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 SEPTEMBER 30, 2001
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)
1370 TIMBERLAKE MANOR PARKWAY
CHESTERFIELD, MISSOURI 63017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(636) 736-7439
(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 OCTOBER 31, 2001:
49,474,993 SHARES.
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I - FINANCIAL INFORMATION
1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2001 and December 31, 2000 3
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2001 and 2000 5
Notes to Unaudited Condensed Consolidated Financial
Statements (Unaudited) 6
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
3 Qualitative and Quantitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
1 Legal Proceedings 22
6 Exhibits and Reports on Form 8-K 22
Signatures 23
Index to Exhibits 24
2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
----------------- ---------------
(Dollars in thousands)
ASSETS
Fixed maturity securities:
Available-for-sale at fair value (amortized cost of $2,711,742 and
$2,753,521 at September 30, 2001 and December 31, 2000, respectively) $ 2,677,812 $ 2,692,840
Mortgage loans on real estate 155,676 128,111
Policy loans 716,041 706,877
Funds withheld at interest 1,078,084 938,362
Short-term investments 54,495 68,735
Other invested assets 65,524 25,233
------------- ------------
Total investments 4,747,632 4,560,158
Cash and cash equivalents 183,515 70,797
Accrued investment income 72,792 37,555
Premiums receivable 185,422 226,365
Reinsurance ceded receivables 344,966 296,368
Deferred policy acquisition costs 758,313 621,475
Other reinsurance balances 177,323 202,158
Other assets 35,461 46,984
------------- ------------
Total assets $ 6,505,424 $ 6,061,860
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 2,043,808 $ 1,933,508
Interest sensitive contract liabilities 2,258,269 2,128,743
Other policy claims and benefits 660,320 555,423
Other reinsurance balances 57,227 69,343
Deferred income taxes 179,097 170,905
Other liabilities 69,940 68,758
Long-term debt 318,246 272,257
------------- ------------
Total liabilities 5,586,907 5,198,937
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; 75,000,000 shares authorized,
51,053,273 shares issued at September 30, 2001 and December 31, 2000,
respectively) 511 511
Additional paid-in capital 612,807 611,349
Retained earnings 400,412 348,158
Accumulated other comprehensive income:
Accumulated currency translation adjustment, net of income taxes (29,622) (15,867)
Unrealized depreciation of securities, net of income taxes (28,258) (42,004)
------------- ------------
Total stockholders' equity before treasury stock 955,850 902,147
Less treasury shares held of 1,578,280 and 1,759,715 at cost at
September 30, 2001 and December 31, 2000, respectively (37,333) (39,224)
------------- ------------
Total stockholders' equity 918,517 862,923
------------- ------------
Total liabilities and stockholders' equity $ 6,505,424 $ 6,061,860
============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------------- --------------------------------
2001 2000 2001 2000
------------- ------------- --------------- --------------
(Dollars in thousands, except per share data)
REVENUES:
Net premiums $ 387,825 $ 316,116 $ 1,179,746 $ 991,059
Investment income, net of related expenses 90,693 82,118 251,058 238,420
Realized investment losses, net (26,324) (2,821) (35,356) (18,345)
Other revenues 5,922 6,949 21,850 12,637
----------- ----------- ------------- ------------
Total revenues 458,116 402,362 1,417,298 1,223,771
BENEFITS AND EXPENSES:
Claims and other policy benefits 314,882 242,921 954,652 776,326
Interest credited 32,639 26,087 79,590 74,562
Policy acquisition costs and other insurance expenses 70,672 57,595 203,947 171,257
Other operating expenses 22,802 20,270 66,880 59,782
Interest expense 4,431 5,108 13,719 12,417
----------- ----------- ------------- ------------
Total benefits and expenses 445,426 351,981 1,318,788 1,094,344
----------- ----------- ------------- ------------
Income before income taxes 12,690 50,381 98,510 129,427
Provision for income taxes 3,705 19,011 37,369 52,743
----------- ----------- ------------- ------------
Income from continuing operations 8,985 31,370 61,141 76,684
Discontinued operations:
Loss from discontinued accident and health operation
net of taxes - (2,261) - (8,249)
----------- ----------- ------------- ------------
Net income $ 8,985 $ 29,109 $ 61,141 $ 68,435
=========== =========== ============= ============
Earnings per share from continuing operations:
Basic earnings per share $ 0.18 $ 0.64 $ 1.24 $ 1.55
=========== =========== ============= ============
Diluted earnings per share $ 0.18 $ 0.63 $ 1.22 $ 1.53
=========== =========== ============= ============
Earnings per share from net income: $
Basic earnings per share 0.18 $ 0.59 $ 1.24 $ 1.38
=========== =========== ============= ============
Diluted earnings per share $ 0.18 $ 0.59 $ 1.22 $ 1.37
=========== =========== ============= ============
See accompanying notes to unaudited condensed consolidated financial statements.
4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
------------------------------
2001 2000
-------------- --------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 61,141 $ 68,435
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (35,237) (36,522)
Premiums receivable 40,943 64,113
Deferred policy acquisition costs (147,144) (115,859)
Reinsurance ceded balances (48,598) (17,688)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 229,621 119,321
Deferred income taxes 14,815 31,091
Other assets and other liabilities 8,301 (140)
Amortization of net investment discounts, goodwill and other (26,991) (22,340)
Realized investment losses, net 35,356 18,345
Other, net 10,103 (11,454)
----------- ------------
Net cash provided by operating activities 142,310 97,302
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of subsidiaries - 26,509
Sales of investments:
Fixed maturity securities - Available for sale 958,151 439,148
Mortgage loans on real estate - 1,745
Maturities of fixed maturity securities - Available for sale - 13,784
Purchases of fixed maturity securities - Available for sale (951,577) (1,106,216)
Cash invested in:
Mortgage loans on real estate (37,875) (21,951)
Policy loans (9,164) (7,995)
Funds withheld at interest (180,693) (127,086)
Principal payments on mortgage loans on real estate 10,316 4,321
Change in short-term and other invested assets (28,672) 137,870
----------- ------------
Net cash used in investing activities (239,514) (639,871)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (8,887) (8,944)
Borrowings under credit agreements 45,989 78,119
Reissuance (purchase) of treasury stock 1,891 (19,881)
Excess deposits on universal life and other investment
type policies and contracts 170,496 592,520
----------- ------------
Net cash provided by financing activities 209,489 641,814
Effect of exchange rate changes 433 559
----------- ------------
Change in cash and cash equivalents 112,718 99,804
Cash and cash equivalents, beginning of period 70,797 24,316
----------- ------------
Cash and cash equivalents, end of period $ 183,515 $ 124,120
=========== ============
See accompanying notes to unaudited condensed consolidated financial statements.
5
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Reinsurance Group of America, Incorporated ("RGA") and Subsidiaries
(collectively, the "Company") have been prepared in conformity with accounting
principles generally accepted in the United States of America 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 nine-month periods ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 ("Annual Report").
The accompanying unaudited condensed consolidated financial statements include
the accounts of Reinsurance Group of America, Incorporated and its Subsidiaries.
All material intercompany accounts and transactions have been eliminated. The
Company has reclassified the presentation of certain prior period information to
conform to the 2001 presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share from continuing operations (dollars in thousands, except per share
information):
-----------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
-----------------------------------------------------------------------
Earnings:
Income from continuing operations
(numerator for basic and diluted
calculations) $8,985 $31,370 $61,141 $76,684
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 49,446 49,286 49,396 49,625
Equivalent shares from outstanding stock
options 524 434 526 336
-----------------------------------------------------------------------
Denominator for diluted calculation 49,970 49,720 49,922 49,961
Earnings per share:
Basic $0.18 $0.64 $1.24 $1.55
Diluted $0.18 $0.63 $1.22 $1.53
-----------------------------------------------------------------------
The calculation of equivalent shares from outstanding stock options does not
include the impact of options having a strike price that exceeds the average
stock price for the earnings period, as the result would be antidilutive. For
the three and nine month periods ended September 30, 2001, substantially all
outstanding stock options were included in the calculation of common equivalent
shares. For the three and nine months ended September 30, 2000, approximately
0.3 million and 0.4 million, respectively, in outstanding stock options were not
included in the calculation of common equivalent shares. These options were
outstanding at the end of their respective periods.
6
3. COMPREHENSIVE INCOME (LOSS)
The following table reflects the change in accumulated other comprehensive
income (loss) for the three and nine-month periods ended September 30, 2001 and
2000 (dollars in thousands):
-----------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
-----------------------------------------------------------------------
Net income $8,985 $29,109 $ 61,141 $68,435
Accumulated other comprehensive
income (expense):
Unrealized gains on securities 32,097 31,068 13,746 64,418
Foreign currency items (8,789) (4,633) (13,755) (7,386)
-----------------------------------------------------------------------
Comprehensive income $32,293 $55,544 $ 61,132 $125,467
-----------------------------------------------------------------------
4. 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 Annual Report. The
Asia Pacific, Latin America and Other Markets operating segments have been
condensed into one reportable segment, Other International, as allowed by
applicable accounting pronouncements. The Company measures segment performance
based on profit or loss from operations before income taxes. There are no
intersegment transactions and the Company does not have any material long-lived
assets. Investment income is allocated to the segments based upon average assets
and related capital levels deemed appropriate to support the segment business
volumes.
The Company's reportable segments are strategic business units that are
segregated by geographic region. Information related to revenues and income
(loss) before income taxes of the Company's continuing operations are summarized
below (dollars in thousands).
-----------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
-----------------------------------------------------------------------
REVENUES
U.S. $345,462 $294,044 $1,047,792 $897,820
Canada 57,010 55,287 183,622 172,224
Other International 55,682 50,340 184,765 149,319
Corporate (38) 2,691 1,119 4,408
-----------------------------------------------------------------------
Total from continuing operations $458,116 $402,362 $1,417,298 $1,223,771
-----------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
U.S. $30,445 $50,198 $104,574 $129,075
Canada 8,301 4,961 40,444 26,491
Other International (19,016) 489 (24,982) (8,855)
Corporate (7,040) (5,267) (21,526) (17,284)
-----------------------------------------------------------------------
Total from continuing operations $12,690 $50,381 $98,510 $129,427
-----------------------------------------------------------------------
7
Segment assets for Other International increased over 30% from the amounts
disclosed in Note 17 of the 2000 Annual Report. Growth in the Asia Pacific and
Other Markets sub-segments drove the increase. Segment assets of the other
reportable segments have not materially changed.
5. DIVIDENDS
The Board of Directors declared a dividend of six cents per share of common
stock on July 25, 2001. This dividend was paid on August 28, 2001 to
shareholders of record as of August 7, 2001.
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to several arbitrations underway primarily involving its
group medical reinsurance coverages. The Company expects those arbitrations to
be completed during 2001 and 2002. Reserves are established on treaties based
upon estimates of the expected findings of the related arbitration panels. There
are no arbitrations underway as of September 30, 2001, relative to the Company's
portfolio of personal accident business, although such arbitrations could
commence at some point in the future. It is management's opinion that future
developments, if any, will not materially adversely affect the Company's
financial position.
7. NEW ACCOUNTING STANDARDS
In July 2001, the Securities Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 102 - Selected Loan Loss Allowance Methodology and Documentation
Issues ("SAB 102"), expressing certain of the staff's views on the development,
documentation, and application of a systematic methodology as required by
Financial Reporting Release No. 28 for determining allowances for loan and lease
losses in accordance with generally accepted accounting principles. In
particular, the guidance focuses on the documentation the staff normally would
expect registrants to prepare and maintain in support of their allowances for
loan losses. The Company is currently in the process of evaluating the impact,
if any, of SAB 102 on its mortgage loan loss allowance policies and procedures.
Also in July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against these new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. SFAS No. 142 requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. The provisions
of each statement, which apply to goodwill and intangible assets acquired prior
to June 30, 2001, will be adopted by the Company on January 1, 2002. The Company
does not currently expect the adoption of these accounting standards to have a
material impact on the Company's results of operations; however, impairment
reviews subsequent to the initial adoption date may result in future
write-downs.
In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities -- an Amendment of FASB Statement No.
133". This Statement addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133. SFAS No. 133 requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. It also requires that gains or losses resulting from
changes in the values of those derivatives be reported depending on the use of
the derivative and whether it qualifies for hedge accounting. The Company
adopted SFAS No. 138 as of January 1, 2001, resulting in an after-tax loss
included in the first quarter of 2001 of $0.5 million, substantially all of
which related to embedded derivatives on a specific market value annuity
product. The Company has a variety of reasons to use derivative instruments,
such as to attempt to protect the Company against possible changes in the market
value of its investment portfolio as a result of interest rate changes and to
manage the portfolio's effective yield, maturity, and duration. The Company does
not invest in derivatives for speculative purposes. The Company may use both
exchange-traded and customized over-the-counter derivative financial
instruments. The Company's use of derivatives historically has not been
significant to its financial position.
8
In March 1998, the National Association of Insurance Commissioners ("NAIC")
adopted the Codification of Statutory Accounting Principles ("Codification"),
which was effective on January 1, 2001. The purpose of Codification is to
establish a uniform set of accounting rules and regulations (Statements of
Statutory Accounting Principles, "SSAP") for use by insurance companies in
financial report preparation in connection with financial reporting to
regulatory authorities. As of September 30, 2001, the State of Missouri has not
amended its laws and rules to closely mirror SSAP, but the Missouri Department
of Insurance has instructed its domestic insurers to conform to the new codified
SSAP in anticipation of changes to applicable Missouri laws and rules. The
Company adopted Codification pursuant to the new codified SSAP on January 1,
2001, resulting in an increase in the statutory surplus of RGA Reinsurance
Company and its parent, Reinsurance Company of Missouri, of approximately $2.0
million.
8. STOCK REPURCHASE PROGRAM
On September 18, 2001, the Company announced that its board of directors had
approved a repurchase program authorizing the Company to purchase up to $25
million of its shares of stock, as conditions warrant. To date, the Company has
not repurchased any shares under the program.
9. TERRORIST ATTACKS OF SEPTEMBER 11, 2001
The Company's third quarter results include an estimate for its ultimate net
exposure to the terrorist attacks in the United States on September 11, 2001.
The Company believes its only exposure is for individual life claims covered
under various reinsurance contracts with ceding companies. 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 the benefits paid by ceding reinsurance to
other insurance enterprises or reinsurers under excess coverage and coinsurance
contracts. In addition, the Company maintains catastrophe insurance coverage
which provides benefits of up to $100 million per occurrence for claims
involving three or more deaths in a single event. The coverage requires the
Company to pay a $1.5 million deductible in addition to retaining 20 percent of
the first $30 million in claims, per occurrence.
As of September 30, 2001, the Company recorded approximately $16 million,
pre-tax, in individual life claims, net of approximately $10 million in
reinsurance recoverables. The Company believes its reinsurance programs,
including its catastrophe coverage, will limit its net losses to the amount
reflected as of September 30, 2001. However, the Company believes it will take
several more months before all claims are reported. The catastrophe coverage is
placed with highly rated carriers and the Company does not believe that there
are any recoverability issues associated with the claims submitted to
reinsurers. However, no assurance can be given as to the extent of future claims
development or recoverability of any such claims, particularly in light of the
magnitude and unprecedented nature of the terrorist attacks of September 11,
2001.
10. SUBSEQUENT EVENTS
Effective July 1, 2001, the Company stopped renewing any remaining reinsurance
treaties for the privatized pension program in Argentina ("AFJP business"). The
Company is currently evaluating the reserve adequacy on these treaties, however,
it anticipates additional reserves in the range of $25 million to $35 million
may be necessary to absorb additional claims development associated with the
run-off of the treaties. The Company expects to complete its analysis during the
fourth quarter of 2001, at which time it will record any necessary reserve
changes. The Company is no longer writing AFJP business. Subsequent to the end
of the third quarter, the Company also sold substantially all remaining
Argentine-based bond investments in the Argentine investment portfolio backing
the AFJP business, resulting in a $4.2 million pre-tax capital loss that was
recorded in the fourth quarter of 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and Other Markets,
which includes Europe and South Africa. The Asia Pacific, Latin America, and
Other Markets operational segments are presented herein as one reportable
segment, Other International, as allowed by applicable accounting
pronouncements. The U.S. operations provide traditional and non-traditional life
reinsurance to domestic clients. Non-traditional business includes
asset-intensive and financial reinsurance. Asset-intensive products primarily
include reinsurance of corporate-owned life insurance and annuities. The
Canadian operations provide insurers with traditional reinsurance as well as
assistance with capital management activity. Other International operations
primarily provide traditional and non-traditional life reinsurance, privatized
pension plan reinsurance and reinsurance of critical illness risks in Asia
Pacific, Latin America, and other markets being developed by the Company. The
operational segment results do not include the corporate investment activity,
general corporate expenses, interest expense of RGA, or the provision for income
tax expense (benefit). In addition, the Company's discontinued accident and
health operations are not reflected in the continuing operations of the Company.
The Company measures segment performance based on profit or loss from operations
before income taxes.
Consolidated income from continuing operations before income taxes for the third
quarter and first nine months of 2001 decreased $37.7 million and $30.9 million,
respectively, as compared to the prior year. After tax diluted earnings per
share from continuing operations were $0.18 and $1.22 for the third quarter and
first nine months of 2001, respectively, compared to $0.63 and $1.53 for the
prior-year periods. The decrease in pre-tax earnings for the third quarter and
first nine months was primarily attributable to $26.3 million and $35.4 million
in realized investment losses, respectively, and higher death claims of
approximately $16.1 million related to the terrorist attacks of September 11,
2001. The first nine months of 2001 were also affected by higher than expected
death claims in the first quarter.
Investment income and realized investment gains and losses are allocated to the
various operating segments based on average assets and related capital levels
deemed appropriate to support the segment business volumes. Investment
performance varies with the composition of investments and the relative
allocation of capital to operating segments.
Further discussion and analysis of the results for 2001 compared to 2000 are
presented by segment.
10
U.S. OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2001
-----------------------------------------------------------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
-----------------------------------------------------------------
REVENUES:
Net premiums $ 279,239 $ 739 $ - $ 279,978
Investment income, net of related expenses 38,251 27,990 68 66,309
Realized investment gains (losses), net (6,113) 956 - (5,157)
Other revenues 283 350 3,699 4,332
-----------------------------------------------------------------
Total revenues 311,660 30,035 3,767 345,462
BENEFITS AND EXPENSES:
Claims and other policy benefits 227,643 227 - 227,870
Interest credited 12,632 19,511 - 32,143
Policy acquisition costs and other insurance
expenses 38,820 5,464 479 44,763
Other operating expenses 7,922 284 2,035 10,241
-----------------------------------------------------------------
Total benefits and expenses 287,017 25,486 2,514 315,017
Income before income taxes $ 24,643 $ 4,549 $ 1,253 $ 30,445
-----------------------------------------------------------------
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 2000
-----------------------------------------------------------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
-----------------------------------------------------------------
REVENUES:
Net premiums $ 230,921 $ 522 $ - $ 231,443
Investment income, net of related expenses 31,832 27,602 60 59,494
Realized investment gains (losses), net (1,304) (579) - (1,883)
Other revenues 698 (198) 4,490 4,990
-----------------------------------------------------------------
Total revenues 262,147 27,347 4,550 294,044
BENEFITS AND EXPENSES:
Claims and other policy benefits 166,564 2,176 - 168,740
Interest credited 11,898 14,696 - 26,594
Policy acquisition costs and other insurance
expenses 32,183 6,966 1,539 40,688
Other operating expenses 6,489 237 1,098 7,824
-----------------------------------------------------------------
Total benefits and expenses 217,134 24,075 2,637 243,846
Income before income taxes $ 45,013 $ 3,272 $ 1,913 $ 50,198
-----------------------------------------------------------------
11
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
--------------------------------------------------------------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
--------------------------------------------------------------------
REVENUES:
Net premiums $ 864,105 $ 2,127 $ - $ 866,232
Investment income, net of related expenses 112,334 64,698 462 177,494
Realized investment gains (losses), net (16,460) 1,802 - (14,658)
Other revenues 787 1,720 16,217 18,724
--------------------------------------------------------------------
Total revenues 960,766 70,347 16,679 1,047,792
BENEFITS AND EXPENSES:
Claims and other policy benefits 691,184 4,095 - 695,279
Interest credited 37,890 40,256 - 78,146
Policy acquisition costs and other insurance
expenses 121,971 13,486 5,744 141,201
Other operating expenses 21,826 567 6,199 28,592
--------------------------------------------------------------------
Total benefits and expenses 872,871 58,404 11,943 943,218
Income before income taxes $ 87,895 $ 11,943 $ 4,736 $ 104,574
--------------------------------------------------------------------
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 2000
--------------------------------------------------------------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
--------------------------------------------------------------------
REVENUES:
Net premiums $ 727,449 $ 1,566 $ - $ 729,015
Investment income, net of related expenses 102,273 64,302 60 166,635
Realized investment gains (losses), net (5,718) (664) - (6,382)
Other revenues 621 201 7,730 8,552
--------------------------------------------------------------------
Total revenues 824,625 65,405 7,790 897,820
BENEFITS AND EXPENSES:
Claims and other policy benefits 549,921 2,918 - 552,839
Interest credited 34,803 37,760 - 72,563
Policy acquisition costs and other insurance
expenses 102,498 16,765 3,500 122,763
Other operating expenses 18,931 514 1,135 20,580
--------------------------------------------------------------------
Total benefits and expenses 706,153 57,957 4,635 768,745
Income before income taxes $ 118,472 $ 7,448 $ 3,155 $ 129,075
--------------------------------------------------------------------
During the third quarter and first nine months of 2001, income before income
taxes for U.S. operations totaled $30.4 million and $104.6 million,
respectively, a 39.4% and 19.0% decrease from the comparable prior periods. The
decrease in income for the first nine months of 2001 can primarily be attributed
to poor claim experience incurred in the first quarter of 2001 and the claims
arising from the terrorist attacks of September 11, 2001. The traditional
reinsurance sub-segment was primarily affected by these events. The level of
death claims may fluctuate from period to period, but is expected to remain
fairly constant over the long term. We do not believe the first-quarter claim
results indicated a systemic pricing or profitability problem on our underlying
business. The decrease in income before income taxes during the third quarter of
2001 compared to the prior-year period is due to lower than expected death
claims in the traditional sub-segment in the prior-year coupled with death
claims associated with the terrorist attacks of September 11 in the current
period. The Company believes its reinsurance programs, including its
12
catastrophe coverage will limit its net losses to the amount reflected as of
September 30, 2001. However, the Company believes it will take several more
months before all claims are reported. The Company's catastrophe coverage is
placed with highly rated carriers and management does not believe there are any
recoverability issues associated with the claims submitted to reinsurers.
However, no assurance can be given as to the extent of future claims development
or recoverability of any such claims, particularly in light of the magnitude and
unprecedented nature of the terrorist attacks of September 11, 2001. Net premium
growth continued for the U.S. operations segment with a 21.0% and 18.8% increase
for the third quarter and first nine months of 2001 compared to the same periods
last year. The increase is attributed to the continued growth of the Company's
traditional business.
Traditional Reinsurance
The U.S. traditional reinsurance sub-segment is the oldest and largest
sub-segment of the Company. This sub-segment provides life reinsurance to
domestic clients for a variety of life products through yearly renewable term
agreements, coinsurance, and modified coinsurance arrangements. These
reinsurance arrangements may be either facultative or automatic agreements.
During the first nine months of 2001, production totaled $71.4 billion compared
to $82.6 billion for the same period in 2000. Production levels are
significantly influenced by large transactions and reporting practices of ceding
companies and, therefore, can fluctuate from period to period. Management
believes industry consolidation, and the trend towards reinsuring mortality
risks should continue to provide reinsurance opportunities, although the level
of future production is uncertain.
Income before income taxes for U.S. traditional reinsurance decreased 45.3% and
25.8% for the third quarter and nine months ended 2001, respectively. The
decrease in income was primarily due to higher than expected death claims during
the first quarter, the terrorist attacks of September 11, 2001, and realized
investment losses of $6.1 million and $16.5 million associated with investment
security sales and investment write-downs during the third quarter and first
nine months of 2001, respectively.
Net premiums for U.S. traditional reinsurance increased 20.9% and 18.8% in the
third quarter and first nine months of 2001, respectively. New premiums from
facultative and automatic treaties and renewal premiums on existing blocks of
business all contributed to continued growth.
Net investment income increased 20.2% and 9.8% in the third quarter and for the
first nine months of 2001, respectively. The increase was due to the growth in
the invested asset base, primarily due to increased operating cash flows on
traditional reinsurance, which was partially offset by the lower yields as a
result of the general decline in interest rates.
The amount of claims and other policy benefits increased 36.7% and 25.7% in the
third quarter and first nine months of 2001, respectively. Claims and other
policy benefits, as a percentage of net premiums, were 81.5% and 80.0% in the
third quarter and first nine months of 2001, respectively, compared to 72.1% and
75.6% in prior-year periods. The loss ratio when adjusted for the claims related
to the terrorist attacks of September 11, 2001 is reduced to 75.8% and 78.1% for
the third quarter and first nine months of 2001, respectively. Prior-year
percentages reflected a lower level of claims than expected for the third
quarter. Mortality results (death claims) during the first quarter of 2001
exceeded management expectations, primarily related to several treaties that
have been on the books for several years. Mortality may fluctuate somewhat from
period to period, but is expected to remain fairly constant over the long term.
Interest credited relates to amounts credited on the Company's cash value
products in this sub-segment, which have a significant mortality component. The
increase in the third quarter and first nine months of 2001 as compared to 2000
was primarily due to increased deposits. This amount fluctuates with the changes
in deposit levels, cash surrender values and interest crediting rates.
As a percentage of net premiums, policy acquisition costs and other insurance
expenses were 13.9% and 14.1% for the third quarter and first nine months of
2001, respectively, compared to 13.9% and 14.1% in the prior-year periods. The
percentages may fluctuate from period to period due to changes in the mix of
business.
13
Other operating expenses for the third quarter and first nine months of 2001
remained relatively constant as a percentage of net premiums.
Asset-Intensive Reinsurance
The U.S. asset-intensive reinsurance sub-segment includes the reinsurance of
annuities and corporate-owned life insurance.
Income before income taxes increased in the third quarter and first nine months
of 2001 to $4.5 million and $11.9 million, respectively, a 39.0% and 60.4%
increase compared to the same periods last year. Total revenues, which is
comprised primarily of investment income and realized investment gains (losses)
increased 9.8% and 7.6% for the third quarter and the first nine months of 2001,
respectively. Contributing to this growth was a new coinsurance agreement of
single premium deferred annuities, executed during the third quarter, with
assets of approximately $150 million as of September 30, 2001. The growth in
revenue is offset, in part, by the growth in claims and other policy benefits,
interest credited, and policy acquisition costs and other insurance expenses.
Net premiums reported in this sub-segment relate to a yearly renewable term
treaty that reinsures the mortality risk of a corporate-owned life insurance
product. Policy acquisition costs and other insurance expenses relate primarily
to the commission payments and premium taxes (if applicable) on deposits
received.
Financial Reinsurance
The U.S. financial reinsurance sub-segment includes net fees earned on financial
reinsurance agreements and the Company's investment in RGA Financial Group,
L.L.C. ("RGA Financial Group"). Effective July 1, 2000, the Company increased
its ownership of RGA Financial Group from 40% to 80%. The Company acquired the
remaining 20% interest during the fourth quarter of 2000. The majority of the
financial reinsurance transactions assumed by the Company are retroceded to
other insurance companies. Financial reinsurance agreements represent low risk
mortality business that the Company assumes and subsequently retrocedes with a
net fee earned on the transaction. The fees earned from the assumption of the
financial reinsurance contracts are reflected in other revenues, and the fees
paid to retrocessionaires are reflected in policy acquisition costs and other
insurance expenses.
Income before income taxes in the third quarter and in the first nine months of
2001 was $1.3 million and $4.7 million, respectively, as compared to $1.9
million and $3.2 million for the prior-year periods. The decrease in income for
the quarter is attributed to an increase in the amortization of intangibles
associated with the acquisition of RGA Financial Group. The increase in income
for the first nine months of 2001 is attributed to the increased ownership
position in RGA Financial Group.
14
CANADA OPERATIONS (dollars in thousands)
-----------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
-----------------------------------------------------------------------
REVENUES:
Net premiums $39,975 $39,683 $126,689 $126,856
Investment income, net of related
expenses 17,442 15,325 48,739 45,609
Realized investment gains (losses), net (501) (163) 8,015 (810)
Other revenues 94 442 179 569
-----------------------------------------------------------------------
Total revenues 57,010 55,287 183,622 172,224
BENEFITS AND EXPENSES:
Claims and other policy benefits 43,164 44,822 126,259 124,787
Interest credited 69 141 248 635
Policy acquisition costs and other
insurance expenses 3,309 3,316 10,163 14,096
Other operating expenses 2,167 2,047 6,508 6,215
-----------------------------------------------------------------------
Total benefits and expenses 48,709 50,326 143,178 145,733
Income before income taxes $8,301 $4,961 $40,444 $26,491
-----------------------------------------------------------------------
Income before income taxes increased 67.3% and 52.7% in the third quarter and
first nine months of 2001, respectively. Excluding realized investment gains
(losses), income before income taxes increased 71.8% and 18.8% in the third
quarter and first nine months of 2001, respectively. The increase in the third
quarter and first nine months of 2001 is in line with management expectations
and is primarily the result of unfavorable mortality in the prior-year, offset
by the effects of changes in the foreign exchange rates during 2001 compared to
2000. Weakness in the Canadian dollar during 2001 adversely affected the
reported income before income taxes by $0.2 million, or 2.6%, and $1.6 million,
or 3.9%, in the third quarter and the first nine months, respectively.
Net premiums remained relatively flat in the third quarter and first nine months
of 2001. In local currency, premiums increased 4.5% and 4.2% in the third
quarter and the first nine months of 2001, respectively. Premium levels are
significantly influenced by large transactions and reporting practices of ceding
companies and therefore can fluctuate from period to period. In addition, the
decline in the strength of the Canadian dollar had an adverse effect on the
amount of net premiums reported of $1.7 million or 4.0% and $5.8 million or 4.3%
in the third quarter and the first nine months, respectively.
Net investment income increased 13.8% and 6.9% in the third quarter and first
nine months of 2001, respectively, due to an increase in the invested asset
base, offset by the effects of the change in the foreign exchange rate of $0.6
million or 3.4% and $2.0 million or 3.9% in the respective periods. The invested
asset base growth is due to operating cash flows on traditional reinsurance,
proceeds from capital contributions made to the segment, and interest on the
growth of funds withheld at interest.
Claims and other policy benefits as a percentage of net premiums were 108.0% and
99.7% in the third quarter and first nine months of 2001, respectively, compared
to 113.0% and 98.4% in the prior-year periods. These percentages for the third
quarter and first nine months of 2001 are in line with management's expectations
in light of the premium level. For the first nine months of 2001, mortality was
consistent with management expectations. Mortality may fluctuate somewhat from
period to period, but is expected to remain fairly constant over the long term.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums totaled 8.3% and 8.0% in the third quarter and first nine months of
2001, respectively, compared to 8.4% and 11.1% in the prior-year periods.
15
The decrease in the first nine months of 2001 is primarily due to the mix of
business processed as the general mix of business shifted towards yearly
renewable term from coinsurance agreements. These yearly renewable term
agreements tend to have lower commission costs than coinsurance agreements.
OTHER INTERNATIONAL OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2001
-------------------------------------------------------------
TOTAL
LATIN OTHER OTHER
ASIA PACIFIC AMERICA MARKETS INTERNATIONAL
-------------------------------------------------------------
REVENUES:
Net premiums $30,953 $ 9,072 $27,847 $ 67,872
Investment income, net of related expenses 998 3,256 (141) 4,113
Realized investment gains (losses), net (67) (17,700) (31) (17,798)
Other revenues 892 118 485 1,495
-------------------------------------------------------------
Total revenues 32,776 (5,254) 28,160 55,682
BENEFITS AND EXPENSES:
Claims and other policy benefits 17,489 10,639 15,720 43,848
Interest credited - 427 - 427
Policy acquisition costs and other insurance
expenses 11,473 2,671 8,455 22,599
Other operating expenses 2,821 2,120 2,483 7,424
Interest expense 219 - 181 400
-------------------------------------------------------------
Total benefits and expenses 32,002 15,857 26,839 74,698
Income (loss) before income taxes $ 774 $(21,111) $ 1,321 $(19,016)
-------------------------------------------------------------
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------
TOTAL
LATIN OTHER OTHER
ASIA PACIFIC AMERICA MARKETS INTERNATIONAL
--------------------------------------------------------------
REVENUES:
Net premiums $25,181 $11,623 $ 8,186 $44,990
Investment income, net of related expenses 1,422 1,881 619 3,922
Realized investment gains (losses), net (25) (42) 121 54
Other revenues 518 162 694 1,374
--------------------------------------------------------------
Total revenues 27,096 13,624 9,620 50,340
BENEFITS AND EXPENSES:
Claims and other policy benefits 13,313 10,572 5,474 29,359
Interest credited - (648) - (648)
Policy acquisition costs and other insurance
expenses 9,532 856 3,203 13,591
Other operating expenses 2,356 2,317 2,315 6,988
Interest expense 255 - 306 561
--------------------------------------------------------------
Total benefits and expenses 25,456 13,097 11,298 49,851
Income (loss) before income taxes $ 1,640 $ 527 $(1,678) $489
--------------------------------------------------------------
16
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001
--------------------------------------------------------------
TOTAL
LATIN OTHER OTHER
ASIA PACIFIC AMERICA MARKETS INTERNATIONAL
--------------------------------------------------------------
REVENUES:
Net premiums $85,774 $41,567 $59,484 $186,825
Investment income, net of related expenses 3,279 10,992 1,110 15,381
Realized investment gains (losses), net 76 (20,568) (61) (20,553)
Other revenues 2,234 297 581 3,112
--------------------------------------------------------------
Total revenues 91,363 32,288 61,114 184,765
BENEFITS AND EXPENSES:
Claims and other policy benefits 54,252 42,760 36,102 133,114
Interest credited - 1,196 - 1,196
Policy acquisition costs and other insurance
expenses 26,350 8,777 17,455 52,582
Other operating expenses 7,989 6,341 7,371 21,701
Interest expense 683 - 471 1,154
--------------------------------------------------------------
Total benefits and expenses 89,274 59,074 61,399 209,747
Income (loss) before income taxes $ 2,089 $(26,786) $(285) $ (24,982)
--------------------------------------------------------------
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------
TOTAL
LATIN OTHER OTHER
ASIA PACIFIC AMERICA MARKETS INTERNATIONAL
--------------------------------------------------------------
REVENUES:
Net premiums $66,384 $49,885 $18,919 $135,188
Investment income, net of related expenses 3,473 14,505 1,310 19,288
Realized investment gains (losses), net (6) (8,960) 439 (8,527)
Other revenues 1,259 315 1,796 3,370
--------------------------------------------------------------
Total revenues 71,110 55,745 22,464 149,319
BENEFITS AND EXPENSES:
Claims and other policy benefits 37,951 47,646 13,103 98,700
Interest credited - 1,364 - 1,364
Policy acquisition costs and other insurance
expenses 24,200 4,721 5,477 34,398
Other operating expenses 7,110 8,652 7,092 22,854
Interest expense 552 - 306 858
--------------------------------------------------------------
Total benefits and expenses 69,813 62,383 25,978 158,174
Income (loss) before income taxes $1,297 $(6,638) $(3,514) $(8,855)
--------------------------------------------------------------
Loss before income taxes for the other international segment totaled $19.0
million and $25.0 million for the third quarter and first nine months of 2001,
respectively, compared to income of $0.5 million and loss of $8.9 million for
the comparable prior-year periods. The results for the third quarter and first
nine months of 2001 are primarily attributable to poor performance in Argentina,
part of the Latin America sub-segment. The poor performance relates to higher
than expected claims for privatized pension reinsurance in the first and third
quarters. Privatized pension reinsurance covers the life insurance as well as
the total and permanent disability components of the pension program. The claims
under that program are indexed to the underlying pension fund performance at the
point at which they are filed. As such, ultimate amounts of claims paid by the
reinsurer under the program vary with the
17
underlying fund performance of the related pension fund over the period in which
the claims are adjudicated. In addition, the reinsurer is subject to the
mortality and morbidity risks associated with the underlying plan participants.
The Company also experienced realized investment losses related to investment
security sales in the Argentine investment portfolio. During the third quarter,
a significant amount of Argentine based bond investments were sold to reduce the
Company's exposure to the volatile Argentine economy. Those sales resulted in a
$17.7 million pre-tax realized investment loss. Subsequent to September 30,
2001, the Company sold substantially all remaining Argentine based bond
investments supporting the privatized pension reinsurance, resulting in a
pre-tax realized investment loss of $4.2 million. During 2000, the Latin America
results included activity for the Chilean subsidiaries that were sold during the
second quarter of 2000 (the "Chilean Sale").
Net premiums increased 50.9% and 38.2% during the third quarter and first nine
months of 2001, respectively. The increase was primarily the result of renewal
premiums from existing blocks of business, new business premiums from
facultative and automatic treaties, and premium flows from larger blocks of
business in the Other Markets and Asia Pacific sub-segments. Other Markets also
experienced an increase in premiums associated with the reinsurance of critical
illness coverage, primarily in the UK. This coverage provides a benefit in the
event of a death from or the diagnosis of a defined critical illness. Premiums
associated with this coverage totaled $9.6 million and $18.1 million,
respectively, for the three months and nine months ended September 30, 2001,
compared with $0.3 million and $1.0 million for the same periods in 2000. The
Asia Pacific sub-segment also provides reinsurance of critical illness
coverages. Asia Pacific premiums associated with this coverage totaled $2.2
million and $6.7 million, respectively, for the three months and nine months
ended September 30, 2001, compared with $2.5 million and $7.9 million for the
same periods in 2000. The increases were partially offset by a decrease in
privatized pension business in Argentina and the decrease in premiums related to
the Chilean Sale. Premium levels are significantly influenced by large
transactions and reporting practices of ceding companies and therefore can
fluctuate from period to period.
Net investment income increased 4.9% and decreased 20.3% in the third quarter
and first nine months of 2001, respectively, compared to prior-year periods. The
increase during the third quarter was primarily due to higher crediting rates on
the underlying Argentine investment portfolio, substantially all of which has
been sold. The decrease in the first nine months was primarily due to a decrease
in the Latin America invested asset base from the Chilean Sale. Investment
income and realized investment gains and losses are allocated to the various
operating segments based on average assets and related capital levels deemed
appropriate to support the segment business volumes. Investment performance
varies with the composition of investments and the relative allocation of
capital to operating segments.
The amount of claims and other policy benefits increased 49.4% and 34.9% in the
third quarter and first nine months of 2001, respectively, due primarily to
increased business volume. Claims and other policy benefits, as a percentage of
net premiums, were 64.6% and 71.3%, in the third quarter and first nine months
of 2001, respectively, compared to 65.3% and 73.0% in the comparable prior-year
periods. The decrease as a percentage of premiums is primarily due to the Other
Markets sub-segment, whose year-to-year comparisons of premiums and claims and
other policy benefits are not considered meaningful due to the start-up nature
of this sub-segment. Mortality may fluctuate somewhat from period to period, but
is expected to remain fairly constant over the long term. The Company monitors
mortality trends to evaluate the appropriateness of reserve levels and adjusts
the reserve levels on a periodic basis. The Company ceased renewal of
reinsurance treaties associated with privatized pension contracts in Argentina
because of adverse experience on this business, as several aspects of the
pension fund claims flow are not developing as was contemplated when the
reinsurance programs were initially priced, and to focus on other traditional
reinsurance opportunities in the region. Although premiums will continue to
decline, it is estimated that claims for the privatized pension business will
continue to be paid over the next several years. The Company is currently
evaluating the reserve adequacy on these treaties, however, it anticipates
additional reserves in the range of $25 million to $35 million may be necessary
to absorb additional claims development associated with the run-off of the
treaties. The Company expects to complete its analysis during the fourth quarter
of 2001, at which time it will record any necessary reserve changes. Policy
acquisition costs and other insurance expenses as a percentage of net premiums
were 33.3% and 28.1% in the third quarter and first nine months of 2001,
respectively, compared to 30.2% and 25.4% in the prior-year periods. These
percentages fluctuate due to the timing of client company reporting and
variations in the mixture of business being written. Other operating expenses
for the third quarter and
18
first nine months of 2001 increased $0.4 million and decreased $1.2 million,
respectively. The Company believes that sustained growth in premiums should
lessen the burden of start-up expenses and expansion costs over time.
CORPORATE AND OTHER SELECTED CONSOLIDATED INFORMATION
Corporate activity generally represents investment income on the undeployed
proceeds from the Company's capital raising efforts and corporate investment
income allocation, corporate expenses that include unallocated overhead and
executive costs, as well as the interest on corporate debt. In addition, the
provision for income taxes is generally calculated based on the overall
operations of the Company.
Consolidated investment income from continuing operations increased 10.4% and
5.3% for the third quarter and first nine months of 2001, respectively. The
increase in investment income primarily relates to an increase in deposits on
Asset Intensive reinsurance and positive operating cash flows. The average yield
earned on investments was 7.12% and 7.29% for the third quarters of 2001 and
2000, respectively. The decrease in overall yield reflected a general decrease
in interest rates. Investment income and realized investment gains and losses
are allocated to the various operating segments based on average assets and
related capital levels deemed appropriate to support the segment business
volumes.
Consolidated other expenses represent general corporate expenses that are not
allocated to the operational segments.
The consolidated effective tax rate for income taxes for continuing operations
was 29.2% and 37.9% for the third quarter and first nine months of 2001,
compared to 37.7% and 40.8% in the comparable prior-year periods. Excluding
realized capital gains and losses, the effective rate on operating earnings was
34.6% and 37.2% for the third quarter and first nine months of 2001, compared to
38.5% and 38.0% in the comparable prior-year periods. The decrease in the
effective tax rate for both the third quarter and first nine months of 2001 is
primarily a result of a decrease in Canadian statutory income tax rates.
DISCONTINUED OPERATIONS
At December 31, 1998, the Company formally reported its accident and health
division as a discontinued operation for financial reporting purposes. The
accident and health division was placed into run-off with all treaties
(contracts) being terminated at the earliest possible date. This discontinued
segment reported break-even results for the third quarter and first nine months
of 2001, compared to an after tax loss of $2.3 million and $8.2 million for the
comparable prior-year periods. The nature of the underlying risks is such that
the claims may take years to reach the reinsurers involved. Thus, the Company
expects to pay claims out of existing reserves over a number of years. The
experience on this block of business will continue to be monitored as the
business runs off.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 2001, the Company generated $142.3 million in
cash from operating activities, used $239.5 million of cash in investing
activities and generated $209.5 million in cash from financing activities. The
sources of funds from the Company's operating subsidiaries consist of premiums
and deposits received from ceding insurers, investment income, proceeds from
sales and redemptions of investments, and cash infusions from RGA. Premiums are
generally received in advance of related claim payments. Funds are primarily
applied to policy claims and benefits, interest credited, operating expenses,
income taxes, and investment purchases.
As the Company continues its expansion efforts, management continually analyzes
capital adequacy issues. During the third quarter of 2000, the Company entered
into a credit agreement (the "Credit Agreement") with a bank syndicate, whereby
it may borrow up to $140.0 million to continue expansion of the Company's
business. Interest on borrowings is payable quarterly at rates based either on
the prime, federal funds or LIBOR rates plus a base rate margin defined in the
Credit Agreement. As of September 30, 2001, the Company had approximately $120.0
million outstanding under the Credit Agreement. The termination date of the
Credit Agreement is May 24, 2003. RGA Australian Holdings PTY, Limited
("Australian Holdings") has AUD$19.0 million (approximately $9.3 million)
outstanding on a line of credit as of September 30, 2001. The line of credit was
amended and restated in January 2001 (the "Australian Credit Agreement")
increasing the capacity to AUD$35.0 million (approximately $17.2 million) and
now expires December 2005. Interest on borrowings is payable quarterly at rates
based on Reuter rate quotes plus an applicable margin defined in the Australian
Credit Agreement. On May 8, 2000, RGA Holdings
19
Limited, a wholly-owned subsidiary of the Company, entered into a revolving
credit facility (the "U.K. Credit Agreement"), whereby it may borrow up to
(pound)15.0 million (approximately $22.1 million) for expansion of the Company's
business primarily in the United Kingdom. Interest on borrowings is payable
quarterly at LIBOR rates plus a base rate margin defined in the U.K. Credit
Agreement. As of September 30, 2001, the Company had (pound)10.0 million
(approximately $14.7 million) outstanding under the U.K. Credit Agreement. The
termination date of the U.K. Credit Agreement is May 8, 2004. On March 1, 2001,
the Company entered into a $75.0 million intercompany loan from MetLife Credit
Corp. replacing a $75.0 million loan from General American Life Insurance
Company, both wholly-owned subsidiaries of MetLife, Inc., that was first made in
1999. Interest is payable at 75.5 basis points over the 30-day AA financial
discount rate on commercial paper. The Company's borrowing arrangements contain
covenants that are considered usual and customary for facilities of these sizes,
types and purposes.
The ability of the Company and its subsidiaries to make principal and interest
payments, and of the Company to continue to pay dividends to stockholders, is
ultimately dependent on the earnings and statutory surplus of the Company's
subsidiaries and their ability to pay dividends, the investment earnings on the
undeployed funds at the Company, and the Company's ability to raise additional
capital. At September 30, 2001, RGA Reinsurance and RGA Canada had statutory
capital and surplus of $450.6 million and $179.8 million, respectively. The
transfer of funds from the subsidiaries to the Company is subject to applicable
insurance laws and regulations. The Company expects any future increases in
liquidity needs due to treaty recaptures, relatively large policy loans or
unanticipated material claims levels would be met first by operating cash flows
and then by selling fixed-income securities or short-term investments.
The Company has several treaties that provide clients the right to recapture,
generally subject to 90 days written notice, if the Company's ratings fall below
certain thresholds. The extent of any realized gains or losses associated with
such recaptures would depend on market conditions at the time of recapture.
INVESTMENTS
Invested assets, including cash and short-term investments, totaled $4.9 billion
at September 30, 2001, compared to $4.6 billion at December 31, 2000. The
increase resulted primarily from an increase in deposits on Asset Intensive
reinsurance and positive operating cash flows. The Company has historically
generated positive cash flows from operations.
At September 30, 2001, the Company's portfolio of fixed maturity securities
available for sale had net unrealized losses before income taxes of $33.9
million.
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. Both derivative and nonderivative financial instruments
have market risk so the Company's risk management extends beyond derivatives to
encompass all financial instruments held that are sensitive to market risk. RGA
is primarily exposed to interest rate risk and foreign currency risk.
Interest Rate Risk arises from many of the Company's primary activities, as the
Company invests substantial funds in interest-sensitive assets and also has
certain interest-sensitive contract liabilities. The Company manages interest
rate risk and credit risk to maximize the return on the Company's capital
effectively and to preserve the value created by its business operations. As
such, certain management monitoring processes are designed to minimize the
impact of sudden and sustained changes in interest rates on fair value, cash
flows, and net interest income.
The Company is subject to foreign currency translation, transaction, and net
income exposure. The Company generally does not hedge the foreign currency
translation exposure related to its investment in foreign subsidiaries as it
views these investments to be long-term. Translation differences resulting from
translating foreign subsidiary balances to U.S. dollars are reflected in equity.
The Company generally does not hedge the foreign currency exposure of its
subsidiaries transacting business in currencies other than their functional
currency (transaction exposure). Currently, the Company believes its foreign
currency transaction exposure is not material to the consolidated results of
operations.
20
There has been no significant change in the Company's quantitative or
qualitative aspects of market risk during the quarter ended September 30, 2001
from that disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements included in this Form 10-Q regarding the Company's business which
are not historical facts, including, without limitation, statements and
information relating to future financial performance, growth potential,
increases in premiums, the effect of mortality rates and experience, claims
levels, its views on the life reinsurance industry, and other statements related
to the Company's business are "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These "forward-looking
statements" include, without limitation, certain statements in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Such
statements also may include, but are not limited to, projections of earnings,
revenues, income or loss, estimated fair values of fixed rate instruments,
estimated cash flows of floating rate instruments, capital expenditures, plans
for future operations and financing needs or plans, growth prospects and
targets, industry trends, trends in or expectations regarding operations and
capital commitments, the sufficiency of claims reserves and assumptions relating
to the foregoing. 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 factors could cause actual results and events to differ materially from
those expressed or implied by forward-looking statements including, without
limitation, (1) market conditions and the timing of sales of investment
securities, (2) regulatory action taken by the New York or Missouri Departments
of Insurance with respect to Metropolitan Life Insurance Company ("MetLife") or
General American Life Insurance Company ("General American") or the Company or
its subsidiaries, (3) changes in the credit ratings of the Company, MetLife, or
General American and the effect of such changes on the Company's future results
of operations and financial condition, (4) material changes in mortality and
claims experience, (5) competitive factors and competitors' responses to the
Company's initiatives, (6) general economic conditions affecting the demand for
insurance and reinsurance in the Company's current and planned markets, (7)
successful execution of the Company's entry into new markets, (8) successful
development and introduction of new products, (9) the stability of governments
and economies in foreign markets in which we operate, (10) fluctuations in U.S.
and foreign currency exchange rates, interest rates and securities and real
estate markets, (11) the success of the Company's clients, (12) changes in laws,
regulations, and accounting standards applicable to the Company and its
subsidiaries, and (13) other risks and uncertainties described in this Quarterly
Report and in the Company's other filings with the Securities and Exchange
Commission.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. WE DO NOT
UNDERTAKE ANY OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING STATEMENTS, EVEN
THOUGH OUR SITUATION MAY CHANGE IN THE FUTURE. WE QUALIFY ALL OF OUR
FORWARD-LOOKING STATEMENTS BY THESE CAUTIONARY STATEMENTS.
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 incorporated by reference herein.
21
PART II - OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
The Company is currently a party in several arbitrations primarily involving
group medical reinsurance coverages as discussed in Note 21 to the consolidated
financial statements contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000. From time to time, the Company is subject to
litigation and arbitration related to its reinsurance business and to
employment-related matters in the normal course of its business. While it is not
feasible to predict or determine the ultimate outcome of the pending arbitration
or legal proceedings or provide reasonable ranges of potential losses, after
consideration of the provisions made in the Company's consolidated financial
statements it is the opinion of Management that the outcome of these disputes
would not have a material adverse effect on its consolidated financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See index to exhibits.
(b) The following report on Form 8-K was filed with the Securities and
Exchange Commission during the three months ended September 30, 2001:
The Company filed a Current Report on Form 8-K on September 24, 2001,
dated as of September 24, 2001, to comment under Item 5 on its potential
exposure to claims arising from the terrorist attacks of September 11, 2001. The
Company additionally reported under Item 5 that the Company's Board of Directors
approved a stock repurchase program under which the Company may purchase up to
$25 million of its shares of stock. Finally, the Company reported and described
under Item 5 several historic agreements between RGA and MetLife, Inc.
("MetLife"), and their respective affiliates, that had not previously been
filed.
22
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 November 13, 2001
-------------------------------------------
A. Greig Woodring
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Jack B. Lay November 13, 2001
------------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
23
INDEX TO EXHIBITS
Exhibit
Number Description
- -------- -----------
3.1 Second Restated Articles of Incorporation of Reinsurance Group of
America, Incorporated, incorporated by reference to Post-Effective
Amendment No. 1 to Form S-3 (No. 333-55304) filed on September 6, 2001
at the corresponding exhibit.
3.2 Bylaws of Reinsurance Group of America, Incorporated, as amended,
incorporated by reference to Exhibit 3.2 to Form 10-Q for the quarter
ended September 30, 2000 (No. 1-11848), filed on November 13, 2000.
3.3 Form of Certificate of Designations for Series A Junior Participating
Preferred Stock, incorporated by reference to Exhibit 3.3 to Amendment
No. 1 to Form 10-Q for the quarter ended September 30, 1997 (No.
1-11848) filed May 21, 1997.
4.1 Form of Specimen Certificate for Common Stock of RGA, incorporated by
reference to Amendment No. 1 to Registration Statement on Form S-1 (No.
33-58960), filed on April 14, 1993 at the corresponding exhibit.
4.2 Rights Agreement dated as of May 4, 1993, between RGA and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, incorporated by
reference to Amendment No. 1 to Form 10-Q for the quarter ended
September 30, 1997 (No. 1-11848) filed on May 21, 1997 at the
corresponding exhibit.
4.3 Second Amendment to Rights Agreement, dated as of April 22, 1998,
between RGA and ChaseMellon Shareholder Services, L.L.C. (as successor
to Boatmen's Trust Company), as Rights Agent, incorporated by reference
to Registration Statement on Form S-3 (No. 333-5177) filed on September
4, 1998 at the corresponding exhibit.
4.4 Third Amendment to Rights Agreement dated as of August 12, 1999,
between Reinsurance Group of America, Incorporated and ChaseMellon
Shareholder Services, L.L.C. (as successor to Boatmen's Trust Company),
as Rights Agent, incorporated by reference to Exhibit 4.4 to Form 8-K
dated August 10, 1999 (No. 1-11848), filed August 25, 1999.
4.5 Fourth Amendment to Rights Agreement dated as of August 23, 1999,
between Reinsurance Group of America, Incorporated and ChaseMellon
Shareholder Services, L.L.C. (as successor to Boatmen's Trust Company),
as Rights Agent, incorporated by reference to Exhibit 4.1 to Form 8-K
dated August 26, 1999 (No. 1-11848), filed September 10, 1999.
24
