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                              UNITED STATES
                  SECURITIES AND EXCHANGE COMMISSION
                         WASHINGTON, D.C. 20549

                               FORM 10-Q

(MARK ONE)
   /X/       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934

             FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997

                                   OR

   / /       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
             OF THE SECURITIES EXCHANGE ACT OF 1934

                     -------------------------------

                     COMMISSION FILE NUMBER 1-11848

              REINSURANCE GROUP OF AMERICA, INCORPORATED
       (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          MISSOURI                                    43-1627032
(STATE OR OTHER JURISDICTION                        (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION)               IDENTIFICATION NUMBER)

                       660 MASON RIDGE CENTER DRIVE
                        ST. LOUIS, MISSOURI  63141
               (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

                             (314) 453-7439
          (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

                     ------------------------------

      INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

                                                   YES   X         NO
                                                       ----            ----

COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF APRIL 30, 1997: 16,978,896
SHARES



 2

             REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES


                                 TABLE OF CONTENTS

ITEM PAGE ---- ---- PART I - FINANCIAL INFORMATION ------------------------------ 1 Financial Statements Condensed Consolidated Balance Sheets (Unaudited) March 31, 1997 and December 31, 1996 3 Condensed Consolidated Statements of Income (Unaudited) Three months ended March 31, 1997 and 1996 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 30, 1997 and 1996 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6-7 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-13 PART II - OTHER INFORMATION --------------------------- 1 Legal Proceedings 14 6 Exhibits and Reports on Form 8-K 14 Signatures 15 Index to Exhibits 16
2 3 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 1997 1996 --------- ------------ (Dollars in thousands) Assets Fixed maturity securities Available for sale-at fair value (amortized cost of $1,688,511 and $1,469,649 at March 31, 1997, and December 31, 1996, respectively) $1,708,304 $1,517,264 Mortgage loans on real estate 99,359 98,262 Policy loans 424,585 426,366 Funds withheld at interest 156,140 129,949 Short-term investments 74,223 93,548 Other invested assets 8,554 6,659 ---------- ---------- Total investments 2,471,165 2,272,048 Cash and cash equivalents 11,666 13,145 Accrued investment income 33,639 23,308 Premiums receivable 100,356 76,438 Funds withheld 34,473 30,697 Reinsurance ceded receivables 71,798 59,618 Deferred policy acquisition costs 245,438 233,565 Other reinsurance balances 152,855 157,065 Other assets 26,626 27,770 ---------- ---------- Total assets $3,148,016 $2,893,654 ========== ========== Liabilities and Stockholders' Equity Future policy benefits $ 819,521 $ 755,793 Interest sensitive contract liabilities 1,244,803 1,106,491 Other policy claims and benefits 249,841 206,284 Other reinsurance balances 171,667 149,289 Deferred income taxes 63,818 73,275 Other liabilities 78,051 63,689 Long-term debt 106,377 106,493 ---------- ---------- Total liabilities 2,734,078 2,461,314 Minority interest 6,226 6,782 Commitments and contingent liabilities Stockholders' equity: Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no shares issued or outstanding) - - Common stock (par value $.01 per share; 50,000,000 shares authorized, 17,366,250 shares issued) 174 174 Additional paid in capital 264,399 264,399 Currency translation adjustments (7,282) (5,536) Unrealized appreciation of securities, net of taxes 10,747 28,365 Retained earnings 149,289 147,824 ---------- ---------- Total stockholders' equity before treasury stock 417,327 435,226 Less treasury shares held of 387,354 and 389,354 at cost at March 31, 1997, and December 31, 1996, respectively (9,615) (9,668) ---------- ---------- Total stockholders' equity 407,712 425,558 ---------- ---------- Total liabilities and stockholders' equity $3,148,016 $2,893,654 ========== ========== See accompanying notes to condensed consolidated financial statements.
3 4 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three months ended March 31, -------------------------- 1997 1996 -------- -------- (Dollars in thousands, except per share data) Revenues: Net premiums $205,372 $167,892 Investment income, net of related expenses 41,849 27,875 Realized investment gains, net 387 562 Other revenue 4,155 4,093 -------- -------- Total revenues 251,763 200,422 Benefits and expenses: Claims and other policy benefits 177,882 143,685 Accident and health pool charge (see Note 3) 18,000 - Policy acquisition costs and other insurance expenses 40,467 30,425 Other operating expenses 10,519 8,993 Interest expense 1,948 291 -------- -------- Total benefits and expenses 248,816 183,394 -------- -------- Income before income taxes and minority interest 2,947 17,028 Provision for income taxes (1) 6,249 -------- -------- Income before minority interest 2,948 10,779 Minority interest in earnings of consolidated subsidiaries (120) (243) -------- -------- Net income $ 2,828 $ 10,536 ======== ======== Earnings per common and common equivalent share $ 0.16 $ 0.62 ======== ======== Weighted average number of common and common equivalent shares outstanding (in thousands) 17,153 16,984 ======== ======== See accompanying notes to condensed consolidated financial statements.
4 5 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, ------------------------ 1997 1996 --------- --------- (Dollars in thousands) Operating Activities: Net income $ 2,828 $ 10,536 Adjustments to reconcile net income to net cash provided by operating activities: Change in: Accrued investment income (10,343) (8,403) Premiums receivable (24,066) 11,975 Deferred policy acquisition costs (12,432) (6,904) Funds withheld (3,776) (2,375) Reinsurance ceded balances (12,179) (10,057) Future policy benefits, other policy claims and benefits, and other reinsurance balances 147,915 115,898 Deferred income taxes 868 5,634 Other assets and other liabilities 5,694 (27,625) Amortization of goodwill and value of business acquired 299 274 Amortization of net investment discounts (2,509) (2,188) Realized investment gains, net (387) (561) Other, net (342) 276 --------- --------- Net cash provided by operating activities 91,570 86,480 Investing Activities: Sales of fixed maturity securities 42,166 14,478 Available for sale Maturities of fixed maturity securities 46,135 9,663 Purchases of fixed maturity securities (297,361) (277,503) Cash invested in: Mortgage loans (1,486) (2,518) Policy loans - (25,892) Funds withheld at interest (26,191) (21,552) Principal payments on: Mortgage loans 389 224 Policy loans 1,781 - Change in short-term and other invested assets 16,772 (66,750) --------- --------- Net cash used in investing activities (217,795) (369,850) Financing activities: Dividends to stockholders (1,358) (1,178) Reissuance of treasury stock 52 65 Minority interest in earnings 120 243 Excess deposits on universal life and other investment type policies and contracts 126,016 176,515 Proceeds from long-term debt issuance - 104,222 --------- --------- Net cash provided by financing activities 124,830 279,867 Effect of exchange rate changes (84) 172 --------- --------- Change in cash and cash equivalents (1,479) (3,331) Cash and cash equivalents, beginning of period 13,145 18,258 --------- --------- Cash and cash equivalents, end of period $ 11,666 $ 14,927 ========= ========= See accompanying notes to condensed consolidated financial statements.
5 6 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1997 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited, condensed, consolidated financial statements of Reinsurance Group of America, Incorporated and Subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles 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 generally accepted accounting principles 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 months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report for the year ended December 31, 1996. The Company has reclassified the presentation of certain prior period information to conform with the 1997 presentation. 2. EARNINGS PER SHARE Earnings per share were computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding during the period. Outstanding employee stock options, which are reflected as common stock equivalents using the treasury stock method, have been considered in net earnings per share calculations. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share ("EPS")." SFAS No. 128 supersedes and simplifies the existing computational guidelines under Accounting Principles Board Opinion No. 15, "Earnings Per Share." It is effective for financial statements issued for periods ending after December 15, 1997. Among other changes, SFAS No. 128 eliminates the presentation of primary EPS and replaces it with basic EPS for which common stock equivalents are not considered in the computation. It also revises the computation of diluted EPS. It is not expected that the adoption of SFAS No. 128 will have a material impact on the earnings per share results reported by the Company under the Company's current capital structure. 6 7 3. Significant Transaction During the first quarter of 1997, the Company recorded a non-recurring charge of $18.0 million, $10.4 million after-tax, to increase reserves associated with run-off claims from certain accident and health insurance pools in which it had formerly participated. That action was a result of management's strategic decision to exit all outside-managed pools. The charge reflects management's intent to reserve fully for all anticipated claim payments attributed to outside-managed accident and health pools. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1997 AND 1996 - ------------------------------------------ RESULTS OF OPERATIONS Net Premiums. Net premiums increased $37.5 million, or 22.3%, to $205.4 million in the first quarter of 1997 compared to $167.9 million for the same period in 1996. Premiums by major segment were as follows (in millions):
Change ------------ 1997 1996 Dollars Percent ---- ---- ------- ------- U.S. life $145.9 126.3 19.6 15.5 Canadian life 18.8 13.3 5.5 41.4 Accident and health 16.5 14.4 2.1 14.6 Other international 24.2 13.9 10.3 74.1 ---- ---- ---- ---- Totals $205.4 167.9 37.5 22.3 ====== ===== ==== ====
Renewal premiums from the existing block of business, along with new business premiums from facultative and automatic treaties contributed to the premium increase. Business premium levels are significantly influenced by large transactions and reporting practices of ceding companies and therefore fluctuate from period to period. In the U.S. life segment, the increase from prior year was attributed to premium growth on the existing block of business, combined with strong new business premium. The Canadian life segment increased $1.9 million in first year premiums and $3.6 million in renewal premiums. The first quarter is largely a renewal quarter and several of the treaties processed related to closed blocks of calendar year business. The first year premium growth in this quarter was primarily the result of strong new business production in the second half of 1996. Accident and health premiums increased $2.1 million, or 14.6%. The increase resulted from growth in business from the Company's contact office in London and a new contract that generated approximately $1.6 million during 1997. 8 9 The Company's other international business reported strong growth from year to year. Premiums in the Latin American operations increased $7.5 million as the single premium immediate annuity business from Chile grew $5.6 million. In the Asia Pacific operations, premiums increased $2.7 million resulting from growth in the base of business from the prior year and business generated from the Company's operating subsidiary in Australia. Investment Income, Net. Investment income, net of investment expenses, increased $13.9 million, or 49.8%, to $41.8 million in the first quarter of 1997 from $27.9 million for the same period in 1996. The cost basis of invested assets increased $552.8 million from the first quarter of 1996. The increase in invested assets was a result of operating cash flows and reinsurance transactions involving stable value deposits from ceding companies of $374.1 million since March 31, 1996. The stable value product asset portfolio generated $9.9 million of investment income in the first quarter of 1997 compared to $2.6 million for the same period in 1996. The earnings on the stable value product asset portfolio are offset by earnings credited and paid to ceding companies of $9.3 million and $2.5 million for the first quarter of 1997 and 1996, respectively, which are included in claims and other policy benefits as well as policy acquisition costs and other insurance expenses. The average earned yield on the consolidated investment portfolio decreased to 7.22% for the first quarter of 1997 compared to 7.50% for the same period in 1996. This primarily resulted from the increase in the stable value portfolio which requires a shorter duration to achieve appropriate asset and liability duration matching. Realized Investment Gains, Net. In the first quarter of 1997, net realized investment gains decreased $0.2 million to $0.4 million from $0.6 million for the same period in prior year. Net realized investment gains resulted from normal activity within the Company's portfolios. Other Revenue. Other revenue increased $0.1 million in the first quarter of 1997 to $4.2 million. Other revenue includes items such as profit and risk fees associated with financial reinsurance as well as earnings in unconsolidated investees, management fee income, and miscellaneous income associated with late premium payments. During 1997, financial reinsurance treaties resulted in $3.9 million in financial reinsurance fees which were partially offset by fees paid to retrocessionaires of $3.4 million, included in other insurance expenses. Claims and Other Policy Benefits. Claims and other policy benefits increased $34.2 million, or 23.8%, to $177.9 million in the first quarter of 1997 compared to $143.7 million for the same period in 1996. For the first quarter of 1997, total claims and other policy benefits represented 86.6% of total net premiums. Net of the impact of the stable value products, the total claims and other policy benefits represented 82.6% of total net premiums. This was comparable to the 84.3% of total net premiums net of the impact of stable value products for the first quarter of 1996 and 80.0% for the entire year ended December 31, 1996. The Company expects mortality to fluctuate somewhat from period to period but believes it is fairly constant over longer periods of time. 9 10 Claims and other policy benefits by major segment were as follows (in millions):
Change ------------- 1997 1996 Dollars Percent ---- ---- ------- ------- U.S. life $130.6 109.1 21.5 19.7 Canadian life 15.1 12.2 2.9 23.8 Accident and health 12.1 11.2 0.9 8.0 Other international 20.1 11.2 8.9 79.5 ---- ---- --- ---- Totals $177.9 143.7 34.2 23.8 ====== ===== ==== ====
The increase in claims in the U.S. and Canadian life segments was the result of an overall increase in the amount at risk, which corresponds with the overall increase in premiums. In the U.S. and Canadian life segments, mortality was favorable for the first quarter of 1997 as compared to the first quarter of 1996. In addition, reserve levels increased in relation to the overall increase in the amount at risk and the aging of the existing blocks of business. The accident and health segment increase correlated with the increase in premiums discussed above. The increase in claims in the other international segment correlated with the increase in premiums from the Latin American and Asia Pacific regions discussed above. Accident and Health Pool Charge. The Company reported a non-recurring charge totaling $18.0 million during the first quarter of 1997 associated with the decision to exit all outside-managed accident and health pools, along with the run-off claims from certain accident and health reinsurance pools in which the Company had formerly participated. The adjustment in this segment represented management's current estimate to reserve fully for claim payments attributable to outside-managed accident and health pools. The reserve increase of $18.0 million was developed from information received from the accident and health reinsurance pool managers, along with the Company management's judgment of the completeness of the amounts reported. Policy Acquisition Costs and Other Insurance Expenses. Policy acquisition costs and other insurance expenses totaled $40.5 million, or 19.7% of net premium for the quarter. This compares to 20.2% of net premiums for the entire year ended December 31, 1996. Net of the impact of fees paid to retrocessionnaires in connection with financial reinsurance and stable value products, those costs represented $36.1 million, or 17.6% of net premium for the first quarter of 1997 compared to total costs of $27.1 million, or 16.1% of net premium for the first quarter of 1996. 10 11 Policy acquisition costs and other insurance expenses by major segment were as follows (in millions):
Change ------------ 1997 1996 Dollars Percent ---- ---- ------- ------- U.S. life $27.9 22.7 5.2 22.9 Canadian life 3.2 1.9 1.3 68.4 Accident and health 5.8 3.7 2.1 56.8 Other international 3.6 2.1 1.5 71.4 --- --- --- ---- Totals $40.5 30.4 10.1 33.2 ===== ==== ==== ====
Policy acquisition costs and other insurance expenses for the U.S. life business increased primarily due to the financial reinsurance business, coupled with an overall increase in the current production and the amount at risk from the prior year. The increase was offset partially by the overall shift of business from coinsurance to yearly renewable term and by lower expense rates on new business. In the U.S. life segment, policy acquisition costs and other insurance expenses as a percent of net premium remained relatively stable at 19.2% for the first quarter of 1997 compared to 19.8% for the entire year of 1996. Net of the effect of financial reinsurance and stable value products, the policy acquisition costs and other insurance expenses represented 11.4% as a percent of net premium for the first quarter of 1997 compared to 11.6% for the first quarter of 1996. In the Canadian life segment, policy acquisition costs and other insurance expenses as a percentage of net premiums increased to 17.0% for the first quarter of 1997 compared to 14.3% for the first quarter of 1996. Additionally, this compared to 16.1% of net premiums for the entire year of 1996. The Canadian life segment increase resulted from new business premiums, which was partially offset by the processing of significant blocks of renewal business during the first quarter that carry lower net renewal commissions than the first year business. In the accident and health segment, policy acquisition costs and other insurance expenses as a percentage of net premiums increased to 35.2% for the first quarter of 1997 compared to 25.7% for the first quarter of 1996. This increase was attributed to the new business growth primarily with the new contract referenced above. In the other international segment, policy acquisition costs and other insurance expenses as a percent of net premium decreased to approximately 14.9% for the first quarter of 1997 compared to 16.7% for the entire year of 1996. The Company's other international segment percentages fluctuate due primarily to the timing of client company reporting. 11 12 Other Operating Expenses. Other operating expenses increased $1.5 million, or 16.7%, to $10.5 million in the first quarter of 1997 compared to $9.0 million for the same period in 1996. Expenses of the U.S., Canadian, and accident and health operations remained relatively stable compared to the prior year. Other international business operating expenses increased $1.5 million which represented increased operating costs in those countries and additional home office staff. The overall increase in other expenses was the result of planned activities associated with pursuing new business opportunities and international expansion efforts. The operating expense increases were consistent with expectations and remain relatively stable as a percentage of net premiums. Interest Expense. Interest expense related to the issuance of long-term debt by Reinsurance Group of America, Incorporated ("RGA") on March 22, 1996, and the financing of a portion of the Company's Australian reinsurance operations during 1996. Provision for Income Taxes. Income tax expense from operations represents approximately 36.7% of pre-tax income for the first quarters of 1997 and 1996. The Company calculated a tax benefit of $7.6 million on the $18.0 million accident and health reserve adjustment. The effective tax rate of 36.7% on income from operations is representative of the Company's expected annual effective tax rate. LIQUIDITY AND CAPITAL RESOURCES During the first quarter of 1997, the Company generated $91.6 million in cash from operating activities and $124.1 million from deposits related to the stable value business. These increases were offset by cash used for investing of $217.8 million and dividends to stockholders of $1.3 million. The sources of funds of RGA's operating subsidiaries consist of premiums received from ceding insurers, investment income, and proceeds from sales and redemption of investments. Premiums are generally received in advance of related claim payments. The funds are primarily applied to policy claims and benefits, operating expenses, income taxes, and investment purchases. In addition, RGA's liquidity position was supported by the $100.0 million offering of Senior Notes in March 1996. The ability of the Company to make principal and interest payments, and to continue to pay dividends to stockholders, is ultimately dependent on the earnings and surplus of RGA's subsidiaries, as well as the investment earnings on the undeployed debt proceeds. The transfer of funds from the subsidiaries to RGA is subject to applicable insurance laws and regulations. Any future increases in liquidity needs due to relatively large policy loans or unanticipated material claim levels would be met first by operating cash flows and then by selling fixed-income securities or short-term investments. 12 13 INVESTMENTS Invested assets increased by $199.1 million, or 8.8%, to $2,471.2 million at March 31, 1997, compared to $2,272.0 million at December 31, 1996. The increase resulted from cash deposits for stable value products of $124.1 million and positive operating cash flows. These increases were partially offset by a decrease in the fair value adjustment of fixed maturities available for sale of $27.8 million. The Company has historically generated positive cash flows from operations, and expects to do so in the future. At March 31, 1997, the Company's portfolio of fixed maturity securities available for sale had net unrealized gains before tax of $19.8 million. 13 14 PART II - OTHER INFORMATION - --------------------------- ITEM 1 - ------ LEGAL PROCEEDINGS - ----------------- From time to time, subsidiaries of Reinsurance Group of America, Incorporated are subject to reinsurance-related litigation and arbitration in the normal course of business. Management does not believe that any such pending litigation or arbitration would have a material adverse effect on the Company's future operations. ITEM 6 - ------ EXHIBITS AND REPORTS ON FORM 8-K - -------------------------------- (a) See index to exhibits. (b) No reports on Form 8-K were filed during the three months ended March 31, 1997. 14 15 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 5/5/97 -------------------------------------------- A. Greig Woodring President & Chief Executive Officer /s/ Jack B. Lay 5/5/97 -------------------------------------------- Jack B. Lay Executive Vice President & Chief Financial Officer 15 16 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 3.1 Restated Articles of Incorporation of RGA incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 (No. 33-58960) filed on March 2, 1993 3.2 Bylaws of RGA incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (No. 33-58960) filed on March 2, 1993 3.3 Form of Certificate of Designations for Series A Junior Participating Preferred Stock incorporated by reference to Exhibit 3.3 to Amendment No. 1 to Registration Statement on Form S-1 (No. 33-58960) filed on April 14, 1993 27.1 Financial Data Schedule
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7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT AND IS QUALIFED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 U.S. DOLLAR 3-MOS DEC-31-1996 JAN-01-1997 MAR-31-1997 1 1,708,304 0 0 6,992 99,359 0 2,471,165 11,666 71,798 245,438 3,148,016 2,064,324 0 249,841 0 106,377 0 0 174 407,538 3,148,016 205,372 41,849 387 4,155 195,882 14,370 26,097 2,947 (1) 2,948 0 0 0 2,828 0.16 0.16 0 0 0 0 0 0 0