fair value is reflected as an unrealized gain or loss, less applicable deferred
taxes as well as related adjustments to deferred acquisition costs, if applicable, in accumulated
other comprehensive income (“AOCI”) in stockholders’ equity. The determinations of fair value may
require extensive use of assumptions and inputs. In addition, other-than-temporary impairment
losses related to non-credit factors are recognized in AOCI.
The Company performs regular analysis and review of the various techniques, assumptions and inputs
utilized in determining fair value to ensure that the valuation approaches utilized are appropriate
and consistently applied, and that the various assumptions are reasonable. The Company also
utilizes information from third parties, such as pricing services and brokers, to assist in
determining fair values for certain assets and liabilities; however, management is ultimately
responsible for all fair values presented in the Company’s financial statements. The Company
performs analysis and review of the information and prices received from third parties to ensure
that the prices represent a reasonable estimate of the fair value. This process involves
quantitative and qualitative analysis and is overseen by the Company’s investment and accounting
personnel. Examples of procedures performed include, but are not limited to, initial and ongoing
review of third party pricing services and techniques, review of pricing trends and monitoring of
recent trade information. In addition, the Company utilizes both internal and external cash flow
models to analyze the reasonableness of fair values utilizing credit spread and other market
assumptions, where appropriate. As a result of the analysis, if the Company determines there is a
more appropriate fair value based upon the available market data, the price received from the third
party is adjusted accordingly.
When available, fair values are based on quoted prices in active markets that are regularly and
readily obtainable. Generally, these are very liquid investments and the valuation does not
require management judgment. When quoted prices in active markets are not available, fair value is
based on market standard valuation techniques, primarily a combination of a market approach,
including matrix pricing and an income approach. The assumptions and inputs used by management in
applying these techniques include, but are not limited to: interest rates, credit standing of the
issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund
requirements, maturity, estimated duration and assumptions regarding liquidity and future cash
flows.
The significant inputs to the market standard valuation techniques for certain types of securities
with reasonable levels of price transparency are inputs that are observable in the market or can be
derived principally from or corroborated by observable market data. Such observable inputs include
benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are
not active and observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation techniques for determining
the estimated fair value of certain types of securities that trade infrequently, and therefore have
little or no price transparency, rely on inputs that are significant to the estimated fair value
that are not observable in the market or cannot be derived principally from or corroborated by
observable market data. These unobservable inputs can be based in large part on management
judgment or estimation, and cannot be supported by reference to market activity. Even though
unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and
are believed to be consistent with what other market participants would use when pricing such
securities.
The use of different techniques, assumptions and inputs may have a material effect on the estimated
fair values of the Company’s securities holdings.
Additionally, the Company evaluates its intent to sell fixed maturity securities and whether it is
more likely than not that it will be required to sell fixed maturity securities, along with factors
such as the financial condition of the issuer, payment performance, the extent to which the market
value has been below amortized cost, compliance with covenants, general market and industry sector
conditions, and various other factors. Securities, based on management’s judgments, with an
other-than-temporary impairment in value are written down to management’s estimate of fair value.
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Valuation of Embedded Derivatives
The Company reinsures certain annuity products that contain terms that are deemed to be embedded
derivatives, primarily EIAs and variable annuities with guaranteed minimum benefits. The Company
assesses each identified embedded derivative to determine whether it is required to be bifurcated
under the general accounting principles for Derivatives and Hedging. If the instrument would not
be accounted for in its entirety at fair value and it is determined that the terms of the embedded
derivative are not clearly and closely related to the economic characteristics of the host
contract, and that a separate instrument with the same terms would qualify as a derivative
instrument, the embedded derivative is bifurcated from the host contract and reported separately.
Such embedded derivatives are carried on the condensed consolidated balance sheets at fair value
with the host contract.
The valuation of the various embedded derivatives requires complex calculations based on actuarial
and capital market inputs assumptions related to estimates of future cash flows. Such assumptions
include, but are not limited to, equity market performance, equity market volatility, interest
rates, credit spreads, benefits and related contract charges, mortality, lapses, withdrawals,
benefit selections and non-performance risk. These assumptions have a significant impact on the
value of the embedded derivatives. For example, independent future decreases in equity market
returns, future decreases in interest rates and future increases in equity market volatilities
would increase the value of the embedded liability derivative associated with guaranteed minimum
withdrawal benefits on variable annuities, resulting in an increase in investment related losses.
See “Market Risk” disclosures in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” for additional information.
Additionally, reinsurance treaties written on a modified coinsurance or funds withheld basis are
subject to the general accounting principles for Derivatives and Hedging related to embedded
derivatives. The majority of the Company’s funds withheld at interest balances are associated with
its reinsurance of annuity contracts, the majority of which are subject to the general accounting
principles for Derivatives and Hedging related to embedded derivatives. Management believes the
embedded derivative feature in each of these reinsurance treaties is similar to a total return swap
on the assets held by the ceding companies. The valuation of these embedded derivatives is
sensitive to the credit spread environment. Decreases or increases in credit spreads result in an
increase or decrease in value of the embedded derivative and therefore an increase in investment
related gains or losses, respectively. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for the U.S. Asset-Intensive Segment for additional
information.
Income Taxes
Income taxes represent the net amount of income taxes that the Company expects to pay to or receive
from various taxing jurisdictions in connection with its operations. The Company provides for
federal, state and foreign income taxes currently payable, as well as those deferred due to
temporary differences between the financial reporting and tax bases of assets and liabilities. The
Company’s accounting for income taxes represents management’s best estimate of various events and
transactions.
Deferred tax assets and liabilities resulting from temporary differences between the financial
reporting and tax bases of assets and liabilities are measured at the balance sheet date using
enacted tax rates expected to apply to taxable income in the years the temporary differences are
expected to reverse.
The realization of deferred tax assets depends upon the existence of sufficient taxable income
within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction.
The Company has significant deferred tax assets related to net operating and capital losses. Most
of the Company’s exposure related to its deferred tax assets are within legal entities that file a
consolidated United States federal income tax return. The Company has projected its ability to
utilize its net operating losses and has determined that all of these losses are expected to be
utilized prior to their expiration. The Company has also done analysis of its capital losses and
has determined that sufficient unrealized capital gains exist within its investment portfolios that
should offset any capital loss realized. It is also the Company’s intention to hold all unrealized
loss securities until maturity or until their market value recovers.
The Company will establish a valuation allowance when management determines, based on available
information, that it is more likely than not that deferred income tax assets will not be realized.
Significant judgment is required in determining whether valuation allowances should be established
as well as the amount of such allowances. When making such determination, consideration is given
to, among other things, the following:
| (i) | future taxable income exclusive of reversing temporary differences and carryforwards; | |
| (ii) | future reversals of existing taxable temporary differences; | |
| (iii) | taxable income in prior carryback years; and | |
| (iv) | tax planning strategies. |
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The Company may be required to change its provision for income taxes in certain circumstances.
Examples of such circumstances include when the ultimate deductibility of certain items is
challenged by taxing authorities, when it becomes clear that certain items will not be challenged,
or when estimates used in determining valuation allowances on deferred tax assets significantly
change or when receipt of new information indicates the need for adjustment in valuation
allowances. Additionally, future events such as changes in tax legislation could have an impact on
the provision for income tax and the effective tax rate. Any such changes could significantly
affect the amounts reported in the condensed consolidated financial statements in the period these
changes occur.
Arbitration and Litigation Reserves
The Company at times is a party to various litigation and arbitrations. The Company cannot predict
or determine the ultimate outcome of any pending litigation or arbitrations or even provide useful
ranges of potential losses. A legal reserve is established when the Company is notified of an
arbitration demand or litigation or is notified that an arbitration demand or litigation is
imminent, it is probable that the Company will incur a loss as a result and the amount of the
probable loss is reasonably capable of being estimated. However, it is possible that an adverse
outcome on any particular arbitration or litigation situation could have a material adverse effect
on the Company’s consolidated financial position and/or net income in a particular reporting
period.
Further discussion and analysis of the results for 2010 compared to 2009 are presented by segment.
U.S. Operations
U.S. operations consist of two major sub-segments: Traditional and Non-Traditional. The
Traditional sub-segment primarily specializes in mortality-risk reinsurance. The Non-Traditional
sub-segment consists of Asset-Intensive and Financial Reinsurance.
| For the three months ended June 30, 2010 | Non-Traditional | |||||||||||||||
| Financial | Total | |||||||||||||||
| (dollars in thousands) | Traditional | Asset-Intensive | Reinsurance | U.S. | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 933,162 | $ | 3,128 | $ | — | $ | 936,290 | ||||||||
Investment income, net of related expenses |
120,782 | 82,961 | 107 | 203,850 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(930 | ) | (16 | ) | — | (946 | ) | |||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
620 | (59 | ) | — | 561 | |||||||||||
Other investment related gains (losses), net |
3,031 | 16,381 | (10 | ) | 19,402 | |||||||||||
Total investment related gains (losses), net |
2,721 | 16,306 | (10 | ) | 19,017 | |||||||||||
Other revenues |
190 | 21,944 | 5,820 | 27,954 | ||||||||||||
Total revenues |
1,056,855 | 124,339 | 5,917 | 1,187,111 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
788,956 | 2,850 | — | 791,806 | ||||||||||||
Interest credited |
16,312 | 62,858 | — | 79,170 | ||||||||||||
Policy acquisition costs and other insurance expenses |
134,470 | 38,656 | 580 | 173,706 | ||||||||||||
Other operating expenses |
18,303 | 2,414 | 937 | 21,654 | ||||||||||||
Total benefits and expenses |
958,041 | 106,778 | 1,517 | 1,066,336 | ||||||||||||
Income before income taxes |
$ | 98,814 | $ | 17,561 | $ | 4,400 | $ | 120,775 | ||||||||
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| Non-Traditional | ||||||||||||||||
| For the three months ended June 30, 2009 | Financial | Total | ||||||||||||||
| (dollars in thousands) | Traditional | Asset-Intensive | Reinsurance | U.S. | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 807,181 | $ | 1,639 | $ | — | $ | 808,820 | ||||||||
Investment income (loss), net of related expenses |
104,616 | 105,167 | (99 | ) | 209,684 | |||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(29,384 | ) | (1,935 | ) | (69 | ) | (31,388 | ) | ||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
13,344 | 1,044 | 31 | 14,419 | ||||||||||||
Other investment related gains (losses), net |
(894 | ) | 86,665 | 76 | 85,847 | |||||||||||
Total investment related gains (losses), net |
(16,934 | ) | 85,774 | 38 | 68,878 | |||||||||||
Other revenues |
920 | 16,962 | 4,118 | 22,000 | ||||||||||||
Total revenues |
895,783 | 209,542 | 4,057 | 1,109,382 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
668,870 | (341 | ) | — | 668,529 | |||||||||||
Interest credited |
15,701 | 57,169 | — | 72,870 | ||||||||||||
Policy acquisition costs and other insurance expenses |
115,325 | 130,504 | 262 | 246,091 | ||||||||||||
Other operating expenses |
12,600 | 2,265 | 801 | 15,666 | ||||||||||||
Total benefits and expenses |
812,496 | 189,597 | 1,063 | 1,003,156 | ||||||||||||
Income before income taxes |
$ | 83,287 | $ | 19,945 | $ | 2,994 | $ | 106,226 | ||||||||
| Non-Traditional | ||||||||||||||||
| For the six months ended June 30, 2010 | Financial | Total | ||||||||||||||
| (dollars in thousands) | Traditional | Asset-Intensive | Reinsurance | U.S. | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 1,836,123 | $ | 15,005 | $ | — | $ | 1,851,128 | ||||||||
Investment income, net of related expenses |
234,243 | 179,328 | 56 | 413,627 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(930 | ) | (45 | ) | — | (975 | ) | |||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
620 | (565 | ) | — | 55 | |||||||||||
Other investment related gains (losses), net |
5,879 | 149,512 | (19 | ) | 155,372 | |||||||||||
Total investment related gains (losses), net |
5,569 | 148,902 | (19 | ) | 154,452 | |||||||||||
Other revenues |
788 | 42,837 | 10,870 | 54,495 | ||||||||||||
Total revenues |
2,076,723 | 386,072 | 10,907 | 2,473,702 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
1,578,731 | 12,460 | — | 1,591,191 | ||||||||||||
Interest credited |
32,948 | 103,142 | — | 136,090 | ||||||||||||
Policy acquisition costs and other insurance expenses |
263,243 | 182,744 | 1,106 | 447,093 | ||||||||||||
Other operating expenses |
39,162 | 5,603 | 2,216 | 46,981 | ||||||||||||
Total benefits and expenses |
1,914,084 | 303,949 | 3,322 | 2,221,355 | ||||||||||||
Income before income taxes |
$ | 162,639 | $ | 82,123 | $ | 7,585 | $ | 252,347 | ||||||||
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| Non-Traditional | ||||||||||||||||
| For the six months ended June 30, 2009 | Financial | Total | ||||||||||||||
| (dollars in thousands) | Traditional | Asset-Intensive | Reinsurance | U.S. | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 1,593,929 | $ | 3,348 | $ | — | $ | 1,597,277 | ||||||||
Investment income (loss), net of related expenses |
207,177 | 160,994 | (164 | ) | 368,007 | |||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(51,949 | ) | (5,787 | ) | (129 | ) | (57,865 | ) | ||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
13,344 | 1,044 | 31 | 14,419 | ||||||||||||
Other investment related gains (losses), net |
(16,557 | ) | 61,945 | 168 | 45,556 | |||||||||||
Total investment related gains (losses), net |
(55,162 | ) | 57,202 | 70 | 2,110 | |||||||||||
Other revenues |
1,490 | 32,085 | 10,689 | 44,264 | ||||||||||||
Total revenues |
1,747,434 | 253,629 | 10,595 | 2,011,658 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
1,364,802 | 933 | — | 1,365,735 | ||||||||||||
Interest credited |
30,934 | 78,797 | — | 109,731 | ||||||||||||
Policy acquisition costs and other insurance expenses |
206,858 | 175,813 | 600 | 383,271 | ||||||||||||
Other operating expenses |
27,203 | 5,163 | 1,480 | 33,846 | ||||||||||||
Total benefits and expenses |
1,629,797 | 260,706 | 2,080 | 1,892,583 | ||||||||||||
Income (loss) before income taxes |
$ | 117,637 | $ | (7,077 | ) | $ | 8,515 | $ | 119,075 | |||||||
Income before income taxes for the U.S. operations segment increased by $14.5 million and
$133.3 million for the three and six months ended June 30, 2010, as compared to the same periods in
2009. The increase in income before income taxes for the second quarter and first six months of
2010 is primarily due to an increase in investment related gains attributed to the change in fair
value of the guaranteed minimum benefits, after allowing for changes in free standing derivatives
associated with variable annuities. Also contributing to the increase in income was the
acquisition of the Reliastar Life Insurance Company’s group life and health reinsurance business,
effective January 1, 2010. Offsetting these somewhat was unfavorable mortality experience in 2010
within the U.S. Traditional sub-segment. Furthermore, changes in credit spreads on the fair value
of embedded derivatives associated with treaties written on a modified coinsurance or funds
withheld basis unfavorably affected the second quarter and favorably affected the first six months
of income as compared to the same periods in 2009. Decreases or increases in credit spreads result
in an increase or decrease in value of the embedded derivatives, and therefore, an increase or
decrease in investment related gains or losses, respectively. In addition, the increase in income
for the first six months of 2010 reflects a decrease in investment impairments and an increase in
investment income compared to the same period in 2009. See the discussion of “Investments” in the
“Liquidity and Capital Resources” section of Management’s Discussion and Analysis for additional
information on impairment losses.
Traditional Reinsurance
The U.S. Traditional sub-segment provides life reinsurance to domestic clients for a variety of
life products through yearly renewable term, coinsurance and modified coinsurance agreements.
These reinsurance arrangements may involve either facultative or automatic agreements. This
sub-segment added new business production, measured by face amount of insurance in force, of $44.1
billion and $25.8 billion during the second quarters, and $84.7 billion and $61.3 billion during
the first six months of 2010 and 2009, respectively. Management believes industry consolidation
and the established practice of reinsuring mortality risks should continue to provide opportunities
for growth, albeit at rates less than historically experienced.
Income before income taxes for the U.S. Traditional sub-segment increased by $15.5 million and
$45.0 million for the three and six months ended June 30, 2010, as compared to the same periods in
2009. The increase in the second quarter and first six months was primarily due to increases in
net investment related gains of $19.7 million and $60.7 million, respectively, and income generated
from the newly acquired group life and health business as compared to the same periods in 2009.
Offsetting this somewhat was a slightly unfavorable mortality experience, compared to a slightly
favorable experience in the second quarter of 2009.
Net premiums for the U.S. Traditional sub-segment increased $126.0 million, or 15.6%, and $242.2
million, or 15.2% for the three and six months ended June 30, 2010, as compared to the same periods
in 2009. These increases in net premiums were driven primarily by the growth of total U.S.
Traditional business in force. Most notably was the acquisition of ReliaStar Life Insurance
Company’s group life and health reinsurance business, which contributed $68.5 million and $139.1
million of
premium, primarily group health, in the second quarter and first six months of 2010, respectively.
At June 30, 2010, total
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face amount of life insurance for the U.S. Traditional sub-segment was
$1,328.9 billion compared to $1,275.2 billion at June 30, 2009.
Net investment income increased $16.2 million, or 15.5%, and $27.1 million, or 13.1%, for the three
and six months ended June 30, 2010, as compared to the same periods in 2009, primarily due to
growth in the invested asset base. Investment related gains increased $19.7 million and $60.7
million for the three and six months ended June 30, 2010, as compared to the same periods in 2009.
The increase in investment related gains year over year was largely due to a higher level of
investment impairments recognized in 2009, combined with higher investment related gains.
Investment income and investment related gains and losses are allocated to the various operating
segments based on average assets and related capital levels deemed appropriate to support segment
operations. Investment performance varies with the composition of investments and the relative
allocation of capital to the operating segments.
Claims and other policy benefits as a percentage of net premiums (“loss ratios”) were 84.5% and
82.9% for the second quarter of 2010 and 2009, respectively, and 86.0% and 85.6% for the six months
ended June 30, 2010 and 2009, respectively. The increase in the percentages for both the second
quarter and year to date was primarily due to the increased volume and severity of large claims
received. Although reasonably predictable over a period of years, death claims can be volatile
over short-term periods.
Interest credited expense increased $0.6 million, or 3.9%, and $2.0 million, or 6.5%, for the three
and six months ended June 30, 2010, as compared to the same periods in 2009. These increases were
driven by a treaty with a minor increase in asset base and a constant credited loan rate of 5.6%.
Also contributing to the increases was the addition of a new treaty in 2010. Interest credited in
this sub-segment relates to amounts credited on cash value products which also have a significant
mortality component.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 14.4%
and 14.3% for the second quarter of 2010 and 2009, respectively, and 14.3% and 13.0% for the six
ended June 30, 2010 and 2009, respectively. Overall, while these ratios are expected to remain in
a predictable range, they may fluctuate from period to period due to varying allowance levels
within coinsurance-type arrangements. In addition, the amortization pattern of previously
capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying
insurance policies, may vary. Also, the mix of first year coinsurance business versus yearly
renewable term business can cause the percentage to fluctuate from period to period.
Other operating expenses increased $5.7 million, or 45.3%, and $12.0 million, or 44.0%, for the
three and six months ended June 30, 2010, as compared to the same periods in 2009. Other operating
expenses as a percentage of net premiums were 2.0% and 1.6% for the second quarter of 2010 and
2009, respectively, and 2.1% and 1.7% for the six months ended June 30, 2010 and 2009,
respectively. The increase in expenses is primarily due to the acquisition of ReliaStar Life
Insurance Company’s group life and health reinsurance business.
Asset-Intensive Reinsurance
The U.S. Asset-Intensive sub-segment assumes primarily investment risk within underlying annuities
and corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance
with funds withheld or modified coinsurance whereby the Company recognizes profits or losses
primarily from the spread between the investment income earned and the interest credited on the
underlying deposit liabilities.
Impact of certain derivatives:
Income for the asset-intensive business tends to be volatile due to changes in the fair value of
certain derivatives, including embedded derivatives associated with reinsurance treaties structured
on a modified coinsurance (“Modco”) basis or funds withheld basis, as well as embedded derivatives
associated with the Company’s reinsurance of equity-indexed annuities and variable annuities with
guaranteed minimum benefit riders. The following table summarizes the asset-intensive results and
quantifies the impact of these embedded derivatives for the periods presented.
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| For the three months ended | For the six months ended | |||||||||||||||
| (dollars in thousands) | June 30, | June 30, | ||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Total revenues |
$ | 124,339 | $ | 209,542 | $ | 386,072 | $ | 253,629 | ||||||||
Less: |
||||||||||||||||
Embedded derivatives – Modco/Funds withheld treaties |
32,512 | 64,337 | 155,147 | 23,912 | ||||||||||||
Guaranteed minimum benefit riders and related free standing derivatives |
(16,828 | ) | 22,263 | (7,451 | ) | 45,168 | ||||||||||
Revenues before certain derivatives |
108,655 | 122,942 | 238,376 | 184,549 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Total benefits and expenses |
106,778 | 189,597 | 303,949 | 260,706 | ||||||||||||
Less: |
||||||||||||||||
Embedded derivatives – Modco/Funds withheld treaties |
25,391 | 46,787 | 110,057 | 7,119 | ||||||||||||
Guaranteed minimum benefit riders and related free standing derivatives |
(10,831 | ) | 37,939 | (6,151 | ) | 76,331 | ||||||||||
Equity-indexed annuities |
4,616 | (2,874 | ) | (932 | ) | (5,221 | ) | |||||||||
Benefits and expenses before certain derivatives |
87,602 | 107,745 | 200,975 | 182,477 | ||||||||||||
Income (loss) before income taxes: |
||||||||||||||||
Income (loss) before income taxes |
17,561 | 19,945 | 82,123 | (7,077 | ) | |||||||||||
Less: |
||||||||||||||||
Embedded derivatives – Modco/Funds withheld treaties |
7,121 | 17,550 | 45,090 | 16,793 | ||||||||||||
Guaranteed minimum benefit riders and related free standing derivatives |
(5,997 | ) | (15,676 | ) | (1,300 | ) | (31,163 | ) | ||||||||
Equity-indexed annuities |
(4,616 | ) | 2,874 | 932 | 5,221 | |||||||||||
Income before income taxes and certain derivatives |
21,053 | 15,197 | 37,401 | 2,072 | ||||||||||||
Modco/Funds Withheld Treaties- Represents the change in the fair value of embedded derivatives
on funds withheld at interest associated with treaties written on a modified coinsurance or funds
withheld basis, allowing for deferred acquisition expenses. Changes in the fair value of the
embedded derivative are driven by changes in investment credit spreads, including the Company’s own
credit spread. Generally, an increase in investment credit spreads, ignoring changes in the
Company’s own credit spread, will have a negative impact on the fair value of the embedded
derivative (decrease in income).
In the second quarter of 2010, the change in fair value of the embedded derivative increased
revenues by $32.5 million and related deferred acquisition expenses increased benefits and expenses
by $25.4 million, for a net positive pre-tax income impact of $7.1 million, primarily due to a
decrease in investment credit spreads. During the second quarter of 2009, the change in fair value
of the embedded derivative increased revenues by $64.3 million and related deferred acquisition
expenses increased benefits and expenses by $46.8 million, for a net positive pre-tax income impact
of $17.6 million, primarily due to a decrease in investment credit spreads. In the first six
months of 2010, the change in fair value of the embedded derivative increased revenues by $155.1
million and related deferred acquisition expenses increased benefits and expenses by $110.1
million, for a positive pre-tax income impact of $45.1 million, primarily due to a decrease in
investment credit spreads. During the first six months of 2009, the change in fair value of the
embedded derivative increased revenues by $23.9 million and related deferred acquisition expenses
increased benefits and expenses by $7.1 million, for a positive pre-tax income impact of $16.8
million, primarily due to a decrease in investment credit spreads.
Guaranteed Minimum Benefit Riders- Represents the impact related to guaranteed minimum benefits
associated with variable annuities. The fair value changes of the guaranteed minimum benefits
along with the changes in fair value of the free standing derivatives designed to hedge the
liability are reflected in revenues, while the related impact on deferred acquisition expenses is
reflected in benefits and expenses. In the second quarter of 2010, the change in the fair value of
the guaranteed minimum benefits, after allowing for changes in the associated free standing
derivatives, decreased revenues by $16.8 million and related deferred acquisition expenses reduced
benefits and expenses by $10.8 million for a negative pre-tax income impact of $6.0 million. In
the second quarter of 2009, the change in the fair value of the guaranteed minimum benefits after
allowing for changes in the associated hedge instruments increased revenues by $22.3 million and
related deferred acquisition expenses increased benefits and expenses by $37.9 million for a
negative pre-tax income impact of $15.7 million. In the first six months of 2010, the change in
the fair value of the guaranteed minimum benefits, after allowing for changes in the associated
free standing derivatives, reduced revenues by $7.5 million and related deferred acquisition
expenses reduced benefits and expenses by $6.2 million for a negative pre-tax income impact of $1.3
million. In the first six months of 2009, the change in the fair value of the guaranteed minimum
benefits after allowing for changes in the associated hedge instruments increased revenues by $45.2
million and related deferred acquisition expenses increased benefits and expenses by $76.3 million
for a negative pre-tax income impact of $31.2 million.
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Equity-Indexed Annuities- Represents the impact of changes in the risk-free rate on the calculation
of the fair value of embedded derivative liabilities associated with EIAs, after adjustments for
related deferred acquisition expenses and retrocession. In the second quarter of 2010 and 2009,
benefits and expenses increased $4.6 million and decreased $2.9 million, respectively. In the
first six months of 2010 and 2009, benefits and expenses decreased $0.9 million and $5.2 million,
respectively.
The changes in derivatives discussed above do not affect current cash flows, crediting rates or
spread performance on the underlying treaties. Fluctuations occur period to period primarily due
to changing investment conditions including, but not limited to, interest rate movements (including
risk-free rates and credit spreads), implied volatility and equity market performance, all of which
are factors in the calculations of fair value. Therefore, management believes it is helpful to
distinguish between the effects of changes in these derivatives, net of related hedging activity,
and the primary factors that drive profitability of the underlying treaties, namely investment
income, fee income, and interest credited.
Discussion and analysis before certain derivatives:
Income before income taxes and certain derivatives increased by $5.9 million and $35.3 million for
the three and six months ended June 30, 2010, as compared to the same periods in 2009, primarily
due to improvement in the broader U.S. financial markets and related favorable impacts on the
underlying annuity account values. Also contributing to the positive variance was an increase in
capital gains in both the funds withheld and coinsurance portfolios. These investment gains
increased approximately $3.0 million and $17.1 million, before deferred acquisition costs, for the
three and six months ended June 30, 2010, as compared to the same periods in 2009. Higher fee
income earned on the variable annuity transactions also contributed to the increased income in
2010.
Revenue before certain derivatives decreased by $14.3 million and increased by $53.8 million for
the three and six months ended June 30, 2010, as compared to the same periods in 2009. These
variances were driven by changes in investment income related to equity options held in a funds
withheld portfolio associated with equity-indexed annuity treaties. Increases and decreases in
investment income related to equity options were mostly offset by corresponding increases and
decreases in interest credited expense. Also affecting revenue were capital gains in both the
funds withheld and coinsurance portfolios which increased approximately $3.0 million and $17.1
million, before deferred acquisition costs, for the three and six months ended June 30, 2010, as
compared to the same periods in 2009.
The average invested asset base supporting this sub-segment increased to $5.6 billion in the second
quarter of 2010 from $5.0 billion in the second quarter of 2009. The growth in the asset base was
driven primarily by new business written on existing equity-indexed treaties. As of June 30, 2010,
$3.9 billion of the invested assets were funds withheld at interest, of which 93.8% is associated
with one client.
Benefits and expenses before certain derivatives decreased by $20.1 million and increased by $18.5
million for the three and six months ended June 30, 2010, as compared to the same periods in 2009,
primarily due to a change in the interest credited expense related to equity option income on funds
withheld equity-indexed annuity treaties. These changes were mostly offset by corresponding
changes in investment income.
Financial Reinsurance
U.S. Financial Reinsurance sub-segment income consists primarily of net fees earned on financial
reinsurance transactions. The majority of the financial reinsurance risks are retroceded to other
insurance companies or brokered business in which the Company does not participate in the
assumption of risk. The fees earned from financial reinsurance contracts and brokered business are
reflected in other revenues, and the fees paid to retrocessionaires are reflected in policy
acquisition costs and other insurance expenses.
Income before income taxes increased $1.4 million, or 47.0%, and decreased $0.9 million, or 10.9%
for the three and six months ended June 30, 2010, as compared to the same periods in 2009. The
increase in the three months ended June 30, 2010 was attributed to new treaties effective at the
end of 2009. The decrease in the first six months of 2010 was primarily related to the absence of
a one-time fee received at inception of a new treaty signed in 2009. At June 30, 2010 and 2009,
the amount of reinsurance provided, as measured by pre-tax statutory surplus, was $1,121.7 million
and $744.7 million, respectively. These pre-tax statutory surplus amounts include all business
assumed or brokered by the Company in the U.S. Fees earned from this business can vary
significantly depending on the size of the transactions and the timing of their completion and,
therefore, can fluctuate from period to period.
Canada Operations
The Company conducts reinsurance business in Canada through RGA Life Reinsurance Company of Canada
(“RGA Canada”), a wholly-owned subsidiary. RGA Canada assists clients with capital management
activity and mortality and morbidity risk management, and is primarily engaged in traditional
individual life reinsurance, as well as creditor, critical
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illness, and group life and health reinsurance. Creditor insurance covers the outstanding balance
on personal, mortgage or commercial loans in the event of death, disability or critical illness and
is generally shorter in duration than traditional life insurance.
| (dollars in thousands) | For the three months ended | For the six months ended | ||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 177,079 | $ | 154,862 | $ | 385,729 | $ | 292,918 | ||||||||
Investment income, net of related expenses |
42,206 | 32,115 | 82,434 | 62,475 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
— | (44 | ) | — | (76 | ) | ||||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
— | 20 | — | 20 | ||||||||||||
Other investment related gains (losses), net |
1,730 | 9,408 | 5,580 | 9,131 | ||||||||||||
Total investment related gains (losses), net |
1,730 | 9,384 | 5,580 | 9,075 | ||||||||||||
Other revenues |
241 | (618 | ) | 284 | 1,079 | |||||||||||
Total revenues |
221,256 | 195,743 | 474,027 | 365,547 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
145,250 | 128,312 | 317,766 | 243,947 | ||||||||||||
Interest credited |
— | 27 | — | 75 | ||||||||||||
Policy acquisition costs and other insurance expenses |
35,264 | 36,367 | 89,705 | 69,434 | ||||||||||||
Other operating expenses |
6,994 | 5,523 | 13,835 | 10,391 | ||||||||||||
Total benefits and expenses |
187,508 | 170,229 | 421,306 | 323,847 | ||||||||||||
Income before income taxes |
$ | 33,748 | $ | 25,514 | $ | 52,721 | $ | 41,700 | ||||||||
Income before income taxes increased $8.2 million, or 32.3%, and $11.0 million, or 26.4%, for
the three and six months ended June 30, 2010, as compared to the same periods in 2009. A stronger
Canadian dollar resulted in an increase in income before income taxes of approximately $4.5 million
and $6.4 million in the second quarter and first six months of 2010, respectively. In addition,
the increase in income in the second quarter and first six months of 2010 is due to somewhat
favorable mortality experience compared to 2009, offset by a decrease in net investment related
gains.
Net premiums increased $22.2 million, or 14.3%, and $92.8 million, or 31.7%, for the three and six
months ended June 30, 2010, as compared to the same periods in 2009. Creditor premiums, excluding
foreign exchange impact, decreased by $14.6 million and increased by $12.5 million in the second
quarter and first six months of 2010, respectively. Creditor and group life and health premiums
represented 14.8% and 31.2% of net premiums for the second quarter of 2010 and 2009, respectively,
and 28.8% and 30.1% for the first six months of 2010 and 2009, respectively. In addition, a
stronger Canadian dollar contributed to an increase in net premiums of approximately $20.7 million
and $54.2 million in the second quarter and first six months of 2010 compared to 2009. Premium
levels can be significantly influenced by currency fluctuations, large transactions, mix of
business and reporting practices of ceding companies and therefore may fluctuate from period to
period.
Net investment income increased $10.1 million, or 31.4%, and $20.0 million, or 31.9%, for the three
and six months ended June 30, 2010, as compared to the same periods in 2009. A stronger Canadian
dollar resulted in an increase in net investment income of approximately $5.0 million and $9.6
million in the second quarter and first six months of 2010 compared to 2009. Investment income and
investment related gains and losses are allocated to the segments based upon average assets and
related capital levels deemed appropriate to support segment operations. Investment performance
varies with the composition of investments and the relative allocation of capital to the operating
segments. The increase in investment income, excluding the impact of foreign exchange, was
primarily the result of an increase in the allocated asset base due to growth in the underlying
business volume.
Loss ratios for this segment were 82.0% and 82.9% for the second quarter of 2010 and 2009,
respectively, and 82.4% and 83.3% for the six months ended June 30, 2010 and 2009, respectively.
The loss ratios on creditor reinsurance business are normally lower than traditional reinsurance,
while allowances are normally higher as a percentage of premiums. Loss ratios for creditor
business were 40.6% and 44.1% for the second quarter of 2010 and 2009, respectively, and 41.0% and
42.8% for the six months ended June 30, 2010 and 2009, respectively. Excluding creditor business,
the loss ratios for this segment were 91.9% and 98.6% for the second quarter of 2010 and 2009,
respectively, and 99.0% for both six month periods ended June 30, 2010 and 2009. The lower loss
ratio in the second quarter of 2010 is primarily the result of favorable mortality experience
compared to adverse mortality experience in the prior-year period. Claims and other policy
benefits, as a
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percentage of net premiums and investment income were 66.2% and 68.6% in the second quarter of 2010
and 2009, respectively, and 67.9% and 68.6% for the six months ended June 30, 2010 and 2009,
respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 19.9%
and 23.5% for the second quarter of 2010 and 2009, respectively, and 23.3% and 23.7% for the six
months ended June 30, 2010 and 2009, respectively. Policy and acquisition costs and other
insurance expenses as a percentage of net premiums for creditor business were 55.7% and 51.5% for
the second quarter of 2010 and 2009, respectively, and 52.3% and 52.9% for the six months ended
June 30, 2010 and 2009, respectively. Excluding foreign exchange and creditor business, policy
acquisition costs and other insurance expenses as a percentage of net premiums were 11.5% and 12.1%
for the second quarter of 2010 and 2009, respectively, and 11.6% and 12.4% for the six months ended
June 30, 2010 and 2009, respectively. Overall, while these ratios are expected to remain in a
predictable range, they may fluctuate from period to period due to varying allowance levels and
product mix. In addition, the amortization pattern of previously capitalized amounts, which are
subject to the form of the reinsurance agreement and the underlying insurance policies, may vary.
Other operating expenses increased by $1.5 million, or 26.6%, and $3.4 million, or 33.1%, for the
three and six months ended June 30, 2010, as compared to the same periods in 2009. A stronger
Canadian dollar contributed approximately $0.7 million and $1.6 million to the increase in
operating expenses in the second quarter and first six months of 2010, respectively. Other
operating expenses as a percentage of net premiums were 3.9% and 3.6% for the second quarter of
2010 and 2009, respectively, and 3.6% and 3.5% for the six months ended June 30, 2010 and 2009,
respectively.
Europe & South Africa Operations
The Europe & South Africa segment has operations in France, Germany, India, Italy, Mexico, the
Netherlands, Poland, Spain, South Africa and the United Kingdom (“UK”). The segment provides life
reinsurance for a variety of products through yearly renewable term and coinsurance agreements, and
reinsurance of critical illness coverage and to a lesser extent, the reinsurance of longevity risk
on payout annuities. Reinsurance agreements may be either facultative or automatic agreements
covering primarily individual risks and in some markets, group risks.
| (dollars in thousands) | For the three months ended | For the six months ended | ||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 209,919 | $ | 180,017 | $ | 427,571 | $ | 353,273 | ||||||||
Investment income, net of related expenses |
8,369 | 8,120 | 16,201 | 14,869 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
— | (1,094 | ) | — | (1,857 | ) | ||||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
— | 496 | — | 496 | ||||||||||||
Other investment related gains (losses), net |
1,347 | 584 | 1,806 | 1,769 | ||||||||||||
Total investment related gains (losses), net |
1,347 | (14 | ) | 1,806 | 408 | |||||||||||
Other revenues |
108 | 538 | 946 | 798 | ||||||||||||
Total revenues |
219,743 | 188,661 | 446,524 | 369,348 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
165,827 | 147,018 | 345,843 | 291,236 | ||||||||||||
Policy acquisition costs and other insurance expenses |
10,273 | 10,369 | 23,671 | 21,186 | ||||||||||||
Other operating expenses |
21,317 | 18,911 | 44,027 | 36,028 | ||||||||||||
Total benefits and expenses |
197,417 | 176,298 | 413,541 | 348,450 | ||||||||||||
Income before income taxes |
$ | 22,326 | $ | 12,363 | $ | 32,983 | $ | 20,898 | ||||||||
Income before income taxes increased $10.0 million, or 80.6% and $12.1 million, or 57.8%, for
the three and six months ended June 30, 2010, as compared to the same periods in 2009. The
increase in income before income taxes for the second quarter and first six months was primarily
due to favorable claims experience, mainly in the UK. Unfavorable foreign currency exchange
fluctuations contributed to a decrease to income before income taxes totaling approximately $1.2
million and $0.8 million for the second quarter and first six months of 2010, respectively.
Net premiums increased $29.9 million, or 16.6%, and $74.3 million, or 21.0%, for the three and six
months ended June 30, 2010, as compared to the same periods in 2009. Unfavorable foreign currency
exchange fluctuations, particularly related to the British pound and the euro, decreased net
premiums by approximately $6.2 million in the second quarter of 2010 compared to 2009. For the six
months ended June 30, 2010 as compared to the
same period in 2009, favorable foreign currency exchange fluctuations, particularly with the
British pound and South African rand, increased net premiums by
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approximately $14.0 million. In addition, net premiums increased as a result of new business
from both new and existing treaties including an increase for the second quarter and first six
months of 2010 of $26.9 million and $14.9 million, respectively, associated with reinsurance of
longevity risk in the UK.
A significant portion of the net premiums relates to critical illness coverage, primarily in the
UK. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical
illness. Net premiums earned from this coverage totaled $52.8 million and $52.7 million in the
second quarter of 2010 and 2009, respectively, and $108.6 million and $99.0 million for the six
months ended June 30, 2010 and 2009, respectively. Premium levels can be significantly influenced
by currency fluctuations, large transactions and reporting practices of ceding companies and
therefore can fluctuate from period to period.
Net investment income increased $0.2 million, or 3.1%, and $1.3 million, or 9.0%, for the three and
six months ended June 30, 2010, as compared to the same periods in 2009. These increases can be
primarily attributed to growth in the invested asset base. Investment income and investment
related gains and losses are allocated to the various operating segments based on average assets
and related capital levels deemed appropriate to support segment operations.
Loss ratios were 79.0% and 81.7% for the second quarter of 2010 and 2009, respectively, and 80.9%
and 82.4% for the six months ended June 30, 2010 and 2009, respectively. The decreases were due to
favorable claims experience, primarily in the UK in 2010, and unfavorable claims experience in
2009. Although reasonably predictable over a period of years, death claims can be volatile over
shorter periods. Management views recent experience as normal short-term volatility that is
inherent in the business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 4.9% and
5.8% for the second quarter of 2010 and 2009, respectively, and 5.5% and 6.0% for the six months
ended June 30, 2010 and 2009, respectively. These percentages fluctuate due to timing of client
company reporting, variations in the mixture of business being reinsured and the relative maturity
of the business. In addition, as the segment grows, renewal premiums, which have lower allowances
than first-year premiums, represent a greater percentage of the total net premiums.
Other operating expenses increased $2.4 million, or 12.7%, and $8.0 million, or 22.2%, for the
three and six months ended June 30, 2010, as compared to the same periods in 2009. Other operating
expenses as a percentage of net premiums totaled 10.2% and 10.5% for the second quarter of 2010 and
2009, respectively, and 10.3% and 10.2% for the six months ended June 30, 2010 and 2009,
respectively. These increases were due to higher costs associated with maintaining and supporting
the segment’s increase in business over the past several years and the Company’s recent expansion
into central Europe. The Company believes that sustained growth in net premiums should lessen the
burden of start-up expenses and expansion costs over time.
Asia Pacific Operations
The Asia Pacific segment has operations in Australia, Hong Kong, Japan, Malaysia, Singapore, New
Zealand, South Korea, Taiwan and mainland China. The principal types of reinsurance for this
segment are life, critical illness, disability income, superannuation, and financial reinsurance.
Superannuation is the Australian government mandated compulsory retirement savings program.
Superannuation funds accumulate retirement funds for employees, and in addition, offer life and
disability insurance coverage. Reinsurance agreements may be facultative or automatic agreements
covering primarily individual risks and in some markets, group risks.
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| (dollars in thousands) | For the three months ended | For the six months ended | ||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 256,878 | $ | 229,430 | $ | 542,696 | $ | 473,158 | ||||||||
Investment income, net of related expenses |
17,249 | 14,877 | 34,513 | 27,574 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
— | (2,029 | ) | — | (3,951 | ) | ||||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
— | 832 | — | 832 | ||||||||||||
Other investment related gains (losses), net |
1,926 | 2,052 | 2,513 | 407 | ||||||||||||
Total investment related gains (losses), net |
1,926 | 855 | 2,513 | (2,712 | ) | |||||||||||
Other revenues |
6,128 | 4,471 | 12,315 | 14,200 | ||||||||||||
Total revenues |
282,181 | 249,633 | 592,037 | 512,220 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
204,494 | 179,556 | 427,590 | 391,970 | ||||||||||||
Policy acquisition costs and other insurance expenses |
31,661 | 26,526 | 69,591 | 56,955 | ||||||||||||
Other operating expenses |
22,265 | 18,031 | 44,650 | 34,202 | ||||||||||||
Total benefits and expenses |
258,420 | 224,113 | 541,831 | 483,127 | ||||||||||||
Income before income taxes |
$ | 23,761 | $ | 25,520 | $ | 50,206 | $ | 29,093 | ||||||||
Income before income taxes decreased $1.8 million, or 6.9%, and increased $21.1 million, or
72.6%, for the three and six months ended June 30, 2010, as compared to the same periods in 2009.
The decrease in income before income taxes for the second quarter is primarily due to favorable
segment wide mortality experience in the prior year. The increase in the first six months of 2010
is primarily due to an increase in premiums in all markets within the segment except Korea and
Japan, compared to the same period in 2009. Foreign currency exchange fluctuations resulted in
increases to income before income taxes totaling approximately $2.5 million and $6.1 million for
the second quarter and first six months of 2010, respectively.
Net premiums increased $27.4 million, or 12.0%, and $69.5 million, or 14.7%, for the three and six
months ended June 30, 2010, as compared to the same periods in 2009. Premiums in the second
quarter of 2010 increased by $34.7 million, collectively, in Australia, New Zealand, Hong Kong,
Southeast Asia and Taiwan and were partially offset by decreased premiums of $7.8 million in Korea,
as compared to the same period in 2009. Premiums in the first six months of 2010 increased by
$76.5 million, collectively, in Australia, New Zealand, Hong Kong, Southeast Asia and Taiwan and
were partially offset by decreased premiums of $7.2 million in Japan and Korea, as compared to the
same period in 2009.
Foreign currencies in certain significant markets, particularly the Australian dollar, New Zealand
dollar, Korean won and Japanese yen, have strengthened against the U.S. dollar during 2010 compared
to 2009. The overall effect of changes in Asia Pacific segment currencies was an increase in net
premiums of approximately $25.9 million and $76.2 million for the second quarter and first six
months of 2010, respectively.
A portion of the net premiums relates to reinsurance of critical illness coverage. This coverage
provides a benefit in the event of the diagnosis of a pre-defined critical illness. Reinsurance of
critical illness in the Asia Pacific operations is offered primarily in South Korea, Australia and
Hong Kong. Net premiums earned from this coverage totaled $48.5 million and $29.2 million in the
second quarter of 2010 and 2009, respectively and $87.9 million and $83.4 million for the first six
months of 2010 and 2009, respectively. Premium levels can be significantly influenced by currency
fluctuations, large transactions and reporting practices of ceding companies and can fluctuate from
period to period.
Net investment income increased $2.4 million, or 15.9%, and $6.9 million, or 25.2%, for the three
and six months ended June 30, 2010, as compared to the same periods in 2009. These increases were
primarily related to growth in the invested asset base. Also contributing to the increases were
favorable changes in foreign currency exchange fluctuations of $1.3 million and $2.9 million in the
second quarter and first six months of 2010, respectively. Investment income and investment
related gains and losses are allocated to the various operating segments based on average assets
and related capital levels deemed appropriate to support segment operations. Investment
performance varies with the composition of investments and the relative allocation of capital to
the operating segments.
Other revenues increased $1.7 million, or 37.1%, and decreased $1.9 million, or 13.3%, for the
three and six months ended June 30, 2010, as compared to the same periods in 2009. The primary
source of other revenues is fees from financial reinsurance treaties in Japan. The decrease in the
first six months of 2010 was primarily related to the absence of a fee received at inception of a
new treaty signed in the first quarter of 2009. At June 30, 2010 and 2009, the amount of
reinsurance assumed from client companies, as measured by pre-tax statutory surplus, was $392.5
million and $516.2
51
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million, respectively. Fees earned from this business can vary significantly depending on the size
of the transactions and the timing of their completion and, therefore, can fluctuate from period to
period.
Loss ratios for this segment were 79.6% and 78.3% for the second quarter of 2010 and 2009,
respectively, and 78.8% and 82.8% for the six months ended June 30, 2010 and 2009, respectively.
The increase in the loss ratio for the second quarter of 2010 was primarily attributable to an
increase in claims and other policy benefits in Australia and Southeast Asia when compared to the
more favorable results for the same period in 2009. Offsetting the increase in the second quarter
of 2010 loss ratio were lower claims and other policy benefits in New Zealand and Korea compared to
the same period in 2009. The decrease in the loss ratio for the first six months of 2010 is
primarily attributable to lower claims and other policy benefits in New Zealand and Hong Kong
compared to the same period in 2009. Although reasonably predictable over a period of years, death
claims can be volatile over shorter periods. Management views recent experience as normal
short-term volatility that is inherent in the business. Loss ratios will fluctuate due to timing
of client company reporting, variations in the mixture of business and the relative maturity of the
business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 12.3%
and 11.6% for the second quarter of 2010 and 2009, respectively, and 12.8% and 12.0% for the six
months ended June 30, 2010 and 2009, respectively. The ratio of policy acquisition costs and other
insurance expenses as a percentage of net premiums should generally decline as the business
matures; however, the percentage does fluctuate periodically due to timing of client company
reporting and variations in the mixture of business.
Other operating expenses increased $4.2 million, or 23.5%, and $10.4 million, or 30.5%, for the
three and six months ended June 30, 2010, as compared to the same periods in 2009. Other operating
expenses as a percentage of net premiums totaled 8.7% and 7.9% for the second quarter of 2010 and
2009, respectively and 8.2% and 7.2% for the six months ended June 30, 2010 and 2009, respectively.
The timing of premium flows and the level of costs associated with the entrance into and
development of new markets in the growing Asia Pacific segment may cause other operating expenses
as a percentage of net premiums to fluctuate over time.
Corporate and Other
Corporate and Other revenues include investment income from invested assets not allocated to
support segment operations and undeployed proceeds from the Company’s capital raising efforts, in
addition to unallocated investment related gains and losses. Corporate expenses consist of the
offset to capital charges allocated to the operating segments within the policy acquisition costs
and other insurance expenses line item, unallocated overhead and executive costs, and interest
expense related to debt and trust preferred securities. Additionally, Corporate and Other includes
results from, among others, RGA Technology Partners, Inc., a wholly-owned subsidiary that develops
and markets technology solutions for the insurance industry and the investment income and expense
associated with the Company’s collateral finance facility.
| (dollars in thousands) | For the three months ended | For the six months ended | ||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 1,851 | $ | 2,052 | $ | 3,357 | $ | 4,602 | ||||||||
Investment income, net of related expenses |
19,997 | 19,840 | 49,154 | 34,907 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(2,543 | ) | (2,387 | ) | (9,944 | ) | (7,588 | ) | ||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
(700 | ) | 368 | 2,150 | 368 | |||||||||||
Other investment related gains (losses), net |
2,215 | 1,104 | (2,380 | ) | 4,265 | |||||||||||
Total investment related gains (losses), net |
(1,028 | ) | (915 | ) | (10,174 | ) | (2,955 | ) | ||||||||
Other revenues |
766 | 48,770 | 3,435 | 48,679 | ||||||||||||
Total revenues |
21,586 | 69,747 | 45,772 | 85,233 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
(138 | ) | 281 | 29 | 552 | |||||||||||
Interest credited |
(1 | ) | — | 13 | — | |||||||||||
Policy acquisition costs and other insurance expenses |
(13,755 | ) | (10,950 | ) | (26,609 | ) | (23,642 | ) | ||||||||
Other operating expenses |
10,917 | 12,964 | 24,853 | 23,377 | ||||||||||||
Interest expenses |
25,141 | 19,595 | 40,590 | 41,712 | ||||||||||||
Collateral finance facility expense |
1,960 | 2,057 | 3,766 | 4,371 | ||||||||||||
Total benefits and expenses |
24,124 | 23,947 | 42,642 | 46,370 | ||||||||||||
Income (loss) before income taxes |
$ | (2,538 | ) | $ | 45,800 | $ | 3,130 | $ | 38,863 | |||||||
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Income before income taxes decreased $48.3 million and $35.7 million, for the three and six
months ended June 30, 2010, as compared to the same periods in 2009. The decrease for the second
quarter was primarily due to the absence of the recognition of a gain on the repurchase of
long-term debt of $38.9 million and a $4.8 million foreign exchange gain on the repayment of debt,
recorded in other revenues in 2009. The decrease for the first six months is primarily due to the
absence of the gains from the debt repurchase and repayment partially offset by a $14.2 million
increase in investment income.
Total revenues decreased $48.2 million and $39.5 million, for the three and six months ended June
30, 2010, as compared to the same periods in 2009. These decreases were largely due to decreases
in other revenues associated with the absence in 2010 of gains from the debt repurchase and
repayment, as described above. The decrease for the first six months was partially offset by an
increase in investment income largely due to an increase in invested assets, related to the
issuance of $400.0 million of senior notes in the fourth quarter of 2009.
Total benefits and expenses increased $0.2 million, or 0.7%, and decreased by $3.7 million, or
8.0%, for the three and six months ended June 30, 2010, as compared to the same periods in 2009.
The increase for the second quarter was primarily due to increased interest expense on the
aforementioned senior notes issued in 2009 offset by lower operating expenses and decreased policy
acquisition costs and other insurance expenses. The decrease for the first six months was
primarily due to decreased interest expense related to lower interest provisions for income taxes
related to an uncertain tax position partially offset by increased interest expense on the
aforementioned senior notes issued in 2009. In addition, policy acquisition costs and other
insurance expenses were lower in 2010, primarily due to increased charges to the operating segments
for the use of capital.
Liquidity and Capital Resources
Current Market Environment
The U.S. and global financial markets have improved significantly since the second quarter of 2009.
Throughout the first six months of 2009, the capital and credit markets experienced volatility and
disruption. This environment was driven by, among other things, heightened concerns over
conditions in the U.S. housing and mortgage markets, the availability and cost of credit, the
health of U.S. and global financial institutions, a decline in business and consumer confidence and
increased unemployment. Turmoil in the U.S. and global financial markets resulted in bankruptcies,
credit defaults, consolidations and government interventions.
Results of operations in the first six months of 2010 reflect a favorable change in the value of
embedded derivatives as credit spreads tightened significantly since the second quarter of 2009.
Gross unrealized losses in the Company’s fixed maturity and equity securities available-for-sale
have improved from $1,063.6 million at June 30, 2009 to $386.7 million at June 30, 2010. Likewise,
gross unrealized gains have also improved.
The Company continues to be in a position to hold its investment securities until recovery,
provided it remains comfortable with the credit of the issuer. The Company does not rely on
short-term funding or commercial paper, and therefore, to date, it has experienced no liquidity
pressure, nor does it anticipate such pressure in the foreseeable future. The Company has
selectively reduced its exposure to distressed security issuers through security sales. Although
management believes the Company’s current capital base is adequate to support its business at
current operating levels, it continues to monitor new business opportunities and any associated new
capital needs that could arise from the changing financial landscape.
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, dividends paid to shareholders and interest
payments on indebtedness. The primary sources of RGA’s liquidity include proceeds from capital
raising efforts, interest income on undeployed corporate investments, interest income received on
surplus notes with two operating subsidiaries, and dividends from operating subsidiaries. As the
Company continues its expansion efforts, RGA will continue to be dependent on these sources of
liquidity.
The Company believes that it has sufficient liquidity to fund its cash needs under various
scenarios that include the potential risk of early recapture of reinsurance treaties and higher
than expected death claims. Historically, the Company has generated positive net cash flows from
operations. However, in the event of significant unanticipated cash requirements beyond normal
liquidity, the Company has multiple liquidity alternatives available based on market conditions and
the amount and timing of the liquidity need. These options include borrowings under committed
credit facilities, secured borrowings, the ability to issue long-term debt, capital securities or
common equity and, if necessary, the sale of invested assets.
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Cash Flows
The Company’s net cash flows provided by operating activities for the six months ended June 30,
2010 and 2009 were $1,035.2 million and $539.2 million, respectively. Cash flows from operating
activities are affected by the timing of premiums received, claims paid, and working capital
changes. The $496.0 million net increase in operating cash flows during the six months of 2010
compared to the same period in 2009 was primarily a result of cash inflows related to premiums and
investment income increasing and cash outflows related to claims, acquisition costs, income taxes
and other operating expenses decreasing. Cash from premiums and investment income increased $475.6
million and $79.3 million, respectively, and was offset by higher cash outlays of $58.9 million for
the current six month period. The Company believes the short-term cash requirements of its
business operations will be sufficiently met by the positive cash flows generated. Additionally,
the Company believes it maintains a high quality fixed maturity portfolio that can be sold, if
necessary, to meet the Company’s short- and long-term obligations.
Net cash used in investing activities for the six months ended June 30, 2010 and 2009 was $877.0
million and $707.1 million, respectively. The sales and purchases of fixed maturity securities are
related to the management of the Company’s investment portfolios and the investment of excess cash
generated by operating and financing activities.
Net cash used in financing activities for the six months ended June 30, 2010 and 2009 was $107.4
million and $300.8 million, respectively. The decrease in cash used in financing activities was
primarily due to a $216.2 million increase in the cash collateral received under derivative
contracts due to a change in the value of the underlying derivatives.
Debt and Preferred Securities
As of June 30, 2010 and December 31, 2009, the Company had $1,216.2 million and $1,216.1 million,
respectively, in outstanding borrowings under its debt agreements and was in compliance with all
covenants under those agreements.
The Company maintains three revolving credit facilities, including a syndicated credit facility
with an overall capacity of $750.0 million that expires in September 2012. The Company may borrow
cash and may obtain letters of credit in multiple currencies under this facility. As of June 30,
2010, the Company had no cash borrowings outstanding and $402.6 million in issued, but undrawn,
letters of credit under this facility. The Company’s other credit facilities consist of a £15.0
million credit facility that expires in May 2012, and an A$50.0 million Australian credit facility
that expires in March 2011, with no outstanding balances as of June 30, 2010.
As of June 30, 2010, the average interest rate on all long-term and short-term debt outstanding,
excluding the Company-obligated mandatorily redeemable preferred securities of subsidiary trust
holding solely junior subordinated debentures of the Company (“Trust Preferred Securities”), was
6.38%. Interest is expensed on the face amount, or $225 million, of the Trust Preferred Securities
at a rate of 5.75%.
Based on the historic cash flows and the current financial results of the Company, management
believes RGA’s cash flows will be sufficient to enable RGA to meet its obligations for at least the
next 12 months.
Collateral Finance Facility
In June 2006, RGA’s subsidiary, Timberlake Financial, L.L.C. (“Timberlake Financial”), issued
$850.0 million of Series A Floating Rate Insured Notes due June 2036 in a private placement. The
notes were issued to fund the collateral requirements for statutory reserves required by the U.S.
Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX) on specified
term life insurance policies reinsured by RGA Reinsurance Company (“RGA Reinsurance”). Proceeds
from the notes, along with a $112.8 million direct investment by the Company, were deposited into a
series of trust accounts that collateralize the notes and are not available to satisfy the general
obligations of the Company. Interest on the notes will accrue at an annual rate of 1-month LIBOR
plus a base rate margin, payable monthly. The payment of interest and principal on the notes is
insured by a monoline insurance company through a financial guaranty insurance policy. The notes
represent senior, secured indebtedness of Timberlake Financial without legal recourse to RGA or its
other subsidiaries. Timberlake Financial will rely primarily upon the receipt of interest and
principal payments on a surplus note and dividend payments from its wholly-owned subsidiary,
Timberlake Reinsurance Company II (“Timberlake Re”), a South Carolina captive insurance company, to
make payments of interest and principal on the notes. The ability of Timberlake Re to make
interest and principal payments on the surplus note and dividend payments to Timberlake Financial
is contingent upon South Carolina regulatory approval, the return on Timberlake Re’s investment
assets and the performance of specified term life insurance policies with guaranteed level premiums
retroceded by RGA’s subsidiary, RGA Reinsurance, to Timberlake Re.
Asset / Liability Management
The Company actively manages its cash and invested assets using an approach that is intended to
balance quality, diversification, asset/liability matching, liquidity and investment return. The
goals of the investment process are to optimize after-tax, risk-adjusted investment income and
after-tax, risk-adjusted total return while managing the assets and liabilities on a cash flow and
duration basis.
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Table of Contents
The Company has established target asset portfolios for each major insurance product, which
represent the investment strategies intended to profitably fund its liabilities within acceptable
risk parameters. These strategies include objectives and limits for effective duration, yield
curve sensitivity and convexity, liquidity, asset sector concentration and credit quality.
The Company’s liquidity position (cash and cash equivalents and short-term investments) was $621.7
million and $633.1 million at June 30, 2010 and December 31, 2009, respectively. The decrease in
the Company’s liquidity position from December 31, 2009 is primarily due to the timing of
investment activity. Liquidity needs are determined from valuation analyses conducted by
operational units and are driven by product portfolios. Periodic evaluations of demand liabilities
and short-term liquid assets are designed to adjust specific portfolios, as well as their durations
and maturities, in response to anticipated liquidity needs.
The Company periodically sells investment securities under agreements to repurchase the same
securities. These arrangements are used for purposes of short-term financing. There were no
securities subject to these agreements outstanding at June 30, 2010 or December 31, 2009. The
Company also occasionally enters into arrangements to purchase securities under agreements to
resell the same securities. Amounts outstanding, if any, are reported in cash and cash
equivalents. These agreements are primarily used as yield enhancement alternatives to other cash
equivalent investments. There were no agreements outstanding at June 30, 2010 or December 31, 2009.
RGA Reinsurance is a member of the Federal Home Loan Bank of Des Moines (“FHLB”) and holds $18.9
million in common stock of the FHLB, which is included in other invested assets on the Company’s
condensed consolidated balance sheets. RGA Reinsurance occasionally enters into traditional
funding agreements with the FHLB, but had no outstanding traditional funding agreements with the
FHLB at June 30, 2010 and December 31, 2009.
In addition, RGA Reinsurance has also entered into funding agreements with the FHLB under
guaranteed investment contracts whereby RGA Reinsurance has issued the funding agreements in
exchange for cash and for which the FHLB has been granted a blanket lien on RGA Reinsurance’s
commercial and residential mortgage-backed securities and commercial mortgage loans used to
collateralize RGA Reinsurance’s obligations under the funding agreements. RGA Reinsurance
maintains control over these pledged assets, and may use, commingle, encumber or dispose of any
portion of the collateral as long as there is no event of default and the remaining qualified
collateral is sufficient to satisfy the collateral maintenance level. The funding agreements and
the related security agreements represented by this blanket lien provide that upon any event of
default by RGA Reinsurance, the FHLB’s recovery is limited to the amount of RGA Reinsurance’s
liability under the outstanding funding agreements. The amount of the Company’s liability for the
funding agreements with the FHLB under guaranteed investment contracts was $199.3 million and
$399.3 million at June 30, 2010 and December 31, 2009, respectively, which is included in interest
sensitive contract liabilities. The advances on these agreements are collateralized primarily by
commercial and residential mortgage-backed securities and commercial mortgage loans.
Investments
The Company had total cash and invested assets of $21.6 billion and $19.7 billion at June 30, 2010
and December 31, 2009, respectively, as illustrated below (dollars in thousands):
| June 30, 2010 | December 31, 2009 | |||||||
Fixed maturity securities, available-for-sale |
$ | 13,077,607 | $ | 11,763,358 | ||||
Mortgage loans on real estate |
838,827 | 791,668 | ||||||
Policy loans |
1,173,016 | 1,136,564 | ||||||
Funds withheld at interest |
5,257,929 | 4,895,356 | ||||||
Short-term investments |
63,962 | 121,060 | ||||||
Other invested assets |
637,827 | 516,086 | ||||||
Cash and cash equivalents |
557,756 | 512,027 | ||||||
Total cash and invested assets |
$ | 21,606,924 | $ | 19,736,119 | ||||
The following table presents consolidated average invested assets at amortized cost, net
investment income and investment yield, excluding funds withheld. Funds withheld assets are
primarily associated with the reinsurance of annuity contracts on which the Company earns a spread.
Fluctuations in the yield on funds withheld assets are generally offset by a corresponding
adjustment to the interest credited on the liabilities (dollars in thousands).
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||
| 2010 | 2009 | Increase/ (Decrease) | 2010 | 2009 | Increase/ (Decrease) | |||||||||||||||||||
Average invested assets at amortized cost |
$ | 15,432,369 | $ | 12,976,510 | 18.9 | % | $ | 15,141,511 | $ | 12,737,497 | 18.9 | % | ||||||||||||
Net investment income |
208,303 | 183,823 | 13.3 | % | 423,598 | 358,123 | 18.3 | % | ||||||||||||||||
Investment yield (ratio of net investment
income to average invested assets) |
5.51 | % | 5.79 | % | (28) bps | 5.67 | % | 5.70 | % | (3) bps | ||||||||||||||
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Table of Contents
Investment yield decreased for the three months ended June 30, 2010 due primarily to slightly
lower yields on several asset classes including fixed maturity securities, mortgage loans and
policy loans. The lower yields are due primarily to a lower interest rate environment which
decreases the yield on new investment purchases. All investments held by RGA and its subsidiaries
are monitored for conformance to the qualitative and quantitative limits prescribed by the
applicable jurisdiction’s insurance laws and regulations. In addition, the operating companies’
boards of directors periodically review their respective investment portfolios. The Company’s
investment strategy is to maintain a predominantly investment-grade, fixed maturity portfolio, to
provide adequate liquidity for expected reinsurance obligations, and to maximize total return
through prudent asset management. The Company’s asset/liability duration matching differs between
operating segments. Based on Canadian reserve requirements, the Canadian liabilities are matched
with long-duration Canadian assets. The duration of the Canadian portfolio exceeds twenty years.
The average duration for all the Company’s portfolios, when consolidated, ranges between eight and
ten years. See Note 4 – “Investments” in the Notes to Consolidated Financial Statements of the
2009 Annual Report for additional information regarding the Company’s investments.
Fixed Maturity and Equity Securities Available-for-Sale
The following tables provide information relating to investments in fixed maturity securities and
equity securities by sector as of June 30, 2010 and December 31, 2009 (dollars in thousands):
| Other-than- | ||||||||||||||||||||||||
| Estimated | temporary | |||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | % of | impairments | |||||||||||||||||||
| June 30, 2010: | Cost | Gains | Losses | Value | Total | in AOCI | ||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 4,269,575 | $ | 309,130 | $ | 118,585 | $ | 4,460,120 | 34.1 | % | $ | — | ||||||||||||
Canadian and Canadian provincial
governments |
2,032,471 | 489,262 | 6,312 | 2,515,421 | 19.2 | — | ||||||||||||||||||
Residential mortgage-backed securities |
1,554,585 | 57,289 | 38,514 | 1,573,360 | 12.0 | (3,227 | ) | |||||||||||||||||
Foreign corporate securities |
1,895,573 | 113,455 | 19,097 | 1,989,931 | 15.2 | — | ||||||||||||||||||
Asset-backed securities |
496,652 | 14,093 | 61,122 | 449,623 | 3.5 | (3,404 | ) | |||||||||||||||||
Commercial mortgage-backed securities |
1,229,237 | 56,477 | 118,777 | 1,166,937 | 8.9 | (12,114 | ) | |||||||||||||||||
U.S. government and agencies |
443,024 | 25,546 | — | 468,570 | 3.6 | — | ||||||||||||||||||
State and political subdivisions |
106,978 | 404 | 9,295 | 98,087 | 0.8 | — | ||||||||||||||||||
Other foreign government securities |
353,543 | 6,231 | 4,216 | 355,558 | 2.7 | — | ||||||||||||||||||
Total fixed maturity securities |
$ | 12,381,638 | $ | 1,071,887 | $ | 375,918 | $ | 13,077,607 | 100.0 | % | $ | (18,745 | ) | |||||||||||
Non-redeemable preferred stock |
$ | 111,566 | $ | 2,574 | $ | 9,550 | $ | 104,590 | 63.1 | % | ||||||||||||||
Other equity securities |
54,800 | 7,638 | 1,185 | 61,253 | 36.9 | |||||||||||||||||||
Total equity securities |
$ | 166,366 | $ | 10,212 | $ | 10,735 | $ | 165,843 | 100.0 | % | ||||||||||||||
| Other-than- | ||||||||||||||||||||||||
| Estimated | temporary | |||||||||||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | % of | impairments | |||||||||||||||||||
| December 31, 2009: | Cost | Gains | Losses | Value | Total | in AOCI | ||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 3,689,797 | $ | 180,635 | $ | 147,384 | $ | 3,723,048 | 31.7 | % | $ | — | ||||||||||||
Canadian and Canadian provincial
governments |
1,984,475 | 394,498 | 25,746 | 2,353,227 | 20.0 | — | ||||||||||||||||||
Residential mortgage-backed securities |
1,494,021 | 32,538 | 70,015 | 1,456,544 | 12.4 | (7,018 | ) | |||||||||||||||||
Foreign corporate securities |
1,627,806 | 77,340 | 33,398 | 1,671,748 | 14.2 | — | ||||||||||||||||||
Asset-backed securities |
522,760 | 9,307 | 80,131 | 451,936 | 3.8 | (2,194 | ) | |||||||||||||||||
Commercial mortgage-backed securities |
1,177,621 | 20,670 | 169,427 | 1,028,864 | 8.7 | (13,690 | ) | |||||||||||||||||
U.S. government and agencies |
540,001 | 1,085 | 15,027 | 526,059 | 4.5 | — | ||||||||||||||||||
State and political subdivisions |
107,233 | 273 | 17,744 | 89,762 | 0.8 | — | ||||||||||||||||||
Other foreign government securities |
473,243 | 2,198 | 13,271 | 462,170 | 3.9 | — | ||||||||||||||||||
Total fixed maturity securities |
$ | 11,616,957 | $ | 718,544 | $ | 572,143 | $ | 11,763,358 | 100.0 | % | $ | (22,902 | ) | |||||||||||
Non-redeemable preferred stock |
$ | 123,648 | $ | 1,878 | $ | 12,328 | $ | 113,198 | 66.0 | % | ||||||||||||||
Other equity securities |
58,008 | 760 | 409 | 58,359 | 34.0 | |||||||||||||||||||
Total equity securities |
$ | 181,656 | $ | 2,638 | $ | 12,737 | $ | 171,557 | 100.0 | % | ||||||||||||||
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Table of Contents
The Company’s fixed maturity securities are invested primarily in U.S. and foreign corporate
bonds, mortgage- and asset-backed securities, and U.S. and Canadian government securities. As of
June 30, 2010 and December 31, 2009, approximately 94.7% and 94.8%, respectively, 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 maturity securities were invested was in corporate securities, which represented
approximately 49.3% of fixed maturity securities as of June 30, 2010, compared to 45.9% at
December 31, 2009. The table below shows the major industry types and weighted average credit
ratings, which comprise the U.S. and foreign corporate fixed maturity holdings at (dollars in
thousands):
| Estimated | Average Credit | |||||||||||||
| June 30, 2010: | Amortized Cost | Fair Value | % of Total | Ratings | ||||||||||
Finance |
$ | 1,510,575 | $ | 1,510,087 | 23.4 | % | A- | |||||||
Industrial |
2,102,396 | 2,247,318 | 34.8 | BBB+ | ||||||||||
Foreign (1) |
1,895,573 | 1,989,931 | 30.9 | A+ | ||||||||||
Utility |
652,785 | 698,450 | 10.8 | BBB+ | ||||||||||
Other |
3,819 | 4,265 | 0.1 | A+ | ||||||||||
Total |
$ | 6,165,148 | $ | 6,450,051 | 100.0 | % | A- | |||||||
| Estimated | Average Credit | |||||||||||||
| December 31, 2009: | Amortized Cost | Fair Value | % of Total | Ratings | ||||||||||
Finance |
$ | 1,411,464 | $ | 1,358,925 | 25.2 | % | A- | |||||||
Industrial |
1,670,610 | 1,735,522 | 32.2 | BBB+ | ||||||||||
Foreign (1) |
1,627,352 | 1,671,090 | 30.9 | A | ||||||||||
Utility |
603,958 | 624,710 | 11.6 | BBB+ | ||||||||||
Other |
4,219 | 4,549 | 0.1 | A | ||||||||||
Total |
$ | 5,317,603 | $ | 5,394,796 | 100.0 | % | A- | |||||||
| (1) | Includes U.S. dollar-denominated debt obligations of foreign obligors and other foreign investments. |
The National Association of Insurance Commissioners (“NAIC”) assigns securities quality
ratings and uniform valuations called “NAIC Designations” which are used by insurers when preparing
their annual statements. The NAIC assigns designations to publicly traded as well as privately
placed securities. The designations assigned by the NAIC range from class 1 to class 6, with
designations in classes 1 and 2 generally considered investment grade (BBB or higher rating agency
designation). NAIC designations in classes 3 through 6 are generally considered below investment
grade (BB or lower rating agency designation).
The quality of the Company’s available-for-sale fixed maturity securities portfolio, as measured at
fair value and by the percentage of fixed maturity securities invested in various ratings
categories, relative to the entire available-for-sale fixed maturity security portfolio, at June
30, 2010 and December 31, 2009 was as follows (dollars in thousands):
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||
| NAIC | Rating Agency | Estimated | Estimated | |||||||||||||||||||||||
| Designation | Designation | Amortized Cost | Fair Value | % of Total | Amortized Cost | Fair Value | % of Total | |||||||||||||||||||
1 |
AAA/AA/A | $ | 8,908,058 | $ | 9,593,357 | 73.4 | % | $ | 8,457,812 | $ | 8,716,920 | 74.1 | % | |||||||||||||
2 |
BBB | 2,639,071 | 2,783,867 | 21.3 | 2,401,885 | 2,433,144 | 20.7 | |||||||||||||||||||
3 |
BB | 479,755 | 424,060 | 3.2 | 455,539 | 381,242 | 3.3 | |||||||||||||||||||
4 |
B | 255,530 | 192,244 | 1.5 | 210,252 | 145,206 | 1.2 | |||||||||||||||||||
5 |
CCC and lower | 80,415 | 65,496 | 0.5 | 75,486 | 70,165 | 0.6 | |||||||||||||||||||
6 |
In or near default | 18,809 | 18,583 | 0.1 | 15,983 | 16,681 | 0.1 | |||||||||||||||||||
| Total | $ | 12,381,638 | $ | 13,077,607 | 100.0 | % | $ | 11,616,957 | $ | 11,763,358 | 100.0 | % | ||||||||||||||
The Company’s fixed maturity portfolio includes structured securities. The following table
shows the types of structured securities the Company held at June 30, 2010 and December 31, 2009
(dollars in thousands):
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| June 30, 2010 | December 31, 2009 | |||||||||||||||
| Estimated | Estimated | |||||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
Agency |
$ | 726,078 | $ | 770,690 | $ | 771,787 | $ | 797,354 | ||||||||
Non-agency |
828,507 | 802,670 | 722,234 | 659,190 | ||||||||||||
Total residential mortgage-backed securities |
1,554,585 | 1,573,360 | 1,494,021 | 1,456,544 | ||||||||||||
Commercial mortgage-backed securities |
1,229,237 | 1,166,937 | 1,177,621 | 1,028,864 | ||||||||||||
Asset-backed securities |
496,652 | 449,623 | 522,760 | 451,936 | ||||||||||||
Total |
$ | 3,280,474 | $ | 3,189,920 | $ | 3,194,402 | $ | 2,937,344 | ||||||||
The residential mortgage-backed securities include agency-issued pass-through securities,
collateralized mortgage obligations, a majority of which are guaranteed or otherwise supported by
the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, or the
Government National Mortgage Association. As of June 30, 2010 and December 31, 2009, the weighted
average credit rating was “AA+”. The principal risks inherent in holding mortgage-backed
securities are prepayment and extension risks, which will affect the timing of when cash will be
received and are dependent on the level of mortgage interest rates. Prepayment risk is the
unexpected increase in principal payments, primarily as a result of owner refinancing. Extension
risk relates to the unexpected slowdown in principal payments. In addition, mortgage-backed
securities face default risk should the borrower be unable to pay the contractual interest or
principal on their obligation. The Company monitors its mortgage-backed securities to mitigate
exposure to the cash flow uncertainties associated with these risks.
As of June 30, 2010 and December 31, 2009, the Company had exposure to commercial mortgage-backed
securities with amortized costs totaling $1,754.8 million and $1,655.0 million, and estimated fair
values of $1,668.7 million and $1,439.1 million, respectively. Those amounts include exposure to
commercial mortgage-backed securities held directly in the Company’s investment portfolios within
fixed maturity securities, as well as securities held by ceding companies that support the
Company’s funds withheld at interest investment. The securities are highly rated with weighted
average S&P credit ratings of approximately “AA-” at June 30, 2010 and “AA” at December 31, 2009.
Approximately 56.7% and 65.1%, based on estimated fair value, were classified in the “AAA” category
at June 30, 2010 and December 31, 2009, respectively. The Company recorded $1.5 million and $4.0
million in other-than-temporary impairments in its direct investments in commercial mortgage-backed
securities during the second quarter and first six months of 2010. The Company recorded an
other-than-temporary impairment of $0.2 million, net of non-credit adjustments, in its direct
investments in commercial mortgage-backed securities for the second quarter and first six months
ended June 30, 2009. The following tables summarize the securities by rating and underwriting year
at June 30, 2010 and December 31, 2009 (dollars in thousands):
| AAA | AA | A | ||||||||||||||||||||||
| June 30, 2010: | Estimated | Estimated | Estimated | |||||||||||||||||||||
| Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 300,276 | $ | 321,624 | $ | 84,125 | $ | 82,542 | $ | 91,649 | $ | 81,475 | ||||||||||||
2006 |
313,951 | 321,875 | 45,829 | 48,009 | 42,412 | 40,690 | ||||||||||||||||||
2007 |
234,052 | 246,946 | 20,821 | 14,773 | 93,612 | 93,434 | ||||||||||||||||||
2008 |
29,010 | 33,395 | 37,934 | 39,850 | — | — | ||||||||||||||||||
2009 |
15,807 | 17,490 | 3,090 | 3,483 | — | — | ||||||||||||||||||
2010 |
4,750 | 5,132 | — | — | 5,970 | 5,970 | ||||||||||||||||||
Total |
$ | 897,846 | $ | 946,462 | $ | 191,799 | $ | 188,657 | $ | 233,643 | $ | 221,569 | ||||||||||||
| BBB | Below Investment Grade | Total | ||||||||||||||||||||||
| Estimated | Estimated | Estimated | ||||||||||||||||||||||
| Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 65,737 | $ | 59,050 | $ | 36,144 | $ | 28,443 | $ | 577,931 | $ | 573,134 | ||||||||||||
2006 |
34,679 | 28,723 | 53,871 | 32,284 | 490,742 | 471,581 | ||||||||||||||||||
2007 |
86,497 | 83,688 | 130,972 | 67,138 | 565,954 | 505,979 | ||||||||||||||||||
2008 |
— | — | 23,596 | 12,696 | 90,540 | 85,941 | ||||||||||||||||||
2009 |
— | — | — | — | 18,897 | 20,973 | ||||||||||||||||||
2010 |
— | — | — | — | 10,720 | 11,102 | ||||||||||||||||||
Total |
$ | 186,913 | $ | 171,461 | $ | 244,583 | $ | 140,561 | $ | 1,754,784 | $ | 1,668,710 | ||||||||||||
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| AAA | AA | A | ||||||||||||||||||||||
| December 31, 2009: | Estimated | Estimated | Estimated | |||||||||||||||||||||
| Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 398,619 | $ | 403,551 | $ | 57,602 | $ | 51,754 | $ | 75,449 | $ | 55,124 | ||||||||||||
2006 |
292,369 | 280,475 | 41,649 | 34,854 | 41,128 | 34,859 | ||||||||||||||||||
2007 |
223,827 | 216,853 | 6,922 | 2,267 | 64,860 | 56,996 | ||||||||||||||||||
2008 |
19,050 | 19,790 | 29,211 | 26,617 | — | — | ||||||||||||||||||
2009 |
16,638 | 16,422 | 1,485 | 1,532 | — | — | ||||||||||||||||||
Total |
$ | 950,503 | $ | 937,091 | $ | 136,869 | $ | 117,024 | $ | 181,437 | $ | 146,979 | ||||||||||||
| BBB | Below Investment Grade | Total | ||||||||||||||||||||||
| Estimated | Estimated | Estimated | ||||||||||||||||||||||
| Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 47,616 | $ | 33,986 | $ | 28,298 | $ | 19,457 | $ | 607,584 | $ | 563,872 | ||||||||||||
2006 |
26,257 | 19,091 | 47,951 | 22,392 | 449,354 | 391,671 | ||||||||||||||||||
2007 |
82,460 | 68,428 | 128,193 | 62,440 | 506,262 | 406,984 | ||||||||||||||||||
2008 |
— | — | 25,384 | 12,204 | 73,645 | 58,611 | ||||||||||||||||||
2009 |
— | — | — | — | 18,123 | 17,954 | ||||||||||||||||||
Total |
$ | 156,333 | $ | 121,505 | $ | 229,826 | $ | 116,493 | $ | 1,654,968 | $ | 1,439,092 | ||||||||||||
Asset-backed securities include credit card and automobile receivables, subprime securities,
home equity loans, manufactured housing bonds and collateralized debt obligations. The Company’s
asset-backed securities are diversified by issuer and contain both floating and fixed rate
securities and had a weighted average credit rating of “AA-” at June 30, 2010 and “AA” at December
31, 2009. The Company owns floating rate securities that represent approximately 16.3% and 19.0%
of the total fixed maturity securities at June 30, 2010 and December 31, 2009, respectively. These
investments 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. The Company holds these
investments to match specific floating rate liabilities primarily reflected in the condensed
consolidated balance sheets as collateral finance facility. 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.
As of June 30, 2010 and December 31, 2009, the Company held investments in securities with subprime
mortgage exposure with amortized costs totaling $164.9 million and $164.6 million, and estimated
fair values of $118.4 million and $104.3 million, respectively. Those amounts include exposure to
subprime mortgages through securities held directly in the Company’s investment portfolios within
asset-backed securities, as well as securities backing the Company’s funds withheld at interest
investment. The weighted average S&P credit ratings on these securities was approximately “BBB-”
at June 30, 2010 and “BBB+” at December 31, 2009. Historically, these securities have been highly
rated, however, in recent years have been downgraded by rating agencies, although the weighted
average rating remains investment-grade. Additionally, the Company has largely avoided directly
investing in securities originated since the second half of 2005, which management believes was a
period of lessened underwriting quality. While ratings and vintage year are important factors to
consider, the tranche seniority and evaluation of forecasted future losses within a tranche is
critical to the valuation of these types of securities. The Company recorded $0.5 million in
other-than-temporary impairments in its subprime portfolio during the second quarter and first six
months of 2010. The Company recorded $7.4 million and $20.8 million, respectively, of
other-than-temporary impairments in its subprime portfolio, during the second quarter and first six
months of 2009. The following tables summarize the securities by rating and underwriting year at
June 30, 2010 and December 31, 2009 (dollars in thousands):
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| AAA | AA | A | ||||||||||||||||||||||
| June 30, 2010: | Estimated | Estimated | Estimated | |||||||||||||||||||||
| Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 18,758 | $ | 17,536 | $ | 22,023 | $ | 23,566 | $ | 9,815 | $ | 8,127 | ||||||||||||
2006 |
— | — | — | — | — | — | ||||||||||||||||||
2007 |
— | — | — | — | — | — | ||||||||||||||||||
2008 - 2010 |
— | — | — | — | — | — | ||||||||||||||||||
Total |
$ | 18,758 | $ | 17,536 | $ | 22,023 | $ | 23,566 | $ | 9,815 | $ | 8,127 | ||||||||||||
| BBB | Below Investment Grade | Total | ||||||||||||||||||||||
| Estimated | Estimated | Estimated | ||||||||||||||||||||||
| Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 22,311 | $ | 16,525 | $ | 71,172 | $ | 40,615 | $ | 144,079 | $ | 106,369 | ||||||||||||
2006 |
4,985 | 1,600 | 4,567 | 2,680 | 9,552 | 4,280 | ||||||||||||||||||
2007 |
— | — | 11,314 | 7,724 | 11,314 | 7,724 | ||||||||||||||||||
2008 - 2010 |
— | — | — | — | — | — | ||||||||||||||||||
Total |
$ | 27,296 | $ | 18,125 | $ | 87,053 | $ | 51,019 | $ | 164,945 | $ | 118,373 | ||||||||||||
| AAA | AA | A | ||||||||||||||||||||||
| December 31, 2009: | Estimated | Estimated | Estimated | |||||||||||||||||||||
| Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 22,816 | $ | 18,780 | $ | 39,873 | $ | 33,014 | $ | 17,017 | $ | 9,779 | ||||||||||||
2006 |
— | — | — | — | — | — | ||||||||||||||||||
2007 |
— | — | — | — | — | — | ||||||||||||||||||
2008 - 2009 |
— | — | — | — | — | — | ||||||||||||||||||
Total |
$ | 22,816 | $ | 18,780 | $ | 39,873 | $ | 33,014 | $ | 17,017 | $ | 9,779 | ||||||||||||
| BBB | Below Investment Grade | Total | ||||||||||||||||||||||
| Estimated | Estimated | Estimated | ||||||||||||||||||||||
| Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 24,394 | $ | 12,593 | $ | 39,203 | $ | 18,686 | $ | 143,303 | $ | 92,852 | ||||||||||||
2006 |
4,985 | 1,507 | 4,566 | 2,563 | 9,551 | 4,070 | ||||||||||||||||||
2007 |
— | — | 11,709 | 7,372 | 11,709 | 7,372 | ||||||||||||||||||
2008 - 2009 |
— | — | — | — | — | — | ||||||||||||||||||
Total |
$ | 29,379 | $ | 14,100 | $ | 55,478 | $ | 28,621 | $ | 164,563 | $ | 104,294 | ||||||||||||
Alternative residential mortgage loans (“Alt-A”) are a classification of mortgage loans where
the risk profile of the borrower falls between prime and sub-prime. At June 30, 2010 and December
31, 2009, the Company’s Alt-A mortgage-backed securities had an amortized cost of $162.9 million
and $176.6 million, respectively, with an unrealized loss of $7.4 million and $21.9 million,
respectively. As of June 30, 2010 and December 31, 2009, 57.5% and 56.4%, respectively, of the
Alt-A securities were rated “AA-” or better. This amount includes securities directly held by the
Company and securities backing the Company’s funds withheld at interest investment. The Company
recorded $1.2 million, and $1.7 million in other-than-temporary impairments in the second quarter
and first six months of 2010, respectively, in its Alt-A portfolio due primarily to the increased
likelihood that some or all of the remaining scheduled principal and interest payments on select
securities would not be received. The Company recorded $4.6 million, and $10.1 million in
other-than-temporary impairments in the second quarter and first six months of 2009, respectively,
in its Alt-A portfolio due primarily to the increased likelihood that
some or all of the remaining scheduled principal and interest payments on select securities would
not be received.
At June 30, 2010 and December 31, 2009, the Company’s fixed maturity and funds withheld portfolios
included
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Table of Contents
approximately $653.2 million and $601.8 million, respectively, in estimated fair value, of
securities that are insured by various financial guarantors, or less than five percent of
consolidated investments. The securities are diversified between municipal bonds and asset-backed
securities with well diversified collateral pools. The Company held investment-grade securities
issued by financial guarantors totaling $8.2 million in amortized cost at June 30, 2010 and $8.3
million at December 31, 2009.
The Company does not invest in the common equity securities of Fannie Mae and Freddie Mac, both
government sponsored entities; however, as of June 30, 2010 and December 31, 2009, the Company held
in its general portfolio $56.7 million, amortized cost in direct exposure in the form of senior
unsecured agency and preferred securities. Additionally, as of June 30, 2010 and December 31,
2009, the portfolios held by the Company’s ceding companies that support its funds withheld asset
contain approximately $512.0 million and $543.6 million, respectively, in amortized cost of
unsecured agency bond holdings and no equity exposure. As of June 30, 2010 and December 31, 2009,
indirect exposure in the form of secured, structured mortgaged securities issued by Fannie Mae and
Freddie Mac totaled approximately $0.8 billion and $0.9 billion, respectively, in amortized cost
across the Company’s general and funds withheld portfolios. Including the funds withheld
portfolios, the Company’s direct holdings in the form of preferred securities had a total book
value of $0.7 million at June 30, 2010 and December 31, 2009, respectively.
The Company monitors its fixed maturity and equity securities to determine impairments in value and
evaluates factors such as financial condition of the issuer, payment performance, the length of
time and the extent to which the market value has been below amortized cost, compliance with
covenants, general market conditions and industry sector, current intent and ability to hold
securities and various other subjective factors. Based on management’s judgment, securities
determined to have an other-than-temporary impairment in value are written down to fair value. The
Company recorded $3.6 million and $8.7 million in other-than-temporary impairments in its fixed
maturity and equity securities in the second quarter and first six months of 2010, respectively.
The other-than-temporary impairment losses on Subprime / Alt-A / Other structured securities
recognized in earnings of $3.6 million and $8.1 million in the second quarter and first six months
of 2010, respectively, are primarily due to a decline in value of structured securities with
exposure to commercial mortgages. The Company recorded $20.8 million and $60.6 million in
other-than-temporary impairments in its fixed maturity and equity securities in the second quarter
and first six months of 2009, respectively. The impairments in 2009 were due primarily to the
turmoil in the U.S. and global financial markets which has resulted in bankruptcies, credit
defaults, consolidations and government interventions. The table below summarizes
other-than-temporary impairments for the second quarter and first six months of 2010 and 2009
(dollars in thousands).
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
Asset Class |
||||||||||||||||
Subprime / Alt-A / Other structured securities |
$ | 3,628 | $ | 13,434 | $ | 8,129 | $ | 34,043 | ||||||||
Corporate / Other fixed maturity securities |
— | 7,373 | 585 | 21,159 | ||||||||||||
Equity securities |
10 | — | 32 | 5,430 | ||||||||||||
Other |
1,165 | 1,268 | 2,395 | 2,965 | ||||||||||||
Total |
$ | 4,803 | $ | 22,075 | $ | 11,141 | $ | 63,597 | ||||||||
During the three months ended June 30, 2010 and 2009, the Company sold fixed maturity
securities and equity securities with fair values of $159.2 million and $214.2 million at gross
losses of $5.7 million and $18.8 million, respectively, or at 96.6% and 91.9% of amortized cost,
respectively. During the six months ended June 30, 2010 and 2009, the Company sold fixed maturity
securities and equity securities with fair values of $399.3 million and $322.6 million at gross
losses of $14.2 million and $38.5 million, respectively, or at 96.6% and 89.3% of amortized cost,
respectively. The Company generally does not engage in short-term buying and selling of
securities.
At June 30, 2010 and December 31, 2009, the Company had $386.7 million and $584.9 million,
respectively, of gross unrealized losses related to its fixed maturity and equity securities. The
distribution of the gross unrealized losses related to these securities is shown below.
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| June 30, | December 31, | |||||||
| 2010 | 2009 | |||||||
Sector: |
||||||||
U.S. corporate securities |
33 | % | 26 | % | ||||
Canadian and Canada provincial governments |
2 | 4 | ||||||
Residential mortgage-backed securities |
10 | 12 | ||||||
Foreign corporate securities |
5 | 7 | ||||||
Asset-backed securities |
16 | 14 | ||||||
Commercial mortgage-backed securities |
31 | 29 | ||||||
State and political subdivisions |
2 | 3 | ||||||
U.S. government and agencies |
— | 3 | ||||||
Other foreign government securities |
1 | 2 | ||||||
Total |
100 | % | 100 | % | ||||
Industry: |
||||||||
Finance |
26 | % | 25 | % | ||||
Asset-backed |
16 | 13 | ||||||
Industrial |
10 | 7 | ||||||
Mortgage-backed |
41 | 41 | ||||||
Government |
5 | 12 | ||||||
Utility |
2 | 2 | ||||||
Total |
100 | % | 100 | % | ||||
The following table presents total gross unrealized losses, including other-than-temporary
impairment losses reported in AOCI, for 900 and 1,316 fixed maturity securities and equity
securities as of June 30, 2010 and December 31, 2009, respectively, where the estimated fair value
had declined and remained below amortized cost by the indicated amount (dollars in thousands):
| June 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
| Gross | Gross | |||||||||||||||||||||||
| Number of | Unrealized | Number of | Unrealized | |||||||||||||||||||||
| Securities | Losses | % of Total | Securities | Losses | % of Total | |||||||||||||||||||
Less than 20% |
765 | $ | 137,788 | 35.6 | % | 1,112 | $ | 254,075 | 43.4 | % | ||||||||||||||
20% or more for less than six months |
30 | 56,428 | 14.6 | 38 | 69,322 | 11.9 | ||||||||||||||||||
20% or more for six months or greater |
105 | 192,437 | 49.8 | 166 | 261,483 | 44.7 | ||||||||||||||||||
Total |
900 | $ | 386,653 | 100.0 | % | 1,316 | $ | 584,880 | 100.0 | % | ||||||||||||||
As of June 30, 2010 and December 31, 2009, respectively, 58.7% and 71.4% of these securities
were investment grade. The Company has experienced a higher recovery of market value for
investment-grade securities in recent periods. The amount of the unrealized loss on these
securities was primarily attributable to a widening of credit default spreads since the time
securities were purchased.
While all of these securities are monitored for potential impairment, the Company believes due to
fluctuating market conditions and liquidity concerns, and the recent relatively high levels of
price volatility, the extent and duration of a decline in value have become less indicative of when
there has been credit deterioration with respect to an issuer. The Company’s determination of
whether a decline in value is other-than-temporary involves the Company’s analysis of the
underlying credit and the extent and duration of a decline in value. The Company’s credit analysis
of an investment includes determining whether the issuer is current on its contractual payments,
evaluating whether it is probable that the Company will be able to collect all amounts due
according to the contractual terms of the security and analyzing the overall ability of the Company
to recover the amortized cost of the investment. The Company continues to consider valuation
declines as a potential indicator of credit deterioration.
The following tables present the estimated fair values and gross unrealized losses, including
other-than-temporary impairment losses reported in AOCI, for the 900 and 1,316 fixed maturity
securities and equity securities that have estimated fair values below amortized cost as of June
30, 2010 and December 31, 2009, respectively (dollars in thousands). These investments are
presented by class and grade of security, as well as the length of time the related market value
has remained below amortized cost.
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Table of Contents
| Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
| June 30, 2010: | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 172,127 | $ | 28,320 | $ | 356,979 | $ | 63,781 | $ | 529,106 | $ | 92,101 | ||||||||||||
Canadian and Canadian provincial
governments |
110,191 | 2,321 | 129,393 | 3,991 | 239,584 | 6,312 | ||||||||||||||||||
Residential mortgage-backed securities |
220,187 | 8,692 | 158,173 | 10,059 | 378,360 | 18,751 | ||||||||||||||||||
Foreign corporate securities |
166,246 | 4,036 | 168,247 | 11,562 | 334,493 | 15,598 | ||||||||||||||||||
Asset-backed securities |
12,037 | 1,360 | 137,569 | 35,303 | 149,606 | 36,663 | ||||||||||||||||||
Commercial mortgage-backed securities |
60,812 | 7,503 | 160,272 | 31,513 | 221,084 | 39,016 | ||||||||||||||||||
State and political subdivisions |
23,443 | 921 | 53,484 | 5,693 | 76,927 | 6,614 | ||||||||||||||||||
Other foreign government securities |
28,355 | 176 | 89,826 | 4,040 | 118,181 | 4,216 | ||||||||||||||||||
Total investment grade securities |
793,398 | 53,329 | 1,253,943 | 165,942 | 2,047,341 | 219,271 | ||||||||||||||||||
Non-investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
91,934 | 9,278 | 133,958 | 17,206 | 225,892 | 26,484 | ||||||||||||||||||
Asset-backed securities |
11,174 | 2,158 | 29,522 | 22,301 | 40,696 | 24,459 | ||||||||||||||||||
Foreign corporate securities |
3,017 | 3,446 | 597 | 53 | 3,614 | 3,499 | ||||||||||||||||||
Residential mortgage-backed securities |
397 | 551 | 67,120 | 19,212 | 67,517 | 19,763 | ||||||||||||||||||
Commercial mortgage-backed securities |
— | — | 60,956 | 79,761 | 60,956 | 79,761 | ||||||||||||||||||
State and political subdivisions |
— | — | 5,432 | 2,681 | 5,432 | 2,681 | ||||||||||||||||||
Total non-investment grade securities |
106,522 | 15,433 | 297,585 | 141,214 | 404,107 | 156,647 | ||||||||||||||||||
Total fixed maturity securities |
$ | 899,920 | $ | 68,762 | $ | 1,551,528 | $ | 307,156 | $ | 2,451,448 | $ | 375,918 | ||||||||||||
Non-redeemable preferred stock |
$ | 29,219 | $ | 1,755 | $ | 35,596 | $ | 7,795 | $ | 64,815 | $ | 9,550 | ||||||||||||
Other equity securities |
12,927 | 909 | 1,352 | 276 | 14,279 | 1,185 | ||||||||||||||||||
Total equity securities |
$ | 42,146 | $ | 2,664 | $ | 36,948 | $ | 8,071 | $ | 79,094 | $ | 10,735 | ||||||||||||
Total number of securities in an
unrealized loss position |
371 | 529 | 900 | |||||||||||||||||||||
| Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
| Gross | Gross | Gross | ||||||||||||||||||||||
| Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
| December 31, 2009: | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 373,049 | $ | 27,625 | $ | 679,908 | $ | 89,711 | $ | 1,052,957 | $ | 117,336 | ||||||||||||
Canadian and Canadian provincial
governments |
494,718 | 15,374 | 135,315 | 10,372 | 630,033 | 25,746 | ||||||||||||||||||
Residential mortgage-backed securities |
402,642 | 23,671 | 197,320 | 20,185 | 599,962 | 43,856 | ||||||||||||||||||
Foreign corporate securities |
362,406 | 5,262 | 182,300 | 24,693 | 544,706 | 29,955 | ||||||||||||||||||
Asset-backed securities |
48,651 | 1,927 | 166,603 | 57,262 | 215,254 | 59,189 | ||||||||||||||||||
Commercial mortgage-backed securities |
177,360 | 10,312 | 425,793 | 79,297 | 603,153 | 89,609 | ||||||||||||||||||
U.S. government and agencies |
496,514 | 15,027 | — | — | 496,514 | 15,027 | ||||||||||||||||||
State and political subdivisions |
34,612 | 3,397 | 40,945 | 11,437 | 75,557 | 14,834 | ||||||||||||||||||
Other foreign government securities |
240,216 | 8,370 | 30,321 | 4,901 | 270,537 | 13,271 | ||||||||||||||||||
Total investment grade securities |
2,630,168 | 110,965 | 1,858,505 | 297,858 | 4,488,673 | 408,823 | ||||||||||||||||||
Non-investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
35,477 | 11,293 | 168,375 | 18,755 | 203,852 | 30,048 | ||||||||||||||||||
Asset-backed securities |
6,738 | 3,256 | 24,408 | 17,686 | 31,146 | 20,942 | ||||||||||||||||||
Foreign corporate securities |
1,755 | 17 | 3,771 | 3,426 | 5,526 | 3,443 | ||||||||||||||||||
Residential mortgage-backed securities |
10,657 | 1,909 | 66,756 | 24,250 | 77,413 | 26,159 | ||||||||||||||||||
Commercial mortgage-backed securities |
— | — | 57,179 | 79,818 | 57,179 | 79,818 | ||||||||||||||||||
State and political subdivisions |
— | — | 5,170 | 2,910 | 5,170 | 2,910 | ||||||||||||||||||
Total non-investment grade securities |
54,627 | 16,475 | 325,659 | 146,845 | 380,286 | 163,320 | ||||||||||||||||||
Total fixed maturity securities |
$ | 2,684,795 | $ | 127,440 | $ | 2,184,164 | $ | 444,703 | $ | 4,868,959 | $ | 572,143 | ||||||||||||
Non-redeemable preferred stock |
$ | 8,320 | $ | 1,263 | $ | 68,037 | $ | 11,065 | $ | 76,357 | $ | 12,328 | ||||||||||||
Other equity securities |
5 | 15 | 7,950 | 394 | 7,955 | 409 | ||||||||||||||||||
Total equity securities |
$ | 8,325 | $ | 1,278 | $ | 75,987 | $ | 11,459 | $ | 84,312 | $ | 12,737 | ||||||||||||
Total number of securities in an
unrealized loss position |
582 | 734 | 1,316 | |||||||||||||||||||||
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As of June 30, 2010, the Company does not intend to sell these fixed maturity securities and
does not believe it is more likely than not that it will be required to sell these fixed maturity
securities before the recovery of the fair value up to the current amortized cost of the
investment, which may be maturity. However, as facts and circumstances change, the Company may
sell fixed maturity securities in the ordinary course of managing its portfolio to meet
diversification, credit quality, asset-liability management and liquidity guidelines. As of June
30, 2010, the Company has the ability and intent to hold the equity securities until the recovery
of the fair value up to the current cost of the investment. However, from time to time if facts
and circumstances change, the Company may sell equity securities in the ordinary course of managing
its portfolio to meet diversification, credit quality and liquidity guidelines.
As of June 30, 2010 and December 31, 2009, respectively, the Company classified approximately 11.5%
and 15.3% of its fixed maturity securities in the Level 3 category (refer to Note 6 — “Fair Value
of Financial Instruments” in the Notes to Condensed Consolidated Financial Statements for
additional information). These securities primarily consist of private placement corporate
securities with an inactive trading market and asset-backed securities with subprime exposure in
the Level 3 category due to the current market uncertainty associated with these securities and the
Company’s utilization of information from third parties.
Mortgage Loans on Real Estate
Mortgage loans represented approximately 3.9% and 4.0% of the Company’s cash and invested assets as
of June 30, 2010 and December 31, 2009, respectively. The Company’s mortgage loan portfolio
consists principally of investments in U.S.-based commercial offices, light industrial properties
and retail locations. The mortgage loan portfolio is diversified by geographic region and property
type.
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. Any subsequent
adjustments to the valuation allowances will be treated as investment gains or losses. Information
regarding the Company’s loan valuation allowances for mortgage loans as of June 30, 2010 and 2009
are as follows (dollars in thousands):
| Six Months Ended June 30, | ||||||||
| 2010 | 2009 | |||||||
Balance, beginning of period |
$ | 5,784 | $ | 526 | ||||
Additions |
2,395 | 2,557 | ||||||
Deductions |
— | (401 | ) | |||||
Balance, end of period |
$ | 8,179 | $ | 2,682 | ||||
Information regarding the portion of the Company’s mortgage loans that were impaired as of
June 30, 2010 and December 31, 2009 is as follows (dollars in thousands):
| June 30, 2010 | December 31, 2009 | |||||||
Impaired loans with valuation allowances |
$ | 20,160 | $ | 14,967 | ||||
Impaired loans without valuation allowances |
21,605 | 14,317 | ||||||
Subtotal |
41,765 | 29,284 | ||||||
Less: Valuation allowances on impaired loans |
8,179 | 5,784 | ||||||
Impaired loans |
$ | 33,586 | $ | 23,500 | ||||
The Company’s average investment per impaired loan was $4.2 million and $3.3 million as of
June 30, 2010 and December 31, 2009, respectively. Interest income on impaired loans was $0.1
million and $0.3 million for the three and six months ended June 30, 2010 and $0.2 million for the
three and six months ended 2009, respectively.
Policy Loans
Policy loans comprised approximately 5.4% and 5.8% of the Company’s cash and invested assets as of
June 30, 2010 and December 31, 2009, respectively, substantially all of which are associated with
one client. 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.
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Funds Withheld at Interest
Funds withheld at interest comprised approximately 24.3% and 24.8% of the Company’s cash and
invested assets as of June 30, 2010 and December 31, 2009, 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 the Company’s condensed consolidated balance sheet.
In the event of a ceding company’s insolvency, the Company would need to assert a claim on the
assets supporting its reserve liabilities. However, the risk of loss to the Company is mitigated
by its ability to offset amounts it owes the ceding company for claims or allowances with amounts
owed to the Company from the ceding company. Interest accrues to these assets at rates defined by
the treaty terms. Additionally, under certain treaties 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. The underlying portfolios also include options related to
equity-indexed annuity products. The market value changes associated with these investments have
caused some volatility in reported investment income. This is largely offset by a corresponding
change in interest credited, with minimal impact on income before taxes. To mitigate 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 rating of “A” at June 30, 2010 and
December 31, 2009. Certain ceding companies maintain segregated portfolios for the benefit of the
Company.
Other Invested Assets
Other invested assets represented approximately 3.0% and 2.6% of the Company’s cash and invested
assets as of June 30, 2010 and December 31, 2009, respectively. Other invested assets include
equity securities, non-redeemable preferred stocks, limited partnership interests, structured loans
and derivative contracts. Carrying values of these assets as of June 30, 2010 and December 31,
2009 are as follows (dollars in thousands):
| June 30, 2010 | December 31, 2009 | |||||||
Equity securities |
$ | 50,155 | $ | 58,359 | ||||
Non-redeemable preferred stock |
104,590 | 113,198 | ||||||
Limited partnerships |
183,170 | 156,573 | ||||||
Structured loans |
196,643 | 150,677 | ||||||
Derivatives |
68,801 | 24,156 | ||||||
Other |
34,468 | 13,123 | ||||||
Total other invested assets |
$ | 637,827 | $ | 516,086 | ||||
The Company recorded no other-than-temporary impairments on other invested assets for the
second quarter and first six months ended June 30, 2010, respectively. The Company did not record
any other-than-temporary impairments on other invested assets in the second quarter of 2009, but
recorded other-than-temporary impairments of $5.4 million in the first six months of 2009. The
Company may be exposed to credit-related losses in the event of non-performance by counterparties
to derivative financial instruments. Generally, the current credit exposure of the Company’s
derivative contracts is limited to the net positive fair value at the reporting date less
collateral held by the Company. The Company held derivative assets related to its derivative
contracts with counterparties of $68.8 million and $24.2 million at June 30, 2010 and December 31,
2009, respectively. However, due to counterparty netting arrangements, and collateral held, the
Company’s credit exposure was $16.1 million at June 30, 2010. The Company had no credit exposure
at December 31, 2009.
Contractual Obligations
There were no other material changes in the Company’s contractual obligations from those reported
in the 2009 Annual Report.
Enterprise Risk Management
RGA maintains an Enterprise Risk Management framework which provides a process for assessing,
measuring and monitoring risks facing the enterprise. This includes development and implementation
of mitigation strategies to maintain exposures within approved risk limits. Risk management is an
integral part of the Company’s culture and every day activities. It includes guidelines and
controls in areas such as mortality, morbidity, longevity, pricing, underwriting, currency,
administration, investments, asset-liability management, counterparty exposure, financing,
regulatory change, business continuity planning, human resources, liquidity, sovereign risks and
technology development.
The Enterprise Risk Management framework is directed by the Chief Risk Officer. The Chief Risk
Officer leads and is supported by the Risk Management Steering Committee which oversees all risk
taking of the organization. Risk management officers from all areas of the Company support the
Chief Risk Officer and the Risk Management Steering Committee in this
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effort. The Chief Risk Officer provides quarterly risk management updates to the Finance,
Investment and Risk Management Committee of the Board of Directors, executive management and the
internal risk management officers.
Specific risk assessments and descriptions can be found below and in Item 1A — “Risk Factors” the
2009 Annual Report.
Mortality Risk Management
In the event that mortality or morbidity experience develops in excess of expectations, some
reinsurance treaties allow for increases to future premium rates. Other treaties include
experience refund provisions, which may also help reduce RGA’s mortality risk. In the normal
course of business, the Company seeks to limit its exposure to loss on any single insured and to
recover a portion of claims paid by ceding reinsurance to other insurance enterprises or
retrocessionaires under excess coverage and coinsurance contracts. In the individual life markets,
the Company retains a maximum of $8 million of coverage per individual life. In certain limited
situations, due to the acquisition of in force blocks of business, the Company has retained more
than $8 million per individual life. In total, the Company has identified 17 such cases of
over-retained lives, for a total amount of $41.6 million over the Company’s normal retention limit.
These amounts include 9 cases with $21.4 million of exposure related to second to die policies
with coverages split between multiple insureds. The largest amount over-retained on any one life
is $10.7 million. The Company enters into agreements with other reinsurers to help mitigate the
residual risk related to the over-retained policies. Additionally, due to some lower face amount
reinsurance coverages provided by the Company in addition to individual life, such as group life,
disability and health, under certain circumstances, the Company could potentially incur claims
totaling more than $8 million per individual life.
The Company maintains a catastrophe insurance program (“Program”) that renews on September 7th of
each year. The current Program began September 7, 2009, and covers events involving 10 or more
insured deaths from a single occurrence. The Company retains the first $20 million in claims, the
Program covers the next $80 million in claims, and the Company retains all claims in excess of $100
million. The Program covers reinsurance programs worldwide and includes losses due to acts of
terrorism, including terrorism losses due to nuclear, chemical and/or biological events. The
Program excludes, among other things, losses from earthquakes occurring in California and also
excludes losses from pandemics. The Program is insured by 14 insurance companies and Lloyd’s
Syndicates, with only one single entity providing more than $10 million of coverage.
Insurance Counterparty Risk
In the normal course of business, the Company seeks to limit its exposure to reinsurance contracts
by ceding a portion of the reinsurance to other insurance companies or reinsurers. Should a
counterparty not be able to fulfill its obligation to the Company under a reinsurance agreement,
the impact could be material to the Company’s financial condition and results of operations. In
addition, certain reinsurance structures can lead to counterparty risk to the Company’s clients.
Generally, RGA’s insurance subsidiaries retrocede amounts in excess of their retention to RGA
Reinsurance, Parkway Reinsurance Company, RGA Reinsurance Company (Barbados) Ltd., RGA Americas
Reinsurance Company, Ltd., RGA Worldwide Reinsurance Company, Ltd. or RGA Atlantic Reinsurance
Company, Ltd. External retrocessions are arranged through the Company’s retrocession pools for
amounts in excess of its retention. As of June 30, 2010, all retrocession pool members in this
excess retention pool reviewed by the A.M. Best Company were rated “A-”, the fourth highest rating
out of fifteen possible ratings, or better. For a majority of the retrocessionaires that are not
rated, letters of credit or trust assets have been given as additional security in favor of RGA
Reinsurance. In addition, the Company performs annual financial and in force reviews of its
retrocessionaires to evaluate financial stability and performance.
The Company has never experienced a material default in connection with retrocession arrangements,
nor has it experienced any material difficulty in collecting claims recoverable from
retrocessionaires; however, no assurance can be given as to the future performance of such
retrocessionaires or as to the recoverability of any such claims.
The Company relies upon its clients to provide timely, accurate information. The Company may
experience volatility in its earnings as a result of erroneous or untimely reporting from its
clients. The Company works closely with its clients and monitors this risk in an effort to
minimize its exposure.
Market Risk
Market risk is the risk of loss that may occur when fluctuations in interest and currency exchange
rates and equity and commodity prices change the value of a financial instrument. Since both
derivative and nonderivative financial instruments have market risk, the Company’s risk management
extends beyond derivatives to encompass all financial instruments held. The Company is primarily
exposed to interest rate risk, including credit spreads, and foreign currency risk.
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Interest Rate Risk:
Interest rate risk arises from many of the Company’s primary activities, as the Company invests
substantial funds in interest-sensitive assets and also has certain interest-sensitive contract
liabilities. The Company manages interest rate risk and credit risk to maximize the return on the
Company’s capital effectively and to preserve the value created by its business operations. As
such, certain management monitoring processes are designed to minimize the impact of sudden and
sustained changes in interest rates on fair value, cash flows, and interest income.
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 to the extent possible. As of June 30, 2010, the Company had in
place net investment hedges for a portion of its investments in its Canada and Australia
operations. Translation differences resulting from translating foreign subsidiary balances to U.S.
dollars are reflected in stockholders’ equity on the condensed consolidated balance sheets. 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 Canadian dollars, British pounds,
Australian dollars, Japanese yen, Korean won, euros and the South African rand.
Market Risk Associated with Annuities and Guaranteed Minimum Benefits:
The Company reinsures variable annuities including those with guaranteed minimum benefits and
guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”), guaranteed
minimum accumulation benefits (“GMAB”) and guaranteed minimum withdrawal benefits (“GMWB”). Strong
equity markets, increases in interest rates and decreases in volatility will generally decrease the
fair value of the liabilities underlying the benefits. Conversely, a decrease in the equity
markets along with a decrease in interest rates and an increase in volatility will generally result
in an increase in the fair value of the liabilities underlying the benefits, which has the effect
of increasing reserves and lowering earnings. The Company maintains a customized dynamic hedging
program that is designed to mitigate the risks associated with income volatility around the change
in reserves on guaranteed benefits. However, the hedge positions may not fully offset the changes
in the carrying value of the guarantees due to, among other things, time lags, high levels of
volatility in the equity and derivative markets, extreme swings in interest rates, unexpected
contract holder behavior, and divergence between the performance of the underlying funds and
hedging indices. These factors, individually or collectively, may have a material adverse effect
on the Company’s net income, financial condition or liquidity. The table below provides a summary
of variable annuity account values and the fair value of the guaranteed benefits as of June 30,
2010 and December 31, 2009.
| (dollars in millions) | June 30, 2010 | December 31, 2009 | ||||||
No guarantee minimum benefits |
$ | 1,190.2 | $ | 1,231.2 | ||||
GMDB only |
79.2 | 78.7 | ||||||
GMIB only |
5.5 | 5.7 | ||||||
GMAB only |
58.1 | 62.1 | ||||||
GMWB only |
1,516.8 | 1,563.0 | ||||||
GMDB / WB |
430.5 | 437.4 | ||||||
Other |
32.3 | 34.3 | ||||||
Total variable annuity account values |
$ | 3,312.6 | $ | 3,412.4 | ||||
Fair value of liabilities associated with living benefit riders |
$ | 157.5 | $ | 23.7 | ||||
There has been no significant change in the Company’s quantitative or qualitative aspects of market risk
during the quarter ended June 30, 2010 from that disclosed in the 2009 Annual Report.
New Accounting Standards
In June 2009, the Financial Accounting Standards Board (“FASB”) issued “The FASB Accounting
Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles”. Effective
July 1, 2009, FASB Accounting Standards Codification™ (“Codification”) has become the source of
authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the Securities and Exchange Commission for public companies. This statement is
effective for financial statements issued for interim and annual periods ending after September 15,
2009. The Company adopted Codification on September 30, 2009 and has updated all disclosures to
reference Codification herein.
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Changes to the general accounting principles are established by the FASB in the form of accounting
standards updates to the FASB’s Codification. Accounting standards updates not listed below were
assessed and determined to be either not applicable or are expected to have minimal impact on the
Company’s condensed consolidated financial statements.
Consolidation and Business Combinations
In February 2010, the FASB amended the general accounting principles for Consolidation as it
relates to the assessment of a variable interest entity for potential consolidation. The amendment
defers the effective date of the Consolidation amendment made in June 2009 for certain variable
interest entities. This update also clarifies how a related party’s interest should be considered
when evaluating variable interests. The amendment is effective for fiscal years and interim periods
beginning after January 31, 2010. The adoption of this amendment did not have an impact on the
Company’s condensed consolidated financial statements.
In January 2010, the FASB amended the general accounting principles for Consolidation as it relates
to decreases in ownership of a subsidiary. This amendment clarifies the scope of the decrease in
ownership provisions. This amendment also requires additional disclosures about the deconsolidation
of a subsidiary or derecognition of a group of assets. The amendment is effective for fiscal years
and interim periods beginning after December 15, 2009. The adoption of this amendment did not have
an impact on the Company’s condensed consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Consolidation as it relates to
the assessment of a variable interest entity for potential consolidation. This amendment also
requires additional disclosures to provide transparent information regarding the involvement in a
variable interest entity. The amendment is effective for fiscal years and interim periods beginning
after November 15, 2009. The adoption of this amendment did not have a material impact on the
Company’s condensed consolidated financial statements.
In December 2007, the FASB amended the general accounting principles for Business Combinations.
This amendment establishes principles and requirements for how an acquirer recognizes and measures
certain items in a business combination, as well as disclosures about the nature and financial
effects of a business combination. The FASB also amended the general accounting principles for
Consolidation as it relates to noncontrolling interests in consolidated financial statements. This
amendment establishes accounting and reporting standards surrounding noncontrolling interest, or
minority interests, which are the portions of equity in a subsidiary not attributable, directly or
indirectly, to a parent. The amendments are effective for fiscal years beginning on or after
December 15, 2008 and apply prospectively to business combinations. Presentation and disclosure
requirements related to noncontrolling interests must be retrospectively applied. The adoption of
these amendments did not have a material impact on the Company’s condensed consolidated financial
statements.
Investments
In July 2010, the FASB amended the general accounting principles for Receivables as it relates to
the disclosures about the credit quality of financing receivables and the allowance for credit
losses. This amendment requires additional disclosures that provide a greater level of
disaggregated information about the credit quality of financing receivables and the allowance for
credit losses. It also requires the disclosure of credit quality indicators, past due information,
and modifications of financing receivables. The amendment is effective for interim and annual
reporting periods ending on or after December 15, 2010, except for disclosures about activity that
occurs during the reporting period. Those disclosures are effective for interim and annual
reporting periods beginning after December 15, 2010. The Company is currently evaluating the impact
of this amendment on its condensed consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Investments as it relates to
the recognition and presentation of other-than-temporary impairments. This amendment updates the
other-than-temporary impairment guidance for fixed maturity securities to make it more operational
and to improve the presentation and disclosure of other-than-temporary impairments (“OTTI”) on
fixed maturity and equity securities in the financial statements. The recognition provisions apply
only to fixed maturity securities classified as available-for-sale and held-to-maturity, while the
presentation and disclosure requirements apply to both fixed maturity and equity securities. An
impaired fixed maturity security will be considered other-than-temporarily impaired if the Company
has the intent to sell or it more likely than not will be required to sell prior to recovery of the
amortized cost. If the holder of a fixed maturity security does not expect recovery of the entire
cost basis, even if there is no intention to sell the security, an OTTI has occurred. This
amendment also changes how an entity recognizes an OTTI for a fixed maturity security by separating
the loss between the amount representing the credit loss and the amount relating to other factors,
if the Company does not have the intent to sell or it more likely than not will not be required to
sell prior to recovery of the amortized cost less any current period credit loss. Credit losses
will be recognized in net income and losses relating to other factors will be recognized in
accumulated other comprehensive income (“AOCI”). If
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the Company has the intent to sell or it more likely than not will be required to sell before its
recovery of amortized cost less any current period credit loss, the entire OTTI will be recognized
in net income. This amendment is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this amendment resulted in a net after-tax increase to retained
earnings and a decrease to accumulated other comprehensive income of $4.4 million, as of April 1,
2009. The required disclosures are provided in Note 4 — “Investments” in the Notes to Condensed
Consolidated Financial Statements.
Transfers and Servicing
In June 2009, the FASB amended the general accounting principles for Transfers and Servicing as it
relates to the transfers of financial assets. This amendment also requires additional disclosures
to address concerns regarding the transparency of transfers of financial assets. The amendment is
effective for fiscal years and interim periods beginning after November 15, 2009. The adoption of
this amendment did not have a material impact on the Company’s condensed consolidated financial
statements.
In February 2008, the FASB amended the general accounting principles for Transfers and Servicing as
it relates to the accounting for transfers of financial assets and repurchase financing
transactions. This amendment provides guidance for evaluating whether to account for a transfer of
a financial asset and repurchase financing as a single transaction or as two separate transactions.
The amendment is effective prospectively for financial statements issued for fiscal years beginning
after November 15, 2008. The adoption of this amendment did not have a material impact on the
Company’s condensed consolidated financial statements.
Derivatives and Hedging
In March 2010, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to embedded derivatives. This amendment clarifies the scope exception for embedded credit
derivative features related to the transfer of credit risk in the form of subordination of a
financial instrument to another. The amendment is effective for financial statements issued for
fiscal years and interim periods beginning after June 15, 2010. The adoption of this amendment did
not have a material impact on the Company’s condensed consolidated financial statements.
In March 2008, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to the disclosures about derivative instruments and hedging activities. This amendment
requires enhanced qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. The amendment is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company adopted this amendment in the first quarter
of 2009. The required disclosures are provided in Note 5 — “Derivative Instruments” in the Notes
to Condensed Consolidated Financial Statements.
Fair Value Measurements and Disclosures
In January 2010, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to the disclosures about fair value measurements. This amendment requires
new disclosures about the transfers in and out of Level 1 and 2 measurements and also enhances
disclosures about the activity within the Level 3 measurements. It also clarifies the required
level of disaggregation and the disclosures regarding valuation techniques and inputs to fair value
measurements. The amendment is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the enhanced Level 3 disclosures. Those disclosures are effective for
interim and annual reporting periods beginning after December 15, 2010. The Company adopted the
effective portions of this amendment in the first quarter of 2010 and is evaluating the impact of
the enhanced Level 3 disclosures. The required disclosures are provided in Note 6 — “Fair Value of
Financial Instruments” in the Notes to Condensed Consolidated Financial Statements.
In September 2009, the FASB amended the general accounting principles for Fair Value Measurements
and Disclosures as it relates to the fair value measurement of investments in certain entities that
calculate net asset value per share. This amendment allows the fair value of certain investments to
be measured on the basis of the net asset value. It also requires disclosure, by major category
type, of the attributes of those investments, such as the nature of any restrictions on redemption,
any unfunded commitments, and the investment strategies of the investees. The amendment is
effective for interim and annual reporting periods ending after December 15, 2009. The adoption of
this amendment did not have a material impact on the Company’s condensed consolidated financial
statements.
In August 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to measuring liabilities at fair value. This amendment provides guidance
for measuring liabilities at fair value when a
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quoted price in an active market for the identical liability is not available. It also clarifies
that the inclusion of a separate input, used in the fair value measurement, relating to the
existence of a restriction that prevents the transfer of a liability is not necessary. The
amendment is effective for interim and annual reporting beginning after issuance. The adoption of
this amendment did not have a material impact on the Company’s condensed consolidated financial
statements.
In April 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining fair value when the volume and level of activity for asset
or liability have significantly decreased and identifying transactions that are not orderly. This
amendment provides additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased in relation to normal market
activity for the asset or liability and clarifies that the use of multiple valuation techniques may
be appropriate. It also provides additional guidance on circumstances that may indicate a
transaction is not orderly. Further, it requires additional disclosures about fair value
measurements in annual and interim reporting periods. This amendment is effective prospectively for
interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment did
not have a material impact on the Company’s consolidated financial statements. The required
disclosures are provided in Note 6 — “Fair Value of Financial Instruments” in the Notes to
Condensed Consolidated Financial Statements.
In October 2008, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining the fair value of a financial asset when the market for
that asset is not active. This amendment clarifies the application of fair value in a market that
is not active and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not active. The amendment
was effective upon issuance on October 10, 2008, including prior periods for which financial
statements had not been issued. The Company did not consider it necessary to change any valuation
techniques as a result of the amendment. The Company also adopted an amendment that delayed the
effective date of fair value measurement for certain nonfinancial assets and liabilities that are
recorded at fair value on a nonrecurring basis. The effective date was delayed until January 1,
2009 and impacts balance sheet items including nonfinancial assets and liabilities in a business
combination and the impairment testing of goodwill and long-lived assets. The adoption of this
amendment did not have a material impact on the Company’s condensed consolidated financial
statements.
Compensation
In April 2010, the FASB amended the general accounting principles for Compensation as it relates to
stock compensation. This amendment clarifies that an employee share-based payment award with an
exercise price denominated in the currency of a market in which a substantial portion of the
entity’s equity securities trades should not be considered to contain a condition that is not a
market, performance, or service condition. Therefore, such an award should not be classified as a
liability if it otherwise qualifies as equity. The amendment is effective for fiscal years and
interim periods beginning after December 15, 2010. The adoption of this amendment is not expected
to have an impact on the Company’s condensed consolidated financial statements.
In December 2008, the FASB amended the general accounting principles for Compensation as it relates
to employers disclosures about postretirement benefit plan assets. This amendment provides guidance
for disclosure of the types of assets and associated risks in retirement plans. The new disclosures
are designed to provide additional insight into the major categories of plan assets, the inputs and
valuation techniques used to measure the fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in plan assets for the period,
significant concentrations of risk within plan assets and how investment decisions are made,
including factors necessary to understanding investment policies and strategies. The disclosures
about plan assets required by this amendment is effective for financial statements with fiscal
years ending after December 15, 2009. The adoption of this amendment did not have a material impact
on the Company’s condensed consolidated financial statements.
Debt
In October 2009, the FASB amended the general accounting principles for Debt as it relates to the
accounting for own-share lending arrangements entered into in contemplation of a convertible debt
issuance or other financing. This amendment provides accounting and disclosure guidance for
own-share lending arrangements issued in contemplation of convertible debt issuance. The amendment
is effective for fiscal years and interim periods beginning after December 15, 2009. The adoption
of this amendment did not have an impact on the Company’s condensed consolidated financial
statements.
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Equity
In January 2010, the FASB amended the general accounting principles for Equity as it relates to
distributions to shareholders with components of stock and cash. This amendment clarifies that the
stock portion of a distribution to shareholders, which allows them to elect to receive cash or
stock with a limitation on the total amount of cash that shareholders can receive, is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
The amendment is effective for fiscal years and interim periods beginning after December 15, 2009.
The adoption of this amendment did not have an impact on the Company’s condensed consolidated
financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
See “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of
Operations — Market Risk” which is included herein.
ITEM 4. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the
design and operation of the Company’s disclosure controls and procedures as defined in Exchange Act
Rule 13a-15(e) as of the end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls
and procedures were effective.
There was no change in the Company’s internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f) during the quarter ended June 30, 2010, that has materially affected,
or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.
PART II — OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is subject to litigation in the normal course of its business. The Company currently
has no material litigation. A legal reserve is established when the Company is notified of an
arbitration demand or litigation or is notified that an arbitration demand or litigation is
imminent, it is probable that the Company will incur a loss as a result and the amount of the
probable loss is reasonably capable of being estimated. However, if such material litigation did
arise, it is possible that an adverse outcome on any particular arbitration or litigation situation
could have a material adverse effect on the Company’s consolidated financial position and/or net
income in a particular reporting period.
ITEM 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Company’s
2009 Annual Report.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Under a board of directors approved plan, the Company may purchase at its discretion up to $50
million of its common stock on the open market. The Company has approximately $43.4 million
remaining under the approved program with no shares purchased since 2002. The Company generally
uses treasury shares to support the future exercise of options granted under its stock option
plans.
ITEM 6. Exhibits
See index to exhibits.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Reinsurance Group of America, Incorporated | ||||
| By: | /s/ A. Greig Woodring August 4, 2010 | |||
| A. Greig Woodring | ||||
| President & Chief Executive Officer (Principal Executive Officer) |
||||
| By: | /s/ Jack B. Lay August 4, 2010 | |||
| Jack B. Lay | ||||
| Senior Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) |
||||
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INDEX TO EXHIBITS
| Exhibit | ||
| Number | Description | |
3.1
|
Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 of Current Report on Form 8-K filed November 25, 2008. | |
3.2
|
Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 of Current Report on Form 8-K filed November 25, 2008. | |
31.1
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | |
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. |
73
Exhibit 31.1
CEO CERTIFICATION
I, A. Greig Woodring, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reinsurance Group of America,
Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
| Date: August 4, 2010 | /s/ A. Greig Woodring | |||
| A. Greig Woodring | ||||
| President & Chief Executive Officer | ||||
Exhibit 31.2
CFO CERTIFICATION
I, Jack B. Lay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reinsurance Group of America,
Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit
committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
| Date: August 4, 2010 | /s/ Jack B. Lay | |||
| Jack B. Lay | ||||
| Senior Executive Vice President & Chief Financial Officer |
||||
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Reinsurance Group of America, Incorporated
and subsidiaries, (the “Company”), for the quarterly period ended June 30, 2010, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), A. Greig Woodring, Chief
Executive Officer of the Company, certifies, to his best knowledge and belief, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
| Date: August 4, 2010 | /s/ A. Greig Woodring | |||
| A. Greig Woodring | ||||
| President & Chief Executive Officer | ||||
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Reinsurance Group of America, Incorporated
and subsidiaries, (the “Company”), for the quarterly period ended June 30, 2010, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), Jack B. Lay, Chief Financial
Officer of the Company, certifies, to his best knowledge and belief, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
| Date: August 4, 2010 | /s/ Jack B. Lay | |||
| Jack B. Lay | ||||
| Chief Financial Officer & Senior Executive Vice President |
||||