<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, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------
COMMISSION FILE NUMBER 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-1627032
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
660 MASON RIDGE CENTER DRIVE
ST. LOUIS, MISSOURI 63141
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(314) 453-7439
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED
ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR
FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE
SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---- ----
COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF OCTOBER 23, 1997:
26,049,375 SHARES
<PAGE> 2
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
<CAPTION>
ITEM PAGE
---- ----
PART I - FINANCIAL INFORMATION
------------------------------
<S> <C>
1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income (Unaudited)
Three months and nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months and nine months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-7
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-18
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 19
6 Exhibits and Reports on Form 8-K 19
Signatures 20
Index to Exhibits 21
</TABLE>
2
<PAGE> 3
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Fixed maturity securities
Available for sale-at fair value (amortized cost of $2,068,553 and
$1,469,649 at September 30, 1997, and December 31, 1996, respectively) $2,166,331 $1,517,264
Mortgage loans on real estate 151,501 98,262
Policy loans 429,005 426,366
Funds withheld at interest 151,470 129,949
Short-term investments 78,661 93,548
Other invested assets 14,861 6,659
---------- ----------
Total investments 2,991,829 2,272,048
Cash and cash equivalents 18,429 13,145
Accrued investment income 51,689 23,308
Premiums receivable 142,631 76,438
Funds withheld 36,798 30,697
Reinsurance ceded receivables 52,292 59,618
Deferred policy acquisition costs 275,412 233,565
Other reinsurance balances 155,256 157,065
Other assets 32,076 27,770
---------- ----------
Total assets $3,756,412 $2,893,654
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 893,729 $ 755,793
Interest sensitive contract liabilities 1,637,095 1,106,491
Other policy claims and benefits 252,014 206,284
Other reinsurance balances 176,158 149,289
Deferred income taxes 102,525 73,275
Other liabilities 108,318 63,689
Long-term debt 107,715 106,493
---------- ----------
Total liabilities 3,277,554 2,461,314
Minority interest 7,624 6,782
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) -- --
Common stock (par value $.01 per share; 75,000,000 shares authorized,
26,049,375 shares issued) 261 174
Additional paid in capital 264,293 264,399
Currency translation adjustments (10,237) (5,536)
Unrealized appreciation of securities, net of taxes 58,542 28,365
Retained earnings 175,877 147,824
---------- ----------
Total stockholders' equity before treasury stock 488,736 435,226
Less treasury shares held of 758,033 and 584,031 at cost at
September 30, 1997, and December 31, 1996, respectively (17,502) (9,668)
---------- ----------
Total stockholders' equity 471,234 425,558
---------- ----------
Total liabilities and stockholders' equity $3,756,412 $2,893,654
========== ==========
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,
---------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues:
Net premiums $197,910 $151,284 $604,850 $482,599
Investment income, net of related expenses 46,532 35,873 134,376 96,798
Realized investment (losses)/gains, net (353) 127 566 1,922
Other revenue 4,938 4,754 13,929 12,632
-------- -------- -------- --------
Total revenues 249,027 192,038 753,721 593,951
Benefits and expenses:
Claims and other policy benefits 165,538 126,342 510,403 407,594
Accident and health pool charge (see Note 3) -- -- 18,000 --
Policy acquisition costs and other insurance expenses 46,440 32,633 134,708 93,679
Other operating expenses 12,797 10,425 35,526 29,165
Interest expense 1,949 1,959 5,853 4,198
-------- -------- -------- --------
Total benefits and expenses 226,724 171,359 704,490 534,636
-------- -------- -------- --------
Income before income taxes and minority interest 22,303 20,679 49,231 59,315
Provision for income taxes 7,797 7,593 16,553 21,840
-------- -------- -------- --------
Income before minority interest 14,506 13,086 32,678 37,475
Minority interest in earnings of consolidated subsidiaries (134) (469) (383) (862)
-------- -------- -------- --------
Net income $ 14,372 $ 12,617 $ 32,295 $ 36,613
======== ======== ======== ========
Earnings per common and common equivalent share $ 0.56 $ 0.49 $ 1.25 $ 1.44
======== ======== ======== ========
Weighted average number of common and common equivalent
shares outstanding (in thousands) 25,766 25,513 25,758 25,499
======== ======== ======== ========
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,
-------------------------------------
1997 1996
------------- ------------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 32,295 $ 36,613
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (28,391) (23,145)
Premiums receivable (66,382) (3,858)
Deferred policy acquisition costs (42,560) (30,146)
Funds withheld (6,102) (1,377)
Reinsurance ceded balances 7,283 6,069
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 236,065 189,195
Deferred income taxes 9,665 13,325
Other assets and other liabilities 37,906 30,313
Amortization of goodwill and value of business acquired 973 879
Amortization of net investment discounts (10,277) (6,934)
Realized investment gains, net (566) (1,922)
Other, net (558) (101)
----------- ---------
Net cash provided by operating activities 169,351 208,911
INVESTING ACTIVITIES:
Sales of investments:
Fixed maturity securities - Available for sale 245,341 96,664
Mortgage loans 28,178 --
Maturities of fixed maturity securites 177,989 119,949
Purchases of fixed maturity securities (1,003,293) (850,108)
Cash invested in:
Mortgage loans (81,135) (41,685)
Policy loans (5,797) (32,067)
Funds withheld at interest (21,521) (26,052)
Principal payments on:
Mortgage loans 1,060 30
Policy loans 3,158 --
Change in short-term and other invested assets 7,571 28,645
Investment in joint venture and purchase of subsidiary stock -- (3,207)
----------- ---------
Net cash used in investing activities (648,449) (707,831)
FINANCING ACTIVITIES:
Dividends to stockholders (4,242) (3,702)
Purchase of treasury stock (8,740) --
Reissuance of treasury stock 907 312
Minority interest in earnings 383 862
Excess deposits on universal life and other investment type
policies and contracts 494,759 391,573
Proceeds from long-term debt issuance 1,906 106,335
----------- ---------
Net cash provided by financing activities 484,973 495,380
Effect of exchange rate changes (591) (282)
----------- ---------
Change in cash and cash equivalents 5,284 (3,822)
Cash and cash equivalents, beginning of period 13,145 18,258
----------- ---------
Cash and cash equivalents, end of period $ 18,429 $ 14,436
=========== =========
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, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited, condensed, consolidated financial statements of
Reinsurance Group of America, Incorporated and Subsidiaries (the "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report for the
year ended December 31, 1996.
The Company has reclassified the presentation of certain prior period
information to conform with the 1997 presentation.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," effective for years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general purpose financial statements. The Company anticipates that the most
significant items of comprehensive income will be the change in unrealized
gains and losses on securities as well as the change in foreign currency
translation, both items which historically have been reported only as a
component of stockholders' equity. The adoption of SFAS No. 130 will not
affect results of operations or financial position, but will affect their
presentation and disclosure.
Also in June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
effective for years beginning after December 15, 1997. SFAS No. 131 requires
that a public company report financial and descriptive information about its
reportable operating segments pursuant to criteria that differ from current
accounting practice. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The adoption of SFAS No.
131 will not affect results of operations or financial position, but will
affect the disclosure of segment information. However, the Company has not
completed its analysis of the impact on disclosures of implementing this new
standard, but plans to adopt SFAS 131 effective January 1, 1998.
6
<PAGE> 7
2. EARNINGS PER SHARE
Earnings per share were computed by dividing net income by the weighted
average number of common shares and common stock equivalents outstanding
during the period. Outstanding employee stock options, which are reflected
as common stock equivalents using the treasury stock method, have been
considered in net earnings per share calculations.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share ("EPS")." SFAS No. 128 supersedes and simplifies
the existing computational guidelines under Accounting Principles Board
Opinion No. 15, "Earnings Per Share." It is effective for financial
statements issued for periods ending after December 15, 1997, and requires
all prior period earnings per share data presented to be restated to conform
with the provisions of SFAS No. 128. Accordingly, the Company plans to
retroactively restate all interim amounts during the fourth quarter. Among
other changes, SFAS No. 128 eliminates the presentation of primary EPS and
replaces it with basic EPS for which common stock equivalents are not
considered in the computation. It also revises the computation of diluted
EPS. It is expected that the adoption of SFAS No. 128 will not have a
material impact on the earnings per share results reported by the Company
under the Company's current capital structure.
3. SIGNIFICANT TRANSACTION
During the first quarter of 1997, the Company recorded a charge of $18.0
million, $10.4 million after-tax, to increase reserves associated with
run-off claims from certain accident and health insurance pools in which it
had formerly participated. That action was a result of management's
strategic decision to exit all outside-managed accident and health pools.
The charge reflects management's intent to reserve fully for all anticipated
claim payments attributed to outside-managed accident and health pools.
4. STOCK SPLIT
The Board of Directors of Reinsurance Group of America, Incorporated (RGA)
approved a three-for-two split of the Company's stock for all shareholders of
record as of August 8, 1997, which was payable on August 29, 1997. Effective
September 2, 1997, RGA stock began trading at a new, post-split price. All
share and per share data is stated to reflect the stock split.
5. RELATED PARTY TRANSACTIONS
The Company's stable value products are reinsured from General American Life
Insurance Company (General American), who owned approximately 64% of RGA's
outstanding shares as of September 30, 1997. Deposits from stable value
products were approximately $912.7 million as of September 30, 1997. In
addition, the Company entered into annuity reinsurance transactions during
the second quarter of 1997 with Cova Financial Services Life Insurance
Company, a subsidiary of General American. Deposits related to this business
were $82.8 million as of September 30, 1997.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- - ----------------------------------------------
RESULTS OF OPERATIONS
Net Premiums. Net premiums increased $46.6 million, or 30.8%, to
$197.9 million in the third quarter of 1997 from $151.3 million for the same
period in 1996.
Premiums by major segment were as follows (dollars in millions):
<TABLE>
<CAPTION>
Change
------
1997 1996 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. life $137.2 106.9 30.3 28.3
Canadian life 17.7 12.4 5.3 42.7
Accident and health 22.0 12.6 9.4 74.6
Other international 21.0 19.4 1.6 8.2
------ ----- ---- ----
Totals $197.9 151.3 46.6 30.8
====== ===== ==== ====
</TABLE>
Renewal premiums from the existing block of business, along with new business
premiums from facultative and automatic treaties contributed to the overall
premium increase. Business premium levels are significantly influenced by
large transactions and reporting practices of ceding companies and therefore
fluctuate from period to period. In the U.S. life segment, the increase from
prior year was attributed to premium growth on the existing block of
business, combined with strong new business premium. In the Canadian life
segment, the increase of $5.3 million represented growth in new business of
$1.0 million and growth in renewal business of $4.3 million for the quarter
compared to the same period in prior year.
Accident and health premiums continue to grow based on contracts executed
during the second half of 1996. The increase represented growth primarily in
domestic business while growth in business from the Company's contact office
in London remained comparable to last year. The accident and health
segment's premium levels for managed pools have grown $9.0 million compared
to the third quarter of 1996. Of the total accident and health premiums,
approximately 47.5% related to pool business through the third quarter of
1997. Premium levels did not show any decline resulting from the decision to
exit outside-managed pools in the first quarter of 1997. The Company
anticipates that outside-managed pool business will represent approximately
40.0% of total accident and health premium for the full year 1997. The
Company estimates that
8
<PAGE> 9
pool premiums will decline by approximately 10.0% in 1998, approximately 60.0%
in 1999, and 100% in 2000.
The Company's other international business reported modest growth from year
to year. Premiums in the Latin American operations decreased $0.8 million
for the quarter primarily due to the timing of processing statements from
client companies for mortality risk reinsurance. The single premium
immediate annuity business from Chile grew $1.8 million from the third
quarter of 1996. In the Asia Pacific operations, premiums increased $1.4
million resulting from growth in the base of business from the prior year.
The growth primarily stems from the new business generated from the Company's
operating subsidiary in Australia. New premiums from other regions totaled
$1.0 million for the third quarter of 1997.
Investment Income, Net. Investment income, net of investment expenses,
increased $10.7 million, or 29.7%, to $46.5 million in the third quarter of
1997. The cost basis of invested assets increased $829.6 million from
September 30, 1996, to September 30, 1997. The increase in invested assets
was a result of operating cash flows and reinsurance transactions involving
stable value deposits from ceding companies, which totaled $425.6 million
since September 30, 1996. The stable value product asset portfolio generated
$13.4 million of investment income in the third quarter of 1997 compared to
$7.4 million for the same period in 1996. The investment income earned on
the stable value product asset portfolio was offset by amounts credited and
paid to ceding companies of $12.8 million and $6.9 million for the third
quarter of 1997 and 1996, respectively. These amounts credited are primarily
included in claims and other policy benefits.
Realized Investment (Losses)/Gains, Net. In the third quarter of 1997,
net realized investment gains decreased $0.5 million from $0.1 million for
the same period in the prior year. The net realized investment loss resulted
from ongoing repositioning within the Company's portfolios.
Other Revenue. Other revenue increased $0.2 million in the third
quarter of 1997 to $4.9 million. Other revenue includes items such as profit
and risk fees associated with financial reinsurance as well as earnings in
unconsolidated investees, management fee income, and miscellaneous income
associated with late premium payments. During the third quarter of 1997,
financial reinsurance treaties resulted in $4.1 million in financial
reinsurance fees which were partially offset by fees paid to
retrocessionaires of $3.7 million, included in policy acquisition costs and
other insurance expenses.
Claims and Other Policy Benefits. Claims and other policy benefits
increased $39.2 million, or 31.0%, to $165.5 million in the third quarter of
1997. For the third quarter of 1997, total claims and other policy benefits
represented 83.6% of total net premiums. Net of the interest credited on the
stable value product portfolio, the total claims and other policy benefits
represented 76.9% of total net premiums. This was comparable to the 79.4% of
total net premiums, net of the impact of stable value products, for the third
quarter of 1996 and 80.0% for the entire year ended December 31, 1996. This
percentage can fluctuate from quarter to quarter due to changes in the mix of
new business and mortality fluctuations. The Company expects
9
<PAGE> 10
mortality to fluctuate somewhat from quarter to quarter but believes it is
fairly constant over longer periods of time. The third quarter percentage is
not considered indicative of any longer term trend.
Claims and other policy benefits by major segment were as follows (dollars in
millions):
<TABLE>
<CAPTION>
Change
------
1997 1996 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. life $116.6 92.8 23.8 25.6
Canadian life 17.3 10.1 7.2 71.3
Accident and health 16.6 9.7 6.9 71.1
Other international 15.0 13.7 1.3 9.5
------ ----- ---- ----
Totals $165.5 126.3 39.2 31.0
====== ===== ==== ====
</TABLE>
In the U.S. life segment, mortality experience net of the impact of stable
value products was slightly better for the third quarter of 1997 as compared
to the third quarter of 1996. In the Canadian life segment, adverse
mortality contributed to the overall increase in claims and other policy
benefits. In addition, reserve levels for the U.S. life and Canadian life
business increased in relation to the overall increase in the amount at risk
and the aging of the existing blocks of business. The accident and health
segment increase was due to poor experience on existing personal accident
business from U.K. operations and premium increases discussed above. These
risks were subject to the Company's underwriting and were not part of the
outside managed pools for which the Company took a charge in the first
quarter of 1997. The increase in claims in the other international segment
correlated with the increase in premiums from the Latin American and Asia
Pacific regions discussed above.
Policy Acquisition Costs and Other Insurance Expenses. Policy
acquisition costs and other insurance expenses totaled $46.4 million, or
23.5% of net premium for the quarter. This compares to 20.2% of net premiums
for the entire year ended December 31, 1996. Net of the impact of fees paid
to retrocessionnaires in connection with financial reinsurance and allowances
on other investment-type products, those costs represented $43.4 million, or
21.9% of net premium, for the third quarter of 1997 compared to total costs
of $29.1 million, or 19.2% of net premium, for the third quarter of 1996.
The impact of higher renewal allowances on traditional reinsurance treaties
contributed to the increase in this ratio.
10
<PAGE> 11
Policy acquisition costs and other insurance expenses by major segment were
as follows (in millions):
<TABLE>
<CAPTION>
Change
------
1997 1996 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. life $32.6 21.3 11.3 53.1
Canadian life 1.9 2.4 (0.5) (20.8)
Accident and health 6.7 4.0 2.7 67.5
Other international 5.2 4.9 0.3 6.1
----- ---- ---- ----
Totals $46.4 32.6 13.8 42.3
===== ==== ==== =====
</TABLE>
In the U.S. life segment, policy acquisition costs and other insurance
expenses as a percent of net premium, net of the effect of financial
reinsurance and allowances on other investment-type products, was 21.6% for
the third quarter of 1997 compared to 16.7% for the third quarter of 1996 and
17.2% for the entire year ended December 31, 1996. The increase in policy
acquisition costs and other insurance expenses for the U.S. life segment was
primarily a result of changes in the mix of business and decreases in
deferrable commissions due to higher renewal commissions on several
significant blocks of business.
In the Canadian life segment, policy acquisition costs and other insurance
expenses as a percent of net premiums decreased to 10.7% for the third
quarter of 1997 compared to 19.4% for the third quarter of 1996 and 16.1% of
net premiums for the entire year ended December 31, 1996. The decrease
resulted from increased use of yearly renewable term products from
coinsurance products since September 30, 1996. This change resulted in fewer
commissions as a percent of net premiums for the current period compared to
the same period in 1996.
In the accident and health segment, policy acquisition costs and other
insurance expenses as a percent of net premiums was 30.5% for the third
quarter of 1997 compared to 31.7% for the third quarter of 1996 and 32.2% for
the entire year ended December 31, 1996. This increase was attributed to the
mix of new business growth discussed in the premiums above.
In the other international segment, policy acquisition costs and other
insurance expenses as a percent of net premium increased to approximately
24.8% for the third quarter of 1997 compared to 16.7% for the entire year of
1996. The Company's other international segment percentages fluctuate due
primarily to the timing of client company reporting and the diversity in the
mix of business being reported.
11
<PAGE> 12
Other Operating Expenses. Other operating expenses increased $2.4
million, or 23.1%, to $12.8 million in the third quarter of 1997 compared to
$10.4 million for the same period in 1996. Expenses of the U.S. life,
Canadian life and accident and health operations remained comparable to the
prior year. Other international business operating expenses increased $2.2
million as the result of activities associated with pursuing new business
opportunities and international expansion efforts.
Interest Expense. Interest expense related to the issuance of
long-term debt by Reinsurance Group of America, Incorporated on March 22,
1996, and the on-going financing of a portion of the Company's Australian
reinsurance operations.
Provision for Income Taxes. Income tax expense from operations before
realized investment gains/(losses) represented approximately 35.2% of pre-tax
income for the third quarter of 1997 compared to 37.6% of pre-tax income for
the third quarter of 1996. The effective tax rate of 36.1% on income from
operations through September 30, 1997, is representative of the Company's
expected annual effective tax rate for 1997, based upon its current mix of
reinsurance business and applicable tax rates associated with the markets in
which it is transacting business.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
- - ---------------------------------------------
RESULTS OF OPERATIONS
Net Premiums. Net premiums increased $122.3 million, or 25.3%, to
$604.9 million for the first nine months of 1997 compared to $482.6 million
for the same period in 1996.
Premiums by major segment were as follows (dollars in millions):
<TABLE>
<CAPTION>
Change
------
1997 1996 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. life $418.3 356.1 62.2 17.5
Canadian life 54.0 41.2 12.8 31.1
Accident and health 58.6 38.4 20.2 52.6
Other international 74.0 46.9 27.1 57.8
------ ------ ----- ----
Totals $604.9 482.6 122.3 25.3
====== ===== ===== ====
</TABLE>
12
<PAGE> 13
In the first nine months of 1997, the U.S. life premiums increased by 17.5%
over the same period in 1996. 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.
Growth in credit life premiums of $13.5 million over 1996 contributed to the
overall increase in premiums. The Canadian life segment increased $2.0
million in first year premiums and $10.8 million in renewal premiums.
Continued growth in new and renewal premiums was a result of strong new
business production in 1996. Fluctuations in premiums are also subject to
the timing of when client company statements are processed.
Accident and health premiums increased $20.2 million, or 52.6%. The increase
represented growth in domestic business of $16.9 million and growth in
business from the Company's contact office in London of $3.3 million. The
accident and health segment's managed pool premium levels increased $13.6
million compared to the same period in prior year and did not show any
decline resulting from the decision to exit outside-managed pools. Of the
total accident and health premiums, 47.5% related to pool business through
the third quarter of 1997. Premium levels did not show any decline resulting
from the decision to exit outside-managed pools in the first quarter of 1997.
The Company anticipates that outside-managed pool business will represent
approximately 40.0% of total accident and health premium for the full year
1997. The Company estimates that pool premiums will decline by approximately
10.0% in 1998, approximately 60.0% in 1999, and 100% in 2000.
The Company's other international business reported strong growth from year
to year. Premiums in the Latin American operations increased $16.9 million,
with the largest increase from single premium immediate annuity business from
Chile, which grew $12.1 million. In the Asia Pacific operations, premiums
increased $9.0 million, including $7.1 million in new business generated from
the Company's operating subsidiary in Australia. Premiums from other regions
totaled $1.2 million through the third quarter of 1997.
Investment Income, Net. Investment income, net of investment expenses,
increased $37.6 million, or 38.8%, to $134.4 million in the first nine months
of 1997 from $96.8 million for the same period in 1996. The cost basis of
invested assets increased $829.6 million from September 30, 1996, to
September 30, 1997. The increase in invested assets was a result of
operating cash flows, and reinsurance transactions involving stable value
deposits from ceding companies of $425.6 million, since September 30, 1996.
The stable value product asset portfolio generated $34.0 million of
investment income in 1997 compared to $15.7 million for the same period in
1996. The investment income earned on the stable value product asset
portfolio was offset by amounts credited and paid to ceding companies of
$32.4 million and $14.6 million for 1997 and 1996, respectively. These
amounts are primarily included in claims and other policy benefits. The
average earned yield on the consolidated investment portfolio decreased to
7.25% for 1997 compared to 7.29% for the same period in 1996. This resulted
primarily from the increase in the stable value portfolio, which requires a
shorter duration to achieve appropriate asset and liability duration
matching, offset by increased yields through the addition of mortgage loans
in other portfolios.
13
<PAGE> 14
Realized Investment Gains, Net. Realized investment gains decreased
$1.3 million to $0.6 million in the first nine months of 1997 from $1.9
million for the same period in 1996. Net realized investment gains resulted
from ongoing repositioning within the Company's portfolios.
Other Revenue. Other revenue increased $1.3 million in the first nine
months of 1997 to $13.9 million compared to $12.6 million for the same period
in 1996. Other revenue includes items such as profit and risk fees
associated with financial reinsurance as well as earnings in unconsolidated
investees, management fee income, and miscellaneous income associated with
late premium payments. During 1997, financial reinsurance treaties resulted
in $11.9 million in financial reinsurance fees which were partially offset by
fees paid to retrocessionaires of $10.7 million, included in policy
acquisition costs and other insurance expenses.
Claims and Other Policy Benefits. Claims and other policy benefits
increased $102.8 million, or 25.2%, to $510.4 million through the end of the
third quarter of 1997 compared to $407.6 million for the same period in 1996.
For the first nine months of 1997, total claims and other policy benefits
represented 84.4% of total net premiums. Net of the interest credited on the
stable value product portfolio, the total claims and other policy benefits
represented 79.2% of total net premiums. This was comparable to the 81.8% of
total net premiums, net of the impact of stable value products, for the first
nine months of 1996 and 80.0% for the entire year ended December 31, 1996.
The Company expects mortality to fluctuate somewhat from period to period but
believes it is fairly constant over longer periods of time.
Claims and other policy benefits by major segment were as follows (dollars in
millions):
<TABLE>
<CAPTION>
Change
------
1997 1996 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. life $362.7 309.0 53.7 17.4
Canadian life 46.4 33.8 12.6 37.3
Accident and health 41.8 29.0 12.8 44.1
Other international 59.5 35.8 23.7 66.2
------ ----- ----- ----
Totals $510.4 407.6 102.8 25.2
====== ===== ===== ====
</TABLE>
14
<PAGE> 15
For the first nine months of 1997, the increase in claims and other policy
benefits in the U.S. life and Canadian life segments was the result of an
overall increase in the amount at risk, which corresponds with the overall
increase in premiums. In the U.S. life segment, mortality was slightly more
favorable for 1997 as compared to the same period in 1996, while reserve
levels increased in relation to the overall increase in the amount at risk
and the aging of the existing blocks of business. In addition, the stable
value product interest credited and paid to ceding companies increased $18.6
million over the same period in 1996 in the U.S. life segment. In the
Canadian life segment, adverse mortality in the third quarter of 1997
exceeded expectations and contributed to the overall increase from the same
period in prior year. The accident and health segment increase correlated
with the increase in premiums discussed above as well as poor experience on
the U.K. block of business during the third quarter of 1997. These risks were
subject to the Company's underwriting and were not part of the outside
managed accident and health pools for which the Company took a charge in the
first quarter of 1997. The increase in claims and other policy benefits in
the other international segment correlated with the increase in premiums from
the Latin American and Asia Pacific regions discussed above.
Accident and Health Pool Charge. The Company reported a charge
totaling $18.0 million during the first quarter of 1997 associated with the
decision to exit all outside-managed accident and health pools, along with
the run-off claims from certain accident and health reinsurance pools in
which the Company has already terminated its participation. The adjustment
in this segment represented management's current estimate to reserve fully
for claim payments attributable to outside-managed accident and health pools.
The reserve increase of $18.0 million was developed from information received
from the accident and health reinsurance pool managers, along with the
Company management's judgment of the completeness of the amounts reported.
Policy Acquisition Costs and Other Insurance Expenses. Policy
acquisition costs and other insurance expenses totaled $134.7 million, or
22.3% of net premium for the first nine months of 1997. This was higher than
the 20.2% of net premiums for the entire year ended December 31, 1996. Net
of the impact of fees paid to retrocessionnaires in connection with financial
reinsurance and allowances on asset intensive products, those costs
represented $123.2 million, or 20.4% of net premium, for the first nine
months of 1997 compared to total costs of $82.8 million, or 17.2% of net
premium, for the same period of 1996. The impact of higher renewal
allowances on traditional reinsurance treaties contributed to the increase in
this ratio.
15
<PAGE> 16
Policy acquisition costs and other insurance expenses by major segment were
as follows (dollars in millions):
<TABLE>
<CAPTION>
Change
------
1997 1996 Dollars Percent
---- ---- ------- -------
<S> <C> <C> <C> <C>
U.S. life $ 92.6 65.9 26.7 40.5
Canadian life 8.4 7.0 1.4 20.0
Accident and health 19.3 11.9 7.4 62.2
Other international 14.4 8.9 5.5 61.8
------ ---- ---- ----
Totals $134.7 93.7 41.0 43.8
====== ==== ==== ====
</TABLE>
In the U.S. life segment, policy acquisition costs and other insurance
expenses as a percent of net premium, net of the effect of financial
reinsurance and allowances on other investment-type products, represented
19.4% for the first nine months of 1997 compared to 15.4% for the same period
of 1996 and 17.2% for the entire year ended December 31, 1996. The increase
in policy acquisition costs and other insurance expenses for the U.S. life
segment was primarily a result of changes in the mix of business and
decreases in deferrable commissions due to higher renewal commissions on
several significant blocks of business.
In the Canadian life segment, policy acquisition costs and other insurance
expenses as a percent of net premiums decreased to 15.6% for the first nine
months of 1997 compared to 17.0% for the same period of 1996 and 16.1% of net
premiums for the entire year ended December 31, 1996. The decrease resulted
from increased use of yearly renewable term products from coinsurance
products since September 30, 1996. This change resulted in fewer commissions
as a percent of net premiums for the current period compared to the same
period in 1996.
In the accident and health segment, policy acquisition costs and other
insurance expenses as a percentage of net premiums increased to 32.9% for the
first nine months of 1997 compared to 30.9% for the same period of 1996.
This increase was attributed to the mix of new business growth discussed in
the premiums above.
In the other international segment, policy acquisition costs and other
insurance expenses as a percent of net premium increased to approximately
19.5% for the first nine months of 1997 compared to 16.7% for the entire year
of 1996. The Company's other international segment percentages fluctuate due
primarily to the timing of client company reporting and the diversity in the
mix of business being reported.
Other Operating Expenses. Other operating expenses increased $6.3
million, or 21.6%, to $35.5 million in the first nine months of 1997 compared
to $29.2 million for the same period in 1996. Expenses of the Canadian life
and accident and health operations remained relatively
16
<PAGE> 17
stable compared to the prior year. U.S. life operating expenses increased $0.9
million and other international business operating expenses increased $4.9
million. The overall increase in other expenses was the result of activities
associated with pursuing new business opportunities and international expansion
efforts. The operating expense increases were consistent with expectations and
remain relatively stable as a percent of net premiums.
Interest Expense. Interest expense related to the issuance of
long-term debt by Reinsurance Group of America, Incorporated on March 22,
1996, and the on-going financing of a portion of the Company's Australian
reinsurance operations during 1996.
Provision for Income Taxes. Income tax expense from operations before
realized investment gains/(losses and non-operating charge) represented
approximately 36.1% of pre-tax income for the first nine months of 1997 and
37.1% of pre-tax income for the same period of 1996. The Company calculated
a tax benefit of $7.6 million on the $18.0 million accident and health
reserve adjustment recorded in the first quarter of 1997. The effective tax
rate of 36.1% on income from operations is representative of the Company's
expected annual effective tax rate for 1997, based upon its current mix of
reinsurance business and applicable tax rates associated with the markets in
which it is transacting business.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1997, the Company generated $169.4 million in
cash from operating activities and $494.8 million from deposits related to
the stable value and other investment-type reinsurance business. These
increases were offset by cash used for investing of $648.4 million, dividends
to stockholders of $4.2 million and the repurchase of the Company's stock of
$8.7 million. The sources of funds of RGA's operating subsidiaries consist
of premiums received from ceding insurers, investment income, and proceeds
from sales and redemption of investments. Premiums are generally received in
advance of related claim payments. The funds are primarily applied to policy
claims and benefits, operating expenses, income taxes, and investment
purchases.
In addition, RGA's liquidity position was supported by the $100.0 million
offering of Senior Notes in March 1996, of which approximately $76.0 million
was maintained in investment-grade securities at the holding company level at
September 30, 1997. The ability of the Company to make principal and
interest payments, and to continue to pay dividends to stockholders, is
ultimately dependent on the earnings and surplus of RGA's subsidiaries, as
well as the investment earnings on the undeployed debt proceeds. The transfer
of funds from the subsidiaries to RGA is subject to applicable insurance laws
and regulations. Any future increases in liquidity needs due to relatively
large policy loans, unanticipated material claim levels, or recapture of
treaties would be met first by operating cash flows and then by selling
fixed-income securities or short-term investments.
RGA recently declared a cash dividend of $0.06 per share of common stock
payable November 26, 1997, to shareholders of record as of November 5, 1997.
All future payments of dividends are at the discretion of the Company's Board
of Directors and will depend on the Company's earnings,
17
<PAGE> 18
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
subsidiaries.
During the second quarter of 1997, RGA began a program of repurchasing shares
of RGA common stock. The program is intended to enable RGA to satisfy
obligations under its stock option program. Purchases were made in the open
market, at the then prevailing market price. As of September 30, 1997,
226,150 shares have been repurchased through the program.
INVESTMENTS
Invested assets increased by $719.8 million, or 31.7%, to $2,991.8 million at
September 30, 1997, compared to $2,272.0 million at December 31, 1996. The
increase resulted from cash deposits for stable value and other
investment-type products of $494.8 million and positive operating cash flows.
The increase was also attributed to an increase in the fair value adjustment
of fixed maturities available for sale of $50.2 million. The Company has
historically generated positive cash flows from operations, and expects to do
so in the future.
At September 30, 1997, the Company's portfolio of fixed maturity securities
available for sale had net unrealized gains before tax of $97.8 million.
18
<PAGE> 19
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) A report on Form 8-K was filed with the Securities and Exchange
Commission on July 28, 1997, regarding the three-for-two stock split
of the registrant's Common Stock. The stock split was in the form of a
stock dividend payable August 29, 1997, to stockholders of record on
August 8, 1997. No other reports on Form 8-K were filed during the
three months ended September 30, 1997.
19
<PAGE> 20
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 11/12/97
-------------------------------------
A. Greig Woodring
President & Chief Executive Officer
/s/ Jack B. Lay 11/12/97
------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial
Officer
20
<PAGE> 21
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit
Number Description
- - ------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of RGA incorporated by
reference to Exhibit 3.1 to Registration Statement on Form S-1
(No. 33-58960) filed on March 2, 1993
3.2 Bylaws of RGA incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-1 (No. 33-58960) filed on March
2, 1993
3.3 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 March 31, 1997
(No. 1-11848)
27.1 Financial Data Schedule
</TABLE>
21
<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>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 2,166,331
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,757
<MORTGAGE> 151,501
<REAL-ESTATE> 0
<TOTAL-INVEST> 2,991,829
<CASH> 18,429
<RECOVER-REINSURE> 52,292
<DEFERRED-ACQUISITION> 275,412
<TOTAL-ASSETS> 3,756,412
<POLICY-LOSSES> 2,530,824
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 252,014
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 107,715
0
0
<COMMON> 261
<OTHER-SE> 470,973
<TOTAL-LIABILITY-AND-EQUITY> 3,756,412
604,850
<INVESTMENT-INCOME> 134,376
<INVESTMENT-GAINS> 566
<OTHER-INCOME> 13,929
<BENEFITS> 528,403
<UNDERWRITING-AMORTIZATION> 45,808
<UNDERWRITING-OTHER> 88,900
<INCOME-PRETAX> 49,231
<INCOME-TAX> 16,553
<INCOME-CONTINUING> 32,678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,295
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.25
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
