1
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, 1998
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, 1998: 25,228,880
shares
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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, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Income and Comprehensive
Income (Unaudited)
Three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-9
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-20
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 20
6 Exhibits and Reports on Form 8-K 20
Signatures 21
Index to Exhibits 22
2
3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1998 1997
---------- -----------
(Dollars in thousands)
ASSETS
Fixed maturity securities
Available for sale-at fair value (amortized cost of $2,819,278 and
$2,416,308 at March 31, 1998, and December 31, 1997, respectively) $2,941,290 $2,528,290
Mortgage loans on real estate 185,370 165,452
Policy loans 471,440 480,234
Funds withheld at interest 167,807 165,413
Short-term investments 186,437 277,635
Other invested assets 21,263 16,977
---------- ----------
Total investments 3,973,607 3,634,001
Cash and cash equivalents 39,327 37,395
Accrued investment income 50,882 34,377
Premiums receivable 118,577 119,554
Funds withheld 48,758 33,957
Reinsurance ceded receivables 341,432 316,156
Deferred policy acquisition costs 311,247 289,842
Other reinsurance balances 137,589 153,134
Other assets 53,438 55,134
---------- ----------
Total assets $5,074,857 $4,673,550
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $1,332,156 $1,244,541
Interest sensitive contract liabilities 2,272,609 1,969,270
Other policy claims and benefits 389,258 344,848
Other reinsurance balances 215,428 232,096
Deferred income taxes 124,802 110,763
Other liabilities 104,300 157,616
Long-term debt 106,991 106,830
---------- ----------
Total liabilities 4,545,544 4,165,964
Minority interest 8,247 8,265
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,
26,049,375 shares issued) 261 261
Additional paid in capital 265,021 264,748
Retained earnings 211,080 196,685
Accumulated other comprehensive income 65,779 59,089
---------- ----------
Total stockholders' equity before treasury stock 542,141 520,783
Less treasury shares held of 820,895 and 844,535 at cost at
March 31, 1998, and December 31, 1997, respectively (21,075) (21,462)
---------- ----------
Total stockholders' equity 521,066 499,321
---------- ----------
Total liabilities and stockholders' equity $5,074,857 $4,673,550
========== ==========
See accompanying notes to condensed consolidated financial statements.
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three months ended
March 31,
------------------------------
1998 1997
-------- --------
(Dollars in thousands, except per share data)
Revenues:
Net premiums $269,978 $205,372
Investment income, net of related expenses 63,679 41,849
Realized investment gains, net 922 387
Other revenue 6,554 4,155
-------- --------
Total revenues 341,133 251,763
Benefits and expenses:
Claims and other policy benefits 217,296 158,760
Interest credited 34,512 19,122
Accident and health pool charge -- 18,000
Policy acquisition costs and other insurance expenses 46,934 40,467
Other operating expenses 15,464 10,519
Interest expense 2,025 1,948
-------- --------
Total benefits and expenses 316,231 248,816
-------- --------
Income before income taxes and minority interest 24,902 2,947
Provision for income taxes 8,840 (1)
-------- --------
Income before minority interest 16,062 2,948
Minority interest in earnings of consolidated subsidiaries (153) (120)
-------- --------
Net income $ 15,909 $ 2,828
======== ========
Other comprehensive income, net of taxes 6,690 (18,754)
----- -------
Comprehensive income $ 22,599 $(15,926)
======== ========
Basic earnings per share $ 0.63 $ 0.11
======== ========
Diluted earnings per share $ 0.62 $ 0.11
======== ========
Weighted average number of diluted shares outstanding
(in thousands) 25,505 25,629
======== ========
See accompanying notes to condensed consolidated financial statements.
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
-----------------------------
1998 1997
--------- ---------
(Dollars in thousands)
Operating Activities:
Net income $ 15,909 $ 2,828
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (16,496) (10,343)
Premiums receivable 1,078 (24,066)
Deferred policy acquisition costs (21,028) (12,432)
Funds withheld (14,798) (3,776)
Reinsurance ceded balances (24,235) (12,179)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 124,553 147,915
Deferred income taxes 8,538 868
Other assets and other liabilities (51,980) 5,694
Amortization of goodwill and value of business acquired 316 299
Amortization of net investment discounts (581) (2,509)
Realized investment gains, net (922) (387)
Other, net (458) (342)
--------- ---------
Net cash provided by operating activities 19,896 91,570
Investing Activities:
Sales of fixed maturity securities 110,752 42,166
Maturities of fixed maturity securites 19,176 46,135
Purchases of fixed maturity securities (526,902) (297,361)
Cash invested in:
Mortgage loans (23,767) (1,486)
Funds withheld at interest (2,394) (26,191)
Principal payments on:
Mortgage loans 511 389
Policy loans 8,794 1,781
Change in short-term and other invested assets 85,735 16,772
--------- ---------
Net cash used in investing activities (328,095) (217,795)
Financing activities:
Dividends to stockholders (1,514) (1,358)
Reissuance of treasury stock 387 52
Minority interest in earnings 153 120
Excess deposits on universal life and other investment type
policies and contracts 310,998 126,016
--------- ---------
Net cash provided by financing activities 310,024 124,830
Effect of exchange rate changes 107 (84)
--------- ---------
Change in cash and cash equivalents 1,932 (1,479)
Cash and cash equivalents, beginning of period 37,395 13,145
--------- ---------
Cash and cash equivalents, end of period $ 39,327 $ 11,666
========= =========
See accompanying notes to condensed consolidated financial statements.
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(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, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998. 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, 1997.
The Company has reclassified the presentation of certain prior period
information to conform to the 1998 presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands except per share information):
Period Ending March 31 1998 1997
Numerator:
Net income $15,909 $2,828
Numerator for basic earning per share--income
available to common stockholders 15,909 2,828
Effect of dilutive securities -- --
------- ------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $15,909 $2,828
======= ======
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Period Ending March 31 1998 1997
Denominator:
Denominator for basic earnings per share--
weighted average shares 25,236 25,467
Effect of dilutive securities
Employee stock options 269 162
--- ---
Denominator for diluted earnings per share--
adjusted weighted average shares and
assumed conversions 25,505 25,629
====== ======
Basic earnings per share $ 0.63 $ 0.11
Diluted earnings per share $ 0.62 $ 0.11
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," effective for years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The most significant items of
comprehensive income are net income, the change in unrealized gains and
losses on securities, and the change in foreign currency translation. Both
items historically have been reported as a component of stockholders' equity.
The adoption of SFAS No. 130 does not affect results of operations or
financial position, but affects their presentation and disclosure. The
Company has adopted SFAS No. 130 as of January 1, 1998, and the following
summaries present the components of the Company's comprehensive income, other
than net income, for the periods ending March 31, 1998 and 1997 (dollars in
thousands):
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FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1998:
====================================================================================================
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------
Foreign currency translation
adjustments $ (241) $ 84 $ (157)
Unrealized gains on securities:
Unrealized holding gains
arising during period 13,181 (5,751) 7,430
Less: reclassification
adjustment for gains
realized in net income 922 (339) 583
--- ---- ---
Net unrealized gains 12,259 (5,412) 6,847
------ ------ -----
Other comprehensive income $12,018 $(5,328) $6,690
====================================================================================================
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1997:
====================================================================================================
Before-Tax Tax (Expense) Net-of-Tax
Amount Benefit Amount
- ----------------------------------------------------------------------------------------------------
Foreign currency translation
adjustments $ (1,746) $ 611 $ (1,135)
Unrealized gains on securities:
Unrealized holding (losses)
arising during period (27,338) 9,970 (17,368)
Less: reclassification
adjustment for gains
realized in net income 387 (136) 251
--- ---- ---
Net unrealized (losses) (27,725) 10,106 (17,619)
------- ------ -------
Other comprehensive income $(29,471) $10,717 $(18,754)
====================================================================================================
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The following schedule reflects the change in accumulated other comprehensive
income for the period ending March 31, 1998 (dollars in thousands):
====================================================================================================
ACCUMULATED
UNREALIZED OTHER
FOREIGN GAINS ON COMPREHENSIVE
CURRENCY ITEMS SECURITIES INCOME
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $(8,201) $67,290 $59,089
Current period change (157) 6,847 6,690
---- ----- -----
Balance at March 31, 1998 $(8,358) $74,137 $65,779
====================================================================================================
4. SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information,"
effective for years beginning after December 15, 1997. SFAS No. 131 requires
that a public company report financial and descriptive information about its
reportable operating segments pursuant to criteria that differ from current
accounting practice. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. The adoption of SFAS No.
131 will not affect the Company's results of operations or financial
position, but will affect the disclosure of segment information. The Company
plans to adopt SFAS No. 131 during 1998, however SFAS No. 131 need not be
applied to interim financial information in the initial year of its
application.
5. SECURITIES LENDING
The Company participates in a securities lending program. The amount on loan
at March 31, 1998 was $14.6 million. It is the Company's policy to require
collateral at 105% of the loan value.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following tables reflect the net income before income taxes and minority
interest for the Company's primary operational divisions (dollars in
thousands):
=====================
U.S. OPERATIONS
=====================
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1998
========================================================
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
========================================================
REVENUES:
Net premiums $180,375 $ -- $ -- $180,375
Investment income, net of related expenses 28,757 26,738 -- 55,495
Realized investment gains, net 445 241 -- 686
Other revenue 189 -- 4,027 4,216
--------------------------------------------------------
Total revenues 209,766 26,979 4,027 240,772
BENEFITS AND EXPENSES:
Claims and other policy benefits 144,468 22 -- 144,490
Interest credited 10,623 23,614 -- 34,237
Policy acquisition costs and other insurance expenses 26,211 1,042 3,120 30,373
Other operating expenses 6,382 -- -- 6,382
--------------------------------------------------------
Total benefits and expenses 187,684 24,678 3,120 215,482
Income before income taxes and minority
interest $ 22,082 $ 2,301 $ 907 $ 25,290
========================================================
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================================
U.S. OPERATIONS (continued)
================================
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1997
========================================================
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
========================================================
REVENUES:
Net premiums $145,963 $ -- $ -- $145,963
Investment income, net of related expenses 24,662 9,676 -- 34,338
Realized investment gains, net 100 244 -- 344
Other revenue (131) -- 4,171 4,040
--------------------------------------------------------
Total revenues 170,594 9,920 4,171 184,685
BENEFITS AND EXPENSES:
Claims and other policy benefits 111,010 781 -- 111,791
Interest credited 10,498 8,267 -- 18,765
Policy acquisition costs and other insurance expenses 24,284 263 3,415 27,962
Other operating expenses 4,590 -- -- 4,590
--------------------------------------------------------
Total benefits and expenses 150,382 9,311 3,415 163,108
Income before income taxes and minority
interest $ 20,212 $ 609 $ 756 $ 21,577
========================================================
=========================
CANADIAN OPERATIONS
=========================
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1998 1997
REVENUES:
Net premiums $25,026 $18,835
Investment income, net of related expenses 5,158 3,764
Realized investment gains, net 236 --
Other revenue 272 71
-------------------------------
Total revenues 30,692 22,670
BENEFITS AND EXPENSES:
Claims and other policy benefits 23,115 14,742
Interest credited 245 342
Policy acquisition costs and other insurance expenses 2,855 3,169
Other operating expenses 1,803 1,423
-------------------------------
Total benefits and expenses 28,018 19,676
Income before income taxes and minority interest $ 2,674 $ 2,994
===============================
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==========================
OTHER INTERNATIONAL
==========================
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1998
=====================================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS INTERNATIONAL
Direct Reinsurance
=====================================================================
Revenues:
Net premiums $13,451 $13,366 $10,453 $ 406 $37,676
Investment income, net of related
expenses 1,582 488 420 37 2,527
Other revenue 73 -- 1,535 54 1,662
---------------------------------------------------------------------
Total revenues 15,106 13,854 12,408 497 41,865
Benefits and expenses:
Claims and other policy benefits 12,116 12,284 5,553 306 30,259
Interest credited 30 -- -- -- 30
Policy acquisition costs and other
insurance expenses 978 372 4,837 122 6,309
Other operating expenses 1,628 966 1,758 1,051 5,403
Interest expense -- -- 100 45 145
---------------------------------------------------------------------
Total benefits and expenses 14,752 13,622 12,248 1,524 42,146
Income / (loss) before income taxes
and minority interest $ 354 $ 232 $ 160 $(1,027) $ (281)
=====================================================================
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1997
=====================================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS INTERNATIONAL
Direct Reinsurance
=====================================================================
Revenues:
Net premiums $15,098 $2,668 $ 6,248 $ 63 $24,077
Investment income, net of related
expenses 1,140 407 326 4 1,877
Realized investment gains, net -- -- 15 -- 15
Other revenue 14 -- -- -- 14
---------------------------------------------------------------------
Total revenues 16,252 3,075 6,589 67 25,983
Benefits and expenses:
Claims and other policy benefits 13,883 2,108 3,916 176 20,083
Interest credited 15 -- -- -- 15
Policy acquisition costs and other
insurance expenses 1,099 74 2,360 40 3,573
Other operating expenses 1,225 531 1,480 410 3,646
Interest expense -- -- 115 -- 115
---------------------------------------------------------------------
Total benefits and expenses 16,222 2,713 7,871 626 27,432
Income / (loss) before income taxes
and minority interest $ 30 $ 362 $(1,282) $(559) $(1,449)
=====================================================================
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=========================
ACCIDENT AND HEALTH
=========================
FOR THE THREE MONTH PERIODS ENDING MARCH 31, 1998 1997
Revenues:
Net premiums $26,901 $ 16,497
Investment income, net of related expenses 433 281
Realized investment gains, net -- 3
Other revenue 331 30
----------------------
Total revenues 27,665 16,811
Benefits and expenses:
Claims and other policy benefits 19,432 12,144
Accident and health pool charge - 18,000
Policy acquisition costs and other insurance expenses 7,397 5,763
Other operating expenses 786 549
----------------------
Total benefits and expenses 27,615 36,456
Income / (loss) before income taxes and minority interest $ 50 $(19,645)
======================
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
- ------------------------------------------
RESULTS OF OPERATIONS
Income before Income Taxes and Minority Interest. Consolidated income
before income taxes and minority interest increased $22.0 million in the
first quarter of 1998, compared to the same period in 1997. After tax
diluted earnings per share were $0.62 for the first quarter of 1998 compared
with $0.11 for the same period in 1997. After tax consolidated net income
before realized capital gains and losses increased to $15.3 million in the
first quarter of 1998 from $2.6 million in the same period in 1997.
The increase in the U.S. operations income before income taxes and minority
interest in the first quarter of 1998 compared to the same period in 1997 was
due to increased earnings on asset-intensive business resulting from growth
in fixed maturity securities, and continued growth in the traditional
business where premiums increased 23.6%. The decrease in the Canadian
operations income before income taxes and minority interest in the first
quarter of 1998 compared to 1997 was primarily a result of an increase in
claims experience during the first quarter of 1998 compared to the same
period in 1997. The other international operations lost $0.3 million before
income taxes and minority interest in the first quarter of 1998 compared to a
$1.4 million loss in 1997. Strong growth in the Latin America and Asia
Pacific business was offset by costs associated with the development of new
business in several international markets. During the first quarter of 1997,
the Company recorded an accident and health 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 accident and health pools. As of
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December 31, 1997, the Company made a strategic decision to cease marketing
accident and health business and established reserves that it believes are
sufficient to handle the run-off.
Net Premiums. Consolidated net premiums increased $64.6 million, or
31.5%, to $270.0 million in the first quarter of 1998, compared to $205.4
million for the same period in 1997. 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.
The U.S. operations net premiums in the first quarter of 1998 increased 23.6%
to $180.4 million from the prior year, attributed to premium growth on the
existing block of business, combined with strong new business premium for
blocks of business added since the first quarter of 1997.
Net premiums in the Canadian operations in the first quarter of 1998
increased 32.9% to $25.0 million in 1998. New business premiums decreased
$1.2 million, while renewal premiums increased $7.4 million compared to the
first quarter of 1997. The first quarter typically includes a large amount
of renewal premium. Several of the treaties processed related to closed
blocks of calendar year new and renewal business with large renewal premiums
resulting from the strong production in December 1997. The first year
premium decline was primarily the result of strong new business production in
December 1996, which increased the first year premiums for the first quarter
of 1997.
The Company's other international operations reported premiums of $37.7
million for the first quarter of 1998 compared to $24.1 million for the same
period in 1997. The 1998 premiums represented approximately $26.8 million
from Latin America, of which approximately $13.5 million was direct premium
generated in Argentina and Chile. Latin American premiums grew 50.9%, which
resulted from continued growth in Chilean single premium annuities and
universal life business in Argentina, as well as reinsurance on privatized
pensions in Argentina. The Asia Pacific operations and other markets
generated $10.9 million of premiums, predominantly through the Hong Kong
contact office and Australia. Primarily as a result of the new business
generated in Australia, the Asia Pacific premiums in the first quarter of
1998 grew 67.3% compared to the same period in the prior year.
Accident and health operations net premiums increased 63.1% to $26.9 million
in the first quarter of 1998. The increase resulted from premiums on new
contracts initiated and the renewal of existing contracts in the second half
of 1997. Although the decision was made to exit all outside-managed accident
and health pools and to cease marketing accident and health business and to
place the operation into run-off at the end of 1997, several new contracts
were previously executed with an effective date of January 1, 1998. It is
anticipated that accident and health premiums will decrease in each of the
next several years. The Company estimates that future accident and health
premiums compared to 1997 premiums will remain level in 1998. On an annual
basis, premiums are expected to decrease, compared to each preceding year, by
approximately 20%, 70%, 90% and 100% during 1999, 2000, 2001 and 2002,
respectively.
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Net Investment Income. Consolidated net investment income increased
52.2% to $63.7 million, in the first quarter of 1998 from the same period in
1997. The cost basis of fixed maturity securities increased $1.1 billion
from the first quarter of 1997. The increase in invested assets was a result
of an increase in operating cash flows and reinsurance transactions involving
deposits for asset-intensive products from ceding companies, primarily stable
value product deposits. The Company's stable value reinsurance is assumed
from General American Life Insurance Company ("General American"), which
indirectly owns approximately 64% of the Company's common stock. The amount
of future reinsurance of the stable value product is dependent on General
American's claims-paying rating. The average earned yield on the
consolidated investment portfolio decreased to 7.06% for the first quarter of
1998 compared to 7.22% for the same period in 1997. This decrease in overall
yield reflected the increase in assets supporting the stable value
reinsurance product that are generally of a shorter duration and carry a
lower average yield and the overall decrease in interest rates. Earnings
credited and paid to ceding companies are included in interest credited.
Realized Investment Gains/(Losses), Net. Consolidated net realized
investment gains increased $0.5 million to $0.9 million in the first quarter
of 1998 from $0.4 million for the same period in the prior year. Net
realized investment gains resulted from normal activity within the Company's
investment portfolios.
Other Revenue. Consolidated other revenue increased $2.4 million in
the first quarter of 1998 to $6.6 million. Other revenue includes items such
as profit and risk fees associated with financial reinsurance, treaty
recapture fees as well as earnings in unconsolidated subsidiaries, management
fee income, and other miscellaneous income. During 1998, financial
reinsurance treaties in the U.S. operations resulted in $3.4 million in
financial reinsurance fees which were partially offset by $3.1 million of
fees paid to retrocessionaires, included in policy acquisition costs and
other insurance expenses. During March 1998, the Asia Pacific operations
completed a financial reinsurance transaction that resulted in $1.3 million
in financial reinsurance fee revenue which was partially offset by fees paid
to retrocessionaires. The Company's strategy involves the assumption and
subsequent retrocession of most of these financial reinsurance treaties which
resulted in amounts of $128.2 million and $132.2 million being included in
other reinsurance assets and liabilities, respectively, on the Company's
consolidated balance sheets at March 31, 1998. Other revenue also included
$0.8 million and $0.3 million in earnings in unconsolidated subsidiaries for
the first quarter of 1998 and 1997, respectively.
Claims and Other Policy Benefits. Consolidated claims and other policy
benefits increased 36.9% to $217.3 million, in the first quarter of 1998.
For the first quarter of 1998, total claims and other policy benefits
represented 80.5% of total net premiums compared to 77.3% for the same period
in 1997. This fluctuation was primarily a result of higher benefits and
reserves in the U.S. and Canadian operations in the first quarter of 1998
compared to the same period in 1997. The Company expects mortality to
fluctuate somewhat from period to period but believes it is fairly constant
over longer periods of time. The Company continues to monitor mortality
trends to determine the appropriateness of reserve levels.
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U.S. operations claims and other policy benefits increased 29.3% in the first
quarter of 1998, primarily as a result of increases from new business
production and higher claims experience during such period compared to the
same period in 1997. Claims and other policy benefits as a percentage of net
premiums increased to 80.1% in the first quarter of 1998 from 76.6% in the
same period in 1997. This fluctuation was due to an increase in death claims
as well as reserves established for new blocks of business.
Canadian operations claims and other policy benefits increased 56.8% in the
first quarter of 1998. Claims and other policy benefits as a percentage of
net premiums increased to 92.4% to $23.1 million in the first quarter of 1998
from 78.3% in the same period in 1997. The increase as a percent of premiums
was primarily due to reserves established for new and renewal business.
The claims and other policy benefits of the other international business in
the first quarter of 1998 increased $10.2 million from the same period in the
prior year. This increase was primarily the result of reserve and
policyholder benefit increases on business from Latin American ventures and
blocks of mortality risk reinsurance of $8.4 million. These reserve increases
resulted from new business and the continued growth in the Latin American
single premium immediate annuity business in the first quarter of 1998. The
Asia Pacific operations reflected an increase of $1.6 million resulting
primarily from new business written in Australia.
Accident and health operations claims and other policy benefits increased
60.0% in the first quarter of 1998. The claims and other policy benefits for
the first quarter of 1997 do not include the $18.0 million, or $10.4 million
after-tax, accident and health pool charge taken during the first quarter of
1997, which is separately disclosed on the income statement. As a percentage
of net premiums, claims and other policy benefits decreased to 72.2% in the
first quarter of 1998 from 73.6% in the same period of 1997. The accident
and health operations reserves are subject to volatility due to the nature of
risk covered which is primarily accident risk. Reserves are calculated based
upon current information including industry estimates for certain aviation
accidents. In 1997, the Company made the decision to exit all outside-managed
accident and health pools and cease marketing accident and health business and
to place the operation into run-off.
Interest credited. Consolidated interest credited increased $15.4
million in the first quarter of 1998 to $34.5 million. Interest credited
represents amounts credited on the Company's asset-intensive and universal
life type products. Asset-intensive products include stable value
operations, bank-owned life insurance and annuity products. These products
are primarily written in the U.S. operations, while the Canadian operations
have a small annuity block of business and the Latin American operations have
a direct universal life product developing in Argentina. The increase in
interest credited was primarily a result of an increase of approximately
$185.0 million in deposits related to asset-intensive reinsurance for the
first quarter of 1998 compared to the same period in 1997.
Policy Acquisition Costs and Other Insurance Expenses. Consolidated
policy acquisition costs and other insurance expenses, consisting primarily
of allowances, increased 16.0%, to $46.9 million in the first quarter of
1998. As a percentage of net premiums, consolidated policy
16
17
acquisition costs and other insurance expenses decreased to 17.4% in the first
quarter of 1998 from 19.7% during the same period in 1997. This resulted from
a change in business mix from coinsurance to yearly renewable term reinsurance
and the addition of larger blocks of Canadian business at the end of 1997 that
do not have significant commission costs associated with the business. Overall,
policy acquisition costs and other insurance expenses continue to fluctuate
with business volume and changes in product mix from period to period.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums for the U.S. operations decreased to 16.8% in the first quarter of
1998 from 19.2% during the same period in 1997. Within the U.S. operations,
policy acquisition costs and other insurance expenses as a percentage of net
premiums for traditional business decreased to 14.5% in the first quarter of
1998 from 16.6% during the same period in 1997. This was due primarily to
new business added during 1998 which was primarily yearly renewable term
products which do not have a high level of commissions associated with the
premiums. The financial reinsurance business within the U.S. operations
reflects fees of approximately $3.1 million paid to retrocessionaires during
1998, which represented a partial offset to the fees collected that were
reflected as other revenues.
In the Canadian operations, policy acquisition costs and other insurance
expenses as a percentage of net premiums decreased to 11.4% in the first
quarter of 1998, from 16.8% during the same period in 1997. The decrease was
primarily due to the large blocks of business added at the end of 1997 that
do not have significant commission costs associated with the business. In
addition, there was more reinsurance of yearly renewable term products during
the second half of 1997 and first quarter of 1998 compared to the first
quarter of 1997. This shift in reinsurance method resulted in fewer
commissions as a percent of net premiums for the first quarter of 1998
compared to the first quarter of 1997.
Other international operations policy acquisition cost and other insurance
expenses as a percentage of net premiums increased to 16.7% in the first
quarter of 1998 from 14.8% during the same period in 1997. These percentages
fluctuate due to the timing of client company reporting and variations in the
mixture of business being written within the Latin American and Asia Pacific
operations. In addition, the financial reinsurance business within the Asia
Pacific operations reflects fees of approximately $0.6 million paid to
retrocessionaires during the first quarter of 1998, which represented a
partial offset to the fees collected that were reflected as other revenues.
Accident and health segment policy acquisition costs and other insurance
expenses as a percentage of net premiums decreased to 27.5% in the first
quarter of 1998 from 34.9% during the same period in 1997. The decrease will
fluctuate resulting from changes in the mixture of business within the
accident and health operations.
Other Operating Expenses. Consolidated other operating expenses
increased $4.9 million in the first quarter of 1998. The overall increase in
operating expenses was attributed to planned increases associated with the
ongoing growth of the Company, of which other
17
18
international operations operating expenses comprised $1.8 million of the
increase in the first quarter of 1998.
Interest Expense. Consolidated interest expense during the first
quarter of 1998 related to the 7 1/4% Senior Notes issued in 1996 and the
financing of a portion of the Company's Australian reinsurance operations,
RGA Australian Holdings Pty Limited ("Australian Holdings") and interest paid
on an operating line of credit. Interest cost for the first quarter of 1998
and the first quarter of 1997 was $2.0 million and $1.9 million,
respectively. Interest related to the Senior Notes was $1.9 million in the
first quarter of 1998 and $1.8 million in the first quarter of 1997.
Provision for Income Taxes. Consolidated income tax expense increased
$8.8 million in the first quarter of 1998 as a result of higher pre-tax
income. Income tax expense from operations before realized investment
gains/(losses) and accident and health pool charge represented approximately
35.7% and 36.3% of pre-tax income for the first quarters of 1998 and 1997,
respectively. The Company calculated a tax benefit of $7.6 million on the
$18.0 million accident and health reserve adjustment recorded in the first
quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, the Company generated $19.9 million
in cash from operating activities and $311.0 million from deposits related to
asset-intensive business. These increases were offset by cash used for
investing of $328.1 million and dividends to stockholders of $1.5 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. Funds are primarily applied to policy claims and
benefits, operating expenses, income taxes, and investment purchases.
As RGA continues its expansion efforts, management continually analyzes
capital adequacy issues. RGA filed a registration statement with the
Securities and Exchange Commission on May 4, 1998 to facilitate an
underwritten public offering of a new class of non-voting common stock to
raise gross proceeds of approximately $275 million (exclusive of a 15%
over-allotment option). The new class of non-voting common stock is
anticipated to be authorized at RGA's annual stockholders' meeting on May 27,
1998. The Company's intention is to use the net proceeds for general corporate
purposes. Any such offering would be made only by means of a prospectus, and
would be subject to the registration statement becoming effective, compliance
with applicable state securities laws and favorable market conditions. This
report does not constitute an offer to sell, or a solicitation of an offer to
buy any shares of non-voting common stock.
The Company has access to a $25.0 million line of credit. During the
first quarter of 1998, $10.0 million was drawn upon that line. This
liability is included in other liabilities on the balance sheet at March 31,
1998. The ability of RGA and Australian Holdings 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, the
investment earnings on the undeployed debt
18
19
proceeds, and the Company's ability to raise additional capital. 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.
INVESTMENTS
Invested assets increased 9.3%, to $4.0 billion at March 31, 1998,
compared to $3.6 billion at December 31, 1997. The increase resulted from
cash deposits for stable value products of $0.2 billion for the first quarter
of 1998 and positive operating cash flows. These increases were enhanced by
an increase in the fair value adjustment of fixed maturities available for
sale of $10.0 million. The Company has historically generated positive cash
flows from operations, and expects to do so in the future.
At March 31, 1998, the Company's portfolio of fixed maturity securities
available for sale had net unrealized gains before tax of $122.0 million.
CAUTIONARY STATEMENT
Certain statements contained in this filing are or may be deemed to be
"forward-looking statements" under the Private Securities Litigation Reform
Act of 1995. Such statements include, but are not limited to, statements
relating to the Company's financial position, growth prospects and targets,
industry trends, trends in or expectations regarding operations and capital
commitments, the sufficiency of claims reserves, and estimated premium
declines in the accident and health operations. Because such statements are
based on management's current views and assumptions, they are subject to
risks and uncertainties.
Numerous factors could cause actual results and events to differ
materially from those expressed or implied by forward-looking statements (the
"Cautionary Statements"), including, without limitation, (i) general economic
conditions affecting the demand for insurance and reinsurance in the
Company's current and planned markets, (ii) material changes in mortality and
claims experience, (iii) competitive factors and competitors' responses to
the Company's initiatives, (iv) successful execution of the Company's entry
into new markets, (v) successful development and introduction of new
products, (vi) the stability of governments and economies in foreign markets,
(vii) fluctuations in U.S. and foreign interest rates and securities and real
estate markets, (viii) the success of the Company's clients, including
General American and its affiliates, and (ix) changes in laws, regulations,
and accounting standards applicable to the Company and its subsidiaries.
Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the Cautionary
Statements.
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20
Readers are therefore cautioned not to place undue reliance on
such forward-looking statements.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 1
- ------
LEGAL PROCEEDINGS
- -----------------
From time to time, the Company is subject to litigation and arbitration
related to its reinsurance business and to employment-related matters in the
normal course of its business. Management does not believe that the Company
is a party to any such pending litigation or arbitration that would have a
material adverse effect on its 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, 1998.
20
21
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 5/6/98
------------------------------------
A. Greig Woodring
President & Chief Executive Officer
/s/ Jack B. Lay 5/6/98
------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
21
22
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
22
7
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
2,941,290
0
0
11,461
185,370
0
3,973,607
39,327
341,432
311,247
5,074,857
3,604,765
0
389,258
0
106,991
0
0
261
520,805
5,074,857
269,978
63,679
922
6,554
251,808
18,033
28,901
24,902
8,840
16,062
0
0
0
15,909
0.63
0.62
0
0
0
0
0
0
0
