<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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------
COMMISSION FILE NUMBER 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-1627032
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
660 MASON RIDGE CENTER DRIVE
ST. LOUIS, MISSOURI 63141
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(314) 453-7439
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---- ----
VOTING COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF OCTOBER 31, 1998:
25,243,612 SHARES NON-VOTING COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF
OCTOBER 31, 1998: 4,945,000 SHARES
<PAGE> 2
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
<CAPTION>
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I - FINANCIAL INFORMATION
------------------------------
<S> <C>
1 Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 (Unaudited) and December 31, 1997 3
Condensed Consolidated Statements of Income and Comprehensive
Income (Unaudited)
Three and nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-11
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-30
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 30
5 Other Information 30
6 Exhibits and Reports on Form 8-K 30
Signatures 31
Index to Exhibits 32
</TABLE>
2
<PAGE> 3
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Fixed maturity securities
Available for sale-at fair value (amortized cost of $3,406,589 and
$2,416,308 at September 30, 1998, and December 31, 1997, respectively) $3,547,717 $2,528,290
Mortgage loans on real estate 213,717 165,452
Policy loans 471,637 480,234
Funds withheld at interest 185,517 165,413
Short-term investments 152,051 277,635
Other invested assets 21,833 16,977
---------- ----------
Total investments 4,592,472 3,634,001
Cash and cash equivalents 24,485 37,395
Accrued investment income 67,922 34,377
Premiums receivable 193,685 119,554
Funds withheld 103,209 33,957
Reinsurance ceded receivables 279,425 316,156
Deferred policy acquisition costs 337,351 289,842
Other reinsurance balances 205,581 153,134
Other assets 42,326 55,134
---------- ----------
Total assets $5,846,456 $4,673,550
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $1,376,011 $1,244,541
Interest sensitive contract liabilities 2,664,109 1,969,270
Other policy claims and benefits 404,899 344,848
Other reinsurance balances 238,727 232,096
Deferred income taxes 141,035 110,763
Other liabilities 121,847 157,616
Long-term debt 107,695 106,830
---------- ----------
Total liabilities 5,054,323 4,165,964
Minority interest 7,436 8,265
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) - -
Common stock (par value $.01 per share; 75,000,000 shares authorized,
26,049,375 shares issued) 261 261
Non-voting common stock (par value $.01 per share; 20,000,000 shares
authorized; 4,945,000 shares issued; no shares issued at December 31, 1997) 49 -
Additional paid in capital 486,906 264,748
Retained earnings 247,327 196,685
Accumulated other comprehensive income 70,989 59,089
---------- ----------
Total stockholders' equity before treasury stock 805,532 520,783
Less treasury shares held of 805,763 and 844,535 at cost at
September 30, 1998, and December 31, 1997, respectively (20,835) (21,462)
---------- ----------
Total stockholders' equity 784,697 499,321
---------- ----------
Total liabilities and stockholders' equity $5,846,456 $4,673,550
========== ==========
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 AND COMPREHENSIVE INCOME
(Unaudited)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- ---------- ---------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $276,371 $197,910 $ 822,884 $604,850
Investment income, net of related expenses 71,702 46,532 207,606 134,376
Realized investment gains (losses), net 639 (353) 3,358 566
Other revenue 6,938 4,938 17,593 13,929
-------- -------- ---------- --------
Total revenues 355,650 249,027 1,051,441 753,721
BENEFITS AND EXPENSES:
Claims and other policy benefits 200,505 143,870 630,575 447,209
Interest credited 38,821 21,668 111,178 63,194
Accident and health pool charge - - - 18,000
Policy acquisition costs and other insurance expenses 66,508 46,440 170,870 134,708
Other operating expenses 15,015 12,797 44,568 35,526
Interest expense 2,228 1,949 6,440 5,853
-------- -------- ---------- --------
Total benefits and expenses 323,077 226,724 963,631 704,490
-------- -------- ---------- --------
Income before income taxes and minority interest 32,573 22,303 87,810 49,231
Provision for income taxes 11,765 7,797 31,563 16,553
-------- -------- ---------- --------
Income before minority interest 20,808 14,506 56,247 32,678
Minority interest in earnings of consolidated subsidiaries (151) (134) (464) (383)
-------- -------- ---------- --------
Net income $ 20,657 $ 14,372 $ 55,783 $ 32,295
======== ======== ========== ========
Other comprehensive income, net of taxes 5,393 23,857 11,900 27,120
-------- -------- ---------- --------
Comprehensive income $ 26,050 $ 38,229 $ 67,683 $ 59,415
======== ======== ========== ========
Basic earnings per share $ 0.68 $ 0.57 $ 2.04 $ 1.27
======== ======== ========== ========
Diluted earnings per share $ 0.68 $ 0.56 $ 2.01 $ 1.26
======== ======== ========== ========
Weighted average number of diluted shares outstanding
(in thousands) 30,525 25,618 27,649 25,635
======== ======== ========== ========
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,
--------------------------------
1998 1997
----------- -----------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 55,783 $ 32,295
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (33,617) (28,391)
Premiums receivable (75,846) (66,382)
Deferred policy acquisition costs (52,111) (42,560)
Funds withheld (69,046) (6,102)
Reinsurance ceded balances 28,977 7,283
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 245,705 236,065
Deferred income taxes 24,041 9,665
Other assets and other liabilities (23,597) 37,906
Amortization of goodwill and value of business acquired 1,171 973
Amortization of net investment discounts (11,327) (10,277)
Realized investment gains, net (3,358) (566)
Other, net (11) (558)
----------- -----------
Net cash provided by operating activities 86,764 169,351
INVESTING ACTIVITIES:
Sales of investments:
Fixed maturity securities 307,622 245,341
Mortgage loans - 28,178
Maturities of fixed maturity securites 32,252 177,989
Purchases of fixed maturity securities (1,399,701) (1,003,293)
Cash invested in:
Mortgage loans (63,516) (81,135)
Policy loans (6,155) (5,797)
Funds withheld at interest (20,104) (21,521)
Principal payments on:
Mortgage loans 7,914 1,060
Policy loans 14,752 3,158
Change in short-term and other invested assets 113,532 7,571
----------- -----------
Net cash used in investing activities (1,013,404) (648,449)
FINANCING ACTIVITIES:
Dividends to stockholders (5,141) (4,242)
Proceeds from stock offering 221,837 -
Purchase of treasury stock - (8,740)
Reissuance of treasury stock 627 907
Minority interest in earnings 464 383
Excess deposits on universal life and other investment type
policies and contracts 694,839 494,759
Proceeds from long-term debt issuance - 1,906
----------- -----------
Net cash provided by financing activities 912,626 484,973
Effect of exchange rate changes 1,104 (591)
----------- -----------
Change in cash and cash equivalents (12,910) 5,284
Cash and cash equivalents, beginning of period 37,395 13,145
----------- -----------
Cash and cash equivalents, end of period $ 24,485 $ 18,429
=========== ===========
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, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited, condensed, consolidated financial statements of
Reinsurance Group of America, Incorporated and Subsidiaries (the "Company")
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1998. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report for the
year ended December 31, 1997.
The Company has reclassified the presentation of certain prior period
information to conform to the 1998 presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands except per share information):
<TABLE>
<CAPTION>
THREE MONTHS ENDING NINE MONTHS ENDING
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net income $20,657 $14,372 $55,783 $32,295
Numerator for basic earnings per share--
income available to common stockholders 20,657 14,372 55,783 32,295
Effect of dilutive securities - - - -
------- ------- ------- -------
Numerator for diluted earnings per share--
income available to common stockholders
after assumed conversions $20,657 $14,372 $55,783 $32,295
======= ======= ======= =======
6
<PAGE> 7
<CAPTION>
THREE MONTHS ENDING NINE MONTHS ENDING
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Denominator:
Denominator for basic earnings per share--
weighted average shares 30,186 25,383 27,346 25,437
Effect of dilutive securities:
Employee stock plan 339 234 303 198
------- ------- ------- -------
Denominator for diluted earnings per share--
adjusted weighted average shares and assumed
conversions 30,525 25,618 27,649 25,635
======= ======= ======= =======
Basic earnings per share $ 0.68 $ 0.57 $ 2.04 $ 1.27
------- ------- ------- -------
Diluted earnings per share $ 0.68 $ 0.56 $ 2.01 $ 1.26
------- ------- ------- -------
</TABLE>
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income," effective for years beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The most significant items of
comprehensive income are net income, the change in unrealized gains and
losses on securities, and the change in foreign currency translation. Both
the change in unrealized gains and losses on securities and the change in
foreign currency translation historically have been reported as a component
of stockholders' equity. The adoption of SFAS No. 130 does not affect
results of operations or financial position, but affects their presentation
and disclosure. The Company has adopted SFAS No. 130 as of January 1, 1998,
and the following summaries present the components of the Company's
comprehensive income, other than net income, for the three and nine month
periods ending September 30, 1998 and 1997 (dollars in thousands):
7
<PAGE> 8
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 1998:
===============================================================================================
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency translation
adjustments $(8,012) $ 2,804 $(5,208)
Unrealized gains on securities:
Unrealized holding gains
arising during period 17,080 (6,064) 11,016
Less: reclassification
adjustment for gains
realized in net income 639 (224) 415
------- ------- -------
Net unrealized gains 16,441 (5,840) 10,601
------- ------- -------
Other comprehensive income $ 8,429 $(3,036) $ 5,393
===============================================================================================
<CAPTION>
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1998:
===============================================================================================
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency translation
adjustments $(10,540) $ 3,689 $(6,851)
Unrealized gains on securities:
Unrealized holding gains
arising during period 33,620 (12,730) 20,890
Less: reclassification
adjustment for gains
realized in net income 3,358 (1,219) 2,139
-------- -------- -------
Net unrealized gains 30,262 (11,511) 18,751
-------- -------- -------
Other comprehensive income $ 19,722 $ (7,822) $11,900
===============================================================================================
8
<PAGE> 9
<CAPTION>
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 1997:
===============================================================================================
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency translation
adjustments $(1,308) $ 458 $ (850)
Unrealized gains on securities:
Unrealized holding gains
arising during period 40,253 (15,775) 24,478
Less: reclassification
adjustment for (losses)
realized in net income (353) 124 (229)
------- -------- -------
Net unrealized gains 40,606 (15,899) 24,707
------- -------- -------
Other comprehensive income $39,298 $(15,441) $23,857
===============================================================================================
<CAPTION>
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1997:
===============================================================================================
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign currency translation
adjustments $(4,702) $ 1,646 $(3,056)
Unrealized gains on securities:
Unrealized holding gains
arising during period 50,987 (20,451) 30,536
Less: reclassification
adjustment for gains
realized in net income 566 (206) 360
------- -------- -------
Net unrealized gains 50,421 (20,245) 30,176
------- -------- -------
Other comprehensive income $45,719 $(18,599) $27,120
===============================================================================================
</TABLE>
9
<PAGE> 10
The following schedule reflects the change in accumulated other comprehensive
income for the period ending September 30, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
===============================================================================================
ACCUMULATED
UNREALIZED OTHER
FOREIGN GAINS ON COMPREHENSIVE
CURRENCY ITEMS SECURITIES INCOME
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ (8,201) $67,290 $59,089
Current period change (6,851) 18,751 11,900
-------- ------- -------
Balance at September 30, 1998 $(15,052) $86,041 $70,989
===============================================================================================
</TABLE>
4. SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information,"
effective for years beginning after December 15, 1997. SFAS No. 131 requires
that a public company report financial and descriptive information about its
reportable operating segments pursuant to criteria that differ from current
accounting practice. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision-maker in deciding how to
allocate resources and in assessing performance. The adoption of SFAS No.
131 will not affect the Company's results of operations or financial
position, but will affect the disclosure of segment information. The Company
plans to adopt SFAS No. 131 during 1998, however SFAS No. 131 need not be
applied to interim financial information in the initial year of its
application.
5. STOCK OFFERING
In June 1998, Reinsurance Group of America, Incorporated (RGA) completed a
public offering in which it sold 4,945,000 shares of non-voting common stock
traded on the New York Stock Exchange under the symbol RGA.A. The offering
was priced to the public at $47.00 per share and provided net proceeds of
approximately $221.8 million.
10
<PAGE> 11
6. DIVIDENDS AND OPTIONS
In July 1998, the Board of Directors of RGA approved an additional grant of
89,000 options to non-executive management. These options are for non-voting
common shares and will have similar vesting schedules as the most recent
grants under the RGA Flexible Stock Plan.
Also in July, the Board of Directors of RGA approved a stock repurchase
program to accumulate non-voting shares in anticipation of exercise of these
options. No shares have been repurchased at September 30, 1998 pursuant to
this program.
7. NEW ACCOUNTING STANDARDS AND DISCLOSURE REQUIREMENTS
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," effective for fiscal years beginning after December 15, 1997.
SFAS No. 132 does not change the measurement or recognition of pension and
other postretirement benefit plans, but standardizes the disclosure
requirements. The adoption of this standard has no impact on the financial
results of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 1999 and is effective for interim
periods in the initial year of adoption. 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 has
not yet determined the effect, if any, of the implementation of SFAS No. 133
on the results of operation, financial position, or liquidity.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following tables reflect the net income before income taxes and minority
interest for the Company's primary operational divisions (dollars in
thousands):
<TABLE>
*****************
* *
*U.S. OPERATIONS*
*****************
<CAPTION>
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 1998
=====================================================
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
=====================================================
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $160,424 $ 327 $ - $160,751
Investment income, net of related expenses 28,755 32,691 - 61,446
Realized investment gains, net 453 144 - 597
Other revenue 40 - 5,883 5,923
-----------------------------------------------------
Total revenues 189,672 33,162 5,883 228,717
BENEFITS AND EXPENSES:
Claims and other policy benefits 117,964 552 - 118,516
Interest credited 10,467 28,101 - 38,568
Policy acquisition costs and other insurance
expenses 26,207 1,894 3,906 32,007
Other operating expenses 6,842 - - 6,842
-----------------------------------------------------
Total benefits and expenses 161,480 30,547 3,906 195,933
Income before income taxes and minority
interest $ 28,192 $ 2,615 $1,977 $ 32,784
=====================================================
<CAPTION>
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 1997
=====================================================
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
=====================================================
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $137,201 $ - $ - $137,201
Investment income, net of related expenses 22,578 15,408 - 37,986
Realized investment gains (losses), net 1,480 (1,847) - (367)
Other revenue (399) - 5,262 4,863
-----------------------------------------------------
Total revenues 160,860 13,561 5,262 179,683
BENEFITS AND EXPENSES:
Claims and other policy benefits 94,020 1,308 - 95,328
Interest credited 8,935 12,388 - 21,323
Policy acquisition costs and other insurance
expenses 28,074 657 3,746 32,477
Other operating expenses 4,858 - - 4,858
-----------------------------------------------------
Total benefits and expenses 135,887 14,353 3,746 153,986
Income before income taxes and minority
interest $ 24,973 $ (792) $1,516 $25,697
=====================================================
</TABLE>
12
<PAGE> 13
<TABLE>
*********************
* *
*CANADIAN OPERATIONS*
*********************
<CAPTION>
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 1998 1997
<S> <C> <C>
REVENUES:
Net premiums $25,704 $17,640
Investment income, net of related expenses 5,886 3,934
Realized investment gains, net - -
Other revenue (31) 134
-------------------------
Total revenues 31,559 21,708
BENEFITS AND EXPENSES:
Claims and other policy benefits 25,063 17,021
Interest credited 216 323
Policy acquisition costs and other insurance expenses 3,714 1,899
Other operating expenses 1,424 1,542
-------------------------
Total benefits and expenses 30,417 20,785
Income before income taxes and minority interest $ 1,142 $ 923
=========================
</TABLE>
<TABLE>
*********************
* *
*OTHER INTERNATIONAL*
*********************
<CAPTION>
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 1998
==========================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS
Direct Reinsurance
==========================================================
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums $ 9,498 $11,612 $14,224 $2,538 $37,872
Investment income, net of related expenses 829 429 465 49 1,772
Realized investment gains, net - - - 42 42
Other revenue 228 - 349 104 681
----------------------------------------------------------
Total revenues 10,555 12,041 15,038 2,733 40,367
BENEFITS AND EXPENSES:
Claims and other policy benefits 7,127 9,794 6,513 1,598 25,032
Interest credited 37 - - - 37
Policy acquisition costs and other
insurance expenses 1,035 554 6,685 814 9,088
Other operating expenses 2,154 653 1,569 1,250 5,626
Interest expense - - 115 70 185
----------------------------------------------------------
Total benefits and expenses 10,353 11,001 14,882 3,732 39,968
Income / (loss) before income
taxes and minority interest $ 202 $ 1,040 $ 156 $ (999) $ 399
==========================================================
13
<PAGE> 14
<CAPTION>
*********************************
* *
*OTHER INTERNATIONAL (CONTINUED)*
*********************************
FOR THE THREE MONTH PERIOD ENDING SEPTEMBER 30, 1997
==========================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS
Direct Reinsurance
==========================================================
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums $5,701 $4,640 $ 9,705 $ 986 $21,032
Investment income, net of related expenses 747 1,710 328 216 3,001
Realized investment (losses), net - - (1) - (1)
Other revenue 14 30 - 4 48
----------------------------------------------------------
Total revenues 6,462 6,380 10,032 1,206 24,080
BENEFITS AND EXPENSES:
Claims and other policy benefits 5,039 3,587 6,017 315 14,958
Interest credited 22 - - - 22
Policy acquisition costs and other
insurance expenses 800 1,115 3,176 148 5,239
Other operating expenses 146 2,584 1,690 1,289 5,709
Interest expense - - 116 - 116
----------------------------------------------------------
Total benefits and expenses 6,007 7,286 10,999 1,752 26,044
Income / (loss) before income
taxes and minority interest $ 455 $ (906) $ (967) $ (546) $(1,964)
==========================================================
</TABLE>
<TABLE>
*********************
* *
*ACCIDENT AND HEALTH*
*********************
<CAPTION>
FOR THE THREE MONTH PERIODS ENDING SEPTEMBER 30, 1998 1997
<S> <C> <C>
REVENUES:
Net premiums $52,044 $22,037
Investment income, net of related expenses 576 346
Realized investment (losses), net - (22)
Other revenue 365 (107)
--------------------------
Total revenues 52,985 22,254
--------------------------
BENEFITS AND EXPENSES:
Claims and other policy benefits 31,894 16,563
Policy acquisition costs and other insurance expenses 21,684 6,685
Other operating expenses 921 716
--------------------------
Total benefits and expenses 54,499 23,964
--------------------------
(Loss) / income before income taxes and minority interest $(1,514) $(1,710)
==========================
</TABLE>
14
<PAGE> 15
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- - ----------------------------------------------
RESULTS OF OPERATIONS
- - ---------------------
Consolidated income before income taxes and minority interest increased
$10.3 million in the third quarter of 1998, compared to the same period in
1997. Diluted earnings per share were $0.68 for the third quarter of 1998
compared with $0.56 for the same period in 1997. Consolidated net income
before realized capital gains and losses increased to $20.2 million in the
third quarter of 1998 from $14.6 million in the same period in 1997.
The increase in the U.S. operations income before income taxes and
minority interest in the third quarter of 1998 compared to the same period in
1997 was due to increased earnings on asset-intensive business and continued
growth in the traditional business, where premiums increased 16.9%. The
increase in the Canadian operations income before income taxes and minority
interest in the third quarter of 1998 compared to the same period in 1997 was
a result of growth in premiums of 45.7%, which more than offset unfavorable
mortality experience in the quarter. The other international operations
reported income of $0.4 million before income taxes and minority interest in
the third quarter of 1998 compared to a $2.0 million loss in the same period
in 1997. The Latin America and Asia Pacific business showed continued
revenue growth. In addition during 1998, mortality experience improved for
the Latin American direct business compared to the same period in prior year.
The accident and health operations reported a loss of $1.5 million before
income taxes and minority interest in the third quarter of 1998 compared to a
loss of $1.7 million for the same period in 1997.
Net Premiums. Consolidated net premiums increased $78.5 million, or
39.6%, to $276.4 million in the third quarter of 1998, compared to $197.9
million for the same period in 1997. Growth from new in force blocks of
business, renewal premiums from the existing block of business, and new
business premiums from facultative and automatic treaties, contributed to the
premium increase. Business premium levels are significantly influenced by
large transactions and reporting practices of ceding companies and therefore
fluctuate from period to period.
The U.S. operations net premiums in the third quarter of 1998 increased 17.2%
to $160.8 million from the same period in prior year. This was attributed to
continued premium growth resulting from strong production from new in force
blocks of business as well as renewal premiums from the existing blocks of
business.
Net premiums in the Canadian operations in the third quarter of 1998
increased 45.7% to $25.7 million in 1998. New business premiums increased
$2.0 million, while renewal premiums increased $6.1 million compared to the
third quarter of 1997. The increase in renewal premiums was the result of
several treaties produced in December 1997 related to in force blocks of
business with large renewal premiums.
15
<PAGE> 16
The Company's other international operations reported premiums of $37.9
million for the third quarter of 1998 compared to $21.0 million for the same
period in 1997. The 1998 premiums represented approximately $21.1 million
from Latin America, of which approximately $9.5 million was direct premium
generated in Argentina and Chile. Latin America premiums doubled compared to
the same period in 1997. The increase resulted primarily from growth in
reinsurance of privatized pensions in Argentina, as well as reinsurance from
other Latin American markets although direct premiums from Chilean single
premium immediate annuities decreased from prior year due to less favorable
market conditions in Chile during 1998. The Asia Pacific operations and
other markets generated $14.2 million of premiums, an increase of 46.6%
compared to the third quarter in the prior year, predominantly through the
Hong Kong contact office and the subsidiary in Australia.
Accident and health operations net premiums increased $30.0 million to $52.0
million in the third quarter of 1998. The increase primarily resulted from
premiums on contracts signed or renewed in 1997. The Company estimates that
1998 accident and health premiums will increase for the current year, with
significantly lower levels in 1999 and beyond.
Net Investment Income. Consolidated net investment income increased
54.1%, to $71.7 million, in the third quarter of 1998 from the same period in
1997. The cost basis of fixed maturity securities increased $1.3 billion
from the third quarter of 1997. The increase in invested assets was a result
of an increase in operating cash flows on traditional reinsurance;
reinsurance transactions involving deposits for asset-intensive products from
ceding companies, primarily stable value product deposits; and the proceeds
from the Company's non-voting common stock offering during the second quarter
of 1998. The Company's stable value reinsurance is assumed from General
American Life Insurance Company ("General American"), which indirectly owns
approximately 64% of the Company's voting common stock. The amount of future
reinsurance of the stable value product is dependent on General American's
claims-paying rating. Earnings credited and paid to ceding companies are
included in interest credited.
Realized Investment Gains, Net. Consolidated net realized investment
gains increased $1.0 million to $0.6 million in the third quarter of 1998
from the same period in the prior year. Net realized investment gains
resulted from normal restructuring activity within the Company's investment
portfolios.
Other Revenue. Consolidated other revenue increased $2.0 million in the
third quarter of 1998 to $6.9 million. Other revenue includes items such as
profit and risk fees associated with financial reinsurance, treaty recapture
fees, earnings in unconsolidated subsidiaries, management fee income, and other
miscellaneous income. During the third quarter of 1998, financial reinsurance
treaties in the U.S. operations resulted in $4.2 million in financial
reinsurance fees which were partially offset by $3.9 million of fees paid to
retrocessionaires, which is included in policy acquisition costs and other
insurance expenses. The Company's strategy involves the assumption and
subsequent retrocession of most of these financial reinsurance treaties, and
resulted in amounts of $116.7 million and $128.4 million being included in other
reinsurance assets and liabilities, respectively, on the Company's consolidated
balance sheets at September 30, 1998.
16
<PAGE> 17
Balances resulting from the assumption and/or subsequent transfer of
benefits and obligations resulting from cash flows related to variable
annuities have been classified as other reinsurance balance assets and/or
liabilities. Other revenue also included $1.7 million and $1.1 million in
earnings in unconsolidated subsidiaries for the third quarter of 1998 and
1997, respectively.
Claims and Other Policy Benefits. Consolidated claims and other policy
benefits increased 39.4% to $200.5 million, in the third quarter of 1998.
For the third quarter of 1998, total claims and other policy benefits
represented 72.5% of total net premiums compared to 72.7% for the same period
in 1997. The Company expects mortality to fluctuate somewhat from period to
period but believes it is fairly constant over longer periods of time. The
Company continues to monitor mortality trends to determine the
appropriateness of reserve levels.
U.S. operations claims and other policy benefits increased 24.3% in the third
quarter of 1998, primarily as a result of growth of the business in force.
Claims and other policy benefits for traditional reinsurance, as a percentage
of net premiums, increased to 73.5% in the third quarter of 1998 from 68.5%
in the same period in 1997. As a percentage of net premiums, the current
quarter was comparable to the 73.2% of net premiums for the entire year ended
December 31, 1997. The quarter to quarter fluctuation was primarily due to
reserves established for new and renewal blocks of business. Additionally,
this percentage is affected by the timing of premium receipts and claims
reported from client companies.
Canadian operations claims and other policy benefits increased 47.2% in the
third quarter of 1998. Claims and other policy benefits as a percentage of
net premiums increased to 97.5% in the third quarter of 1998 from 96.5% in
the same period in 1997, resulting primarily from mortality experience
fluctuations.
The claims and other policy benefits of the other international business
increased 67.3% in the third quarter of 1998 from the same period in the
prior year. Claims and other policy benefits as a percentage of net premiums
decreased to 66.1% from 71.1%. This fluctuation was primarily the result of
decreases in reserves and policyholder benefits on business from Latin
American direct companies and Asia Pacific business. This percentage will
fluctuate as new business is added and the operation develops.
Accident and health operations claims and other policy benefits increased
$15.3 million in the third quarter of 1998 compared to the same period in
1997. The accident and health operations claims and reserves are subject to
volatility due to the nature of risk covered, which is primarily accident
risk. Reserves are calculated based upon information available, including
industry estimates for certain aviation accidents. In 1997, the Company made
the decision to exit all outside-managed accident and health pools, to cease
marketing accident and health business, and to place the operation into
run-off.
17
<PAGE> 18
Interest credited. Consolidated interest credited increased $17.2
million in the third quarter of 1998 to $38.8 million. Interest credited
represents amounts credited on the Company's asset-intensive and universal
life type products. Asset-intensive products include stable value
operations, bank-owned life insurance and annuity products. These products
are primarily written in the U.S. operations, while the Canadian operations
have a small annuity block of business and the Latin American operations have
a direct universal life product in Argentina. The increase in interest
credited was primarily a result of an increase of $602.8 million in deposits
related to asset-intensive reinsurance since the third quarter of 1997.
Policy Acquisition Costs and Other Insurance Expenses. Consolidated
policy acquisition costs and other insurance expenses, consisting primarily
of allowances, increased 43.2%, to $66.5 million in the third quarter of
1998. As a percentage of net premiums, consolidated policy acquisition costs
and other insurance expenses increased to 24.1% in the third quarter of 1998
from 23.5% during the same period in 1997. Generally, policy acquisition
costs and other insurance expenses fluctuate with business volume and changes
in product mix from period to period.
Within the U.S. operations, policy acquisition costs and other insurance
expenses as a percentage of net premiums for traditional business decreased
to 16.3% in the third quarter of 1998 from 20.5% during the same period in
1997. This was due primarily to new business added during 1998 which was
primarily yearly renewable term reinsurance that did not have a high level of
commissions associated with the premiums. The financial reinsurance business
within the U.S. operations reflects fees of approximately $3.9 million paid
to retrocessionaires during 1998, representing a partial offset to the fees
collected and reflected as other revenues.
In the Canadian operations, policy acquisition costs and other insurance
expenses as a percentage of net premiums increased to 14.4% in the third
quarter of 1998, from 10.8% during the same period in 1997. The increase was
primarily due to processing new business during the current quarter that
resulted in higher commissions as a percent of net premiums, as this business
has high first year commissions. During the same period in 1997, the policy
acquisition costs and other insurance expenses as a percentage of net
premiums was lower as a larger amount of yearly renewable term products were
reinsured that do not have significant commission costs associated with the
business.
Other international operations policy acquisition cost and other insurance
expenses as a percentage of net premiums remained fairly level at 24.0% in
the third quarter of 1998 compared to 24.9% during the same period in 1997.
These percentages fluctuate due to the timing of client company reporting and
variations in the mixture of business being written within the Latin American
and Asia Pacific operations.
Accident and health operations policy acquisition costs and other insurance
expenses as a percentage of net premiums increased to 41.7% in the third
quarter of 1998 from 30.3% during the same period in 1997 resulting from
changes in the mixture of business within the accident and health operations.
18
<PAGE> 19
Other Operating Expenses. Consolidated other operating expenses
increased $2.2 million in the third quarter of 1998 from the same period in
1997. The overall increase in operating expenses was attributed to planned
increases associated with the ongoing growth of the Company.
Interest Expense. Consolidated interest expense during the third
quarter of 1998 related to the 7 1/4% Senior Notes issued in 1996, the
financing of a portion of the Company's Australian reinsurance operations,
RGA Australian Holdings Pty Limited ("Australian Holdings") and interest paid
on an operating line of credit. Interest cost for the third quarter of 1998
and the third quarter of 1997 was $2.2 million and $1.9 million,
respectively. Interest expense related to the 7 1/4% Senior Notes was $1.8
million in the third quarter of 1998 and 1997, respectively.
Provision for Income Taxes. Consolidated income tax expense increased
approximately $4.0 million in the third quarter of 1998 as a result of higher
pre-tax income. Income tax expense from operations before net realized
investment gains represented approximately 36.3% and 35.2% of pre-tax income
for the third quarters of 1998 and 1997, respectively.
19
<PAGE> 20
The following tables reflect the net income before income taxes and minority
interest for the Company's primary operational divisions (dollars in
thousands):
<TABLE>
*****************
* *
*U.S. OPERATIONS*
*****************
<CAPTION>
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1998
=====================================================
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
=====================================================
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $514,961 $ 1,014 $ - $515,975
Investment income, net of related expenses 89,960 89,337 - 179,297
Realized investment gains, net 1,717 981 - 2,698
Other revenue (293) - 13,661 13,368
-----------------------------------------------------
Total revenues 606,345 91,332 13,661 711,338
BENEFITS AND EXPENSES:
Claims and other policy benefits 391,051 2,852 - 393,903
Interest credited 33,064 77,321 - 110,385
Policy acquisition costs and other insurance expenses 86,721 4,504 9,852 101,077
Other operating expenses 19,133 - - 19,133
-----------------------------------------------------
Total benefits and expenses 529,969 84,677 9,852 624,498
Income before income taxes and minority interest $ 76,376 $ 6,655 $ 3,809 $ 86,840
=====================================================
<CAPTION>
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1997
=====================================================
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
=====================================================
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $418,250 $ - $ - $418,250
Investment income, net of related expenses 72,911 35,789 - 108,700
Realized investment gains (losses), net 1,826 (1,391) - 435
Other revenue (23) - 13,318 13,295
-----------------------------------------------------
Total revenues 492,964 34,398 13,318 540,680
BENEFITS AND EXPENSES:
Claims and other policy benefits 298,296 2,284 - 300,580
Interest credited 31,569 30,577 - 62,146
Policy acquisition costs and other insurance expenses 80,621 1,230 10,751 92,602
Other operating expenses 14,889 - - 14,889
-----------------------------------------------------
Total benefits and expenses 425,375 34,091 10,751 470,217
Income before income taxes and minority interest $ 67,589 $ 307 $ 2,567 $ 70,463
=====================================================
</TABLE>
20
<PAGE> 21
<TABLE>
*********************
* *
*CANADIAN OPERATIONS*
*********************
<CAPTION>
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1998 1997
<S> <C> <C>
REVENUES:
Net premiums $75,058 $53,970
Investment income, net of related expenses 16,430 11,541
Realized investment gains, net 617 110
Other revenue 339 203
----------------------
Total revenues 92,444 65,824
BENEFITS AND EXPENSES:
Claims and other policy benefits 69,394 45,371
Interest credited 677 995
Policy acquisition costs and other insurance expenses 9,208 8,428
Other operating expenses 4,824 4,439
----------------------
Total benefits and expenses 84,103 59,233
Income before income taxes and minority interest $ 8,341 $ 6,591
----------------------
</TABLE>
<TABLE>
*********************
* *
*OTHER INTERNATIONAL*
*********************
<CAPTION>
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1998
==================================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS
Direct Reinsurance
==================================================================
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums $35,072 $37,035 $37,630 $ 4,582 $114,319
Investment income, net of related expenses 4,675 1,379 1,518 110 7,682
Realized investment gains, net - - 1 42 43
Other revenue 180 - 2,476 308 2,964
------------------------------------------------------------------
Total revenues 39,927 38,414 41,625 5,042 125,008
BENEFITS AND EXPENSES:
Claims and other policy benefits 30,818 33,544 21,669 3,087 89,118
Interest credited 116 - - - 116
Policy acquisition costs and other
insurance expenses 2,855 1,679 14,312 1,420 20,266
Other operating expenses 5,531 2,085 4,588 3,473 15,677
Interest expense - - 336 153 489
------------------------------------------------------------------
Total benefits and expenses 39,320 37,308 40,905 8,133 125,666
Income / (loss) before
income taxes and minority interest $ 607 $ 1,106 $ 720 $(3,091) $ (658)
==================================================================
21
<PAGE> 22
<CAPTION>
*********************************
* *
*OTHER INTERNATIONAL (CONTINUED)*
*********************************
FOR THE NINE MONTH PERIOD ENDING SEPTEMBER 30, 1997
===================================================================
LATIN AMERICA ASIA OTHER TOTAL
PACIFIC MARKETS
Direct Reinsurance
===================================================================
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums $34,166 $14,032 $24,595 $ 1,222 $74,015
Investment income, net of related
expenses 4,793 2,534 1,255 277 8,859
Realized investment gains, net - - 14 - 14
Other revenue 91 30 - 13 134
-------------------------------------------------------------------
Total revenues 39,050 16,596 25,864 1,512 83,022
BENEFITS AND EXPENSES:
Claims and other policy benefits 31,555 11,956 15,304 656 59,471
Interest credited 53 - - - 53
Policy acquisition costs and other
insurance expenses 3,703 1,342 9,147 203 14,395
Other operating expenses 3,678 3,103 4,639 2,230 13,650
Interest expense - - 354 - 354
-------------------------------------------------------------------
Total benefits and expenses 38,989 16,401 29,444 3,089 87,923
Income / (loss) before income
taxes and minority interest $ 61 $ 195 $(3,580) $(1,577) $(4,901)
===================================================================
</TABLE>
<TABLE>
*********************
* *
*ACCIDENT AND HEALTH*
*********************
<CAPTION>
FOR THE NINE MONTH PERIODS ENDING SEPTEMBER 30, 1998 1997
<S> <C> <C>
REVENUES:
Net premiums $117,532 $ 58,615
Investment income, net of related expenses 1,426 944
Realized investment gains (losses), net - (19)
Other revenue 922 297
-----------------------
Total revenues 119,880 59,837
BENEFITS AND EXPENSES:
Claims and other policy benefits 78,160 41,787
Accident and health pool charge - 18,000
Policy acquisition costs and other insurance expenses 40,304 19,283
Other operating expenses 3,392 1,816
-----------------------
Total benefits and expenses 121,856 80,886
(Loss) before income taxes and minority interest $ (1,976) $(21,049)
-----------------------
</TABLE>
22
<PAGE> 23
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
- - ---------------------------------------------
RESULTS OF OPERATIONS
Consolidated income before income taxes and minority interest increased
$38.6 million in the first nine months of 1998, compared to the same period
in 1997. Diluted earnings per share were $2.01 for the first nine months of
1998 compared with $1.26 for the same period in 1997. Consolidated net income
before realized capital gains and losses increased to $53.6 million in the
first nine months of 1998 from $31.9 million in the same period in 1997.
The increase in the U.S. operations income before income taxes and
minority interest in the first nine months of 1998 compared to the same
period in 1997 was due to increased earnings from asset-intensive business
and financial reinsurance business, combined with continued growth in the
traditional reinsurance business, where premiums increased 23.1%. The
increase in the Canadian operations income before income taxes and minority
interest in the first nine months of 1998 compared to the same period in 1997
was a result of growth in premiums of 39.1%, primarily for renewal business,
and mortality experience in line with expectations. The other international
operations reported a loss of $0.7 million before income taxes and minority
interest in the first nine months of 1998 compared to a $4.9 million loss in
1997. Total revenues in the other international operations increased by
50.6% for the first nine months of 1998 compared to the same period in 1997.
In addition, the direct business in Latin America reported more favorable
mortality experience during 1998 compared to the same period in 1997. This
growth was offset by costs associated with the development of new business in
international markets. The accident and health operations reported a net
loss of $2.0 million for the first nine months of 1998 compared to a loss of
$21.0 million for the same period in 1997. During the first quarter of 1997,
the Company recorded an accident and health charge of $18.0 million, $10.4
million after-tax, to increase reserves associated with run-off claims from
certain accident and health insurance pools in which it had formerly
participated. That action was a result of management's strategic decision to
exit all outside-managed accident and health pools. As of December 31, 1997,
the Company made a strategic decision to cease marketing all accident and
health business.
Net Premiums. Consolidated net premiums increased $218.0 million, or
36.0%, to $822.9 million in the first nine months of 1998, compared to $604.9
million for the same period in 1997. Growth in new in force blocks of
business, renewal premiums from the existing block of business, and new
business premiums from facultative and automatic treaties contributed to the
premium increase. Business premium levels are significantly influenced by
large transactions and reporting practices of ceding companies and therefore
fluctuate from period to period.
The U.S. operations net premiums in the first nine months of 1998 increased
23.4% to $516.0 million from the same period in prior year. This was
attributed to continued premium growth from new in force blocks of business
as well as renewal premiums from existing blocks of business.
23
<PAGE> 24
Net premiums in the Canadian operations in the first nine months of 1998
increased 39.1% to $75.1 million in 1998. New business premiums increased
$0.8 million, while renewal premiums increased $20.3 million compared to the
first nine months of 1997. Several of the treaties produced in December 1997
related to in force blocks of business with large renewal premiums.
The Company's other international operations reported an increase in premiums
of 54.5%, to $114.3 million, for the first nine months of 1998 from the same
period in 1997. The 1998 premiums represented approximately $72.1 million
from Latin America, of which approximately $35.1 million was direct premium
generated in Argentina and Chile. Latin America premiums grew 49.6%, which
resulted primarily from growth in reinsurance of privatized pensions in
Argentina as well as reinsurance from other Latin American markets. The Asia
Pacific operations and other markets generated $42.2 million of premiums, an
increase of 63.5% compared to the first nine months of 1997, predominantly
from the Hong Kong contact office and subsidiary in Australia.
Accident and health operations net premiums increased to $117.5 million in
the first nine months of 1998. The increase resulted primarily from premiums
on contracts signed or renewed in 1997. The Company estimates that 1998
accident and health premiums will increase for the current year, with
significantly lower levels in 1999 and beyond.
Net Investment Income. Consolidated net investment income increased
54.5% to $207.6 million, in the first nine months of 1998 from the same
period in 1997. The cost basis of fixed maturity securities increased $1.3
billion from September 30, 1997. The increase in invested assets was a
result of an increase in operating cash flows on traditional reinsurance;
reinsurance transactions involving deposits for asset-intensive products from
ceding companies, primarily stable value product deposits; and the proceeds
from the Company's issuance of non-voting common shares during the second
quarter of 1998. The average earned yield on the consolidated investment
portfolio decreased to 6.97% for the nine months ending September 30, 1998
compared to 7.25% for the same period in 1997. This decrease in overall
yield reflected the increase in assets supporting the stable value
reinsurance product that are generally of a shorter duration and carry a
lower average yield. This decrease in yield was also affected by the overall
decrease in interest rates. Earnings credited and paid to ceding companies
are included in interest credited.
Realized Investment Gains, Net. Consolidated net realized investment
gains increased $2.8 million to $3.4 million in the first nine months of 1998
from $0.6 million for the same period in the prior year. Net realized
investment gains resulted from normal restructuring activity within the
Company's investment portfolios.
Other Revenue. Consolidated other revenue increased $3.7 million in
the first nine months of 1998 to $17.6 million. Other revenue includes items
such as profit and risk fees associated with financial reinsurance, treaty
recapture fees, earnings in unconsolidated subsidiaries, management fee
income, and other miscellaneous income. During 1998, financial reinsurance
treaties in the U.S. operations resulted in $10.7 million in financial
reinsurance fees
24
<PAGE> 25
which were partially offset by $9.8 million of fees paid to retrocessionaires,
included in policy acquisition costs and other insurance expenses. The Asia
Pacific operations completed a financial reinsurance transaction that resulted
in $2.2 million in financial reinsurance fee revenue through the first nine
months of 1998 that was partially offset by $1.2 million of fees paid to
retrocessionaires. Other revenue also included $2.9 million and $1.3 million in
earnings in unconsolidated subsidiaries for the first nine months of 1998 and
1997, respectively.
Claims and Other Policy Benefits. Consolidated claims and other policy
benefits increased 41.0% to $630.6 million, in the first nine months of 1998.
For the first nine months of 1998, total claims and other policy benefits
represented 76.6% of total net premiums compared to 73.9% for the same period
in 1997. The Company expects mortality to fluctuate somewhat from period to
period but believes it is fairly constant over longer periods of time. The
Company continues to monitor mortality trends to determine the appropriateness
of reserve levels.
U.S. operations claims and other policy benefits increased 31.0% in the first
nine months of 1998, primarily as a result of the overall growth in the business
in force. Claims and other policy benefits as a percentage of net premiums for
traditional reinsurance increased to 75.9% in the first nine months of 1998 from
71.3% in the same period in 1997. This fluctuation was primarily due to
reserves established for new and renewal blocks of business. Additionally, this
percentage is affected by the timing of premium receipts and claims reported
from client companies.
Canadian operations claims and other policy benefits increased 52.9% in the
first nine months of 1998. Claims and other policy benefits as a percentage of
net premiums were 92.5% in the first nine months of 1998 compared to 84.1% for
the same period in 1997. The increase as a percent of premiums was primarily
due to reserves established for new and renewal business during 1998.
The claims and other policy benefits of the other international business in
the first nine months of 1998 increased 49.9% from the same period in the prior
year. Claims and other policy benefits as a percentage of net premiums was
78.0% for the first nine months of 1998 compared to 80.3% for the same period in
1997. The decrease was primarily due to improved mortality experience for some
of the direct business in Latin America.
Accident and health operations claims and other policy benefits increased 87.0%
in the first nine months of 1998 from the same period in the prior year. The
claims and other policy benefits for the first nine months of 1997 do not
include the $18.0 million, or $10.4 million after-tax, accident and health pool
charge taken during the first quarter of 1997, which is separately disclosed on
the income statement. The accident and health operations reserves are subject
to volatility due to the nature of risk covered which is primarily accident
risk. Reserves are calculated based upon current information including industry
estimates for certain aviation accidents.
25
<PAGE> 26
Interest credited. Consolidated interest credited increased $48.0
million in the first nine months of 1998 to $111.2 million. Interest
credited represents amounts credited on the Company's asset-intensive and
universal life type products, including stable value operations, bank-owned
life insurance and annuity products. The increase in interest credited was
primarily a result of an increase of $602.8 million in deposits related to
asset-intensive reinsurance since September 30, 1997.
Policy Acquisition Costs and Other Insurance Expenses. Consolidated
policy acquisition costs and other insurance expenses, consisting primarily
of allowances, increased 26.8%, to $170.9 million in the first nine months of
1998. As a percentage of net premiums, consolidated policy acquisition costs
and other insurance expenses decreased to 20.8% in the first nine months of
1998 from 22.3% during the same period in 1997. This was primarily due to
new business added during 1998 that was yearly renewable term reinsurance and
the addition of larger blocks of business that do not have significant
allowances associated with the business. Generally, policy acquisition costs
and other insurance expenses fluctuate with business volume and changes in
product mix from period to period.
Within the U.S. operations, policy acquisition costs and other insurance
expenses as a percentage of net premiums for traditional business decreased
to 16.8% in the first nine months of 1998 from 19.3% during the same period
in 1997. This was due primarily to new business added during 1998 which was
primarily yearly renewable term reinsurance that did not have a high level of
commissions associated with the premiums. The financial reinsurance business
within the U.S. operations reflects fees of approximately $9.9 million paid
to retrocessionaires during 1998, which represented a partial offset to the
fees collected that were reflected as other revenues.
In the Canadian operations, policy acquisition costs and other insurance
expenses as a percentage of net premiums decreased to 12.3% in the first nine
months of 1998, from 15.6% during the same period in 1997. Although this ratio
increased for the quarter, the decrease for the year to date was primarily due
to the decrease in commission costs associated with large blocks of business
added at the end of 1997 as well as the shift in reinsurance method to yearly
renewable term business.
Other international operations policy acquisition cost and other insurance
expenses as a percentage of net premiums decreased to 17.7% in the first nine
months of 1998 from 19.4% during the same period in 1997. These percentages
fluctuate due to the timing of client company reporting and variations in the
mixture of business being written within the Latin American and Asia Pacific
operations. In addition, the financial reinsurance business within the Asia
Pacific operations reflects fees of approximately $1.2 million paid to
retrocessionaires during the first nine months of 1998, which represented a
partial offset to the fees collected that were reflected as other revenues.
Accident and health segment policy acquisition costs and other insurance
expenses as a percentage of net premiums increased to 34.3% in the first nine
months of 1998 from 32.9%
26
<PAGE> 27
during the same period in 1997, resulting from changes in the mixture of
business within the accident and health operations.
Other Operating Expenses. Consolidated other operating expenses
increased $9.0 million for the first nine months of 1998 compared to the same
period in 1997. The operating expenses represented 5.4% and 5.9% of net
premiums for the first nine months of 1998 and 1997, respectively. The overall
increase in operating expenses was attributed to planned increases associated
with the ongoing growth of the Company.
Interest Expense. Consolidated interest expense for the first nine months
of 1998 and 1997 was $6.4 million and $5.9 million, respectively. Interest
related to the 7 1/4% Senior Notes was $5.5 million in the first nine months of
1998 and 1997, respectively.
Provision for Income Taxes. Consolidated income tax expense increased
$15.0 million in the first nine months of 1998 as a result of higher pre-tax
income. Income tax expense from operations before net realized investment
gains and accident and health pool charge represented approximately 36.1% for
the first nine months of 1998 and 1997. The Company calculated a tax benefit
of $7.6 million on the $18.0 million accident and health reserve adjustment
recorded in the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1998, the Company generated cash of
$86.8 million from operating activities, $221.8 million from the non-voting
common stock offering in June 1998, and $694.8 million from deposits related
to asset-intensive business. These increases were offset by cash used for
investing of $1.0 billion and dividends to stockholders of $5.1 million. The
sources of funds of the operating subsidiaries of RGA consist of premiums
received from ceding insurers, investment income, and proceeds from sales and
redemption of investments. Premiums are generally received in advance of
related claim payments. Funds are primarily applied to policy claims and
benefits, operating expenses, income taxes, and investment purchases.
As the Company continues its expansion efforts, management continually
analyzes capital adequacy issues. At RGA's annual stockholders' meeting on
May 27, 1998, a new class of non-voting common stock was authorized. In June,
the Company completed a public offering in which it raised approximately $221.8
million. The Company is using the net proceeds for general business growth and
development.
In addition, the Company has access to a $25.0 million line of credit.
During the first nine months of 1998, $15.0 million was drawn upon that line.
This liability is included in other liabilities on the balance sheet at
September 30, 1998. The ability of RGA and Australian Holdings to make
principal and interest payments, and to continue to pay dividends to
stockholders, is ultimately dependent on the earnings and surplus of RGA's
subsidiaries, the investment earnings on the undeployed funds at RGA, and the
Company's ability to raise additional capital. The transfer of funds from
the subsidiaries to RGA is subject to applicable insurance laws and
regulations. Any
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<PAGE> 28
future increases in liquidity needs due to relatively large policy loans or
unanticipated material claim levels would be met first by operating cash
flows and then by selling fixed-income securities or short-term investments.
INVESTMENTS
Invested assets increased 26.4%, to $4.6 billion at September 30, 1998,
compared to $3.6 billion at December 31, 1997. The increase resulted from
cash deposits for asset-intensive products of $486.7 million for the first
nine months of 1998, proceeds from the issuance of non-voting common shares
of $221.8 million, and positive operating cash flows. These increases were
enhanced by an increase in the fair value adjustment of fixed maturities
available for sale of $29.1 million. The Company has historically generated
positive cash flows from operations, and expects this to continue in the
future.
At September 30, 1998, the Company's portfolio of fixed maturity
securities available for sale had net unrealized gains before tax of $141.1
million.
YEAR 2000
Many of the world's computer systems currently record years in a
two-digit format. If not addressed, such computer systems will be unable to
properly interpret dates beyond the year 1999, which could lead to business
disruptions in the U.S. and internationally (the "Year 2000" issue). The
potential costs and uncertainties associated with the Year 2000 issue will
depend on a number of factors, including software, hardware and the nature of
the industry in which a company operates. Additionally, companies must
coordinate with other entities with which they electronically interact.
The Company has established a plan to address the Year 2000 issue and the work
being performed in accordance with that plan is progressing on schedule. The
Company has identified all systems that are critical to the Company's operations
and has commenced testing those systems. Inventories of substantially all
software, hardware, and trading partners were compiled in a Year 2000 database.
Each of these items has been researched for Year 2000 compliance, and the
majority have been verified as ready. An outline of a contingency plan has been
developed and meetings are being held with the Company's clients to finalize
recovery procedures. The Company also relies on information from external
parties such as ceding companies and vendors, and is working with those parties
to obtain compliance letters and cooperation with the Company's testing efforts.
The Company could be adversely affected if external parties fail to comply with
the Year 2000 issue. This is a situation over which the Company has no direct
control.
The Company does not have a mainframe computer and its "legacy" systems are
Oracle-based. A legacy system typically represents older systems that are not
currently being maintained or enhanced. As the Company continues to grow, the
steady investment in technology has allowed it to keep systems current and
handle impending problems, such as Year 2000, in the normal
28
<PAGE> 29
course of business. Therefore, the remediation that was required to become Year
2000 compliant was completed relatively quickly.
The Company anticipates that testing of substantially all critical systems will
be completed by December 31, 1998. However, the Company is still accumulating
information relating to some of its foreign subsidiaries and ventures. Two
types of testing have been completed on RGA's core systems: program tests and
global tests. Separate test environments were established and representative
subsets of production data were loaded onto systems on test machines. The
objective was to assure that day-to-day processing would operate correctly
before, during, and beyond the Year 2000. Transactions were processed to
simulate all business functions over important time thresholds between July 1998
and January 2001. These tests revealed minor issues that were addressed. As of
October 30, 1998, 100% of the core systems have been tested successfully and 70%
of the compliance letters requested from external parties have been received.
It is anticipated that the testing and assessment of the Company's Year 2000
readiness will be completed by March 31, 1999, in accordance with the
Company's plan.
The Company expects to incur most of the costs of the Year 2000 effort
primarily from testing of the administrative systems in St. Louis and Canada.
These systems support the administration of the majority of the Company's
subsidiaries. Therefore, the combined costs of these two locations would
effectively represent substantially all of the Company's Year 2000 costs.
Costs for these locations were approximately $265,000 through September 30,
1998, and it is anticipated that additional costs will be less than $600,000.
Year 2000 costs have not been material nor are they expected to be material
in the future. The Company has estimated costs based on its current
knowledge and testing.
The goal of the Company is to be substantially Year 2000 compliant by March
31, 1999. Also, key external parties or service providers may fail to make
their systems Year 2000 compliant by the necessary dates. There can be no
assurances that this goal will be met or that there will not be failures on
the part of external parties. Such circumstances could have a material
adverse impact on the Company's operations and financial results.
CAUTIONARY STATEMENT
Certain statements contained in this filing are or may be deemed to be
"forward-looking statements" under the Private Securities Litigation Reform
Act of 1995. Such statements include, but are not limited to, statements
relating to the Company's financial position, growth prospects and targets,
industry trends, trends in or expectations regarding operations and capital
commitments, the sufficiency of claims reserves, estimated premium levels in
the accident and health operations, and Year 2000 compliance. Because such
statements are based on management's current views and assumptions, they are
subject to risks and uncertainties.
Numerous factors could cause actual results and events to differ
materially from those expressed or implied by forward-looking statements (the
"Cautionary Statements"), including, without limitation, (i) general economic
conditions affecting the demand for insurance and
29
<PAGE> 30
reinsurance in the Company's current and planned markets, (ii) material
changes in mortality and claims experience, (iii) competitive factors and
competitors' responses to the Company's initiatives, (iv) successful
execution of the Company's entry into new markets, (v) successful development
and introduction of new products, (vi) the stability of governments and
economies in foreign markets, (vii) fluctuations in U.S. and foreign interest
rates and securities and real estate markets, (viii) the success of the
Company's clients, including General American and its affiliates, and (ix)
changes in laws, regulations, and accounting standards applicable to the
Company and its subsidiaries.
Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary
Statements. Readers are therefore cautioned not to place undue reliance on
such forward-looking statements.
PART II - OTHER INFORMATION
- - ---------------------------
ITEM 1 LEGAL PROCEEDINGS
From time to time, the Company is subject to litigation and arbitration
related to its reinsurance business and to employment-related matters in the
normal course of its business. Management does not believe that the Company
is a party to any such pending litigation or arbitration that would have a
material adverse effect on its future operations.
ITEM 5 OTHER INFORMATION
The Securities Exchange Act Rule 14a-8 permits shareholders to submit
proposals to be included in the Company's proxy statement for the annual
meeting of the shareholders. The Company must consider including a proposal
in the proxy statement if the Company receives notice of the proposal at
least 120 days prior to the corresponding date of the Company's proxy
statement for the previous year's annual meeting. Shareholder proposals
submitted outside the processes of Rule 14a-8 must be submitted to the
Company by March 15, 1999.
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, 1998.
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<PAGE> 31
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 11/10/98
----------------------------------------
A. Greig Woodring
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Jack B. Lay 11/10/98
----------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
31
<PAGE> 32
<TABLE>
INDEX TO EXHIBITS
<CAPTION>
Exhibit
Number Description
- - ------ -----------
<C> <S>
3.1 Restated Articles of Incorporation of RGA incorporated by
reference to Exhibit 3.1 to Registration Statement on Form S-1
(No. 33-58960) filed on March 2, 1993
3.2 Bylaws of RGA incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-1 (No. 33-58960) filed on
March 2, 1993
3.3 Form of Certificate of Designations for Series A Junior
Participating Preferred Stock incorporated by reference to
Exhibit 3.3 to Amendment No. 1 to Registration Statement on
Form S-1 (No. 33-58960) filed on April 14, 1993
27.1 Financial Data Schedule
</TABLE>
32
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
[DEBT-HELD-FOR-SALE] 3,546,144
[DEBT-CARRYING-VALUE] 0
[DEBT-MARKET-VALUE] 0
[EQUITIES] 9,187
[MORTGAGE] 213,717
[REAL-ESTATE] 1,573
[TOTAL-INVEST] 4,592,472
<CASH> 24,485
[RECOVER-REINSURE] 279,425
[DEFERRED-ACQUISITION] 337,351
<TOTAL-ASSETS> 5,846,456
[POLICY-LOSSES] 4,040,120
[UNEARNED-PREMIUMS] 0
[POLICY-OTHER] 404,899
[POLICY-HOLDER-FUNDS] 0
[NOTES-PAYABLE] 107,695
0
0
<COMMON> 310
<OTHER-SE> 784,387
<TOTAL-LIABILITY-AND-EQUITY> 5,846,456
[PREMIUMS] 822,884
[INVESTMENT-INCOME] 207,606
[INVESTMENT-GAINS] 3,358
[OTHER-INCOME] 17,593
[BENEFITS] 741,753
[UNDERWRITING-AMORTIZATION] 54,098
[UNDERWRITING-OTHER] 116,772
<INCOME-PRETAX> 87,810
<INCOME-TAX> 31,563
<INCOME-CONTINUING> 56,247
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,783
<EPS-PRIMARY> 2.04
<EPS-DILUTED> 2.01
[RESERVE-OPEN] 0
[PROVISION-CURRENT] 0
[PROVISION-PRIOR] 0
[PAYMENTS-CURRENT] 0
[PAYMENTS-PRIOR] 0
[RESERVE-CLOSE] 0
[CUMULATIVE-DEFICIENCY] 0
</TABLE>
