<PAGE> 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 SEPTEMBER 30, 1996
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 OCTOBER 31, 1996:
16,838,896 SHARES
<PAGE> 2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I - FINANCIAL INFORMATION
------------------------------
1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income (Unaudited)
Three months and nine months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-17
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 18
6 Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits 20
2
<PAGE> 3
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1996 1995
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
Assets
Fixed maturity securities
Available for sale-at fair value (amortized cost of $1,475,406 and
$834,314 at September 30, 1996 and December 31, 1995, respectively) $ 1,491,176 $ 887,457
Mortgage loans 41,655 -
Policy loans 379,009 346,942
Funds withheld at interest 127,893 101,841
Short-term investments 35,918 66,161
Other invested assets 4,558 3,112
----------- -----------
Total investments 2,080,209 1,405,513
Cash and cash equivalents 14,436 18,258
Accrued investment income 40,801 17,657
Premiums receivable 88,594 84,731
Funds withheld 30,021 28,644
Reinsurance ceded receivables 58,033 64,076
Deferred policy acquisition costs 216,899 186,813
Other reinsurance balances 153,302 158,967
Other assets 32,461 25,275
----------- -----------
Total assets $ 2,714,756 $ 1,989,934
=========== ===========
Liabilities and Stockholders' Equity
Future policy benefits $ 706,639 $ 601,674
Interest sensitive contract liabilities 1,019,904 598,935
Other policy claims and benefits 212,078 207,673
Other reinsurance balances 146,525 105,178
Deferred income taxes 61,181 61,169
Other liabilities 66,944 30,495
Long-term debt 106,442 -
----------- -----------
Total liabilities 2,319,713 1,605,124
Minority interest 8,392 7,881
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) - -
Common stock (par value $.01 per share; 50,000,000 shares authorized,
17,366,250 shares issued) 174 174
Additional paid in capital 263,169 263,169
Currency translation adjustments (3,179) (3,736)
Unrealized appreciation of securities, net of taxes 8,953 33,010
Retained earnings 130,713 97,802
----------- -----------
Total stockholders' equity before treasury stock 399,830 390,419
Less treasury shares held of 532,354 and 544,354 at cost at September 30, 1996
and December 31, 1995, respectively (13,179) (13,490)
----------- -----------
Total stockholders' equity 386,651 376,929
----------- -----------
Total liabilities and stockholders' equity $ 2,714,756 $ 1,989,934
=========== ===========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE> 4
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Net premiums $ 151,284 $ 137,866 $ 482,599 $ 406,157
Investment income, net of related expenses 35,873 22,929 96,798 65,853
Realized investment gains, net 127 914 1,922 1,143
Other revenue 4,754 1,984 12,632 2,248
--------- --------- --------- ---------
Total revenues 192,038 163,693 593,951 475,401
Benefits and expenses:
Claims and other policy benefits 126,342 110,158 407,594 335,454
Policy acquisition costs and other insurance expenses 32,633 28,406 93,679 68,265
Other operating expenses 10,425 7,697 29,165 21,546
Interest expense 1,959 - 4,198 -
--------- --------- --------- ---------
Total benefits and expenses 171,359 146,261 534,636 425,265
--------- --------- --------- ---------
Income before income taxes and minority interest 20,679 17,432 59,315 50,136
Provision for income taxes 7,593 6,385 21,840 18,467
--------- --------- --------- ---------
Income before minority interest 13,086 11,047 37,475 31,669
Minority interest in earnings of consolidated subsidiaries (469) 169 (862) (15)
--------- --------- --------- ---------
Net income $ $12,617 $ 11,216 $ 36,613 $ 31,654
========= ========= ========= =========
Earnings per common and common equivalent share $ 0.74 $ 0.66 $ 2.15 $ 1.87
========= ========= ========= =========
Weighted average number of common and common equivalent
shares outstanding (in thousands) 17,009 16,917 16,999 16,868
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE> 5
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine months ended
September 30,
---------------------------------
1996 1995
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Operating Activities:
Net income $ 36,613 $ 31,654
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (23,145) (17,500)
Premiums receivable (3,858) (31,176)
Deferred policy acquisition costs (30,146) (57,851)
Funds withheld (1,377) (15,114)
Reinsurance ceded balances 6,069 (35,924)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 189,195 207,800
Deferred income taxes 13,325 4,222
Other assets and other liabilities 30,313 3,204
Amortization of goodwill and value of business acquired 879 784
Amortization of net investment discounts (6,934) (5,497)
Realized investment gains, net (1,922) (1,143)
Other, net (101) 847
---------- ----------
Net cash provided by operating activities 208,911 84,306
Investing Activities:
Sales of fixed maturity securities:
Available for sale 96,664 97,407
Maturities of fixed maturity securites:
Held to maturity - 6,058
Available for sale 119,949 12,520
Purchases of fixed maturity securities:
Held to maturity - (3,068)
Available for sale (850,108) (240,026)
Cash invested in:
Mortgage loans (41,685) -
Policy loans (32,067) (5,126)
Funds withheld at interest (26,052) (20,023)
Principal payments on:
Mortgage loans 30 -
Policy loans - 3,374
Change in short-term and other invested assets 28,645 (5,950)
Investment in joint venture and purchase of subsidiary stock (3,207) (3,366)
---------- ----------
Net cash used in investing activities (707,831) (158,200)
Financing activities:
Dividends to stockholders (3,702) (3,198)
Purchase of treasury stock - (2,422)
Reissuance of treasury stock 312 156
Minority interest in earnings 862 15
Excess deposits on universal life and other investment type
policies and contracts 391,573 72,551
Proceeds from long-term debt issuance 106,335 -
---------- ----------
Net cash provided by financing activities 495,380 67,102
Effect of exchange rate changes (282) 243
---------- ----------
Change in cash and cash equivalents (3,822) (6,549)
Cash and cash equivalents, beginning of period 18,258 11,496
---------- ----------
Cash and cash equivalents, end of period $ 14,436 $ 4,947
========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE> 6
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(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 nine months ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996. 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, 1995.
The Company has reclassified the presentation of certain prior period
information to conform with the 1996 presentation.
2. EARNINGS PER SHARE
Earnings per share was computed by dividing net income by the weighted
average number of common shares and common stock equivalents outstanding
during the period. Outstanding employee stock options, which are reflected
as common stock equivalents using the treasury stock method, have been
considered in net earnings per share calculations.
3. SIGNIFICANT TRANSACTIONS
On March 22, 1996, Reinsurance Group of America, Incorporated completed the
sale of $100,000,000 of 7-1/4% Senior Notes in accordance with Rule 144A of
the Securities Act of 1933, as amended. Interest is payable semiannually on
April 1 and October 1 with the principal amount due April 1, 2006.
In June 1996, Reinsurance Group of America, Incorporated (RGA) purchased the
remaining 275,000 shares of Manantial Seguros de Vida S.A. (Manantial) for
$4.5 million.
In July 1996, RGA created RGA Reinsurance Company - Chile, a wholly-owned
reinsurance company licensed to assume life reinsurance business in Chile.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- - ----------------------------------------------
RESULTS OF OPERATIONS
Net Premiums. Net premiums increased $13.4 million, or 9.7%, to
$151.3 million in the third quarter of 1996 compared to $137.9 million for
the same period in 1995.
Premiums by major segment were as follows (in millions):
<TABLE>
<CAPTION>
Change
---------------
1996 1995 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. ordinary life $106.9 97.6 9.3 9.5
Canadian ordinary life 12.4 12.3 0.1 0.8
Accident and health 12.6 10.3 2.3 22.3
Other international 19.4 17.7 1.7 9.6
---- ---- ---
Totals $151.3 137.9 13.4 9.7
====== ===== ==== ===
</TABLE>
Premiums will fluctuate from quarter to quarter due to the timing of
production and normal reporting lags experienced from client companies. In
the U.S. ordinary life segment, premiums related to the block of business
obtained from ITT Lyndon are included in both periods. As this business was
reinsured with an effective date of July 1, 1995, the impact of this
business on quarterly premium fluctuations will diminish going forward. The
increase of $9.3 million in U.S. ordinary life premium compared to the same
period in 1995 was attributed to the processing of several large blocks of
new business and continued growth of the core business, offset by late
reported lapses from client companies.
7
<PAGE> 8
The Canadian ordinary life premiums were relatively flat compared to the
same period of 1995. Business premium fluctuates due to normal reporting
lags experienced by client companies and the timing of production. At
September 30, 1996, this segment had a higher than normal amount of
unprocessed business due to insufficient information reported by client
companies. Upon receipt of the appropriate information, this business
should be processed in the quarter ended December 31, 1996. The effect of
the changes in foreign exchange rates during the third quarter of 1996
compared to the same period of 1995 was not material.
Accident and health premiums increased $2.3 million, or 22.3% from the same
period in 1995. The increase was primarily due to the timing of statements
received from client companies.
The Company's other international business premiums increased $1.7 million,
or 9.6% from the same period in 1995. Premiums from the South American
operations decreased $3.2 million due to lower renewal rates on premiums for
mortality risk reinsurance. Also, an additional allowance for uncollectible
premiums was recorded for life policies in Argentina which reduced premium
income. In the Asia Pacific operations, premiums increased $4.9 million,
primarily as a result of processing a new block of business and growth in
the existing business. Overall, the base of business from the international
segment continues to grow.
Investment Income, Net. Investment income, net of investment
expenses, increased $13.0 million, or 56.8%, to $35.9 million in the third
quarter of 1996 from $22.9 million for the same period in 1995. The cost
basis of invested assets increased $715.0 million from September 30, 1995,
to September 30, 1996. The increase in invested assets was a result of an
increase in operating cash flows, net proceeds of $99.0 million from the 7-1/4%
Senior Notes issued by Reinsurance Group of America, Incorporated, and
reinsurance transactions involving deposits relating to a variable
guaranteed interest product (stable value product) totaling $370.5 million
and $112.5 million during 1996 and the second half of 1995, respectively.
The average yield earned on the consolidated investment portfolio was 7.29%
for the third quarter of 1996 compared to 7.72% for the same period in 1995.
The decrease in overall yield was a result of the assets in the stable value
product portfolio that carry a lower average yield which are of a shorter
duration and are matched with the shorter duration stable value product
liabilities. The stable value product asset portfolio generated $7.4
million of investment income for the third quarter of 1996, which was
largely offset by earnings credited to ceding companies included in claims
and other policy benefits.
Realized Investment Gains, Net. In the third quarter of 1996, the
Company reported net realized investment gains of $0.1 million compared to
$0.9 million for the prior year's period.
8
<PAGE> 9
Other Revenue. Other revenue increased $2.8 million in the third
quarter of 1996 compared to the same period in 1995. Other revenue includes
items such as fees associated with financial reinsurance, equity in earnings
of minority owned subsidiaries, management fee income, and miscellaneous
income related to late premium payments. The increase in other revenue was
primarily attributed to the assumption of certain financial reinsurance
treaties that resulted in $3.9 million in financial reinsurance fees during
the third quarter of 1996 compared to $2.4 million for the same period in
1995. This increase was partially offset by fees paid to retrocessionaires
of $3.5 million included in other insurance expenses during 1996 compared to
$2.1 million for the same period in 1995. In addition, the Company reported
equity in earnings of a minority owned subsidiary of $0.5 million in the
third quarter of 1996 for a subsidiary that was formed in the third quarter
of 1995.
Claims and Other Policy Benefits. Claims and other policy benefits
increased $16.1 million, or 14.6%, to $126.3 million in the third quarter of
1996 compared to $110.2 million for the same period in 1995.
Claims and other policy benefits by major segment were as follows (in
millions):
<TABLE>
<CAPTION>
Change
---------------
1996 1995 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. ordinary life $ 92.4 77.9 14.5 18.6
Canadian ordinary life 10.1 10.0 0.1 1.0
Accident and health 9.7 7.1 2.6 36.6
Other international 14.1 15.2 (1.1) (7.2)
---- ---- -----
Totals $126.3 110.2 16.1 14.6
====== ===== ==== ====
</TABLE>
The increase in claims and other policy benefits in the U.S. ordinary life
segment was partially a result of the growth in the overall volume of
business and amount of insurance at risk. Also, interest credited on the
stable value product liabilities included in claims and other policy
benefits was $6.1 million in the third quarter of 1996. The U.S. ordinary
life segment experienced mortality results which were about as expected
during the third quarter of 1996. The Company expects actual mortality
experience to fluctuate from period to period, but believes it is fairly
constant over longer periods of time.
9
<PAGE> 10
The Canadian claims and other policy benefits increased $0.1 million when
compared to the same period in 1995. For the Canadian segment, the increase
over the prior year was affected by an increase in the reserve levels due to
the overall increase in the amount at risk and the aging of the existing
blocks of business. The effect of the changes in foreign exchange rates
during the third quarter of 1996 compared to the same period of 1995 was not
material.
Accident and health claims and other policy benefits increased $2.6 million,
primarily resulting from strengthening of claim liabilities and reserves on
several closed blocks of business.
The decrease in claims and other policy benefits in the other international
business relates to the mix of business being written in the current year
compared to prior year. The mortality risk reinsurance assumed in
Argentina had lower premium and reserve increases during 1996 based on an
overall change in the method of reinsurance.
Policy Acquisition Costs and Other Insurance Expenses. Policy
acquisition costs and other insurance expenses totaled $32.6 million, or
21.5% of net premiums for the quarter. This compared to insurance expenses
of $28.4 million, or 20.6% of net premiums for the third quarter 1995. The
increase as a percent of net premium is mainly attributable to the fees paid
to retrocessionaires discussed above under other revenue.
Policy acquisition costs and other insurance expenses by major segment were
as follows (in millions):
<TABLE>
<CAPTION>
Change
---------------
1996 1995 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. ordinary life $ 21.3 21.5 (0.2) (0.9)
Canadian ordinary life 2.4 2.2 0.2 9.1
Accident and health 4.0 2.8 1.2 42.9
Other international 4.9 1.9 3.0 157.9
--- --- ---
Totals $ 32.6 28.4 4.2 14.8
==== ==== === ====
</TABLE>
In the U.S. ordinary life segment, policy acquisition costs and other
insurance expenses increased as a percent of net premium to approximately
20.0% for the third quarter of 1996 compared to 17.2% for the entire year of
1995. The increase in the U.S. ordinary life segment resulted primarily
from the financial reinsurance business which the Company obtained effective
July 1, 1995, coupled with an overall increase in the amount at risk. Most
of the financial reinsurance
10
<PAGE> 11
business assumed by the Company was retroceded to other reinsurers. The cost
of these retrocessions is included in policy acquisition costs and other
insurance expenses and represents an offset to surplus relief fees included in
other income.
The increase in the accident and health segment is a result of a continued
transition in the mix of business during 1996. A larger percentage of
business is being written on a quota share basis resulting in higher
premiums and commissions. The majority of business is being received on a
quota share basis as opposed to an excess risk basis.
The increase in the other international segment was attributed to a shift in
the mix of business compared with the prior year. This business was
primarily mortality risk reinsurance in the third quarter of 1995 versus
single premium immediate annuity business in 1996. Single premium immediate
annuity business includes a more traditional acquisition and insurance
expense margin.
Overall, policy acquisition costs and other insurance expenses continue to
fluctuate with business volume and changes in product mix from period to
period.
Other Operating Expenses. Other operating expenses increased $2.7
million, or 35.1%, to $10.4 million for the third quarter in 1996 compared
to $7.7 million for the same period in 1995. Expenses of the U.S.
operations increased $1.2 million while expenses of the Canadian operations
increased $0.2 million. In addition, the other international business
operating expenses increased $1.4 million which represented operating costs
in South America and Asia Pacific, as well as additional home office support
staff for these operations. The increase in other expenses was primarily
the result of planned activities associated with pursuing new business
opportunities domestically and expansion efforts internationally.
Interest Expense. Interest expense during the third quarter of 1996
relates to the issuance of $100.0 million (principal amount) of 7-1/4% Senior
Notes by Reinsurance Group of America, Incorporated on March 22, 1996, and
the financing of a portion of the Company's Australian reinsurance
operations, RGA Australian Holdings PTY, Limited. Interest cost was $2.0
million for the third quarter of 1996 with $1.8 million related to the
Senior Notes.
Provision for Income Taxes. Income tax expense represented
approximately 36.7% of pre-tax income, compared to 36.6% for the third
quarter of 1995. The effective tax rate of 36.7% represents the Company's
expected annual effective tax rate.
11
<PAGE> 12
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
- - ---------------------------------------------
RESULTS OF OPERATIONS
Net Premiums. Net premiums increased $76.4 million, or 18.8%, to
$482.6 million through the third quarter of 1996 compared to $406.2 million
for the same period of 1995. Premiums by major segment were as follows
(in millions):
<TABLE>
<CAPTION>
Change
---------------
1996 1995 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. ordinary life $ 356.2 291.8 64.4 22.1
Canadian ordinary life 41.2 35.2 6.0 17.0
Accident and health 38.4 35.4 3.0 8.5
Other international 46.8 43.8 3.0 6.8
---- ---- ---
Totals $ 482.6 406.2 76.4 18.8
======= ===== ==== ====
</TABLE>
Through the third quarter of 1996, U.S. ordinary life premiums increased by
22.1% over the same period in 1995. The increase was attributed to new
business production, renewal premium increases from existing blocks of
business, revisions of existing treaties, and the continuing impact of past
production. A significant portion of the increase was attributed to new
business production, which includes the business obtained in the ITT Lyndon
transaction that was effective July 1, 1995. The impact of the original
business reinsured by this transaction on period to period trends will
diminish going forward. In addition, growth in credit life premiums of $7.9
million over 1995 contributed to the overall increase in premiums. Reported
premiums will fluctuate from period to period due to normal reporting lags
experienced by client companies and the timing of production.
The Canadian ordinary life premiums increased $6.0 million, or 17.0% from
the same period in 1995. The increase was attributed to continued growth in
new business and incremental increases in renewal premium rates. The effect
of the changes in foreign exchange rates during the first nine months of
1996 compared to the same period of 1995 was not material.
The accident and health premium level increased 8.5% compared to the same
period in 1995. This rate of increase reflects the Company's decision to
remain selective in the opportunities it
12
<PAGE> 13
pursues. Reported premium will fluctuate from period to period due to the
timing of statements received from client companies.
The Company's other international business contributed to the increase in
premiums with $31.3 million in premiums from South America and $15.5 million
from Asia Pacific. The premiums from South America generally represent
results from the Company's joint venture in Chile and wholly-owned
businesses in Chile and Argentina. Premiums from South America decreased by
$3.2 million in the first nine months of 1996 compared to the same period of
1995. This decrease was the result of increasing the allowance for
uncollectible premiums for life policies in Argentina and lower renewal
rates on premiums for mortality risk reinsurance assumed from Argentina.
The premiums from Asia Pacific increased as a result of the growth in the
base of business from the prior year and the processing of a new block of
business. Overall, the base of business from the other international
segment continues to grow.
Investment Income, Net. Investment income, net of investment
expenses, increased $30.9 million, or 46.9%, to $96.8 million through the
end of the third quarter of 1996 compared to $65.9 million for the same
period in 1995. The cost basis of invested assets increased $715.0 million
from September 30, 1995, to September 30, 1996. The increase in invested
assets was a result of an increase in operating cash flows, net proceeds of
$99.0 million from the 7-1/4% Senior Notes issued by the Company, and
reinsurance transactions involving stable value product deposits from ceding
companies of $370.5 million and $112.5 million during 1996 and the second
half of 1995, respectively. The average yield earned was 7.29% through the
third quarter of 1996 compared with 7.67% earned in the same period of 1995.
The decrease in overall yield was a result of the assets in the stable value
product portfolio that carry a lower average yield which are of a shorter
duration and are matched with the shorter duration stable value product
liabilities. The stable value product asset portfolio generated $15.7
million of investment income through the end of the third quarter of 1996,
which was largely offset by earnings credited to ceding companies included
in claims and other policy benefits.
Realized Investment Gains, Net. Realized investment gains increased
$0.8 million to $1.9 million through the end of the third quarter of 1996
compared to $1.1 million in the same period of 1995. This was primarily the
result of repositioning the Company's Canadian operation portfolio to
achieve a better duration match for the assets and liabilities.
Other Revenue. Other revenue increased $10.4 million to $12.6 million
through the end of the third quarter of 1996 compared to $2.2 million for
the same period in 1995. This increase was primarily attributed to fee
income for the assumption of certain financial reinsurance treaties
resulting in $10.7 million in financial reinsurance fees. This increase was
partially offset by fees paid to retrocessionaires of $9.3 million included
in other insurance expenses.
13
<PAGE> 14
Claims and Other Policy Benefits. Claims and other policy benefits
increased $72.1 million, or 21.5%, to $407.6 million through the end of the
third quarter of 1996 compared to $335.5 million for the same period in
1995.
Claims and other policy benefits by major segment were as follows (in
millions):
<TABLE>
<CAPTION>
Change
---------------
1996 1995 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. ordinary life $308.7 247.4 61.3 24.8
Canadian ordinary life 33.8 27.4 6.4 23.4
Accident and health 29.0 24.6 4.4 17.9
Other international 36.1 36.1 - -
---- ---- ---
Totals $407.6 335.5 72.1 21.5
====== ===== ==== ====
</TABLE>
Through the third quarter of 1996, the increase in claims and other policy
benefits in the U.S. ordinary life segment was the result of increased
business levels over the comparable prior year period, interest paid for the
stable value product of $13.0 million, and less favorable mortality than
that experienced in the same period in 1995. The Company expects mortality
to fluctuate from period to period, but believes it is fairly constant over
longer periods of time.
The Canadian claims and other policy benefits increased $6.4 million when
compared to the same period in 1996. In Canada, the mortality results were
above the expected level through the third quarter of 1996 compared to
favorable mortality during the first nine months of 1995. The Company
continues to monitor mortality trends to determine the appropriateness of
reserve and IBNR levels. Overall, the effect of the changes in foreign
exchange rates through the third quarter of 1996 compared to the same period
of 1995 was not material.
The accident and health segment increase related to the strengthening of
claim liabilities on several closed blocks of business. The claims and
other policy benefits for the other international operations remained stable
between years.
Policy Acquisition Costs and Other Insurance Expenses. Policy
acquisition costs and other insurance expenses totaled $93.7 million, or
19.4% of net premium through the third quarter of 1996. This compared to
16.8% of net premiums through the third quarter of 1995.
14
<PAGE> 15
Policy acquisition costs and other insurance expenses by major segment were
as follows (in millions):
<TABLE>
<CAPTION>
Change
---------------
1996 1995 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. ordinary life $ 66.0 48.7 17.3 35.5
Canadian ordinary life 7.0 6.7 0.3 4.5
Accident and health 11.9 9.9 2.0 20.2
Other international 8.8 3.0 5.8 193.3
--- --- ---
Totals $ 93.7 68.3 25.4 37.2
====== ==== ==== ====
</TABLE>
In the U.S. ordinary life segment, the increase in expenses as a percent of
premium to 18.5% through the third quarter of 1996, from 16.7% for the same
period of 1995, was primarily a result of financial reinsurance transactions
which were effective July 1, 1995. Most of the financial reinsurance
business assumed by the Company was retroceded to other reinsurers. The
cost of these retrocessions is included in policy acquisition costs and
other insurance expenses. The Company's international activities have
experienced a shift in the mix of business compared with the prior year.
This business was primarily mortality risk reinsurance in 1995 versus the
single premium immediate annuity business received in 1996. Single premium
immediate annuity business includes a more traditional acquisition and
insurance expense margin.
Overall, policy acquisition costs and other insurance expenses continue to
fluctuate with business volume and changes in product mix from period to
period.
Other Operating Expenses. Other operating expenses increased $7.7
million, or 35.8%, to $29.2 million in 1996 compared to $21.5 million for
the same period in 1995. The 1996 and 1995 amounts represented
approximately 4.7% and 4.0% of gross premium, respectively. The increase in
other expenses was primarily the result of planned activities associated
with pursuing new business opportunities domestically and expansion efforts
internationally.
15
<PAGE> 16
Interest Expense. Interest expense during 1996 related to the
issuance of $100.0 million (principal amount) of 7-1/4% Senior Notes by
Reinsurance Group of America, Incorporated on March 22, 1996, and the
financing of a portion of the Company's Australian reinsurance operations, RGA
Australian Holdings PTY. Interest cost through the third quarter of 1996 was
$4.2 million with $3.8 million related to the Senior Notes.
Provision for Income Taxes. Income tax expense represented
approximately 36.8% of pre-tax income through the third quarter of 1996 and
1995. The effective tax rate of 36.8% represents the Company's expected
annual effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Invested assets increased by $674.7 million, or 48.0%, to $2,080.2
million at September 30, 1996, compared to $1,405.5 million at December 31,
1995. The increase resulted from cash deposits on certain reinsurance
transactions of $370.5 million, net proceeds from a Senior Note offering of
$99.0 million, and positive operating cash flows. These increases were
partially offset by a decrease in the fair value adjustment of fixed
maturities available for sale of $37.4 million. The Company has
historically generated positive cash flows from operations, and expects to
do so in the future.
At September 30, 1996, the Company's portfolio of fixed maturity
securities available for sale had net unrealized gains before tax of $15.8
million.
The Company began investing in commercial mortgages during this quarter.
Those mortgages were originated by an affiliate of the Company, Conning Asset
Management Company, and are subject to strict guidelines regarding loan to
value ratios, credit attributes of borrowers, and cash flows of underlying
properties.
A regular quarterly dividend of $0.08 per share is payable on November
29, 1996, to shareholders of record on November 8, 1996. All future
payments of dividends are at the discretion of the Board of Directors of
Reinsurance Group of America, Incorporated and will depend on the Company's
earnings, capital requirements, insurance regulatory conditions, operating
conditions, and such other factors as the Board of Directors may deem
relevant. The amount of dividends that the Company can pay will depend in
part on the operations of its reinsurance subsidiaries.
A program of repurchasing shares of stock in Reinsurance Group of
America, Incorporated was approved at a meeting of the company's Board of
Directors held on July 24, 1996. The program is intended to enable
Reinsurance Group of America, Incorporated to satisfy obligations under its
stock option program and to acquire larger blocks of stock. Purchases will
be made in the open market from time to time, at the then prevailing market
price, or through negotiated transactions. To date, no shares have been
repurchased in connection with this program.
16
<PAGE> 17
The ability of the Company to make debt principal and interest
payments as well as dividend payments to shareholders is ultimately
dependent on the earnings and surplus of subsidiaries and the undeployed
debt proceeds. The transfer of funds from the insurance subsidiaries to
Reinsurance Group of America, Incorporated is subject to applicable
insurance laws and regulations.
17
<PAGE> 18
PART II - OTHER INFORMATION
- - ---------------------------
ITEM 1
- - ------
LEGAL PROCEEDINGS
- - -----------------
From time to time, subsidiaries of Reinsurance Group of America,
Incorporated are subject to reinsurance-related litigation and arbitration
in the normal course of business. Management does not believe that any such
pending litigation or arbitration would have a material adverse effect on
the Company's future operations.
ITEM 6
- - ------
EXHIBITS AND REPORTS ON FORM 8-K
- - --------------------------------
(a) See index to exhibits.
(b) No reports on Form 8-K were filed during the three months ended
September 30, 1996.
18
<PAGE> 19
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 11/12/96
--------------------------------------
A. Greig Woodring
President & Chief Executive Officer
/s/ Jack B. Lay 11/12/96
--------------------------------------
Jack B. Lay
Executive Vice President & Chief
Financial Officer
19
<PAGE> 20
INDEX TO EXHIBITS
Exhibit
Number Description
- - ------ -----------
3.1 Restated Articles of Incorporation of
Reinsurance Group of America, Incorporated
("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
20
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited condensed consolidated financial statements of the registrant
and is qualified in its entirety by reference to such financial statements
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 1,491,176
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 41,655
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,080,209
<CASH> 14,436
<RECOVER-REINSURE> 58,033
<DEFERRED-ACQUISITION> 216,899
<TOTAL-ASSETS> 2,714,756
<POLICY-LOSSES> 1,726,543
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 212,078
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 106,442
0
0
<COMMON> 174
<OTHER-SE> 386,477
<TOTAL-LIABILITY-AND-EQUITY> 2,714,756
482,599
<INVESTMENT-INCOME> 96,798
<INVESTMENT-GAINS> 1,922
<OTHER-INCOME> 12,632
<BENEFITS> 407,594
<UNDERWRITING-AMORTIZATION> 36,334
<UNDERWRITING-OTHER> 57,345
<INCOME-PRETAX> 59,315
<INCOME-TAX> 21,840
<INCOME-CONTINUING> 37,475
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36,613
<EPS-PRIMARY> 2
<EPS-DILUTED> 2
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
