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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
--- Act of 1934 for the fiscal year ended December 31, 1997
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
660 Mason Ridge Center Drive, St. Louis, Missouri 63141
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 453-7300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
Common Stock, par value $0.01 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 1,
1998, as reported on the New York Stock Exchange was approximately
$460,325,743.
As of March 1, 1998, Registrant had outstanding 25,225,480 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Annual Report to Shareholders for the year ended
December 31,1997 ("the Annual Report") are incorporated by reference in Part
I of this Form 10-K. Certain portions of the Definitive Proxy Statement in
connection with the 1998 Annual Meeting of Shareholders ("the Proxy
Statement") which will be filed with the Securities and Exchange Commission
not later than 120 days after the Registrant's fiscal year ended December 31,
1997, are incorporated by reference in Part III of this Form 10-K.
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REINSURANCE GROUP OF AMERICA, INCORPORATED
Form 10-K
YEAR ENDED DECEMBER 31, 1997
<TABLE>
INDEX
<CAPTION>
Item Page
Number of this Form
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<S> <C>
Part I
1. Business 3
2. Properties 19
3. Legal Proceedings 20
4. Submission of Matters to a Vote of Security Holders 20
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters 20
6. Selected Financial Data 21
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
7A. Quantitative and Qualitative Disclosures about Market Risk 21
8. Financial Statements and Supplementary Data 21
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 21
Part III
10. Directors and Executive Officers of the Registrant 21
11. Executive Compensation 23
12. Security Ownership of Certain Beneficial Owners and Management 23
13. Certain Relationships and Related Transactions 23
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23
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Item 1. BUSINESS
A. Overview
Reinsurance Group of America, Incorporated (RGA) is an insurance holding
company formed December 31, 1992. Approximately 64% of RGA's outstanding
shares are indirectly owned by General American Life Insurance Company
(General American) at December 31, 1997. The consolidated financial
statements include the assets, liabilities, and results of operations of RGA;
RGA Reinsurance Company (RGA Reinsurance); RGA Australian Holdings PTY,
Limited (Australian Holdings); RGA Reinsurance Company (Barbados) Ltd. (RGA
Barbados); RGA Insurance Company (Bermuda) Ltd. (RGA Bermuda); RGA
International, Ltd. (RGA International), formerly G.A. Canadian Holdings,
Ltd., a Canadian marketing and insurance holding company; RGA Sudamerica,
S.A., a Chilean holding company; RGA Holdings Limited (U.K.) (RGA UK), a
United Kingdom holding company; and Manantial Seguros de Vida, S.A.
(Manantial) now know as General American Argentina Seguros de Vida, S.A., an
Argentine life insurance company; along with the subsidiaries of RGA
Reinsurance, Australian Holdings, RGA International, RGA Sudamerica, S.A.,
and RGA UK subject to an ownership position of fifty percent or more
(collectively, the Company).
The Company is primarily engaged in life reinsurance, accident and
health reinsurance, and international life and disability on a direct and
reinsurance basis. In addition, the Company provides reinsurance of
non-traditional business including asset-intensive products and financial
reinsurance. RGA and its predecessor, the Reinsurance Division of General
American, have been engaged in the business of life reinsurance since 1973.
As of December 31, 1997, the Company had approximately $4.7 billion in
consolidated assets.
Reinsurance is an arrangement under which an insurance company, the
"reinsurer," agrees to indemnify another insurance company, the "ceding
company," for all or a portion of the insurance risks underwritten by the
ceding company. Reinsurance is designed to (i) reduce the net liability on
individual risks, thereby enabling the ceding company to increase the volume
of business it can underwrite, as well as increase the maximum risk it can
underwrite on a single life or risk; (ii) stabilize operating results by
leveling fluctuations in the ceding company's loss experience; (iii) assist
the ceding company to meet applicable regulatory requirements; and (iv)
enhance the ceding company's financial strength and surplus position.
Life reinsurance primarily refers to reinsurance of individual term life
insurance policies, whole life insurance policies, universal life insurance
policies, and joint and survivor insurance policies. Ceding companies
typically contract with more than one company to reinsure their business.
Reinsurance may be written on an indemnity or an assumption basis. Indemnity
reinsurance does not discharge a ceding company from liability to the
policyholder; a ceding company is required to pay the full amount of its
insurance obligations regardless of whether it is entitled or able to receive
payments from its reinsurers. In the case of assumption reinsurance, the
ceding company is discharged from liability to the policyholder, with such
liability passed to the reinsurer. Reinsurers also may purchase reinsurance,
known as retrocession reinsurance, to cover their own risk exposure.
Reinsurance companies enter into retrocession agreements for reasons similar
to those that cause primary insurers to purchase reinsurance.
Reinsurance may be written on a facultative basis or an automatic treaty
basis. Facultative reinsurance is individually underwritten by the reinsurer
for each policy to be reinsured, with the pricing and other terms established
at the time the policy is underwritten based upon rates negotiated in
advance. Facultative reinsurance normally is purchased by insurance
companies for medically impaired lives, unusual risks, or liabilities in
excess of binding limits on their automatic treaties.
An automatic reinsurance treaty provides that the ceding company will
cede risks to a reinsurer on specified blocks of business where the
underlying policies meet the ceding company's underwriting criteria. In
contrast to facultative reinsurance, the reinsurer does not approve each
individual risk. Automatic reinsurance treaties generally provide that the
reinsurer will be liable for a portion of the risk associated with the
specified policies written by the ceding company. Automatic reinsurance
treaties specify the ceding company's binding limit, which is the maximum
amount of risk on a given life that can be ceded automatically and that the
reinsurer must accept. The binding limit may be stated either as a multiple
of the ceding company's retention or as a stated dollar amount.
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Facultative and automatic reinsurance may be written as yearly renewable
term, coinsurance, or modified coinsurance, which vary with the type of risk
assumed and the manner of pricing the reinsurance. Under a yearly renewable
term treaty, the reinsurer assumes only the mortality or morbidity risk.
Under a coinsurance arrangement, depending upon the terms of the contract,
the reinsurer may share in the risk of loss due to mortality or morbidity,
lapses, and the investment risk, if any, inherent in the underlying policy.
Modified coinsurance differs from coinsurance only in that the assets
supporting the reserves are retained by the ceding company while the risk is
transferred to the reinsurer.
Generally, the amount of life reinsurance ceded under facultative and
automatic reinsurance agreements is stated on either an excess or a quota
share basis. Reinsurance on an excess basis covers amounts in excess of an
agreed-upon retention limit. Retention limits vary by ceding company and
also vary by age and underwriting classification of the insured, product, and
other factors. Under quota share reinsurance, the ceding company states its
retention in terms of a fixed percentage of the risk that will be retained,
with the remainder up to the maximum binding limit to be ceded to one or more
reinsurers.
Reinsurance agreements, whether facultative or automatic, may provide
for recapture rights on the part of the ceding company. Recapture rights
permit the ceding company to reassume all or a portion of the risk formerly
ceded to the reinsurer after an agreed-upon period of time (generally 10
years), subject to certain other conditions. Recapture of business
previously ceded does not affect premiums ceded prior to the recapture of
such business.
The potential adverse effects of recapture rights are mitigated by the
following factors: (i) recapture rights vary by treaty and the risk of
recapture is a factor which is taken into account when pricing a reinsurance
agreement; (ii) ceding companies generally may exercise their recapture
rights only to the extent they have increased their retention limits for the
reinsured policies; and (iii) ceding companies generally must recapture all
of the policies eligible for recapture under the agreement in a particular
year if any are recaptured, which prevents a ceding company from recapturing
only the most profitable policies. In addition, when a ceding company
increases its retention and recaptures reinsured policies, the reserves
maintained by the reinsurer to support the recaptured portion of the policies
are released by the reinsurer.
B. Corporate Structure
RGA is a holding company, the principal assets of which consist of the
common stock of RGA Reinsurance and RGA International, as well as investments
in several other subsidiaries or joint ventures. The primary source of funds
for RGA to make dividend distributions is dividends paid to RGA by RGA
Reinsurance and RGA International, securities maintained in its investment
portfolio, and its ability to raise additional capital. RGA Reinsurance's
principal source of funds is derived from current operations. RGA
International's principal source of funds is dividends on its equity interest
in RGA Canada Management Company, Ltd. (RGA Canada Management), whose
principal source of funds is dividends paid by RGA Life Reinsurance Company
of Canada (RGA Canada). RGA Canada's principal source of funds is derived
from current operations.
The U.S. life reinsurance business represented 66.3% of the Company's
business as measured by 1997 net premiums and has experienced significant
growth since inception through 1997. The U.S. operations market life
reinsurance, reinsurance of asset-intensive products, and financial
reinsurance, through RGA Reinsurance, primarily to the largest U.S. life
insurance companies. RGA Reinsurance, a Missouri domiciled stock life
insurance company, is wholly-owned by RGA. As of December 31, 1997, RGA
Reinsurance had regulatory capital and surplus of $249.3 million.
The Company's Canadian life reinsurance business, which represented
10.0% of the Company's business as measured by 1997 net premiums, is
conducted primarily through RGA Canada, an indirect subsidiary of RGA
International. RGA International, a wholly-owned subsidiary of RGA, is a New
Brunswick, Canada, marketing and insurance holding company which owns 100% of
RGA Canada Management, also a New Brunswick, Canada, holding company, which
in turn owns 100% of RGA Canada. During 1997, RGA International issued
250,000 Class A Preferred Shares, Series I to RGA for a cash consideration of
$17.4 million. The funds were contributed to RGA Canada Management in
exchange for 250,000 Class A Preferred Shares, Series I. RGA Canada
Management then contributed the same amount to RGA Canada in exchange for
500,000 newly issued Common Shares. The Canadian operations provide insurers
with traditional reinsurance as well as assistance with capital management
activity. As of December 31, 1997, RGA Canada had regulatory capital and
surplus of $64.5 million.
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The Company's accident and health reinsurance business, which
represented 10.9% of the Company's business as measured by 1997 net premiums,
is assumed by RGA Reinsurance. As of December 31, 1997, RGA Reinsurance
owned 51% of Fairfield Management Group, Inc. (Fairfield), formerly known as
Great Rivers Holding Company, which in turn owns 100% of Great Rivers
Reinsurance Management, Inc. (Great Rivers Reinsurance Management). Great
Rivers Reinsurance Management performs underwriting and administrative
services for the accident and health business reinsured by RGA Reinsurance.
In addition, Fairfield owns 100% of Reinsurance Partners, Inc. (Re Partners),
formerly known as Adrian Baker Reinsurance Intermediaries Inc. Fairfield
also owns 80% of RGA U.K. Underwriting Agency Limited (RGA UK Underwriting),
a contact office for RGA Reinsurance in the United Kingdom. Management of
Fairfield owns the remaining 49% of Fairfield. Management of RGA UK
Underwriting owns the remaining 20% of RGA UK Underwriting. RGA and
management have granted each other certain rights of first refusal with
respect to the stock of Fairfield. In December 1997, RGA Reinsurance was
notified by management of Fairfield of their intent to exercise their put
options for their 49% minority ownership interest as of January 1, 1998.
Based upon the Company's decision to cease marketing accident and health
business, the Company established a reserve of approximately $3,000,000
against the intangible asset that will arise related to the excess of the
purchase price over the fair value of net assets acquired for this put
option. See Item 13 "Certain Relationships and Related Transactions."
Business in the other international segment represented 12.8% of the
Company's business as measured by 1997 net premiums. The other international
operations include results from the Latin American operations, Asia Pacific
operations, and Market Development operations. Other international business
includes direct and reinsurance business from a joint venture and
subsidiaries in Latin America, Australia, and the United Kingdom, as well as
traditional reinsurance of life and health products through RGA Reinsurance.
Latin American direct business is comprised primarily of Chilean single
premium annuities and Argentine group life and individual universal life
products. RGA Sudamerica, S.A., which is 99% owned by RGA and 1% owned by
RGA Barbados, is a Chilean holding company which currently has a 50%
investment in BHIF America Seguros de Vida, S.A. (BHIF America), and a 99%
investment in RGA Reinsurance Company Chile S.A. (RGA Chile), (the remaining
1% of RGA Chile is owned by RGA Barbados). BHIF America sells Chilean
insurance products, including single premium immediate annuities, credit
life, and disability insurance. In July 1996, RGA created RGA Chile, which
is licensed to assume life reinsurance business in Chile. To date, all
business assumed by RGA Chile was ceded from BHIF America. RGA also operates
in Argentina through Manantial, a subsidiary which is 99% owned by RGA and 1%
owned by RGA Sudamerica S.A. Manantial markets and sells individual, group,
credit and universal life and disability insurance. RGA Reinsurance also
provides life and certain forms of disability reinsurance to life insurance
companies throughout the world.
In January 1996, RGA formed Australian Holdings, a wholly-owned holding
company, and RGA Reinsurance Company of Australia Limited (RGA Australia), a
wholly-owned reinsurance company of Australian Holdings licensed to assume
life reinsurance in Australia.
RGA Barbados was formed and capitalized in 1995, providing reinsurance
for a portion of certain business assumed by RGA Reinsurance from the ITT
Lyndon Life Insurance Company and certain other reinsurance business. During
1996, RGA also formed a subsidiary in Bermuda, RGA Bermuda, which had not
commenced any business as of December 31, 1997.
Historical Review
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On December 31, 1992, RGA Canada assumed the General American
Reinsurance Division's Canadian business by means of a retrocession
reinsurance agreement with General American (the Canadian Retrocession
Agreement). On the same date, RGA Canada retroceded back to the Reinsurance
Division pursuant to a retrocession agreement with General American amounts
assumed by RGA Canada pursuant to the Canadian Retrocession Agreement which
exceeded RGA Canada's retention limits (the RGA Canada Retrocession
Agreement). On December 31, 1992, the Reinsurance Division also made a C$10
million capital contribution to RGA Canada through RGA International and
transferred to RGA Canada cash equal to the liabilities assumed by RGA Canada
pursuant to the Canadian Retrocession Agreement, net of amounts retroceded
back to the Reinsurance Division pursuant to the RGA Canada Retrocession
Agreement.
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On January 1, 1993, RGA Reinsurance entered into a retrocession
reinsurance agreement with General American (known as the U.S. Retrocession
Agreement and, together with the Canadian Retrocession Agreement, known as
the Retrocession Agreements) pursuant to which all of the business of the
General American Reinsurance Division (including the Canadian business
retroceded back to the Reinsurance Division by RGA Canada pursuant to the RGA
Canada Retrocession Agreement) was transferred to RGA Reinsurance, net of the
financial effects of all other retrocession agreements of the Reinsurance
Division. As of January 1, 1993, the Reinsurance Division also made a $10
million capital contribution to RGA Reinsurance and transferred to RGA
Reinsurance investment assets equal to the liabilities assumed by RGA
Reinsurance pursuant to the U.S. Retrocession Agreement. The remainder of
the investment portfolio was transferred by the Reinsurance Division to RGA
in April 1993, along with the stock of RGA Reinsurance and RGA International
to RGA. As of the first day of June 1993, all of the full time employees in
the Reinsurance Division transferred to RGA Reinsurance.
The foregoing transactions, including the transfer to RGA of the stock
of RGA Reinsurance and RGA International, the execution of the Retrocession
Agreements, the transfers of investment assets to RGA and RGA Reinsurance,
and the capital contributions to RGA Canada and RGA Reinsurance, are
hereinafter collectively referred to as the "Restructuring."
Intercorporate Relationships
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As a result of the Restructuring, the Company has all the economic
benefits and risks of the reinsurance agreements ceded by General American
pursuant to the Retrocession Agreements, although General American currently
remains the contracting party with some of the underlying ceding companies.
RGA operates on a stand-alone basis, however General American or its
affiliates continue to provide certain administrative and other services to
RGA and RGA Reinsurance pursuant to separate administrative services
agreements, and provide investment management and advisory services to RGA,
RGA Reinsurance, Australian Holdings, RGA Barbados, and RGA Canada pursuant
to separate agreements.
The transfer of the Reinsurance Division to RGA has had no material
effect on the existing reinsurance business of the Reinsurance Division.
Some business of RGA Reinsurance continues to be written through General
American pursuant to a marketing agreement between RGA Reinsurance and
General American. Under the marketing agreement, General American has agreed
to amend and terminate its existing assumed and retroceded reinsurance
agreements pursuant to the Retrocession Agreements only at the direction of
RGA Reinsurance, thus giving RGA Reinsurance the contractual right to direct
future changes to existing reinsurance agreements. Further, General American
has agreed, during the term of the marketing agreement, to enter into
additional reinsurance agreements under which it is the reinsurer at, and
only upon, the direction of RGA Reinsurance. Therefore, until January 1,
2000, the date on which the marketing agreement expires, General American
will be precluded from competing with the Company without the Company's
consent, unless RGA Reinsurance elects to terminate the marketing agreement
earlier. Pursuant to the U.S. Retrocession Agreement, any new reinsurance
contracts will automatically be retroceded to RGA Reinsurance. Although
primary insurers must look to General American for payment in the first
instance with respect to reinsurance business written through General
American, the Company will be ultimately liable to General American with
respect to such reinsurance. General American charges RGA Reinsurance
quarterly an amount equal to, on an annual basis, 0.25% of specified
policy-related liabilities that are associated with existing reinsurance
treaties written by General American for the benefit of RGA Reinsurance. Most
of the existing reinsurance agreements between General American and various
ceding companies were transferred to RGA Reinsurance, replacing General
American as the direct party to the treaties. As of December 31, 1997, eleven
companies had not novated their business directly to RGA Reinsurance, which
represented approximately 2.4% of consolidated net premiums.
Ratings
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The ability of RGA Reinsurance to write reinsurance for its own account
will depend on its financial condition and its ratings. A.M. Best, an
independent insurance company rating organization, has rated RGA Reinsurance
"A+." A.M. Best's ratings are based upon an insurance company's ability to
pay policyholder obligations and are not directed toward the protection of
investors. A.M. Best's ratings for insurance companies currently range from
"A++" to "F", and some companies are not rated. Publications of A.M. Best
indicate that "A+" and "A++" ratings are assigned to those companies which,
in A.M. Best's opinion, have achieved superior overall
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performance when compared to the standards established by A.M. Best and
generally have demonstrated a strong ability to meet their policyholder
obligations over a long period of time. In evaluating a company's financial
strength and operating performance, A.M. Best reviews the company's
profitability, leverage, and liquidity as well as its spread of risk, the
quality and appropriateness of its reinsurance program, the quality and
diversification of its assets, the adequacy of its policy or loss reserves,
the adequacy of its surplus, its capital structure, management's experience
and objectives, and policyholders' confidence.
Additionally, RGA Reinsurance has received an "AA" rating from Standard
& Poor's and an "A1" rating from Moody's Investor Services (Moody's) for
claims-paying ability. These ratings represent Standard & Poor's (S&P's)
third highest rating and Moody's fifth highest rating. RGA has an "A"
long-term debt rating from S&P and "A3" long term debt rating from Moody's.
Regulation
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RGA Reinsurance, RGA Canada, BHIF America, RGA Chile, Manantial, RGA
Barbados, RGA Bermuda, RGA Australia, and RGA UK are regulated by authorities
in Missouri, Canada, Chile, Argentina, Barbados, Bermuda, Australia, and the
United Kingdom, respectively. RGA Reinsurance is subject to regulations in
the other jurisdictions in which it is licensed or authorized to do business.
Insurance laws and regulations, among other things, establish minimum capital
requirements and limit the amount of dividends, distributions, and
intercompany payments affiliates can make without prior regulatory approval.
Missouri law imposes restrictions on the amounts and type of investments
insurance companies like RGA Reinsurance may hold.
Guidelines on Minimum Continuing Capital and Surplus Requirements
(MCCSR) became effective for Canadian insurance companies in December 1992,
and Risk-Based Capital (RBC) guidelines promulgated by the National
Association of Insurance Commissioners (NAIC) became effective for U.S.
companies in 1993. The MCCSR risk-based capital guidelines, which are
applicable to RGA Canada, prescribe surplus requirements and take into
account both assets and liabilities in establishing solvency margins. The
RBC guidelines, applicable to RGA Reinsurance, similarly identify minimum
capital requirements based upon business levels and asset mix. Both RGA
Canada and RGA Reinsurance maintain capital levels in excess of the amounts
required by the applicable guidelines. Regulations in Chile, Argentina,
Australia, Barbados and Bermuda, also require certain minimum capital levels,
and subject the companies operating there to oversight by the applicable
regulatory bodies. The Company's subsidiaries in Chile, Argentina,
Australia, Barbados, and Bermuda meet the minimum capital requirements in
their respective jurisdiction. The Company cannot predict the effect that
any proposed or future legislation or rule-making in the countries in which
the Company operates may have on the financial condition or operations of the
Company or its subsidiaries.
RGA is regulated in Missouri as an insurance holding company. The
Company is subject to regulation under the insurance and insurance holding
company statutes of Missouri. The Missouri insurance holding company laws
and regulations generally require insurance and reinsurance subsidiaries of
insurance holding companies to register with the Missouri Department of
Insurance and to file with the Missouri Department of Insurance certain
reports describing, among other information, their capital structure,
ownership, financial condition, certain intercompany transactions, and
general business operations. The Missouri insurance holding company statutes
and regulations also require prior approval of, or in certain circumstances,
prior notice to the Missouri Department of Insurance of certain material
intercompany transfers of assets, as well as certain transactions between
insurance companies, their parent companies and affiliates.
Under Missouri insurance laws and regulations, unless (i) certain
filings are made with the Missouri Department of Insurance, (ii) certain
requirements are met, including a public hearing, and (iii) approval or
exemption is granted by the Missouri Director of Insurance, no person may
acquire any voting security or security convertible into a voting security of
an insurance holding company, such as RGA, which controls a Missouri
insurance company, or merge with such a holding company, if as a result of
such transaction such person would "control" the insurance holding company.
"Control" is presumed to exist under Missouri law if a person directly or
indirectly owns or controls 10% or more or the voting securities of another
person.
Current Missouri law (applicable to RGA and RGA Reinsurance) permits
the payment of dividends or distributions which, together with dividends or
distributions paid during the preceding 12 months, do not exceed the greater
of (i) 10% of statutory capital and surplus as of the preceding December 31
or (ii) statutory net gain from
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operations for the preceding calendar year. Any proposed dividend in excess
of this amount is considered an "extraordinary dividend" and may not be paid
until it has been approved, or a 30-day waiting period has passed during
which it has not been disapproved, by the Missouri Director of Insurance. In
addition, dividends may be paid only to the extent the insurer has earned
surplus (as opposed to contributed surplus). For example, the maximum amount
available for payment of dividends in 1998 by RGA Reinsurance under Missouri
law, without the prior approval of the Missouri Director of Insurance, is
$24.9 million.
In contrast to current Missouri law, the NAIC Model Insurance Holding
Company Act (the Model Act) defines an extraordinary dividend as a dividend
or distribution which, together with dividends or distributions paid during
the preceding 12 months, exceeds the lesser of (i) 10% of statutory capital
and surplus as of the preceding December 31 or (ii) statutory net gain from
operations for the preceding calendar year. The Company is unable to predict
whether, when, or in what form Missouri will enact a new measure for
extraordinary dividends. The maximum amount available for payment on
dividends in 1998 by RGA Reinsurance under the Model Act without prior
approval of the Missouri Director of Insurance would have been $12.1 million
at December 31, 1997.
In addition to the foregoing, Missouri insurance laws and regulations
require that the statutory surplus of RGA Reinsurance following any dividend
or distribution be reasonable in relation to its outstanding liabilities and
adequate to meet its financial needs. The Missouri Director of Insurance may
bring an action to enjoin or rescind the payment of a dividend or
distribution by RGA Reinsurance that would cause its statutory surplus to be
inadequate under the standards of Missouri.
There are no express restrictions on the declaration of dividends by RGA
International, RGA Canada Management, or RGA Canada under Canadian insurance
laws and regulations. However, RGA Canada must give notice of any dividend
to the Superintendent of Financial Institutions of Canada at least 10 days
prior to the date of payment. In addition, the Canadian MCCSR guidelines
consider both assets and liabilities in establishing solvency margins, the
effect of which could limit the maximum amount of dividends that may be paid
by RGA Canada. RGA Canada's ability to declare and pay dividends in the
future will be affected by its continued ability to comply with such
guidelines. The maximum amount available for payment of dividends by RGA
Canada to RGA Canada Management under the Canadian MCCSR guidelines was $15.5
million at December 31, 1997.
The insurance laws and regulations, as well as the level of supervisory
authority that may be exercised by the various insurance departments, vary by
jurisdiction, but generally grant broad powers to supervisory agencies or
regulators to examine and supervise insurance companies and insurance holding
companies with respect to every significant aspect of the conduct of the
insurance business, including approval or modification of contractual
arrangements. These laws and regulations generally require insurance
companies to meet certain solvency standards and asset tests, to maintain
minimum standards of business conduct, and to file certain reports with
regulatory authorities, including information concerning their capital
structure, ownership, and financial condition, and subject insurers to
potential assessments for amounts paid by guarantee funds.
RGA Reinsurance and RGA Canada are required to file annual or quarterly
statutory financial statements in each jurisdiction in which they are
licensed. Additionally, RGA Reinsurance and RGA Canada are subject to
periodic examination by the insurance departments of the jurisdictions in
which each is licensed, authorized, or accredited. The most recent
examination of RGA Reinsurance by the Missouri Department of Insurance was
for the year ended December 31, 1995. The result of this examination
contained no material adverse findings. RGA Canada, which was formed in
1992, was reviewed by the Canadian Superintendent of Financial Institutions
during 1997. The result of this examination contained no material adverse
findings.
RGA Australia is required to file a quarterly statistical return and
annual financial statement with the Insurance and Superannuation Commission
of Australia (ISC). RGA Australia is subject to additional reviews by the
ISC on an as required basis. In August 1997, RGA Australia was reviewed by
the ISC with no material adverse findings.
RGA Barbados is required to file an annual financial statement with the
Office of the Supervisor of Insurance of Barbados.
Manantial as a direct life insurance company is required to file annual
and quarterly statutory financial statements in Argentina which are reviewed
by external auditors and filed with the Superintendencia de Seguros de
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la Nacion (Superintendencia-Argentina). Additionally, Manantial is subject
to periodic examination by the Superintendencia-Argentina. The most recent
examination by the Superintendencia-Argentina was in March 1997. The results
of this examination were discussed with management and all adjustments were
reflected during 1997.
BHIF America and RGA Chile are required to file annual and quarterly
regulatory financial statements in Chile which are reviewed by external
auditors annually and filed with the Superintendencia de Valores y Seguros de
Chile (Superintendencia-Chile). The most recent examination by the
Supeintendencia-Chile was during 1997. The result of this examination
contained no material adverse findings.
Although some of the rates and policy terms of U.S. direct insurance
agreements are regulated by state insurance departments, the rates, policy
terms, and conditions of reinsurance agreements generally are not subject to
regulation by any regulatory authority. However, the NAIC Model Law on
Credit for Reinsurance, which has been adopted in most states, impose certain
requirements for an insurer to take reserve credit for reinsurance ceded to a
reinsurer. Generally, the reinsurer is required to be licensed or accredited
in the insurer's state of domicile, or security must be posted for reserves
transferred to the reinsurer in the form of letter of credit or assets placed
in trust. The NAIC Life and Health Reinsurance Agreements Model Regulation,
which has been passed in most states, imposes additional requirements for
insurers to claim reserve credit for reinsurance ceded (excluding YRT
reinsurance and non-proportional reinsurance). These requirements include
bona fide risk transfer, an insolvency clause, written agreements, and filing
of reinsurance agreements involving in force business, among other things.
In the event of a default on any debt that may be incurred by RGA or the
bankruptcy, liquidation, or other reorganization of RGA, the creditors and
stockholders of RGA will have no right to proceed against the assets of RGA
Reinsurance, RGA Canada, or other insurance or reinsurance company
subsidiaries of RGA. If RGA Reinsurance were to be liquidated, such
liquidation would be conducted by the Missouri Director of Insurance as the
receiver with respect to such insurance company's property and business. If
RGA Canada were to be liquidated, such liquidation would be conducted
pursuant to the general laws relating to the winding-up of Canadian federal
companies. In both cases, all creditors of such insurance company,
including, without limitation, holders of its reinsurance agreements and, if
applicable, the various state guaranty associations, would be entitled to
payment in full from such assets before RGA, as a direct or indirect
stockholder, would be entitled to receive any distributions made to it prior
to commencement of the liquidation proceedings, and, if the subsidiary was
insolvent at the time of the distribution, shareholders of RGA might likewise
be required to refund dividends subsequently paid to them.
If RGA Australia were to be liquidated, such liquidation would be
conducted pursuant to the general laws relating to winding-up of Australian
insurance companies as prescribed in the Australian Life Insurance Act 1995
and conducted in accordance with the Corporations Law of the State or
internal territory under which RGA Australia was incorporated. The assets of
RGA Australia would then be applied by specific priority as specified in the
Corporations Law of the State.
Certain state legislatures have considered or enacted laws that alter,
and in many cases increase, state regulation of insurance holding companies.
In recent years, the NAIC and state legislators have begun re-examining
existing laws and regulations, specifically focusing on insurance company
investments and solvency issues, risk-based capital guidelines, intercompany
transactions in a holding company system, and rules concerning extraordinary
dividends.
Discussions continue in the Congress of the United States concerning the
future of the McCarran-Ferguson Act, which exempts the "business of
insurance" from most federal laws, including anti-trust laws, to the extent
such business is subject to state regulation. Judicial decisions narrowing
the definition of what constitutes the "business of insurance" and repeal or
modification of the McCarran-Ferguson Act may limit the ability of the
Company, and RGA Reinsurance in particular, to share information with respect
to matters such as rate-setting, underwriting, and claims management. It is
not possible to predict the effect of such decisions or change in the law on
the operation of the Company.
Competition
- -----------
Reinsurers compete on the basis of many factors, including financial
strength, pricing and other terms and conditions of reinsurance agreements,
reputation, service, and experience in the types of business underwritten.
The U.S. and Canadian life reinsurance markets are served by numerous
international and domestic reinsurance
9
<PAGE> 10
companies. The Company believes that RGA Reinsurance's primary competitors
in the U.S. life reinsurance market are currently Transamerica Occidental
Life Insurance Company, Swiss Re Life of America, Security Life of Denver,
Life Reassurance Corporation of America, and Lincoln National Corporation.
However, within the reinsurance industry, this can change from year to year.
The Company believes that RGA Canada's major competitors in the Canadian life
reinsurance market are Swiss Re Life Canada and Munich Reinsurance Company of
Canada.
The other international life operations compete with subsidiaries of
several U.S. individual and group life insurers and reinsurers and other
internationally-based insurers and reinsurers, some of which are larger and
have access to greater resources than the Company. Competition is primarily
on the basis of price, service, and financial strength.
Employees
- ---------
As of December 31, 1997, the Company had 379 employees located in the
United States, Canada, Argentina, Chile, the United Kingdom, Hong Kong,
Australia, and Japan. None of these employees are represented by a labor
union. The Company believes that employee relations at all of its
subsidiaries are good.
C. Industry Segments
The Company obtains substantially all of its revenues through
reinsurance agreements that cover a portfolio of life insurance products,
including term life, credit life, universal life, whole life, and joint and
last survivor (JLS) insurance, as well as annuities, financial reinsurance,
accident and health insurance, and direct premiums which include single
premium pension annuities and group life. Generally, the Company, through a
subsidiary, has provided reinsurance and to a lesser extent insurance for
mortality and morbidity risks associated with such products. With respect to
asset-intensive products, the Company has also provided reinsurance for
investment-related risks. RGA Reinsurance also writes a small amount of
primary insurance on General American directors and officers, and a small
amount of short term life insurance.
The Company's reinsurance and insurance operations are classified into
four main operational segments: U.S., Canadian, accident and health, and other
international. The U.S. operations provide life reinsurance and non-traditional
reinsurance to domestic clients. The Canadian operations provide insurers with
traditional reinsurance as well as assistance with capital management activity.
The accident and health operations include both domestic and international
reinsurance. Other international business includes direct and reinsurance
business from a joint venture and subsidiaries in Latin America, Australia, and
the United Kingdom, as well as reinsurance of life and health products through
RGA Reinsurance. Of the other international segment, 52.8% related to direct
insurance based on 1997 net premiums. Revenue, income (loss) before income
taxes and minority interest, assets, and aggregate depreciation and amortization
attributable to each industry segment for 1997, 1996, and 1995, are set forth in
Note 14 of Notes to Consolidated Financial Statements, which Note is hereby
incorporated by reference.
10
<PAGE> 11
The following table sets forth the Company's gross and net premiums from
new business and renewal business attributable to each of the industry
segments for the periods indicated:
</TABLE>
<TABLE>
New Business and Renewal Premiums by Segment
(dollars in millions)
<CAPTION>
Year Ended December 31
----------------------
1997 1996 1995
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Gross Premiums:
New business:
U.S. operations $ 167.9 59.7 $142.9 65.6 $111.5 66.5
Canadian operations 20.6 7.3 14.7 6.7 9.8 5.8
Accident and health operations <F1> - - - - - -
Other international operations <F2> 92.7 33.0 60.3 27.7 46.4 27.7
-------- ----- ------ ----- ------ -----
Subtotal 281.2 100.0 217.9 100.0 167.7 100.0
Renewals:
U.S. operations 519.3 64.3 477.7 71.7 403.4 69.5
Canadian operations 84.8 10.5 66.8 10.0 55.2 9.5
Accident and health operations <F1> 187.5 23.2 112.3 16.8 107.8 18.6
Other international operations <F2> 16.0 2.0 9.9 1.5 14.2 2.4
-------- ----- ------ ----- ------ -----
Subtotal 807.6 100.0 666.7 100.0 580.6 100.0
Total:
U.S. operations 687.2 63.1 620.6 70.2 514.9 68.8
Canadian operations 105.4 9.7 81.5 9.2 65.0 8.7
Accident and health operations <F1> 187.5 17.2 112.3 12.7 107.8 14.4
Other international operations <F2> 108.7 10.0 70.2 7.9 60.6 8.1
-------- ----- ------ ----- ------ -----
Total $1,088.8 100.0 $884.6 100.0 $748.3 100.0
======== ===== ====== ===== ====== =====
Net Premiums:
New Business:
U.S. operations $ 95.2 46.8 $102.9 58.6 $ 66.4 54.9
Canadian operations 16.4 8.1 14.4 8.2 8.4 6.9
Accident and health operations <F1> - - - - - -
Other international operations <F2> 91.7 45.1 58.3 33.2 46.2 38.2
-------- ----- ------ ----- ------ -----
Subtotal 203.3 100.0 175.6 100.0 121.0 100.0
Renewals:
U.S. operations 459.1 72.6 383.5 76.8 347.7 77.4
Canadian operations 67.2 10.6 48.7 9.8 40.9 9.1
Accident and health operations <F1> 90.7 14.4 57.2 11.4 47.8 10.7
Other international operations <F2> 15.2 2.4 9.9 2.0 12.6 2.8
-------- ----- ------ ----- ------ -----
Subtotal 632.2 100.0 499.3 100.0 449.0 100.0
Total:
U.S. operations $ 554.3 66.3 $486.4 72.1 $414.1 72.7
Canadian operations 83.6 10.0 63.1 9.3 49.3 8.6
Accident and health operations <F1> 90.7 10.9 57.2 8.5 47.8 8.4
Other international operations <F2> 106.9 12.8 68.2 10.1 58.8 10.3
-------- ----- ------ ----- ------ -----
Total $ 835.5 100.0 $674.9 100.0 $570.0 100.0
======== ===== ====== ===== ====== =====
<FN>
<F1> The term "new business" is not applicable to the accident and health
segment, which generally writes reinsurance agreements with terms of
one year.
<F2> Direct single premium annuities in Chile are reported as new business
in the other international segment.
</TABLE>
11
<PAGE> 12
The following table sets forth selected information concerning assumed
reinsurance business in force for the Company's U.S., Canadian and other
international segments for the indicated periods. (The term "in force"
refers to face amounts or net amounts at risk and is not applicable to the
accident and health segment.)
<TABLE>
Reinsurance Business In Force by Segment
(dollars in billions)
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
U.S. operations $171.7 75.5 $137.3 81.6 $127.9 83.1
Canadian operations 27.7 12.2 22.7 13.4 17.3 11.2
Other international operations 27.9 12.3 8.3 5.0 8.7 5.7
------ ----- ------ ----- ------ -----
Total $227.3 100.0 $168.3 100.0 $153.9 100.0
====== ===== ====== ===== ====== =====
</TABLE>
The following table sets forth selected information concerning assumed
new business volume for the Company's U.S., Canadian, and other international
operations for the indicated periods. (The term "volume" refers to face
amounts or net amounts at risk and is not applicable to the accident and
health segment.)
<TABLE>
New Business Volume by Segment
(dollars in billions)
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
U.S. operations $50.2 66.1 $27.0 71.2 $27.7 76.9
Canadian operations 8.0 10.5 6.9 18.2 4.2 11.7
Other international operations 17.7 23.4 4.0 10.6 4.1 11.4
----- ----- ----- ----- ----- -----
Total $75.9 100.0 $37.9 100.0 $36.0 100.0
===== ===== ===== ===== ===== =====
</TABLE>
Reinsurance business in force reflects the addition or acquisition of
new reinsurance business, offset by terminations (e.g., voluntary surrenders
of underlying life insurance policies, lapses of underlying policies, deaths
of insureds, the exercise of recapture options, changes in foreign exchange,
and any other changes in the amount of insurance in force). As a result of
terminations, assumed in force amounts at risk of $16.9 billion, $23.5
billion, and $24.5 billion were released in 1997, 1996, and 1995,
respectively.
U.S. Operations
- ---------------
General
The Company's U.S. life reinsurance business, which totaled 66.3%,
72.1%, and 72.7%, of the Company's net premiums in 1997, 1996, and 1995,
respectively, consists of the reinsurance of various types of life insurance
products. This business has been accepted under many different rate scales,
with rates often tailored to suit the underlying product and the needs of the
ceding company. Premiums typically vary for smokers and non-smokers, males
and females, and may include a preferred underwriting class discount.
Regardless of the premium mode for the underlying primary insurance,
reinsurance premiums are generally paid annually. This business is made up
of facultative and automatic treaty business.
In addition, several of the Company's U.S. clients have purchased life
insurance policies insuring the lives of their executives. These policies
have generally been issued to fund deferred compensation plans and have been
reinsured with the Company. As of December 31, 1997, reinsurance of such
policies was reflected in interest sensitive contract reserves of
approximately $775.5 million and policy loans of $480.2 million.
12
<PAGE> 13
Facultative Business
The U.S. facultative reinsurance operation involves the assessment of
the risks inherent in (i) multiple impairments, such as heart disease, high
blood pressure, and diabetes; (ii) cases involving large policy face amounts;
and (iii) financial risk cases, i.e., cases involving policies
disproportionately large in relation to the financial characteristics of the
proposed insured. The U.S. operations' marketing efforts have focused on
developing facultative relationships with client companies because management
believes facultative reinsurance represents a substantial segment of the
reinsurance activity of many large insurance companies and has been an
effective means of expanding the U.S. operations' automatic business. In
1997, 1996, and 1995, approximately 39.6%, 39.2%, and 38.3% respectively, of
the U.S. gross premiums were written on a facultative basis. The U.S.
operations have emphasized personalized service and prompt response to
requests for facultative risk assessment.
Only a portion of approved facultative applications result in paid
reinsurance. This is because applicants for impaired risk policies often
submit applications to several primary insurers, which in turn seek
facultative reinsurance from several reinsurers; ultimately, only one
insurance company and one reinsurer are likely to obtain the business. The
U.S. operations track the percentage of declined and placed facultative
applications on a client-by-client basis and generally work with clients to
seek to maintain such percentages at levels the U.S. operations deem
acceptable.
Mortality studies by RGA Reinsurance have shown that the U.S.
operations' facultative mortality experience is comparable to its automatic
mortality experience relative to expected mortality rates. Because the U.S.
operations apply its underwriting standards to each application submitted to
it facultatively, the U.S. operations generally do not require ceding
companies to retain any portion of the underlying risk when business is
written on a facultative basis.
Automatic Business
Automatic business, including financial reinsurance treaties, is
generated pursuant to treaties which generally require that the underlying
policies meet the ceding company's underwriting criteria, although a number
of such policies may be rated substandard. In contrast to facultative
reinsurance, reinsurers do not engage in underwriting assessments of the
risks assumed through an automatic treaty. Automatic business tends to be
very price-competitive; however, clients are likely to give favorable
consideration to their existing reinsurers.
Because RGA Reinsurance does not apply its underwriting standards to
each policy ceded to it under automatic treaties, the U.S. operations
generally require ceding companies to keep their full retention when business
is written on an automatic basis, thereby increasing the ceding companies'
incentives to underwrite risks with due care and, when appropriate, to
contest claims diligently.
Non-traditional Business
The Company also provides non-traditional reinsurance of asset-intensive
products and financial reinsurance. Asset-intensive business includes the
reinsurance of stable value products, corporate-owned and bank-owned life
insurance, and annuities. The Company earns investment income on the
deposits underlying the asset-intensive products which is largely offset by
earnings credited and paid to the ceding companies. Financial reinsurance
assists ceding companies in meeting applicable regulatory requirements and
enhances ceding companies' financial strength and regulatory surplus
position. The Company provides ceding companies financial reinsurance by
committing cash or assuming insurance liabilities. Generally, such amounts
are offset by receivables from ceding companies which are supported by the
future profits from the reinsured block of business. The Company earns a
return based on the amount of outstanding reinsurance.
Customer Base
The U.S. reinsurance operation markets life reinsurance primarily to the
largest U.S. life insurance companies and currently has treaties with most of
the top 100 companies. These treaties generally are terminable by either
party on 90 days written notice, but only with respect to future new
business; existing business generally is not terminable, unless the
underlying policies terminate or are recaptured. In 1997, 32 clients had
annual gross
13
<PAGE> 14
premiums of $5 million or more and the aggregate gross premiums from these
clients represented approximately 76.7% of 1997 U.S. life gross premiums.
In 1997, no U.S. client accounted for more than 10% of the Company's
consolidated gross premiums. However, one client accounted for more than 10%
of the Company's U.S. operations gross premiums. Also, three clients ceded
more than 5% of U.S. life gross premiums. Together they ceded $167.7
million, or 24.4%, of U.S. operations gross premiums in 1997.
General American and its affiliates generated less than 4.2% of U.S.
operations gross premiums in 1997, 1996, and 1995, exclusive of the
Retrocession Agreements. The Company's stable value products are reinsured
from General American. Deposits from stable value products totaled
approximately $483.0 million and $429.3 million during 1997 and 1996,
respectively. 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 $124.4 million as of December 31, 1997.
During 1997, $243.9 million of U.S. operations net premium related to
facultative business. The U.S. life operations accepted new facultative
business from over 100 U.S. clients in 1997, and has been receiving
facultative business from most of these clients for an average of 10 years.
Underwriting
Facultative. Senior management has developed underwriting guidelines,
policies, and procedures with the objective of controlling the quality of
U.S. life business written as well as its pricing. The U.S. operations'
underwriting process emphasizes close collaboration among its underwriting,
actuarial, and operations departments. Management periodically updates these
underwriting policies, procedures, and standards to account for changing
industry conditions, market developments, and changes occurring in the field
of medical technology; however, no assurance can be given that all relevant
information has been analyzed or that additional risks will not materialize.
These policies, procedures, and standards are documented in an on-line
underwriting manual.
The U.S. operations determine whether to accept facultative reinsurance
business on a prospective insured by reviewing the client company's
applications and medical requirements, and assessing financial information
and any medical impairments. Most facultative applications involve a
prospective insured with multiple impairments, such as heart disease, high
blood pressure, and diabetes, requiring a difficult underwriting assessment.
To assist its underwriters in making this assessment, the U.S. life
operations employ two full-time and one part-time medical director, as well
as one medical consultant.
Automatic. The U.S. operations' management determines whether to write
automatic reinsurance business by considering many factors, including the
types of risks to be covered; the ceding company's retention limit and
binding authority, product, and pricing assumptions; and the ceding company's
underwriting standards, financial strength and distribution systems. For
automatic business, the U.S. operations endeavor to ensure that the
underwriting standards and procedures of its ceding companies are compatible
with those of RGA. To this end, the U.S. operations conduct periodic reviews
of the ceding companies' underwriting and claims personnel and procedures.
Approximately 12 client audits are conducted each year.
Financial Reinsurance. The financial reinsurance provided by the
Company is repaid by the future profit stream associated with the reinsured
block of business. The Company structures its financial reinsurance
transactions so that the future profits of the underlying reinsured business
conservatively exceed the amount of regulatory surplus provided to the ceding
company.
AIDS. Since 1987, the U.S. life insurance industry has implemented the
practice of antibody blood testing to detect the presence of the HIV virus
associated with Acquired Immune Deficiency Syndrome (AIDS). Prior to the
onset of routine antibody testing, it was possible for applicants with AIDS
to purchase significant amounts of life insurance. Since 1987, the
guidelines used by the U.S. operations have required ceding companies to
conduct HIV testing for life insurance risks at or above $100,000.
The Company believes that the antibody test for AIDS is effective. No
assurance can be given, however, that additional AIDS-related death claims
involving insureds who test negative for AIDS at the time of underwriting
14
<PAGE> 15
will not arise in the future. The Company believes that its primary exposure
to the AIDS risk is related to business issued before the onset of AIDS
antibody testing in 1987. Each year, this business represents a smaller
portion of RGA Reinsurance's reinsurance in force.
Risk Management
Prior to January 1, 1996, RGA Reinsurance's practice was to retain up to
$2 million of liability on any one life for all life reinsurance. Effective
January 1, 1996, RGA Reinsurance increased this retention limit to up to $2.5
million. RGA Reinsurance has a number of retrocession arrangements whereby
certain business in force is retroceded on a quota share or facultative
basis. All of the U.S. retrocessionaires under such arrangements were rated
"A-" or better by A.M. Best as of December 31, 1996. RGA Reinsurance also
retrocedes business to foreign reinsurers. In these instances, additional
security in the form of letters of credit or trust assets have been given by
such retrocessionaires as additional security in favor of RGA Reinsurance.
The Company also retrocedes most of its financial reinsurance business to
other insurance companies to alleviate the strain on statutory surplus
created by this business.
RGA Reinsurance has never experienced a default in connection with its
retrocession arrangements, nor has it experienced any difficulty in
collecting claims recoverable from its retrocessionaires; however, no
assurance can be given as to the future performance of such retrocessionaires
or as to recoverability of any such claims.
RGA Reinsurance has catastrophe insurance coverage issued by an insurer
rated "A" by A.M. Best that provides benefits of up to $100 million per
occurrence for claims involving three or more deaths in a single accident,
with a deductible of $1.5 million per occurrence. This coverage is
terminable annually on 90 days notice and is ultimately provided through a
pool of seventeen unaffiliated insurers. The Company believes such
catastrophe insurance coverage is adequate to protect the Company from the
risks of multiple deaths of lives reinsured by policies with RGA Reinsurance
in a single accident. However, several large corporate plans reinsured by
RGA Reinsurance cover aggregate amounts substantially in excess of these
limits.
Operations
During 1997, substantially all gross U.S. life business was obtained
directly, rather than through brokers. The U.S. operations have an
experienced marketing staff which works to maintain existing relationships
and to provide responsive service.
The U.S. operations' auditing and accounting department is responsible
for treaty compliance auditing, financial analysis of results, generation of
internal management reports, and periodic audits of administrative practices
and records. A significant effort is focused on periodic audits of
administrative and underwriting practices, records, and treaty compliance of
reinsurance clients.
The U.S. operations' claims department (I) reviews and verifies
reinsurance claims, (ii) obtains the information necessary to evaluate
claims, (iii) determines the Company's liability with respect to claims, and
(iv) arranges for timely claims payments. Claims are subjected to a detailed
review process to ensure that the risk was properly ceded, the claim complies
with the contract provisions, and the ceding company is current in the
payment of reinsurance premiums to the U.S. life operation. The claims
department also investigates claims generally for evidence of
misrepresentation in the policy application and approval process. In
addition, the claims department monitors both specific claims and the overall
claims handling procedure of ceding companies.
Claims personnel work closely with their counterparts at client
companies to attempt to uncover fraud, misrepresentation, suicide, and other
situations where the claim can be reduced or eliminated. By law, the ceding
company cannot contest claims made after two years of the issuance of the
underlying insurance policy. By developing good working relationships with
the claims departments of client companies, major claims or problem claims
can be addressed early in the investigation process. Claims personnel review
material claims presented to RGA Reinsurance in detail to find potential
mistakes such as claims ceded to the wrong reinsurer and claims submitted for
improper amounts.
15
<PAGE> 16
Canadian Life Reinsurance
- -------------------------
Canadian life reinsurance business represented 10.0%, 9.4%, and 8.6%, of
RGA's net premiums in 1997, 1996, and 1995, respectively. In 1997, the
Canadian life operations wrote $8.0 billion in new business. Approximately
85% of the 1997 Canadian new business was written on an automatic basis.
During 1997, the Canadian operations began supporting preferred underwriting
products, added creditor business, and began offering reinsurance of critical
illness coverage. These new products and continued growth in traditional
reinsurance have contributed to the overall increase in business.
Clients include virtually all of Canada's principal life insurers with
no single client representing more than 10% of the Company's consolidated net
premium in 1997 and the two largest clients representing less than 5% of
consolidated gross premiums. The Canadian life operations compete with a
small number of individual and group life reinsurers. The Canadian life
operations compete primarily on the basis of price, service, and financial
strength.
RGA Canada's policy is to retain up to C$100,000 of individual life and
up to C$100,000 of Accidental Death and Dismemberment liability on any one
life. RGA Canada retrocedes amounts in excess of its retention mostly to RGA
Reinsurance through General American in accordance with the U.S. Retrocession
Agreement. Retrocessions are arranged through RGA Reinsurance's retrocession
pool. RGA Canada has never experienced a default in connection with its
retrocession arrangements, nor has it experienced any difficulty in
collecting claims recoverable from its retrocessionaires. However, no
assurance can be given as to the future performance of such retrocessionaires
or as to the recoverability of any such claims.
In 1987, the Canadian life insurance industry implemented the practice
of antibody blood testing to detect the presence of the HIV virus associated
with AIDS. Prior to the onset of routine antibody testing, it was possible
for applicants with AIDS to purchase significant amounts of life insurance.
Since 1987, the accepted industry practice is to conduct HIV testing for life
insurance risks over C$100,000. Accordingly, RGA Canada believes that its
main exposure to the AIDS risk is related to business issued before the onset
of AIDS antibody testing in 1987. Each year, this business represents a
smaller portion of RGA Canada's reinsurance in force.
RGA Canada maintains a staff of fifty-one people at the Montreal office
and eleven people in an office in Toronto. RGA Canada employs its own
underwriting, actuarial, claims, pricing, accounting, systems, marketing and
administrative staff.
RGA's Canadian life reinsurance business was originally conducted by
General American. General American entered the Canadian life reinsurance
market in 1978 and was primarily engaged in the retrocession business,
writing only a small amount of business with primary Canadian insurers. In
April 1992, General American, through RGA Canada, purchased the life
reinsurance assets and business of National Reinsurance Company of Canada
(National Re), including C$26.0 million of Canadian life reinsurance gross in
force premiums. National Re had been engaged in the life reinsurance business
in Canada since 1972, writing reinsurance on a direct basis with primary
Canadian insurers. Accordingly, this acquisition represented a significant
expansion of General American's Canadian life reinsurance business.
Accident and Health Reinsurance
- -------------------------------
In 1987, the Company began reinsuring accident and health risks on both
a group and individual basis. The Company's accident and health reinsurance
business represented 10.9%, 8.5%, and 8.4% of the Company's net premiums in
1997, 1996, and 1995, respectively. 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. Due to continuing losses emanating from certain of the
Company's accident and health operations in the third and fourth quarters of
1997, the strategic decision was made to cease marketing accident and health
business and to place the operation into run-off at year-end. The Company
estimates that future accident and health premiums compared to 1997 premiums
will remain level in 1998. Premiums will decrease, compared to each preceding
year, by approximately 20%, 70%, 90%, and 100% by the end of 1999, 2000, 2001,
and 2002, respectively. The Company established an additional $3.0 million in
reserves in the fourth quarter of 1997 to handle the business run-off. In
December 1997, RGA
16
<PAGE> 17
Reinsurance was notified by the holders of minority interests in its accident
and health subsidiaries of their intent to exercise certain put options for
their 49% ownership interest. Based upon the Company's decision to cease
marketing accident and health business, in December 1997, the Company
established a reserve of approximately $3.0 million against the intangible
asset that will arise related to the excess of the purchase price over the
fair value of net assets acquired when put options are exercised by certain
minority interests.
The Company principally reinsures stop-loss medical insurance and
accident insurance providing benefits for death, disability, and
dismemberment. Unlike life reinsurance, most accident and health reinsurance
is short-term in nature. The majority of such insurance is subject to
renegotiation or cancellation on an annual basis. Accordingly, increasing
health care costs generally do not have a significant adverse effect on the
profitability of accident and health reinsurance agreements.
More than 50% of the Company's accident and health reinsurance business
was accepted through participation in reinsurance pools. The Company
generally pursues a strategy of following an underwriting manager, who is
responsible for negotiating the price and terms of reinsurance with the
ceding company. However, in certain cases, the Company sets the price and
terms of the risks it reinsures.
Accident and health reinsurance is written on both a facultative and
treaty basis. Also, coverage provided can be through either a quota-share
treaty or an excess-basis treaty. Generally, the Company retains not more
than $500,000 of risk on one person, although it occasionally writes up to $1
million of risk on one person. The Company retains not more than $5 million
of risk per occurrence, per contract involving multiple insureds. The
Company typically retrocedes amounts in excess of these limits to certain
underwriters of Lloyd's of London, either through Great Rivers Reinsurance
Management, which has certain binding authority from such underwriters, as
described below, or on a facultative basis.
The Company had marketed its accident and health reinsurance to a broad
cross-section of primary insurers, which vary in size, corporate structure,
and geographic location, but which are generally smaller than the primary
insurers in the Company's U.S. life reinsurance business. Most of the
Company's accident and health reinsurance business was generated by
reinsurance intermediaries who were compensated on a commission basis. The
Company's accident and health reinsurance business competes with other
reinsurers and with reinsurance management pools.
Since October 1992, Great Rivers Reinsurance Management has underwritten
accident and health risks on behalf of General American. Since January 1,
1993, accident and health reinsurance written by General American has been
retroceded to RGA Reinsurance pursuant to the U.S. Retrocession Agreement.
Pursuant to a management agreement that can be terminated annually by either
party, Great Rivers Reinsurance Management has the authority to bind RGA
Reinsurance or General American to reinsurance risks subject to underwriting
standards that have been established by RGA Reinsurance and General American.
Great Rivers Reinsurance Management maintains a staff of eight people which
includes three underwriters who occasionally consults with RGA Reinsurance
regarding certain cases. Great Rivers Reinsurance Management receives a
commission for each risk it underwrites and may receive additional
compensation based on the profitability of the business underwritten.
Great Rivers Reinsurance Management is not required to, and does not,
operate exclusively for the Company. Currently, it also has authority from
certain underwriters at Lloyd's of London to bind such underwriters to
certain types of accident and health reinsurance risks, including certain
risks suitable for the Company, up to $5 million per person and up to $30
million per occurrence.
Other International Reinsurance
- -------------------------------
The other international segment includes the Latin American operations,
Asia Pacific operations, and Market Development operations. Beginning in
1994, the Company started various international initiatives that continued to
develop during 1997. In Chile, the Company is represented by a 50%
investment in BHIF America, a Chilean insurance company, and a 100%
investment in RGA Chile, a life reinsurance company. The Company owns 100%
of Manantial, an Argentine insurance company. In addition, RGA Reinsurance
has provided reinsurance on mortality risk reinsurance associated with the
privatization of the Argentine pension system. The Company has a presence in
the Asia Pacific region with a licensed branch office in Hong Kong and a
representative office in Tokyo. The Company also established subsidiary
companies in Australia in January 1996: Australian
17
<PAGE> 18
Holdings, a wholly-owned holding company, and RGA Australia, a wholly-owned
life reinsurance company. In addition, RGA Reinsurance provides direct
reinsurance to several companies within the Asia Pacific region. The
Company's Market Development operations provide marketing support for
operations in existing and potential future markets.
Other international life reinsurance business represented 12.8%, 10.1%,
and 10.3% of the Company's consolidated net premiums in 1997, 1996, and 1995,
respectively. No single client in the other international segment
represented more than 10% of the Company's consolidated net premium for 1997.
For other international business, RGA Reinsurance retains up to $2.5
million for U.S., Canadian, Australian, and New Zealand currency-denominated
business. For other currencies and based on countries with higher risk
factors, RGA Reinsurance systematically reduces its retention. The Chilean
subsidiaries have a policy of ceding business in excess of approximately
$22,000, while the Argentine subsidiary cedes business in excess of $40,000.
RGA Australia has a retrocession arrangement with RGA Reinsurance in which
life risks above $100,000 Australian dollars are retroceded to RGA
Reinsurance. On an aggregate basis among all of its subsidiaries, the
Company does not retain more than $2.5 million on any one life.
BHIF America and RGA Chile maintain staffing of thirty people at the
head offices in Santiago, Chile. Manantial maintains a staff of thirty
people in Buenos Aires, Argentina. These subsidiaries employ their own
underwriting, actuarial, claims, pricing, accounting, systems, marketing and
administrative staff. Within Asia Pacific, six people were on staff in the
Hong Kong office, four people were on staff in the Tokyo office, and RGA
Australia maintained a staff of twelve people in Sydney. The Hong Kong and
Tokyo offices primarily provide marketing and underwriting service to the
direct life insurance companies with other service support provided directly
by RGA Reinsurance operations.
RGA Australia directly maintains its own underwriting, actuarial,
claims, pricing, accounting, systems, marketing and administration service
with additional support provided by RGA Reinsurance operations.
D. Financial Information About Foreign Operations
The Company's foreign operations are primarily in Canada, Latin America,
and the Asia Pacific region which includes Australia. Revenue, income (loss)
which includes net realized gains (losses) before income tax and minority
interest, and identifiable assets attributable to these geographic regions
are identified in the following table:
18
<PAGE> 19
<TABLE>
Financial Information Relating to Foreign Operations
(dollars in millions)
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Canada $120.1 $ 78.5 $ 60.3
Latin America 77.1 52.0 49.1
Asia Pacific 38.3 22.0 12.5
Other International 2.9 0.3 -
------ ------ ------
Total $238.4 $152.8 $121.9
====== ====== ======
Income (Loss):
Canada $ 15.1 $ 13.4 $ 10.9
Latin America (0.1) 2.1 3.5
Asia Pacific (5.0) (4.4) (1.7)
Other International (3.1) (1.8) -
------ ------ ------
Total $ 6.9 $ 9.3 $ 12.7
====== ====== ======
Total Assets:
Canada $580.6 $321.3 $247.4
Latin America 178.0 128.0 80.1
Asia Pacific 80.5 41.8 19.9
Other International 9.1 0.9 3.6
------ ------ ------
Total $848.2 $492.0 $351.0
====== ====== ======
</TABLE>
E. Executive Officers of the Registrant
For information regarding the executive officers of the Company, see
Part III, Item 10, entitled "Directors and Executive Officers of the
Registrant."
Item 2. PROPERTIES
RGA Reinsurance houses its employees and the majority of RGA's officers
in 71,994 square feet of office space at 660 Mason Ridge Center Drive, St.
Louis County, Missouri. These premises are leased from General American for
an initial term ending August 31, 1998, at an annual rent of $1,538,872 plus
a pro-rated share of increases in taxes and operating expenses for the
building beyond the levels of 1995. A portion of this office space is
subleased to subsidiaries, Re Partners and RGA/Swiss Financial Group, L.L.C.
RGA Reinsurance also conducts business from approximately 1,800 square
feet of office space located in Hong Kong and approximately 1,300 square feet
of office space located in Tokyo, Japan. The rental expenses paid by RGA
Reinsurance under the leases during 1997 were approximately $162,000 and
$76,000 for Hong Kong and Tokyo, respectively. RGA Australia conducts
business from approximately 3,600 square feet of office space located in
Sydney, Australia and paid $58,200 during 1997 for lease expense. The Hong
Kong and Tokyo leases expire in January 2001 and December 1998 respectively.
The Sydney lease expires in December 1998.
Manantial conducts business from approximately 15,200 square feet of
office space in Buenos Aires, Argentina, pursuant to several leases. Rental
expense paid for the office was approximately $182,500 during 1997. BHIF
America and RGA Chile conduct business from approximately 4,700 square feet
of office space in Santiago, Chile. The lease expense paid during 1997 was
approximately $48,800. Three of the Buenos Aires leases expire in 1999 with
the remaining lease expiring in 2000. The Santiago lease expires in April
1999.
RGA Canada's operations are conducted from approximately 9,800 square
feet of office space located in Montreal, Canada. The lease with respect to
such space expires in 2010. Rental expenses paid by RGA Canada under the
lease during 1997 were approximately $205,000. RGA Canada also sub-leases
approximately 800 square
19
<PAGE> 20
feet of space in Montreal, Canada. The sub-lease expires in 2000. The
rental expenses paid by RGA Canada under the sub-lease during 1997 were
approximately $13,000. RGA Canada also leases approximately 5,900 square
feet of space in Toronto, Canada. This lease expires in 2005. The rental
expenses paid by RGA Canada under the Toronto lease during 1997 were
approximately $122,000. RGA International conducts operations from
approximately 4,200 square feet of office space located in Toronto, Canada.
The lease with respect to such space expires in 2009. The rental expenses
paid by RGA International under the lease during 1997 were approximately
$32,000.
Great Rivers Reinsurance Management conducts business from approximately
5,900 square feet of office space located in St. Louis, Missouri. The rental
expenses paid for the office were approximately $110,000 during 1997. This
lease expires in March 2002. RGA UK Underwriting conducts business from
approximately 1,200 square feet of office space located in London, England.
The rental expenses paid for the office were approximately $43,000. This
lease expires in March 2003.
The Company believes its facilities have been generally well-maintained,
are in good operating condition, and are adequate for its current
requirements.
Item 3. 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 party to any such pending litigation or arbitration which would have a
material adverse effect on its future operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
There were no matters that were submitted to a vote of security holders
during the fourth quarter of 1997.
Part II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information on this subject is incorporated by reference to the Annual
Report for 1997 under the caption "Quarterly Data (Unaudited)."
Dividend Policy
- ---------------
RGA began paying a dividend of $0.06 per pre-split share each quarter,
starting in August 1993. In August 1995, the dividend was raised to $0.07 per
pre-split share and raised to $0.08 per pre-split share in August 1996. In
July 1997, a three-for-two stock split was declared and the dividend was
raised to $0.09 per pre-split share ($0.06 per share after the split). It is
expected that payments at this level will continue for the foreseeable
future. All future payments of dividends are at the discretion of the
Company's Board of Directors and will depend on the Company's earnings,
capital requirements, insurance regulatory conditions, operating conditions,
and such other factors as the Board of Directors may deem relevant. The
amount of dividends that the Company can pay will depend in part on the
operations of its reinsurance subsidiaries. The transfer of funds from the
subsidiaries to RGA is subject to applicable insurance laws and regulations.
Insurance companies are subject to statutory regulations which restrict
the payment of dividends. In the case of RGA Reinsurance, Missouri
regulations impose a limit of the greater of 10% of statutory capital and
surplus or statutory operating income, both as of the end of the preceding
year. Any dividend proposed by RGA Reinsurance in excess of these measures
would, under Missouri law, be "extraordinary" and subject to review by the
Missouri Director of Insurance. See "Business - Corporate Structure -
Regulation."
20
<PAGE> 21
Item 6. SELECTED FINANCIAL DATA
These data are found at page 56 in the Annual Report for 1997 under the
caption "Selected Consolidated Financial and Operating Data" which section is
incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion and analysis is incorporated by reference to the Annual
Report for 1997 under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This information is incorporated by reference to the Annual Report for
1997 under the following captions:
<TABLE>
<CAPTION>
Page of Annual
Index Report
----- ------
<S> <C>
Consolidated Balance Sheets 34
Consolidated Statements of Income 35
Consolidated Statements of
Stockholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38-53
Independent Auditors' Report 54
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Directors of the Company is incorporated by
reference to the Proxy Statement under the captions "Nominees and Continuing
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance."
The Proxy Statement will be filed pursuant to Regulation 14A within 120 days
of the end of the Company's fiscal year.
The following is certain additional information concerning the executive
officers of the Company. With the exception of Mr. Atkinson, Mr. McCauley,
Mr. Nitsou, Mr. St-Amour, and Mr. Watson, each individual holds the same
position at RGA and RGA Reinsurance.
David B. Atkinson has been Executive Vice President and Chief Operating
Officer since January 1997. He is also President and Chief Executive Officer
of RGA Reinsurance. He served as Executive Vice President and Chief
Operating Officer, U.S. Operations of the Company from 1995 to 1996 and
Executive Vice President and Chief Financial Officer from 1993 to 1994.
Prior to the formation of RGA, Mr. Atkinson served as Reinsurance Operations
Vice President of General American. Mr. Atkinson joined General American in
1987 as Second Vice President and was promoted to Vice President later the
same year. Prior to joining General American, he served as Vice President
and Actuary of Atlas Life Insurance Company from 1981 to 1987, as Chief
Actuarial Consultant at Cybertek Computer Products from 1979 to 1981, and in
a variety of actuarial positions with Occidental Life Insurance Company of
California from 1975 to 1979. Mr. Atkinson also serves as a director and
officer of certain RGA subsidiaries.
21
<PAGE> 22
Bruce E. Counce has been Executive Vice President and Chief Corporate
Operating Officer since January 1997. He served as Executive Vice President,
U.S. Traditional Reinsurance from 1993 to 1997. Prior to the formation of
RGA, Mr. Counce served as Reinsurance Sales and Marketing Vice President for
General American. After joining General American in 1967, Mr. Counce joined
the Reinsurance Division in 1980 in a sales capacity and held a series of
increasingly responsible positions leading to his current position.
Jack B. Lay is Executive Vice President and Chief Financial Officer.
Prior to joining the Company in 1994, Mr. Lay served as Second Vice President
and Associate Controller at General American. In that position, he was
responsible for all accounting and external financial reporting as well as
merger and acquisition support. Before joining General American in 1991, Mr.
Lay was a partner in the financial services practice with the St. Louis
office of KPMG Peat Marwick LLP. Mr. Lay also serves as a director and
officer of certain RGA subsidiaries.
Brendan J. Galligan is Senior Vice President, Asia Pacific Division.
Prior to joining RGA, Mr. Galligan was Senior Vice President of RGA Canada,
and its predecessor, National Re, for five years. His insurance and
reinsurance career commenced in Canada in 1977.
Joel S. Iskiwitch is Senior Vice President, Accident and Health
Division. In 1995, Mr. Iskiwitch joined Great Rivers Reinsurance, a
subsidiary of RGA, as a participant in General American's Management Rotation
Program. Prior to joining Great Rivers Reinsurance Management and RGA, Mr.
Iskiwitch held the position of Vice President of Business Markets and
Advanced Underwriting for GenMark/Individual Line at General American. After
joining General American in 1988, Mr. Iskiwitch held a series of responsible
positions leading to his current position at RGA.
Paul A. Schuster has been Senior Vice President, U.S. Division since
January 1997. He served as Reinsurance Actuarial Vice President in 1995 and
Senior Vice President & Chief Actuary of the Company in 1996. Prior to the
formation of RGA, Mr. Schuster served as Second Vice President and
Reinsurance Actuary of General American. Prior to joining General American
in 1991, he served as Vice President and Assistant Director of Reinsurance
Operations of the ITT Lyndon Insurance Group from 1988 to 1991, and in a
variety of actuarial positions with General Reassurance Corporation from 1976
to 1988.
Kenneth D. Sloan has been Senior Vice President, U.S. Facultative
Division since January 1997. He served as Vice President, Underwriting of
the Company from 1993 to 1997. Prior to the formation of RGA, Mr. Sloan
served as Second Vice President of Reinsurance Underwriting for General
American. Mr. Sloan joined General American in 1968 in an underwriting
capacity and held a series of increasingly responsible positions leading to
his current position.
Matthew P. McCauley is General Counsel and Secretary of the Company.
Mr. McCauley has served as Associate General Counsel of General American
since 1985 and is a director and officer of General American Capital Company
and an officer of The Walnut Street Funds, Inc., both of which are registered
investment companies affiliated with General American. He serves as a
director or officer of a number of General American subsidiaries, including
Conning Corporation, formerly known as General American Investment Management
Company, a registered investment advisor, and Walnut Street Securities, Inc.,
a registered broker/dealer.
Paul Nitsou is Senior Vice President, Market Development Division for
RGA. Prior to joining RGA in 1996, Mr. Nitsou was Vice President,
Reinsurance for Manulife Financial. Mr. Nitsou joined RGA in 1996 as Vice
President, Market Development and was promoted within his first year of
employment to Senior Vice President, Market Development Division.
Andre St-Amour is President and Chief Executive Officer of RGA
Canada and Chief Agent for the General American Life Insurance Company
Canadian Branch. Prior to January 1995, he was President and Chief Operating
Officer. Mr. St-Amour joined RGA Canada in 1992 when the company acquired
the reinsurance business of National Re. Mr. St-Amour served as Executive
Vice President, Life Division, of National Re from 1989 to 1991. Prior to
joining National Re, Mr. St-Amour served in a variety of actuarial positions
with Canadian National Railways and Laurentian National Insurance Company.
22
<PAGE> 23
Graham S. Watson is Executive Vice President and Chief Marketing Officer
of RGA. Upon joining RGA in 1996, Mr. Watson was President and CEO of RGA
Australia. Prior to joining RGA in 1996, Mr. Watson was the President and
CEO of Intercedent Limited in Canada and has held various positions of
increasing responsibility for other life insurance companies. Mr. Watson
also serves as a director and officer of certain RGA subsidiaries.
A. Greig Woodring is President, Chief Executive Officer, and director.
As President and CEO of the Company, Mr. Woodring is also an executive officer
of General American Life Insurance Company. Prior to the formation of RGA,
Mr. Woodring had headed General American's reinsurance business since 1986.
He also serves as a director and officer of a number of the Company's
subsidiaries. Before joining General American Life Insurance Company, Mr.
Woodring was an actuary at United Insurance Company.
Richard A. Liddy is Chairman of the Board of the Company. He also
serves as President, Chief Executive Officer and Chairman of the Board of
General American Life Insurance Company, and President and Chairman of
GenAmerica Corporation and General American Mutual Holding Company (General
American Holding). From 1982 through 1988, he was Senior Vice President and
Executive Vice President of Continental Corporation, and President, Financial
Services Group of Continental Insurance Company. He is also Chairman of the
Board of General American Capital Company and The Walnut Street Funds, Inc.,
each a registered investment company, and is a director of Ameren
Corporation, Brown Group, Inc., Conning Corporation and Ralston Purina
Company. Mr. Liddy is also Chairman of Cova Corporation, Paragon Life
Insurance Company, Security Equity Life Insurance Company and Security Mutual
Life Insurance Company of New York, and a number of other subsidiaries and
affiliates of General American Holding.
Item 11. EXECUTIVE COMPENSATION
Information on this subject is incorporated by reference to the Proxy
Statement under the captions "Executive Compensation" and "Nominees and
Continuing Directors." The Proxy Statement will be filed pursuant to
Regulation 14A within 120 days of the end of the Company's fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information on this subject is incorporated by reference to the Proxy
Statement under the caption "Common Stock Ownership of Management and Certain
Beneficial Owners." The Proxy Statement will be filed pursuant to Regulation
14A within 120 days of the end of the Company's fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information on this subject is incorporated by reference to the Proxy
Statement under the caption "Certain Relationships and Related Transactions."
The Proxy Statement will be filed pursuant to Regulation 14A within 120 days
of the end of the Company's fiscal year.
Part IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated statements are incorporated by reference to
the Annual Report for 1997 under the following captions:
23
<PAGE> 24
<TABLE>
<CAPTION>
Index Page
- ----- ----
<S> <C>
Consolidated Balance Sheets 34
Consolidated Statements of Income 35
Consolidated Statements of Stockholders' Equity 36
Consolidated Statements of Cash Flows 37
Notes to Consolidated Financial Statements 38-53
Independent Auditors' Report 54
</TABLE>
2. Schedules, Reinsurance Group of America, Incorporated and
Subsidiaries
<TABLE>
<CAPTION>
Schedule Page
- -------- ----
<S> <C>
I Summary of Investments 26
III Supplementary Insurance Information 27
IV Reinsurance 28
V Valuation and Qualifying Accounts 29
</TABLE>
All other schedules specified in Regulation S-X are omitted for the
reason that they are not required, are not applicable, or that equivalent
information has been included in the consolidated financial statements, and
notes thereto, appearing in Appendix I attached hereto.
3. Exhibits
See the Index to Exhibits on page 31.
(b) No reports on Form 8-K were filed during the fourth quarter of 1997.
24
<PAGE> 25
Independent Auditors' Report
----------------------------
Board of Directors and Stockholders
Reinsurance Group of America, Incorporated:
Under date of January 29, 1998, we reported on the consolidated balance
sheets of Reinsurance Group of America, Incorporated and subsidiaries (the
Company) as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997, as contained in the
1997 annual report to stockholders. These consolidated financial statements
and our report thereon are incorporated by reference in the annual report on
Form 10-K for the year 1997. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedules as listed in the accompanying
index. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
January 29, 1998
25
<PAGE> 26
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE I--SUMMARY OF INVESTMENTS--OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 1997
(in millions)
<CAPTION>
Amount at
which
shown in
Fair the Balance
Type of Investment Cost Value <F3> Sheets <F1><F3>
------------------ ---- ---------- ---------------
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and government
agencies and authorities $ 90.9 $ 92.2 $ 92.2
Foreign governments <F2> 202.0 270.5 270.5
Public utilities 126.4 145.9 145.9
All other corporate bonds 1,997.0 2,019.7 2,019.7
-------- -------- --------
Total fixed maturities 2,416.3 2,528.3 2,528.3
-------- -------- --------
Equity securities 10.7 10.7 10.7
Mortgage loans on real estate 165.5 xxx 165.5
Policy loans 480.2 xxx 480.2
Funds withheld at interest 165.4 xxx 165.4
Short-term investments 277.6 xxx 277.6
Other 6.3 xxx 6.3
-------- -------- --------
Total investments $3,522.0 xxx $3,634.0
======== ======== ========
<FN>
<F1> Fixed maturities are classified as available for sale and carried at
fair value.
<F2> The following exchange rates have been used to convert foreign
securities to U.S. dollars:
Canadian dollar $0.6992/C$1.00
Argentina dollar $1.0001/A$1.00
Chilean Peso $0.0023/$1.00 Peso
Australian dollar $0.6503/$1.00 Aus
<F3> Fair value represents the closing sales prices of marketable securities.
Estimated fair values for private placement securities of $386.2
million, included in all other corporate bonds, are based on the
credit quality and duration of marketable securities deemed
comparable by the Company, which may be of another issuer.
</TABLE>
26
<PAGE> 27
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
<CAPTION>
as of December 31, Years Ended December 31,
--------------------------------------------------------- --------------------------------------------------
Future Policy Other Policy
Deferred Policy Benefits, Claims and
Acquisition Costs Losses and Claims Benefits Payable
--------------------------------------------------------- Net Benefits,
Invest- Claims Amorti- Other
Premium ment and zation Operating
Assumed Ceded Assumed Ceded Assumed Ceded Income Income Losses of DAC Expenses
- -------------------------------------------------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995
U.S. Operations $132,300 (4,961) 1,010,142 (52,659) 114,625 (10,556) $414,132 73,959 (345,765) (31,875) (55,089)
Canadian Operations 41,614 (336) 138,707 (29,079) 9,712 (3,671) 49,248 11,064 (36,683) (2,176) (10,576)
Accident and Health 651 (5) 7,931 (76) 60,973 (23,660) 47,789 730 (33,640) (6,827) (9,083)
Other International 17,551 (1) 43,829 (3) 22,363 (2,570) 58,821 2,805 (47,779) (454) (11,573)
Adjustments and
Eliminations 0 0 0 0 0 0 0 1,559 0 0 (1,993)
-------- ------ --------- ------- ------- ------- -------- ------- -------- ------- --------
Total $192,116 (5,303) 1,200,609 (81,817) 207,673 (40,457) $569,990 90,117 (463,867) (41,332) (88,314)
======== ====== ========= ======= ======= ======= ======== ======= ======== ======= ========
1996
U.S. Operations $160,737 (7,182) 1,578,172 (52,754) 111,257 (5,342) $486,717 111,801 (414,643) (33,921) (82,300)
Canadian Operations 52,039 (1,220) 184,800 (35,366) 11,390 (4,094) 63,118 12,722 (49,270) (1,603) (14,240)
Accident and Health 848 (11) 10,866 (252) 60,485 (20,228) 57,182 1,019 (42,250) (15,888) (4,851)
Other International 28,354 0 88,446 (3) 23,152 (2,772) 67,868 6,135 (54,282) (575) (21,449)
Adjustments and
Eliminations 0 0 0 0 0 0 0 5,151 0 0 (7,696)
-------- ------ --------- ------- ------- ------- -------- ------- -------- ------- --------
Total $241,978 (8,413) 1,862,284 (88,375) 206,284 (32,436) $674,885 136,828 (560,445) (51,987) (130,536)
======== ====== ========= ======= ======= ======= ======== ======= ======== ======= ========
1997
U.S. Operations $203,486 (6,968) 2,735,772 (185,761) 157,240 (13,577) $554,253 154,303 (498,671) (37,469) (88,928)
Canadian Operations 50,506 (505) 278,738 (54,627) 49,267 (34,536) 83,563 16,321 (76,265) (10,775) (18,023)
Accident and Health 2,680 (36) 23,587 (1,146) 101,205 (31,323) 90,692 1,249 (88,658) (25,260) (8,746)
Other International 40,679 0 175,714 (34,132) 37,136 (3,744) 106,952 10,876 (86,509) (3,485) (36,541)
Adjustments and
Eliminations 0 0 0 0 0 0 0 5,584 0 0 (8,114)
-------- ------ --------- ------- ------- ------- -------- ------- -------- ------- --------
Total $297,351 (7,509) 3,213,811 (275,666) 344,848 (83,180) $835,460 188,333 (750,103) (76,989) (160,352)
======== ====== ========= ======= ======= ======= ======== ======= ======== ======= ========
</TABLE>
27
<PAGE> 28
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE IV - REINSURANCE
(in millions)
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed to
Amount Companies Companies Amount Net
------ --------- --------- ------ ---
<S> <C> <C> <C> <C> <C>
1995
Life insurance in force $ 85 $25,275 $153,861 $128,671 119.58%
Premiums
U.S. Operations $ 2.6 $ 100.7 $ 512.2 $ 414.1 123.69%
Canadian Operations - 15.8 65.1 49.3 132.05%
Accident and Health - 60.0 107.8 47.8 225.52%
Other International 33.8 1.8 26.8 58.8 45.58%
--------------------------------------------------------------
Total $36.4 $ 178.3 $ 711.9 $ 570.0 124.89%
===== ======= ======== ======== ======
1996
Life insurance in force $ 85 $39,050 $168,339 $129,374 130.12%
Premiums
U.S. Operations $ 2.5 $ 134.2 $ 618.1 $ 486.4 127.08%
Canadian Operations - 18.4 81.5 63.1 129.16%
Accident and Health - 55.0 112.2 57.2 196.15%
Other International 41.7 2.0 28.5 68.2 41.79%
--------------------------------------------------------------
Total $44.2 $ 209.6 $ 840.3 $ 674.9 124.51%
===== ======= ======== ======== ======
1997
Life insurance in force $ 83 $28,720 $227,260 $198,623 114.42%
Premiums
U.S. Operations $ 2.4 $ 132.9 $ 684.8 $ 554.3 123.54%
Canadian Operations - 21.8 105.4 83.6 126.08%
Accident and Health - 96.8 187.5 90.7 206.73%
Other International 62.6 1.8 46.1 106.9 43.12%
--------------------------------------------------------------
Total $65.0 $ 253.3 $1,023.8 $ 835.5 122.54%
===== ======= ======== ======== ======
</TABLE>
28
<PAGE> 29
<TABLE>
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS
December 31, 1997
(in millions)
<CAPTION>
Balance at Charges to Charged to Other
Beginning of Costs and Accounts- Deductions- Balance at End
Description Period Expenses Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Mortgage loan
valuation allowance $ - $0.3 $ - $ - $0.3
---- ---- ---- ---- ----
Total $ - $0.3 $ - $ - $0.3
==== ==== ==== ==== ====
1997
Mortgage loan
valuation allowance $0.3 $0.1 $ - $ - $0.4
---- ---- ---- ---- ----
Total $0.3 $0.1 $ - $ - $0.4
==== ==== ==== ==== ====
</TABLE>
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 March 18, 1998
----------------------------------------
A. Greig Woodring
President and Chief Executive Officer
Date: March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the
registrant and in the capacities indicated on March 18, 1998.
<TABLE>
<CAPTION>
Signatures Title
---------- -----
<S> <C> <C>
/s/ Richard A. Liddy March 18, 1998 Chairman of the Board and Director
- ------------------------------------------
Richard A. Liddy
/s/ A. Greig Woodring March 18, 1998 President, Chief Executive Officer,
- ------------------------------------------ and Director
A. Greig Woodring (Principal Executive Officer)
/s/ J. Cliff Eason March 18, 1998 <F*> Director
- ------------------------------------------
J. Cliff Eason
/s/ Bernard A. Edison March 18, 1998 <F*> Director
- ------------------------------------------
Bernard A. Edison
/s/ Stuart I. Greenbaum March 18, 1998 <F*> Director
- ------------------------------------------
Stuart I. Greenbaum
/s/ William A. Peck, M.D. March 18, 1998 <F*> Director
- ------------------------------------------
William A. Peck, M.D.
/s/ Leonard M. Rubenstein March 18, 1998 <F*> Director
- ------------------------------------------
Leonard M. Rubenstein
/s/ William P. Stiritz March 18, 1998 <F*> Director
- ------------------------------------------
William P. Stiritz
/s/ Edwin Trusheim March 18, 1998 Director
- ------------------------------------------
H. Edwin Trusheim
/s/ Jack B. Lay March 18, 1998 Executive Vice President and Chief
- ------------------------------------------ Financial Officer
Jack B. Lay (Principal Financial and Accounting
Officer)
<FN>
<F*> By: /s/ Jack B. Lay March 18, 1998
---------------------------------
Jack B. Lay Attorney-in-fact
</TABLE>
30
<PAGE> 31
<TABLE>
Index to Exhibits
<CAPTION>
Source
Exhibit (See footnotes
Number Description that follow)
- ------ ----------- --------------------
<C> <S> <C>
2.1. Reinsurance Agreement dated as of December 31, 1992 <F2>
between General American Life Insurance Company
("General American") and General American Life
Reinsurance Company of Canada ("RGA Canada")
2.2. Retrocession Agreement dated as of <F2>
July 1, 1990 between General American and
The National Reinsurance Company of Canada,
as amended between RGA Canada and General American
on December 31, 1992
2.3. Reinsurance Agreement dated as of <F2>
January 1, 1993 between RGA Reinsurance
Company ("RGA Reinsurance", formerly "Saint Louis
Reinsurance Company") and General American
3.1. Restated Articles of Incorporation of Reinsurance <F1>
Group of America, Incorporated ("RGA")
3.2. Bylaws of RGA <F1>
3.3. Certificate of Designations for Series A Junior <F5>
Participating Preferred Stock (included as Exhibit A
to Exhibit 4.2)
4.1. Form of Specimen Certificate for Common Stock of RGA <F2>
4.2. Rights Agreement dated as of May 4, 1993, between RGA <F5>
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent
10.1. Marketing Agreement dated as of January 1, 1993 <F3>
between RGA Reinsurance and General American
10.2. Tax Allocation Agreement dated October 30, 1992 <F2>
between RGA Reinsurance and General American
10.3. Tax Allocation Agreement dated as of January 15, 1993 <F2>
among RGA, RGA Reinsurance, and General American
10.4. Tax Sharing Agreement dated as of January 15, 1993 <F2>
among RGA, RGA Reinsurance, and General American
10.5. Administrative Services Agreement dated as of <F3>
January 1, 1993 between RGA and General American
10.6. Administrative Services Agreement dated as of <F3>
January 1, 1993 between RGA Reinsurance
and General American
31
<PAGE> 32
Source
Exhibit (See footnotes
Number Description that follow)
- ------ ----------- --------------------
10.7. Management Agreement dated as of January 1, 1993 <F2><F*>
between RGA Canada and General American
10.8. Investment Advisory Agreement dated as of <F3>
January 1, 1993 between RGA and Conning Asset Management
Company, formerly General American Investment Management
Company ("CAM")
10.9. Investment Advisory Agreement dated as of <F3>
January 1, 1993 between RGA Reinsurance
and CAM
10.10. Lease Agreement dated as of May 17, 1993 between <F4>
RGA and General American and Assignment to RGA
Reinsurance
10.11 Standard Form of General American Automatic <F2>
Agreement
10.12 Standard Form of General American Facultative Agreement <F2>
10.13 Standard Form of General American Automatic and <F2>
Facultative YRT Agreement
10.14 Shareholders' Agreement dated as of November 24, 1992 <F3><F*>
among General American, Fairfield Holding,
Adrian N. Baker II, Richard H. Chomeau, and
Anthony J. Sutcliffe, as amended with RGA and
RGA Reinsurance
10.15 Shareholders' Agreement dated as of March 20, 1992 <F3><F*>
among General American, RGA International, Ltd., formerly
G.A. Canadian Holdings, Ltd., Penta-Life Group Inc., Claude M.
Genest, Brendan Galligan, Graham Watson, Societe FSA 50
Inc., Aenigma Holdings Limited, Andre St-Amour, and Andr
Primeau, as amended with RGA
10.16 Registration Rights Agreement dated as of April 15, 1993 <F2>
between RGA and General American
10.17 RGA Reinsurance Management Incentive Plan as amended <F6><F*>
and restated effective November 1, 1996
10.18 RGA Reinsurance Management Deferred <F2><F*>
Compensation Plan (ended January 1, 1995)
10.19 RGA Reinsurance Executive Deferred <F2><F*>
Compensation Plan (ended January 1, 1995)
32
<PAGE> 33
Source
Exhibit (See footnotes
Number Description that follow)
- ------ ----------- --------------------
10.20 RGA Reinsurance Executive Supplemental <F2><F*>
Retirement Plan (ended January 1, 1995)
10.21 RGA Reinsurance Augmented Benefit Plan <F2><F*>
(ended January 1, 1995)
10.22 RGA Flexible Stock Plan as amended and restated <F6><F*>
effective November 1, 1996
10.23 Form of Directors' Indemnification Agreement <F2>
10.24 RGA Executive Performance Share Plan as amended <F6><F*>
and restated effective November 1, 1996
10.25 RGA Flexible Stock Plan for Directors <F7><F*>
10.26 Employment Agreement dated April 6, 1992 between RGA <F*>
Canada and Andre St-Amour
13.1 Portions of Annual Report to Shareholders for 1997 --
Incorporated by Reference in the Form 10-K
21.1 Subsidiaries of RGA --
23.1 Consent of KPMG Peat Marwick LLP --
24.1 Powers of Attorney for Messrs. Eason, Edison, Peck --
Greenbaum, Rubenstein, Stiritz, and Trusheim
27.1 Financial Data Schedule --
<FN>
<F1> Documents incorporated by reference to Registration Statement on Form S-1
(No. 33-58960) filed on 2 March 1993 at the corresponding exhibit.
<F2> Documents incorporated by reference to Amendment No. 1 to Registration
Statement on Form S-1 (No. 33-58960), filed on 14 April 1993 at the corresponding
exhibit.
<F3> Documents incorporated by reference to Amendment No. 2 to Registration
Statement on Form S-1 (No. 33-58960), filed on 29 April 1993 at the corresponding
exhibit.
<F4> Documents incorporated by reference to Form 10-K for fiscal year ended
December 31, 1993 filed 29 March 1994 at the corresponding exhibit.
<F5> Documents incorporated by reference to Amendment No. 1 to Form 10-Q for the
quarter ended March 31, 1997 (No. 1-11848) filed on 21 May 1997 at the corresponding
exhibit.
33
<PAGE> 34
<F6> Documents incorporated by reference to Form 10-K for the year ended December 31, 1996
(No. 1-11848) filed on 24 March 1997 at the corresponding exhibit.
<F7> Documents incorporated by reference to Registration Statement on Form S-8
(No. 333-27167) filed on 15 May 1997 at the corresponding exhibit
<F*> Represents a management contract or compensatory plan or arrangement
required to be filed as an exhibit to this form pursuant to Item 14C of this Part IV.
</TABLE>
34
<PAGE> 1
Exhibit 10.26
EMPLOYMENT AGREEMENT
MEMORANDUM OF AGREEMENT entered into at Montreal, this 6th day of April,
1992.
BY AND BETWEEN: GENERAL AMERICAN LIFE REINSURANCE COMPANY OF CANADA, a
company duly incorporated under the laws of Canada,
having a principal place of business at 1140 de
Maisonneuve Blvd. West Suite 802, in the City of
Montreal, Province of Quebec, Canada, herein acting
and represented by Mr. Albert G. Woodring, duly
authorized to act hereunder for the purposes of the
present Agreement as he so declares;
(hereinafter the "Employer")
OF THE FIRST PART
AND Andre St-Amour, having his address at 7735 Place
Mairaux, in the City of Brossard, Province of Quebec,
Canada;
(hereinafter "St-Amour" and collectively with the
Employer, "the Parties")
THE PARTIES DECLARE AS FOLLOWS:
WHEREAS the Employer wishes to enlist St-Amour's services and St-Amour
wishes to offer his services to the Employer, the whole in accordance with
the conditions stipulated in the present agreement;
ARTICLE I
Duties
------
1. As President and Chief Operating Officer of the Employer, St-Amour's
duties and responsibilities shall include, above and beyond those
inherent to his office and normally
35
<PAGE> 2
Exhibit 10.26
pertaining to it, those compatible with his position and which the
Employer may delegate to him from time to time.
ARTICLE II
Salary
------
2. As President and Chief Operating Officer of the Employer, St-Amour
shall receive an annual gross compensation of one hundred sixty two
thousand five hundred dollars ($162,500), to be paid in 26 equal
installments of $6,250. Such compensation shall be adjusted annually
by the Employer on the anniversary date by an amount equal to the
percentage increase in the CPI-Urban Consumers - All items for
Montreal plus two percent (2%).
ARTICLE III
Benefits and Vacation
---------------------
3. St-Amour shall have the right to participate to all benefit programs
and plans granted to management employees of the Employer. St-Amour
shall be granted four (4) weeks vacation in accordance with the
Employer's existing policy as amended from time to time.
ARTICLE IV
Expenses
--------
4. The Employer hereby agrees to reimburse St-Amour, upon presentation of
appropriate receipts or other evidence thereof, for all expenses and
fees reasonably incurred by St-Amour in the exercise of his duties,
the whole in accordance with the policy of the Employer as modified
from time to time at its sole discretion. Expenses shall include a
parking space at the place of business.
36
<PAGE> 3
Exhibit 10.26
ARTICLE V
Confidentiality
---------------
5.1 St-Amour hereby agrees that he shall not, use, divulge, diffuse, sell,
transfer, give, circulate, or otherwise distribute to any Person whatsoever
or whomsoever, or otherwise make public, any Confidential Information during
the term of this Agreement and for a period of two (2) years following upon
the termination of this Agreement.
5.2 Notwithstanding any provision of this Agreement, St-Amour shall not, at
any time while he is an employee of the Employer or at any time thereafter,
use, discuss or disclose to any Person a trade secret of the Employer.
5.3 For the purposes hereof, "Confidential Information" shall mean all
information, howsoever received by St-Amour from, through or relating to the
Employer, and in whatever form (whether oral, written, machine readable or
otherwise), which pertains to the Employer; provided, however, that the
phrase "Confidential Information" shall not include information which:
i. is in the public domain, without any fault or responsibility on St-
Amour's part;
ii. is properly within the legitimate possession of St-Amour prior to its
disclosure and without any obligations of confidence attaching thereto;
iii. is approved by the Employer for disclosure prior to its actual
disclosure.
ARTICLE VI
Obligation of non-solicitation of customers
-------------------------------------------
6.1 St-Amour shall not, for a period of twelve (12) months after the
termination of this Agreement, on his own behalf or on behalf of any other
Person, whether directly or indirectly, in any capacity whatsoever,
including, without limitation, as an employer, employee, mandator, mandatory,
principal, agent, joint venturer, partner, shareholder or other equity
holder, independent contractor, licensor, licensee, franchisor, franchisee,
distributor, consultant, supplier, trustee, or through any person for any
purpose which is the same as, is
37
<PAGE> 4
Exhibit 10.26
substantially similar to or is in competition with the Business.:
i. canvass or solicit any Customer, or procure, or assist the canvassing or
soliciting of any Customer;
ii. canvass or solicit any Prospective Customer, or procure, or assist the
canvassing or soliciting of any Prospective Customer.
6.2 St-Amour shall not, for a period of twelve (12) months after the
termination of this Agreement, on his own behalf or on behalf of any other
Person, directly or indirectly, in any capacity whatsoever, including,
without limitation, as an employer, employee, mandator, mandatory, principal,
agent, joint venturer, partner, shareholder or other equity holder,
independent contractor, licensor, licensee, franchisor, franchisee,
distributor, consultant, supplier, trustee, or through any Person for any
purpose which is the same as, is substantially similar to or is in
competition with the Business:
i. accept, or procure, or assist in the acceptance of, any business from
any Customer;
ii. accept, or procure, or assist in the acceptance of, any business from
any Prospective Customer.
ARTICLE VII
Non-solicitation of employees
-----------------------------
7.1 St-Amour shall not, for a period of twelve (12) months after the
termination of this Agreement, on his own behalf or on behalf of any other
Person, whether directly or indirectly, in any capacity whatsoever,
including, without limitation, as an employer, employee, mandator, mandatory,
principal, agent, joint venturer, partner, shareholder or other equity
holder, independent contractor, licensor, licensee, franchisor, franchisee,
distributor, consultant, supplier, trustee, or through any Person:
i. employ, offer employment to, or solicit the employment or engagement of,
or otherwise entice away from the employment of the Employer any
individual who is employed by the Employer at the time of termination
of this Agreement or who was employed by the Employer within the
38
<PAGE> 5
Exhibit 10.26
six (6) months preceding the termination of this Agreement; or
ii. procure or assist any Person to employ, offer employment or solicit the
employment or engagement of, or otherwise entice away from the
employment of the Employer any individual who is employed by the
Employer at the time of termination of this Agreement or who was
employed by the Employer within the six (6) months preceding the
termination of this Agreement.
ARTICLE VIII
Duration
--------
8.1 This Agreement is made for an indefinite period of time, commencing on
January 1, 1992, but the compensation terms and adjustments thereof are set
for a period of five (5) years terminating on December 31, 1996.
ARTICLE IX
Termination of the Agreement
----------------------------
9. Should St-Amour be terminated by the Employer without cause, St-Amour
shall receive, and the Employer hereby undertakes to pay to St-Amour in one
installment, an indemnity in lieu of notice equal to twelve (12) months of
his gross compensation.
ARTICLE X
Language
--------
10.1. The parties hereto acknowledge that they have required and are satisfied
that this Agreement and all related documents be drawn up in the English
language. Les parties aux presentes reconnaissent avoir requis que la
presente entente et les documents qui y sont relatifs soient rediges en
anglais.
39
<PAGE> 6
Exhibit 10.26
Governing Law
-------------
10.2 This Agreement shall be governed by and interpreted in accordance with
the laws of the Province of Quebec and the laws of Canada applicable therein.
Definitions
-----------
10.3 For the purpose of this Agreement, or for the purposes of any notice or
communication required hereunder, the capitalized words and expressions shall
have the respective meanings, except where the context dictates otherwise,
set out in Schedule A, attached hereto.
IN WITNESS WHEREOF this Agreement has been executed by the parties hereto on
the date and at the place first hereinabove mentioned.
In Montreal, Quebec, Canada, this 6th day of April 1992.
/s/ Andre St-Amour
--------------------
ANDRE ST-AMOUR
GENERAL AMERICAN LIFE REINSURANCE
COMPANY OF CANADA
per: /s/ A. Greig Woodring
-----------------------
40
<PAGE> 7
Exhibit 10.26
SCHEDULE A
----------
(a) "Affiliate" shall mean any Person not dealing at arm's length, within
the meaning of any applicable law, with any party hereto, and (ii)
with respect to any corporation or company, an other body corporate
which directly or indirectly controls or is controlled by or is under
directly or indirect common control with such corporation or company,
or any body corporate which is directly or indirectly controlled by a
corporate body which controls such corporation or company; and for the
purposes hereof (I) "control" shall mean, with respect to any body
corporate, the ownership of more than fifty percent (50%) of the
voting shares of such body corporate, and (ii) "Voting Shares" shall
mean shares of the body corporate having the right to elect directors
of such body corporate;
(b) "Agreement" shall mean this Employment Agreement and all instruments
supplemental hereto or in amendment or confirmation hereof; "herein",
"hereof", "hereto", "hereunder" and similar expressions mean and refer
to this Agreement and not to any particular Article, Section,
Subsection or other subdivision; "Article", "Section", "Subsections"
or other subdivision of this Agreement means and refers to the
specified Article, Section, Subsection or other subdivision of this
Agreement;
(c) "Business" shall mean, in relation to the Employer, the business now and
heretofore or hereafter conducted by the Employer, including, without
limitation, the business of life reinsurance underwriting as it now
stands in Canada;
(d) "Customer" shall mean any Person having purchased, retained or utilized
the Employer's goods or services in the course of Business at any time
during the twelve (12) month period preceding the termination of this
Agreement;
(e) "Governmental Body" shall mean:
i. any domestic or foreign national, federal provincial, state,
municipal or other government body;
41
<PAGE> 8
Exhibit 10.26
ii. any subdivision, ministry, department, secretariat, bureau,
agency, commission, board, instrumentality or authority of any of
the foregoing governments or bodies;
iii. any quasi-governmental or private body exercising any regulatory,
expropriation or taxing authority under or for the account of any
of the foregoing governments or bodies;
iv. any domestic or foreign judicial, quasi-judicial, arbitration or
administrative court, grand jury, commission, board or panel;
(f) "Person" shall man any individual not employed by the Employer or any
other entity possessed or juridical personality, including, without
limitation, a corporation, company, cooperative, partnership, trust,
unincorporated association, Affiliate or Governmental Body; and
pronouns when they refer to a Person shall have a similar extended
meaning;
(g) "Prospective Customer" shall mean (I) any Person solicited by St-Amour
on behalf of the Employer at any time during the twelve (12) month
period preceding the termination of this Agreement for any purpose
relating to the Business, and (ii) any Person solicited by the
Employer with St-Amour's knowledge for any purpose relating to the
Business at any time during the six (6) month period preceding the
termination of this Agreement.
42
<PAGE> 1
- ------------------------------------------------------------------------- 19.
DIVISIONAL HIGHLIGHTS
<TABLE>
U.S. Operations
<CAPTION>
1997
Traditional Non-traditional Total
Asset-Intensive Financial Reinsurance
- --------------------------------------------------------- ----------- -------------------------------------- --------
<S> <C> <C> <C> <C>
Revenues:
Net premiums $554,253 $ -- $ -- $554,253
Investment income, net of related expenses 98,666 55,636 -- 154,302
Realized investment gains/(losses), net 1,816 (1,726) -- 90
Other revenue 872 -- 25,308 26,180
------------------------------------------------------ ----------- -------------------------------------- --------
Total revenues 655,607 53,910 25,308 734,825
Benefits and expenses:
Claims and other policy benefits 405,590 2,414 -- 408,004
Interest credited 42,564 48,102 -- 90,666
Policy acquisition costs and other
insurance expenses 89,556 1,548 14,368 105,472
Other operating expenses 20,924 -- -- 20,924
------------------------------------------------------ ----------- -------------------------------------- --------
Total benefits and expenses 558,634 52,064 14,368 625,066
Income before income taxes and minority interest $96,973 $1,846 $10,940 $109,759
=================================================== =========== ====================================== ========
<CAPTION>
1996
Traditional Non-traditional Total
Asset-Intensive Financial Reinsurance
- --------------------------------------------------------- ----------- -------------------------------------- --------
<S> <C> <C> <C> <C>
Revenues:
Net premiums $486,431 $ -- $ -- $486,431
Investment income, net of related expenses 87,163 24,638 -- 111,801
Realized investment (losses), net (1,340) -- -- (1,340)
Other revenue (564) -- 16,957 16,393
------------------------------------------------------ ----------- -------------------------------------- --------
Total revenues 571,690 24,638 16,957 613,285
Benefits and expenses:
Claims and other policy benefits 360,081 -- -- 360,081
Interest credited 34,168 20,224 -- 54,392
Policy acquisition costs and other
insurance expenses 80,667 3,044 12,841 96,552
Other operating expenses 17,768 -- -- 17,768
------------------------------------------------------ ----------- -------------------------------------- --------
Total benefits and expenses 492,684 23,268 12,841 528,793
Income before income taxes and minority interest $ 79,006 $ 1,370 $ 4,116 $ 84,492
=================================================== =========== ====================================== ========
</TABLE>
TABLE OF CONTENTS Divisional Highlights 19 Management's Discussion and
Analysis of Financial Condition and Results of Operations 23 Consolidated
Balance Sheets 34 Consolidated Statements of Income 35
Consolidated Statements of Stockholders' Equity 36 Consolidated Statements
of Cash Flows 37 Notes to Consolidated Financial Statements 38 Independent
Auditors' Report 54 Report of Management Responsibility for Financial
Statements 55 Selected Consolidated Financial and Operating Data 56
Quarterly Data (Unaudited) 57 Management and Shareholders' Information 58
<PAGE> 2
20.
<TABLE>
U.S. OPERATIONS continued
<CAPTION>
1995
Traditional Non-traditional Total
Asset-Intensive Financial Reinsurance
- --------------------------------------------------------- ----------- -------------------------------------- --------
<S> <C> <C> <C> <C>
Revenues:
Net premiums $414,133 $ -- $ -- $414,133
Investment income, net of related expenses 73,093 866 -- 73,959
Realized investment gains, net 640 -- -- 640
Other revenue (318) -- 7,742 7,424
------------------------------------------------------ ----------- -------------------------------------- --------
Total revenues 487,548 866 7,742 496,156
Benefits and expenses:
Claims and other policy benefits 311,974 -- -- 311,974
Interest credited 33,023 768 -- 33,791
Policy acquisition costs and other
insurance expenses 65,526 34 6,037 71,597
Other operating expenses 15,367 -- -- 15,367
------------------------------------------------------ ----------- -------------------------------------- --------
Total benefits and expenses 425,890 802 6,037 432,729
Income before income taxes and minority interest $ 61,658 $ 64 $1,705 $ 63,427
=================================================== =========== ====================================== ========
<CAPTION>
Canadian Operations
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Net premiums $ 83,563 $63,118 $49,248
Investment income, net of related expenses 16,321 12,722 11,064
Realized investment gains/(losses), net 109 2,419 (198)
Other revenue 20,152 290 201
----------------------------------------------------------------------------------------------------
Total revenues 120,145 78,549 60,315
Benefits and expenses:
Claims and other policy benefits 74,972 48,983 36,683
Interest credited 1,293 287 --
Policy acquisition costs and other
insurance expenses 22,411 10,161 8,087
Other operating expenses 6,387 5,682 4,665
----------------------------------------------------------------------------------------------------
Total benefits and expenses 105,063 65,113 49,435
Income before income taxes and minority interest $ 15,082 $13,436 $10,880
=================================================================================================
<PAGE> 3
<CAPTION>
- ------------------------------------------------------------------------- 21.
DIVISIONAL HIGHLIGHTS
Accident and Health
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Net premiums $ 90,692 $57,182 $47,789
Investment income, net of related expenses 1,249 1,019 730
Realized investment gains/(losses), net 2 2 (2)
Other revenue 1,379 666 335
----------------------------------------------------------------------------------------------------
Total revenues 93,322 58,869 48,852
Benefits and expenses:
Claims and other policy benefits 70,658 42,250 33,640
Accident and health pool charge 18,000 -- --
Policy acquisition costs and other
insurance expenses 28,354 18,389 13,630
Other operating expenses 5,652 2,350 2,280
----------------------------------------------------------------------------------------------------
Total benefits and expenses 122,664 62,989 49,550
(Loss) before income taxes and minority interest $(29,342) $(4,120) $ (698)
=================================================================================================
<CAPTION>
Other International
1997
Latin America Asia Pacific Other Markets Total
Direct Reinsurance
- -------------------------------------------------------- ----------------------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Net premiums $56,460 $11,730 $36,591 $ 2,170 $106,951
Investment income, net of related expenses 7,067 1,701 1,730 378 10,876
Realized investment gains, net -- -- 14 -- 14
Other revenue 185 -- -- 332 517
----------------------------------------------------- ------------------------ ------------- -------------- ---------
Total revenues 63,712 13,431 38,335 2,880 118,358
Benefits and expenses:
Claims and other policy benefits 53,181 10,327 21,164 1,755 86,427
Interest credited 82 -- -- -- 82
Policy acquisition costs and other
insurance expenses 3,820 329 15,616 479 20,244
Other operating expenses 6,553 2,962 6,119 3,680 19,314
Interest expense -- -- 468 -- 468
----------------------------------------------------- ------------------------ ------------- -------------- ---------
Total benefits and expenses 63,636 13,618 43,367 5,914 126,535
Income/(loss) before income taxes and
minority interest $ 76 $ (187) $(5,032) $(3,034) $ (8,177)
================================================== ======================== ============= ============== =========
<PAGE> 4
22.
<CAPTION>
Other International continued
1996
Latin America Asia Pacific Other Markets Total
Direct Reinsurance
- -------------------------------------------------------- ----------------------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Net premiums $41,672 $5,130 $21,066 $ 287 $68,155
Investment income, net of related expenses 3,722 1,400 1,013 - 6,135
Realized investment (losses)/gains, net - - - - -
Other revenue 36 1 - - 37
----------------------------------------------------- ----------------------- ------------ ------------- --------
Total revenues 45,430 6,531 22,079 287 74,327
Benefits and expenses:
Claims and other policy benefits 39,492 3,122 11,641 170 54,425
Interest credited 27 - - - 27
Policy acquisition costs and other
insurance expenses 1,379 169 9,808 52 11,408
Other operating expenses 4,434 1,214 4,536 1,850 12,034
Interest expense - - 484 - 484
----------------------------------------------------- ----------------------- ------------ ------------- --------
Total benefits and expenses 45,332 4,505 26,469 2,072 78,378
Income/(loss) before income taxes and
minority interest $ 98 $2,026 $(4,390) $(1,785) $(4,051)
================================================== ======================= ============ ============= ========
<CAPTION>
Other International
1995
Latin America Asia Pacific Other Markets Total
Direct Reinsurance
- -------------------------------------------------------- ----------------------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Net premiums $33,794 $12,292 $12,735 $ - $58,821
Investment income, net of related expenses 2,050 986 (231) - 2,805
Realized investment (losses)/gains, net - - - - -
Other revenue (30) 1 - - (29)
----------------------------------------------------- ----------------------- ------------ ------------- -------
Total revenues 35,814 13,279 12,504 - 61,597
Benefits and expenses:
Claims and other policy benefits 30,654 8,024 9,096 - 47,774
Interest credited 5 - - - 5
Policy acquisition costs and other
insurance expenses 2,276 90 2,392 - 4,758
Other operating expenses 3,299 1,264 2,706 - 7,269
Interest expence - - - - -
----------------------------------------------------- ----------------------- ------------ ------------- -------
Total benefits and expenses 36,234 9,378 14,194 - 59,806
(Loss)/income before income taxes and
minority interest $ (420) $ 3,901 $(1,690) $ - $ 1,791
================================================== ======================= ============ ============= =======
</TABLE>
<PAGE> 5
- ------------------------------------------------------------------------- 23.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following analysis of Reinsurance Group of America, Incorporated's
consolidated financial condition and results of operations should be read in
conjunction with "Selected Consolidated Financial and Operating Data" and
the consolidated financial statements and accompanying notes beginning on
page 34.
General
In 1993, Reinsurance Group of America, Incorporated (RGA) completed an
initial public offering of 9,961,875 shares of common stock at $17.33 per
share (adjusted for the stock split in the form of a dividend during 1997).
At December 31, 1997, General American Life Insurance Company (General
American) indirectly owned approximately 64% of the common stock issued by
RGA.
During 1993, General American contributed its investment in RGA
Reinsurance Company (RGA Reinsurance, formerly Saint Louis Reinsurance
Company) and RGA International, Ltd. (RGA International, formerly G.A.
Canadian Holdings, Ltd.) to RGA. Additionally, General American entered into
an indemnity reinsurance agreement to retrocede virtually all of its net
reinsurance business to RGA Reinsurance effective January 1, 1993.
Subsequently, most of the existing reinsurance agreements between General
American and various ceding companies were transferred to RGA Reinsurance,
replacing General American as the direct party to the treaties.
The net proceeds to RGA from the sale of shares in the initial public
offering were approximately $160.4 million. These proceeds have been utilized
to finance expansion, both domestically and internationally. During 1993, RGA
contributed $95.0 million in the form of capital to its domestic life
insurance subsidiary, RGA Reinsurance, to strengthen its capital base,
finance expansion of its business, and for other general corporate purposes.
Some of the remaining proceeds have been invested in subsidiaries in
Argentina, Australia, Barbados, Bermuda, Canada, Chile and the United
Kingdom.
On March 19, 1996, RGA issued 7 1/4% Senior Notes (Senior Notes) with a
face value of $100,000,000 in accordance with Rule 144A of the Securities Act
of 1933. The net proceeds from the offering of approximately $98,943,000,
have been utilized to finance the continuing development of RGA's operations
and investments in subsidiaries.
The Board of Directors of RGA approved a three-for-two split of RGA'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 information is presented on a post-split
basis, except where otherwise indicated.
Results of Operations
RGA and its subsidiaries (the Company) derive revenues primarily from
renewal premiums from existing reinsurance treaties, new business premiums
from existing or new reinsurance treaties, and income earned on invested
assets, as well as direct insurance premiums from its Latin American
subsidiaries.
The Company's primary business is life reinsurance, which involves
reinsuring life insurance policies that are often in force for the lifetime
of the underlying individual insureds, with premiums earned typically over a
period of 10 to 30 years. Each year, however, a portion of the business under
existing treaties terminates due to, among other things, voluntary surrenders
of underlying life insurance policies, lapses of underlying policies, deaths
of underlying insureds, and the exercise of recapture options.
Most of the Company's existing life reinsurance treaties provide for
contractual increases in premium rates. These premium increases are
constructed to offset expected increases in claims associated with insureds'
advancing ages. New business premiums during each of the last three years
have contributed more than $130.0 million to total net premiums for each
period. "New business" refers to reinsurance resulting from newly issued
underlying policies or blocks of existing business, regardless of whether the
reinsurance is associated with new or existing treaties.
Insurance in force for the Company increased $59.0 billion to $227.3
billion at December 31, 1997. New business production for 1997 totaled $75.9
billion compared to $37.9 billion in 1996 and $36.0 billion in 1995.
Significant growth in new business in U.S. and Latin American operations
contributed to most of this increase.
<PAGE> 6
24.
As is customary in the reinsurance business, life insurance clients
continually update, refine, and revise reinsurance information provided to
the Company. Such revised information is used by the Company in the
preparation of its financial statements and the financial effects resulting
from the incorporation of revised data are reflected in income currently.
The Company's profitability primarily depends on the volume and amount
of death claims incurred. While death claims are reasonably predictable over
a period of many years, claims become less predictable over shorter periods
and are subject to fluctuation from quarter to quarter and year to year. RGA
Reinsurance has catastrophe insurance coverage issued by an insurer rated "A"
by A.M. Best that provides benefits of up to $100.0 million per occurrence
for claims involving three or more deaths in a single accident, with a
deductible of $1.5 million per occurrence. This coverage is terminable
annually on 90 days notice and is ultimately provided through a pool of 17
unaffiliated insurers. The Company believes such catastrophe insurance
coverage is adequate to protect the Company from risks of multiple deaths of
lives reinsured by policies with RGA Reinsurance in a single accident.
Additionally, the Company's practice is to limit its retention to $2.5
million on any one insured life.
The Company has foreign currency risk on business conducted in foreign
currency to the extent that the exchange rate of the foreign currency is
subject to adverse change over time. The Company's Canadian operations
transact business in Canadian dollars. The exchange rate from Canadian to
U.S. currency was 0.6992, 0.7297, and 0.7344 at December 31, 1997, 1996, and
1995, respectively. The Company's Latin American operations primarily conduct
business in Chilean pesos and Argentine dollars. The exchange rate from these
currencies to the U.S. currency remained relatively stable during 1997, 1996,
and 1995. The business generated from the Asia Pacific region is primarily
denominated in U.S. dollars and Australian dollars and the Company was not
materially effected by the decline in the foreign exchange rates within the
Asia Pacific region during 1997.
The Company has four main operational segments: U.S., Canadian,
accident and health, and other international. The U.S. operations provide
life reinsurance and non-traditional reinsurance to domestic clients.
Non-traditional business includes asset-intensive and financial reinsurance.
Asset-intensive products include reinsurance of stable value products,
corporate-owned and bank-owned life insurance, and annuities. The Canadian
operations provide insurers with traditional reinsurance as well as
assistance with capital management activity. The accident and health
operations include both domestic and international reinsurance. The other
international operations include results from Latin American operations, Asia
Pacific operations, and Market Development operations. Other international
business includes direct and reinsurance business from a joint venture and
subsidiaries in Latin America, Australia, and the United Kingdom, as well as
reinsurance of life and health products through RGA Reinsurance. Latin
American direct business is comprised primarily of Chilean single-premium
annuities and Argentine group life and universal life products. The
operational segment results do not include the corporate investment activity,
general expenses and interest expense of RGA.
Year Ended December 31, 1997
Compared to Year Ended December 31, 1996
Income Before Income Taxes and Minority Interest Consolidated income
before income taxes and minority interest decreased 3.4% in 1997. Diluted
earnings per share were $2.13 for 1997 compared with $2.17 for 1996. After
tax consolidated net income before realized capital gains and losses
decreased slightly to $54.4 million in 1997 from $54.6 million in 1996.
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. Due to
continuing losses emanating from certain of the Company's accident and health
operations in the third and fourth quarters of 1997, the strategic decision
was made to cease marketing accident and health business and to place the
operation into run-off at year-end. The Company established an additional
$3.0 million in reserves which it believes are sufficient to handle the
run-off. In December 1997, RGA Reinsurance was notified by the holders of
minority interests in its accident and health subsidiaries of their intent to
exercise certain put options for their 49% ownership interest. Based upon the
Company's decision to cease marketing accident and health business, the
Company also established a reserve of approximately $3.0 million against the
intangible asset that will arise related to the excess of purchase price over
the fair value of net assets acquired when put options are exercised by
certain minority interests.
<PAGE> 7
- ------------------------------------------------------------------------- 25.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The increase in the U.S. operations income before income taxes and
minority interest in 1997 compared to 1996 was due to fees earned on
reinsurance transactions and strong premium and investment income growth of
13.9% and 38.0%, respectively. The increase in the Canadian operations income
before income taxes and minority interest in 1997 compared to 1996 was
primarily a result of strong new business production and recapture fees
earned which were partially offset by adverse mortality experienced in 1997.
The decrease in the accident and health operations income before income taxes
and minority interest in 1997 compared to 1996 was primarily due to the
accident and health charge in the first quarter, the write off of intangibles
and establishment of additional reserves in the fourth quarter discussed
above, as well as continued adverse experience on the remainder of the
business. The other international operations lost $8.2 million before income
taxes and minority interest in 1997 compared to $4.1 million loss in 1996.
The losses in the segment were due primarily to continued price pressure in
highly competitive international markets and adverse mortality for blocks of
mortality risk reinsurance from Argentina. Additionally, costs associated
with the development of new business in several international markets still
exceed the revenue base, due to the relatively recent initiation of market
development activities.
Net Premiums Consolidated net premiums increased 23.8%, to $835.5
million in 1997. Net premiums for the U.S. operations rose 13.9% in 1997.
Renewal premiums from the existing block of business, new business premiums
from facultative and automatic treaties, and premium flows from reinsurance
of larger blocks of in force business all contributed to the premium
increase. Business premium levels are significantly influenced by large
transactions and reporting practices of ceding companies from period to
period.
Net premiums in the Canadian operations increased 32.4% to $83.6
million in 1997. New business premiums increased $2.0 million, while renewal
premiums increased $18.4 million during 1997. The growth in renewal premiums
reflects the normal increase of in force business and the effect of large
blocks of in force business acquired in the fourth quarter of 1996 and
retained during 1997. The effect of changes in the foreign exchange rate
during 1997 was not material.
Accident and health operations net premiums increased 58.6% to $90.7
million in 1997. The net premiums increased primarily from business written
by the Company's domestic underwriting facility. With the decision to cease
marketing this type of business, it is anticipated that accident and health
premiums will decrease in each of the next few years. The Company estimates
that future accident and health premiums compared to 1997 premiums will
remain level in 1998. Premiums will decrease, compared to each preceding
year, by approximately 20%, 70%, 90%, and 100% during 1999, 2000, 2001 and
2002, respectively.
The Company's other international operations reported premiums of
$107.0 million in 1997 compared to $68.2 million in 1996. The 1997 premium
represented approximately $68.2 million from Latin America, of which
approximately $56.5 million was direct premium generated in Argentina and
Chile. This increase resulted from continued growth in Chilean single premium
annuities and universal life business in Argentina. The Asia Pacific
operations and other markets generated $38.8 million of premiums,
predominantly through the Hong Kong contact office and Australia.
Net Investment Income Consolidated net investment income increased
37.6% in 1997. The cost basis of invested assets increased $946.7 million, or
64.4%. The increase in invested assets was a result of an increase in
operating cash flows and reinsurance transactions involving deposits for
asset-intensive products from ceding companies, primarily stable value
product deposits, of $834.3 million and $429.3 million during 1997 and 1996,
respectively. The average yield earned on investments was 7.23% in 1997
compared with 7.32% earned in 1996. The 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. The
asset-intensive products investment portfolios generated approximately $55.6
million and $24.6 million of investment income in 1997 and 1996,
respectively, which was largely offset by earnings credited and paid to
ceding companies included in interest credited.
Realized Investment Gains/(Losses), Net Consolidated net realized
capital gains decreased $0.6 million to $0.3 million in 1997. The 1997 amount
included the write down of the value of an investment by $2.5 million, which
was more than offset by capital gains within the various operating
portfolios.
<PAGE> 8
26.
Other Revenue Consolidated other revenue increased $30.0 million in
1997 to $47.4 million. Other revenue includes items such as treaty recapture
fees, profit and risk fees associated with financial reinsurance as well as
earnings in unconsolidated subsidiaries, management fee income and
miscellaneous income associated with late premium payments. During 1997,
financial reinsurance treaties resulted in $16.0 million in financial
reinsurance fees which were partially offset by fees paid to
retrocessionaires of $14.4 million, included in policy acquisition costs and
other insurance expenses. The Company's strategy involves the assumption and
subsequent retrocession of these financial reinsurance treaties which
resulted in amounts of $147.2 and $148.4 being included in other reinsurance
assets and liabilities, respectively, on the Company's consolidated balance
sheets. Other revenue also included $9.3 million in earnings in
unconsolidated subsidiaries in the U.S. operations and a recapture fee of
$20.1 million for a treaty executed in the Canadian operations during
December 1997. This recapture fee included the recovery of acquisition costs
previously deferred which have been reflected in policy acquisition costs and
other insurance expenses.
Claims and Other Policy Benefits Consolidated claims and other policy
benefits increased 26.6% in 1997. Claims and other policy benefits as a
percentage of net premiums increased to 76.6% in 1997 from 74.9% in 1996.
This increase was primarily a result of adverse experience in the Canadian
and accident and health operations in 1997 and increasing levels of other
international business. 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 13.3% in
1997, primarily as a result of increases from new business production. Claims
and other policy benefits as a percentage of net premiums decreased slightly
to 73.6% in 1997 from 74.0% in 1996. This decrease was due to normal
short-term fluctuations in death claims.
Canadian operations claims and other policy benefits increased 53.1% in
1997. Claims and other policy benefits as a percentage of net premiums
increased to 89.7% in 1997 from 77.6% in 1996. The increase as a percent of
premiums was primarily due to mortality results which were not as favorable
as those experienced in 1996.
Accident and health operations claims and other policy benefits
increased 67.2% in 1997. These claims and other policy benefits do not
include the $18.0 million, $10.4 million after-tax, accident and health pool
charge taken during the first quarter of 1997, which is separately disclosed
on the income statement. As a percentage of net premiums, claims and other
policy benefits increased to 77.9% in 1997 from 73.9% in 1996. The increase
as a percent of premiums was primarily due to an increase in reserves of
approximately $3.0 million during 1997 related to the Company's decision to
cease marketing these services and place the line into run-off. In addition,
the segment continued to experience adverse results in 1997. The accident and
health operations reserves are subject to volatility due to the nature of
risk covered, primarily accident risks. Reserves are calculated based upon
current information, including industry estimates for certain aviation
accidents.
The Company's other international business comprised the remaining
increase of $32.1 million from the prior year. This increase was the result
of reserve and policyholder benefit increases on business from Latin American
ventures and blocks of mortality risk reinsurance of $20.9 million. These
reserve increases resulted from new business and the continued growth in the
Latin American single premium immediate annuity business in 1997. The Asia
Pacific operations reflected an increase of $9.5 million resulting primarily
from new business written in Australia.
Interest Credited Consolidated interest credited increased $37.3
million in 1997 to $92.0 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 and
corporate-owned life insurance and annuity products. Reinsurance of these
products is 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 a result of an increase in reinsurance transactions
involving deposits for asset-intensive products from ceding companies.
Policy Acquisition Costs and Other Insurance Expenses Consolidated
policy acquisition costs and other insurance expenses, consisting primarily
of allowances, increased 29.3%, to $176.5 million in 1997. As a percentage of
net premiums, consolidated policy acquisition costs and other insurance
expenses increased to 21.1% in 1997 from 20.2% in 1996 resulting from growth
in financial reinsurance transactions, partially offset by a change in
business mix from coinsurance to yearly renewable term reinsurance. Overall,
policy acquisition costs and other insurance expenses continue to fluctuate
with business volume and changes in product mix from period to period.
<PAGE> 9
- ------------------------------------------------------------------------- 27.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Policy acquisition costs and other insurance expenses as a percentage
of net premiums for the U.S. operations decreased to 19.0% in 1997 from 19.8%
in 1996. Within the U.S. operations, policy acquisition costs and other
insurance expenses as a percentage of net premiums for traditional business
decreased slightly to 16.2% in 1997 from 16.6% in 1996. The financial
reinsurance business within the U.S. operations reflects fees of
approximately $14.4 million paid to retrocessionaires during 1997, which
represented a partial offset to the fees collected that are reflected as
other revenues.
In the Canadian operations, policy acquisition costs and other
insurance expenses as a percentage of net premiums increased to 26.8% in
1997, from 16.1% in 1996. The increase was primarily a result of the recovery
of deferred acquisition costs of approximately $9.5 million through a treaty
recapture in December 1997 which partially offsets the gross recapture fee
reported as other revenue. In addition, an increased use of coinsurance
versus yearly renewable term reinsurance in 1997 compared to 1996 resulted in
higher commissions as a percent of net premiums for 1997 compared to 1996.
Accident and health operations policy acquisition costs and other
insurance expenses as a percentage of net premiums decreased to 31.3% in 1997
from 32.2% in 1996. The decrease is not considered significant and will
fluctuate resulting from changes in the mixture of business within the
accident and health operations.
Other international operations policy acquisitions costs and other
insurance expenses as a percentage of net premiums increased to 18.9% in 1997
from 16.7% in 1996. 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.
Other Operating Expenses Consolidated other operating expenses
increased $13.2 million in 1997. The overall increase in operating expenses
was attributed to planned increases associated with the ongoing growth of the
Company. Other international operations operating expenses comprised $7.3
million of the increase in 1997. The Company believes sustained growth in
premiums will lessen the burden of start-up expenses and expansion costs. In
addition, $3.0 million of the increase is associated with the write-off of
intangibles associated with the Company's decision to cease marketing
accident and health operations. Excluding the accident and health write-off,
other operating expenses as a percentage of total revenues decreased slightly
to 4.7% in 1997 compared to 4.8% in 1996.
Interest Expense Consolidated interest expense during 1997 related to
the Senior Notes issued in 1996, and the financing of a portion of the
Company's Australian reinsurance operations, RGA Australian Holdings PTY,
Limited (Australian Holdings). Interest cost for 1997 and 1996 was $7.8
million and $6.2 million, respectively. Interest related to the Senior Notes
was $7.3 million in 1997 and $5.7 million in 1996.
Provision for Income Taxes Consolidated income tax expense decreased
9.3% in 1997 as a result of lower pre-tax income. Income tax expense from
operations before realized investment gains/(losses) and accident and health
pool charge represented approximately 35.8% and 36.3% of pre-tax income for
1997 and 1996, respectively. The Company calculated a tax benefit of $7.6
million on the $18.0 million accident and health reserve adjustment recorded
in the first quarter of 1997.
Year Ended December 31, 1996
Compared to Year Ended December 31, 1995
Income Before Income Taxes and Minority Interest Consolidated income
before income taxes and minority interest increased 16.7% in 1996. Diluted
earnings per share were $2.17 for 1996 compared with $1.87 for 1995. After
tax consolidated net income before realized capital gains and losses
increased 15.6%, to $54.6 million in 1996.
Income before income taxes and minority interest for the U.S.
operations increased to $84.5 million in 1996 due primarily to strong premium
growth of 17.5% in 1996. Income before income taxes and minority interest for
the Canadian operations increased 23.5%, to $13.4 million in 1996, primarily
as a result of strong new business production and gains on investments. The
accident and health operations lost $4.1 million before income taxes and
minority interest in 1996 and $0.7 million in 1995. The loss in 1996 was the
result of several large claims incurred and strengthening reserves associated
with several closed blocks of business. The other international operations
lost $4.1 million before income taxes and minority interest in 1996. This
represented approximately $2.1 million of income from Latin American
operations, offset by a loss of $4.4 million from Asia Pacific operations and
$1.8 million from other markets. The loss in the Asia Pacific operations and
other markets was attributable to the cost associated with the development of
a new operation, which more than offset the increasing premium levels during
1996.
<PAGE> 10
28.
Net Premiums Consolidated net premiums increased 18.4%, to $674.9
million in 1996. Net premiums for the U.S. operations rose 17.5% to $486.4
million in 1996. Renewal premiums from the existing block of business, new
business premiums from facultative and automatic treaties, and premium flows
from reinsurance of larger blocks of in force business all contributed to the
premium increase. Business premium levels are significantly influenced by
large transactions and reporting practices of ceding companies from period to
period.
Net premiums in the Canadian operations increased 28.2% to $63.1
million in 1996. New business premiums increased $6.0 million, while renewal
premiums increased $7.8 million during 1996. The effect of changes in the
foreign exchange rate during 1996 was not material.
Accident and health operations net premiums increased 19.7% to $57.2
million in 1996. The net premiums reported from business in the United
Kingdom has more than offset premium losses incurred from cancellation of
existing U.S. treaties during 1996.
The Company's other international operations reported premiums of $68.2
million in 1996 compared to $58.8 million in 1995. The 1996 premium
represented approximately $46.8 million from Latin America, of which
approximately $41.7 million was direct premium generated by business ventures
in Argentina and Chile. The remaining $21.4 million of premiums was reported
from the Asia Pacific operations and other markets, predominantly through the
Hong Kong contact office.
Net Investment Income Consolidated net investment income increased
51.8% in 1996. The cost basis of invested assets increased $650.0 million, or
79.3%. The increase in invested assets resulted from an increase in operating
cash flows, net proceeds of $99.0 million from the 7 1/4% Senior Notes issued
by the Company during 1996, and reinsurance transactions involving deposits
for asset-intensive products from ceding companies, primarily the stable
value product, of $429.3 million and $112.5 million during 1996 and the
second half of 1995, respectively. The average yield earned was 7.32% in 1996
compared with 7.63% earned in 1995. The decrease in overall yield reflected
the increase in assets supporting the stable value reinsurance product that
are of a shorter duration and carry a lower average yield. The
asset-intensive investment portfolio generated $24.1 million of investment
income in 1996, which was largely offset by earnings credited and paid to ceding
companies included in interest credited.
Realized Investment Gains/(Losses), Net Consolidated net realized
capital gains increased $0.9 million to $0.9 million in 1996. This was
primarily the result of repositioning the Company's Canadian operating
portfolio to achieve a better duration match for the assets and liabilities.
Other Revenue Consolidated other revenue increased $9.4 million in 1996
to $17.4 million. Other revenue includes items such as recapture fees, profit
and risk fees associated with financial reinsurance as well as earnings in
unconsolidated subsidiaries, management fee income and miscellaneous income
associated with late premium payments. During 1996, financial reinsurance
treaties resulted in $14.7 million in financial reinsurance fees which were
partially offset by fees paid to retrocessionaires of $12.8 million, included
in policy aquisition costs and other insurance expenses. Other revenue also
included $2.2 million in earnings in unconsolidated subsidiaries. The
Company's strategy involves the assumption and subsequent retrocession of
these financial reinsurance treaties which resulted in $148.7 million and
$137.0 million being included in other reinsurance assets and liabilities,
respectively, on the Company's consolidated balance sheet as of December 31,
1996.
Claims and Other Policy Benefits Consolidated claims and other policy
benefits increased 17.6%, to $505.7 million in 1996. Consolidated claims and
other policy benefits as a percentage of net premiums decreased slightly to
74.9% in 1996, from 75.5% in 1995. This decrease was primarily a result of
changes in the mix of business during 1996. 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. This fluctuation
is due to normal short-term fluctuations in death claims.
U.S. operations claims and other policy benefits increased 15.4% in
1996. However, claims and other policy benefits as a percentage of net
premiums decreased to 74.0% in 1996 from 75.3% in 1995. This increase was due
to normal short-term fluctuations in death claims.
Canadian operations claims and other policy benefits increased 33.5% in
1996. Claims and other policy benefits as a percentage of net premiums
increased to 77.6% in 1996 from 74.5% in 1995. The increase was primarily due
to mortality results which were not as favorable as those experienced in
1995.
<PAGE> 11
- ------------------------------------------------------------------------- 29.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Accident and health operations claims and other policy benefits
increased 25.6% in 1996. As a percentage of net premiums, claims and other
policy benefits increased to 73.9% in 1996, from 70.4% in 1995. The increase
was primarily due to overall strengthening of claim liabilities on several
closed blocks of business. The accident and health operations reserves are
subject to volatility due to the nature of risk covered, primarily accident
risks and reporting lags which are normal for the industry. Reserves are
calculated based upon current information, including industry estimates for
certain aviation accidents.
The Company's other international operations claims and other policy
benefits increased $6.7 million in 1996. This increase was the result of
reserve and policyholder benefit increases on business from Latin American
ventures and blocks of mortality risk reinsurance of $3.9 million. These
reserve increases resulted from new business and the change in product mix in
the Latin American division to more single premium immediate annuity business
in 1996. The Asia Pacific operations reflected an increase of $2.5 million.
This increase is the result of new business written, partially offset by
refinements in reserve calculations.
Interest Credited Consolidated interest credited increased $20.9
million in 1996 to $54.7 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 and
corporate-owned life insurance and annuity products. Reinsurance on these
products is 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 a result of an increase in reinsurance transactions
involving deposits for asset-intensive products from ceding companies.
Policy Acquisition Costs and Other Insurance Expenses Consolidated
policy acquisition costs and other insurance expenses, consisting primarily
of allowances, increased 39.2%, to $136.5 million in 1996. As a percentage of
net premiums, policy acquisition costs and other insurance expenses increased
to 20.2% in 1996 from 17.2% in 1995 resulting from growth in financial
reinsurance transactions, partially offset by a change in business mix from
coinsurance to yearly renewable term reinsurance. Overall, policy acquisition
costs and other insurance expenses continue to fluctuate with business volume
and changes in product mix from period to period.
Policy acquisition costs and other insurance expenses as a percentage
of net premiums for the U.S. operations increased to 19.8% in 1996 from 17.3%
in 1995. Within the U.S. operations, policy acquisition costs and other
insurance expenses as a percentage of net premiums for traditional business
increased slightly to 16.6% in 1996 from 15.8% in 1995. The financial
reinsurance business within the U.S. operations reflects fees of
approximately $12.8 million paid to retrocessionaires, which represents an
offset to the fees collected that are reflected as other revenues.
In the Canadian operations, policy acquisition costs and other
insurance expenses as a percentage of net premiums decreased to 16.1% in
1996, from 16.4% in 1995. The decrease was a result of several factors,
including the mix of business written during the past several years which
continued to transition to a yearly renewable term basis from a coinsurance
basis. Business written on a yearly renewable term basis has significantly
lower commissions than business written on a coinsurance basis.
Accident and health operations policy acquisition costs and other
insurance expenses as a percentage of net premiums increased to 32.2% in 1996
from 28.5% in 1995. The increase was a result of a continued transition in
the mix of business during 1996. During 1996, a larger percentage of business
continued to be written on a quota share basis resulting in higher
commissions.
Other international operations policy acquisition costs and other
insurance expenses as a percentage of net premiums increased to 16.7% in 1996
from 8.1% in 1995. These percentages fluctuate due to the timing of client
company reporting and the continuing refinement of deferred acquisition cost
and policy benefit reserve calculations.
Other Operating Expenses Consolidated other operating expenses
increased $8.3 million in 1996. The overall increase in operating expenses
was attributed to planned increases associated with the ongoing growth of the
Company, of which other international operations operating expenses comprised
$4.8 million of the increase. Other operating expenses as a percentage of
total revenues remained relatively stable at 4.8% compared to 4.7% in 1995.
Interest Expense Consolidated interest expense during 1996 related to
the issuance of $100.0 million of Senior Notes by RGA on March 19, 1996, and
the financing of a portion of the Company's Australian reinsurance
operations, Australian Holdings. Interest cost for 1996 was $6.2 million with
$5.7 million related to Senior Notes.
Provision for Income Taxes Consolidated income tax expense increased
16.7% in 1996 as a result of higher pre-tax income. The Company's effective
tax rate was 36.4% for 1996 and 1995.
<PAGE> 12
30.
Liquidity and Capital Resources
RGA is a holding company which has as its principal assets interests in
RGA Reinsurance, RGA Life Reinsurance Company of Canada (RGA Canada), BHIF
America Seguros de Vida, S.A. (BHIF America), RGA Reinsurance Company Chile
S.A. (RGA Chile), Manantial Seguros de Vida, S.A., currently known as General
American Argentina Seguros de Vida, S.A. (Manantial), Australian Holdings,
RGA Reinsurance Company (Barbados) Ltd. (RGA Barbados), RGA Insurance Company
(Bermuda) Ltd. (RGA Bermuda), and RGA Holdings Limited (U.K.) (RGA UK). In
addition, the Company has minority ownership interests in RGA/Swiss Financial
Group, L.L.C., Malaysian Life Reinsurance Group Berhad (MLRG) and Thomson
Barrett Organization Plc (TBO).
RGA began paying a dividend of $0.06 per pre-split share each quarter,
starting in August 1993. In August 1995, the dividend was raised to $0.07 per
pre-split share and raised to $0.08 per pre-split share in August 1996. In
July 1997, a three-for-two stock split was declared and the dividend was
raised to $0.09 per pre-split share ($0.06 per share after the split). It is
expected that payments at this level will continue for the foreseeable
future. All future payments of dividends are at the discretion of the
Company's Board of Directors and will depend on the Company's earnings,
capital requirements, insurance regulatory conditions, operating conditions,
and such other factors as the Board of Directors may deem relevant. The
amount of dividends that the Company can pay will depend in part on the
operations of its reinsurance subsidiaries. The transfer of funds from the
subsidiaries to RGA is subject to applicable insurance laws and regulations.
As RGA continues its expansion efforts, management continually analyzes
capital adequacy issues. In 1996, RGA issued $100.0 million of 7 1/4% Senior
Notes. Interest is payable semiannually on April 1 and October 1 with the
principal amount due on April 1, 2006. The net proceeds from the offering of
approximately $98.9 million have been utilized to finance the continuing
development of the Company's operations. During 1997, $40.0 million was
contributed to RGA Reinsurance in the form of a surplus note and $17.4
million was contributed in the form of capital to RGA Canada to finance the
continuing expansion of business. Also, proceeds have been invested in
subsidiaries in Argentina, Chile, Malaysia, and the United Kingdom. In
addition, Australian Holdings established a line of credit with an
outstanding balance at December 31, 1997 and 1996, of $7.8 million and $7.6
million, respectively. The Company also has access to a $25.0 million line of
credit. The ability of RGA and Australian Holdings to make principal and
interest payments is ultimately dependent on the earnings and surplus of
RGA's subsidiaries, the investment earnings on the undeployed debt proceeds,
and the Company's ability to raise additional capital.
RGA began repurchasing shares in the open market in May 1997, to enable
RGA to satisfy obligations under its stock option program. Purchases were
made in the open market from time to time, at the then prevailing market
price, or through negotiated transactions. As of December 31, 1997, 322,562
shares had been repurchased since May 1997. Effective January 1998, RGA
ceased repurchasing shares, although it may begin repurchasing shares again
at some point in the future.
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 claims payments. Funds are applied primarily to policy
claims and benefits, operating expenses, income taxes, and investment
purchases.
As of December 31, 1997, RGA Reinsurance had statutory capital and
surplus of $249.3 million. The maximum amount available for payment of
dividends in 1998 by RGA Reinsurance under Missouri law, without the prior
approval of the Missouri Director of Insurance, is $24.9 million. RGA
Canada's statutory capital was $64.5 million at December 31, 1997. The
maximum amount available for dividends by RGA Canada under the Canadian
Minimum Continuing Capital and Surplus Requirements (MCCSR) is $15.5 million.
Dividend payments from other subsidiaries and joint ventures are subject to
regulations in the country of domicile. The Company's ability to service debt
and pay dividends is dependent on operations and the receipt of dividends
from subsidiaries.
The Company's net cash flows from consolidated operating activities for
the years ended December 31, 1997, 1996, and 1995, were $432.7 million,
$256.7 million, and $171.0 million, respectively. Because the Company's
traditional reinsurance business
<PAGE> 13
- ------------------------------------------------------------------------- 31.
MANAGEMENT'S DISCUSSION AND ANALYSIS
provides positive cash flow, the Company's traditional reinsurance liabilities
generally are not subject to disintermediation risk, and because the reinsured
treaties offer no withdrawal options and require no return of premium if
canceled or allowed to lapse, the Company historically has had more than
sufficient funds to pay claims and expenses. The Company expects any future
increase in the need for liquidity due to relatively large policy loans or
unanticipated material claim levels would be met first by operating cash flows
and then by selling fixed-maturity securities or short-term investments.
The Company's asset-intensive products are primarily supported by
investments in fixed-maturity securities. Investment guidelines are
established to structure the investment portfolio based upon the type,
duration and behavior of products in the liability portfolio so as to achieve
targeted levels of profitability. The Company manages the asset-intensive
business to provide a targeted spread between the interest rate earned on
investments and the interest rate credited to underlying liabilities. The
Company periodically reviews models projecting different interest rate
scenarios and their impact on profitability.
Effective December 31, 1993, the National Association of Insurance
Commissioners (NAIC) adopted risk-based capital (RBC) statutory requirements
for U.S.-based life insurance companies. These requirements measure statutory
capital and surplus needs based on the risks associated with a company's mix
of products and investment portfolio. In December 1992, guidelines on MCCSR
became effective for Canadian insurance companies. These guidelines prescribe
surplus requirements and take into account both assets and liabilities in
establishing solvency margins. At December 31, 1997, statutory capital and
surplus of RGA Reinsurance significantly exceeded all RBC thresholds and RGA
Canada's capital levels significantly exceeded any MCCSR requirements. All of
the Company's insurance operating subsidiaries exceed the minimum capital
requirements in their respective jurisdictions.
Investments
All investments made by RGA and its subsidiaries conform to the
qualitative and quantitative limits prescribed by the applicable
jurisdiction's insurance laws and regulations. In addition, the investment
portfolios of the international subsidiaries are periodically reviewed by
their respective Boards of Directors. All investment portfolios are also
reviewed by the RGA Board of Directors. The Company's investment strategy is
to maintain a predominantly investment-grade, fixed-maturity portfolio, to
provide adequate liquidity for expected reinsurance obligations, and to
maximize total return through prudent asset management. The Company's
asset/liability duration matching differs between U.S. and Canadian operating
segments. The target duration for the U.S. investments is currently a range
between four and seven years, with individual investments all along the
maturity spectrum. Based on Canadian reserve requirements, a portion of the
Canadian liabilities is strictly matched with long duration Canadian assets,
with the remaining assets invested to maximize the total rate of return,
given the characteristics of the corresponding liabilities and Company
liquidity needs. For the year ended December 31, 1997, the Company's earned
yield on fixed-maturity securities was 7.23%.
The Company's fixed-maturity securities are invested primarily in U.S.
Treasuries, Canadian government securities, public and private corporate
bonds, and mortgage and asset-backed securities. As of December 31, 1997,
more than 98% of the Company's consolidated investment portfolio of fixed
maturity securities was investment-grade. Important factors in the selection
of investments include diversification, quality, yield, total rate of return
potential, and call protection. The relative importance of these factors is
determined by market conditions and the underlying product or portfolio
characteristics. Cash equivalents are invested in high-grade money market
instruments.
Private placement bonds are issued in negotiated transactions between
lenders and borrowers and are not registered with the Securities and Exchange
Commission. While less liquid than public securities, private placements
often contain investment characteristics favorable to investors, including
more stringent financial covenants, additional call protection, and higher
yields than similar public securities.
The largest asset class in which fixed maturities were invested was
mortgage-backed securities, which represented approximately 24.4% of total
invested assets as of December 31, 1997. Approximately 58% of these
securities are invested in the investment portfolio supporting stable value
reinsurance. Investors are compensated primarily for reinvestment risk rather
than credit quality risk. To mitigate prepayment volatility, the Company
primarily invests in senior, intermediate, average-life tranches of agency
and whole loan collateralized mortgage obligations. All of the Company's
mortgage-backed securities are investment-grade, with an average Standard and
Poor's rating of AA as of December 31, 1997.
<PAGE> 14
32.
As of December 31, 1997, mortgage loans represented approximately 4.6%
of the Company's invested assets, which consisted of approximately $91.8
million in U.S. mortgages and $73.7 million in Chilean mortgage-related
instruments, including real estate leasing, mortgage drafts, and mortgage
loans. The Company invests primarily in mortgages on commercial offices and
retail locations. The Company's domestic mortgage loans generally range in
size from $0.3 million to $7.3 million, with the average mortgage loan
investment as of December 31, 1997, being approximately $3.0 million. The
Company's Chilean mortgage instruments are generally less than $1.0 million,
with the average less than $100,000. The mortgage loan portfolio is
diversified by geographic region and property type as discussed further in
Note 4 to the consolidated financial statements.
As of December 31, 1997, approximately 13.2% of the Company's invested
assets consisted of policy loans. These policy loans present no credit risk
because the amount of the loan cannot exceed the obligation due the ceding
company upon the death of the insured or surrender of the underlying policy.
The policy loan interest rates are determined by the provisions of the
treaties in force and the underlying policies. Because policy loans represent
premature distributions of policy liabilities, they have the effect of
reducing future disintermediation risk. In addition, the Company earns a
spread between the interest rate earned on policy loans and the interest rate
credited to corresponding liabilities.
The Company utilizes derivative financial instruments to improve the
management of the investment related risks. The Company uses both
exchange-traded and customized, over-the-counter derivative financial
instruments. RGA Reinsurance has established minimum credit quality standards
for counterparties and seeks to obtain collateral or other credit supports. The
Company limits its total financial exposure to counterparties. The Company's
use of exchange-traded and customized, over-the-counter derivative financial
instruments is currently not significant.
The invested assets of RGA, RGA Reinsurance, RGA Barbados, Australian
Holdings, and RGA Canada are managed by Conning Asset Management Company
(Conning), a majority owned subsidiary of General American. The investments
of BHIF America, RGA Reinsurance Company of Chile, S.A., Manantial, and RGA
UK were managed by the staffs of those entities.
Foreign Currency Exposure
The Company is subject to foreign currency translation, transaction,
and net income exposure. The Company generally does not hedge the foreign
currency translation exposure related to its investment in foreign
subsidiaries as it views these investments to be long-term. Translation
differences resulting from translating foreign subsidiary balances to U.S.
dollars are reflected in equity. The Company generally does not hedge the
foreign currency exposure of its subsidiaries transacting business in
currencies other than their functional currency (transaction exposure).
Currently, the Company believes its foreign currency transaction exposure is
not material to the consolidated results of operations. Net income exposure
which may result from the strengthening of the U.S. dollar to foreign
currencies will adversely affect results of operations since the income
earned in the foreign currencies is worth less in U.S. dollars. When
evaluating investments in foreign countries, the Company considers the
stability of the political and currency environment. Devaluation of the
currency after an investment decision has been made will affect the value of
the investment when translated to U.S. dollars for financial reporting
purposes.
Inflation
The primary, direct effect on the Company of inflation is the increase
in operating expenses. A large portion of the Company's operating expenses
consists of salaries, which are subject to wage increases at least partly
affected by the rate of inflation. The rate of inflation also has an indirect
effect on the Company. To the extent that a government's policies to control
the level of inflation result in changes in interest rates, the Company's
investment income is affected.
<PAGE> 15
- ------------------------------------------------------------------------- 33.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Year 2000
Many of the Company's data processing systems require modifications to
enable them to process dates including the year 2000 and beyond. The Company
has established a plan to address the Year 2000 issue and that work is
progressing on schedule. The Company also relies on information from external
parties such as ceding companies and retrocessionaires. The Company could be
adversely affected by those companies' compliance with the Year 2000 issue
over which the Company has no direct control. The Company is currently
working with its clients to identify their Year 2000 compliance positions and
will follow-up with clients on potential interface problems. It is
anticipated that testing and resolution will be completed according to the
Company's plan. During the years of 1998 and 1999, the Company expects to
direct certain internal and external resources to the Year 2000 effort. The
Company does not believe the net effect of these efforts will materially
affect the Company's consolidated financial statements during the 1998 and
1999 period.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," effective for years beginning after
December 31, 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 of which items historically
have been reported as a component of stockholders' equity. The adoption of
SFAS No. 130 will not affect the Company's results of operation or financial
position, but will affect their presentation and disclosures.
Also in June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," effective 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.
Cautionary Statement
Certain statements contained in this Annual Report are or may be deemed
to be "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995. Such statements inclue, 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 requirements, the sufficiency of claims reserves, estimated premium
declines in the accident and health segment, 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,
including, without limitation, (i) general economic conditions affecting the
demand for insurance and reinsurance in the Company's current and planned
markets, (ii) material changes in mortality and claims experience, (iii)
competitive factors and competitors' responses to the Company's initiatives,
(iv) successful execution of the Company's entry into new markets, (v)
successful development and introduction of new products, (vi) the stability
of governments and economies in foreign markets, (vii) fluctuations in U.S.
and foreign interest rates and securities and real estate markets, (viii) the
success of the Company's clients, including General American and its
affiliates, and (ix) changes in laws, regulations, and accounting standards
applicable to the Company and its subsidiaries.
Readers are therefore cautioned not to place undue reliance on such
forward-looking statements.
<PAGE> 16
34.
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996
(Dollars in thousands)
<S> <C> <C>
Assets
Fixed maturity securities
Available for sale-at fair value (amortized cost of $2,416,308 and
$1,469,649 at December 31, 1997, and December 31, 1996, respectively) $2,528,290 $1,517,264
Mortgage loans on real estate 165,452 98,262
Policy loans 480,234 426,366
Funds withheld at interest 165,413 129,949
Short-term investments 277,635 93,548
Other invested assets 16,977 6,659
- --------------------------------------------------------------------------------------------------------------------------
Total investments 3,634,001 2,272,048
Cash and cash equivalents 37,395 13,145
Accrued investment income 34,377 23,308
Premiums receivable 119,554 76,438
Funds withheld 33,957 30,697
Reinsurance ceded receivables 316,156 59,618
Deferred policy acquisition costs 289,842 233,565
Other reinsurance balances 153,134 157,065
Other assets 55,134 27,770
- --------------------------------------------------------------------------------------------------------------------------
Total assets $4,673,550 $2,893,654
================================================================================================================
Liabilities and Stockholders' Equity
Future policy benefits $1,244,541 $ 755,793
Interest sensitive contract liabilities 1,969,270 1,106,491
Other policy claims and benefits 344,848 206,284
Other reinsurance balances 232,096 149,289
Deferred income taxes 110,763 73,275
Other liabilities 157,616 63,689
Long-term debt 106,830 106,493
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,165,964 2,461,314
Minority interest 8,265 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; - -
50,000,000 shares authorized, 261 174
26,049,375 and 17,366,250 shares issued and outstanding
at December 31, 1997 and 1996, respectively)
Additional paid in capital 264,748 264,399
Currency translation adjustments (8,201) (5,536)
Unrealized appreciation of securities, net of taxes 67,290 28,365
Retained earnings 196,685 147,824
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity before treasury stock 520,783 435,226
Less treasury shares held of 844,535 and 389,354 at cost at
December 31, 1997, and December 31, 1996, respectively (21,462) (9,668)
----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 499,321 425,558
----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $4,673,550 $2,893,654
================================================================================================================
See accompanying notes to consolidated financial statements.
<PAGE> 17
- -------------------------------------------------------------------------- 35.
</TABLE>
<TABLE>
CONSOLIDATED STATMENTS OF INCOME
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Revenues:
Net premiums $ 835,460 $674,885 $569,990
Investment income, net of related expenses 188,333 136,828 90,117
Realized investment gains, net 334 930 31
Other revenue 47,388 17,386 7,994
- --------------------------------------------------------------------------------------------------------------------------
Total revenues 1,071,515 830,029 668,132
Benefits and expenses:
Claims and other policy benefits 640,062 505,739 430,071
Interest credited 92,041 54,706 33,796
Accident and health pool charge 18,000 - -
Policy acquisition costs and other insurance expenses 176,482 136,509 98,072
Other operating expenses 53,058 39,845 31,574
Interest expense 7,801 6,169 -
- --------------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 987,444 742,968 593,513
================================================================================================================
Income before income taxes and minority interest 84,071 87,061 74,619
Provision for income taxes
Current 13,175 17,992 12,780
Deferred 15,575 13,695 14,368
----------------------------------------------------------------------------------------------------------------
Total provision for income taxes 28,750 31,687 27,148
================================================================================================================
Income before minority interest 55,321 55,374 47,471
Minority interest in earnings of consolidated subsidiaries (702) (302) (180)
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 54,619 $ 55,072 $ 47,291
================================================================================================================
Basic earnings per share $ 2.15 $ 2.18 $ 1.87
==========================================================================================================================
Diluted earnings per share $ 2.13 $ 2.17 $ 1.87
==========================================================================================================================
Weighted average number of diluted shares outstanding (in thousands) 25,604 25,410 25,292
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 18
36.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<CAPTION>
Unrealized
Additional Currency Appreciation
Preferred Common Paid In Translation (Depreciation) Retained Treasury
Stock Stock Capital Adjustments of Securities Earnings Stock Total
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 $ - $174 $263,170 $ (5,791) $(24,387) $ 54,887 $(11,265) $276,788
Currency translation adjustments 2,055 2,055
Unrealized appreciation of securities 57,397 57,397
Net income 47,291 47,291
Dividends to stockholders (4,376) (4,376)
Purchase of treasury stock (2,422) (2,422)
Reissuance of treasury stock (1) 197 196
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 - 174 263,169 (3,736) 33,010 97,802 (13,490) 376,929
Currency translation adjustments (1,800) (1,800)
Unrealized depreciation of securities (4,645) (4,645)
Net income 55,072 55,072
Dividends to stockholders (5,050) (5,050)
Reissuance of treasury stock 1,230 3,822 5,052
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 - 174 264,399 (5,536) 28,365 147,824 (9,668) 425,558
Currency translation adjustments (2,665) (2,665)
Unrealized appreciation of securities 38,925 38,925
Net income 54,619 54,619
Dividends to stockholders 87 (87) (5,758) (5,758)
Purchase of treasury stock (12,877) (12,877)
Reissuance of treasury stock 436 1,083 1,519
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 $ - $261 $264,748 $ (8,201) $ 67,290 $196,685 $(21,462) $499,321
====================================================================================================================================
See accompanying notes to consolidated financial statements.
<PAGE> 19
- -------------------------------------------------------------------------- 37.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the years ending December 31, 1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Operating Activities:
Net income $ 54,619 $ 55,072 $ 47,291
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in:
Accrued investment income (11,125) (5,660) (1,839)
Premiums receivable (44,228) 8,214 (14,008)
Deferred policy acquisition costs (59,485) (47,122) (28,575)
Funds withheld (17,204) (2,053) (6,863)
Reinsurance ceded balances (246,095) 4,422 14,416
Future policy benefits, other policy claims and benefits,
and other reinsurance balances 722,286 258,562 169,732
Deferred income taxes 15,575 13,695 14,367
Other assets and other liabilities 31,570 (20,978) (17,578)
Amortization of goodwill and value of business acquired 1,322 1,233 1,059
Amortization of net investment discounts (15,471) (9,071) (8,384)
Realized investment gains, net (334) (930) (31)
Other, net 1,295 1,297 1,428
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 432,725 256,681 171,015
Investing Activities:
Sales of investments:
Fixed maturity securities - Available for sale 301,685 135,110 154,607
Mortgage loans 42,306 - -
Maturities of fixed maturity securites
Held to maturity - - 6,365
Available for sale 246,814 189,969 14,443
Purchases of fixed maturity securities
Held to maturity - - (3,068)
Available for sale (1,456,450) (917,743) (362,390)
Cash invested in
Mortgage loans (115,937) (89,237) (11,397)
Policy loans (57,026) (79,424) (37,245)
Funds withheld at interest (35,464) (28,108) (21,383)
Principal payments on:
Mortgage loans 6,045 4,739 285
Policy loans 3,158 - 4,794
Change in short-term and other invested assets (190,939) (29,791) (31,576)
Investment in joint venture and purchase of subsidiary stock - (3,207) (3,366)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,255,808) (817,692) (289,931)
Financing activities:
Dividends to stockholders (5,758) (5,050) (4,376)
Purchase of treasury stock (12,877) - (2,422)
Reissuance of treasury stock 2,105 4,029 196
Minority interest capital contribution 702 302 180
Minority interest in earnings
Excess deposits on universal life and
other investment type policies and contracts 861,352 450,079 131,833
Proceeds from long-term debt issuance 1,857 106,403 -
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 847,381 555,763 125,411
Effect of exchange rate changes (48) 135 267
- ----------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents 24,250 (5,113) 6,762
Cash and cash equivalents, beginning of period 13,145 18,258 11,496
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period 37,395 13,145 18,258
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 20
38.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Reinsurance Group of America, Incorporated (RGA) is an insurance
holding company formed December 31, 1992. Approximately 64% of RGA's
outstanding shares are indirectly owned by General American Life Insurance
Company (General American) at December 31, 1997. The consolidated financial
statements include the assets, liabilities, and results of operations of RGA;
RGA Reinsurance Company (RGA Reinsurance); RGA Australian Holdings PTY,
Limited (Australian Holdings); RGA Reinsurance Company (Barbados) Ltd. (RGA
Barbados); RGA Insurance Company (Bermuda) Ltd. (RGA Bermuda); RGA
International, Ltd. (RGA International), formerly G.A. Canadian Holdings,
Ltd., a Canadian marketing and insurance holding company; RGA Sudamerica,
S.A., a Chilean holding company; RGA Holdings Limited (U.K.) (RGA UK), a
United Kingdom holding company; and Manantial Seguros de Vida, S.A.,
currently known as General American Argentina Seguros de Vida, S.A.
(Manantial), an Argentine life insurance company; along with the subsidiaries
of RGA Reinsurance, Australian Holdings, RGA International, and RGA
Sudamerica, S.A., subject to an ownership position of fifty percent or more
(collectively, the Company). The Company is primarily engaged in life
reinsurance, accident and health reinsurance, and international life and
disability on a direct and reinsurance basis. Reinsurance is an arrangement
under which an insurance company, the reinsurer, agrees to indemnify another
insurance company, the ceding company, for all or a portion of the insurance
risks underwritten by the ceding company. Reinsurance is designed to (i)
reduce the net liability on individual risks, thereby enabling the ceding
company to increase the volume of business it can underwrite, as well as
increase the maximum risk it can underwrite on a single life or risk; (ii)
stabilize operating results by leveling fluctuations in the ceding company's
loss experience; (iii) assist the ceding company to meet applicable
regulatory requirements; and (iv) enhance the ceding company's financial
strength and surplus position.
Note 2. Summary of Significant Accounting Policies
Consolidation and Basis of Presentation. The consolidated financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles for stock life insurance companies. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Accounts that
the Company deems to be sensitive to changes in estimates include deferred
policy acquisition costs, premiums receivable, future policy benefits, and
other policy claims and benefits. In all instances, actual results could
differ materially from such estimates or assumptions.
The accompanying financial statements consolidate the accounts of RGA
and its subsidiaries, both direct and indirect, subject to an ownership
position of fifty percent or more. Unconsolidated subsidiaries with an
ownership position less than fifty percent are recorded on the equity method
of accounting. All significant intercompany balances and transactions have
been eliminated.
Investments. Fixed maturities available for sale are reported at fair
value and are so classified based upon the possibility that such securities
could be sold prior to maturity if that action enables the Company to execute
its investment philosophy and appropriately match investment results to
operating and liquidity needs. Effective December 31, 1995, the Company
reclassified the entire portfolio of fixed maturities held to maturity as
available for sale in accordance with the Financial Accounting Standards
Board's "Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities," which was issued during November
1995. This reclassification enabled the Company to gain an added measure of
flexibility in managing credit quality in coordination with appropriate
asset/liability matching.
Impairments in the value of securities held by the Company are recorded
as a reduction of the carrying value of the security, and a corresponding
realized capital loss is recognized in the consolidated statements of income.
The Company's policy is to recognize such an impairment when the projected
cash flows of these securities have been reduced on other than a temporary
basis so that the realizable value is reduced to an amount less than the
carrying value.
Mortgage loans are carried at unpaid principal balances, net of any
unamortized premium or discount and valuation allowances. Valuation
allowances on mortgage loans are being established based upon losses expected
by management to be realized in connection with future dispositions or
settlement of mortgage loans, including foreclosures. The valuation
allowances are being established after management considers, among other
things, the value of underlying collateral and payment capabilities of
debtors.
Policy loans are reported at the unpaid principal balance.
Other invested assets, which consists primarily of Chilean common
stocks, are carried at fair value.
The Company utilizes some derivative financial instruments to improve
the management of the investment related risks. These derivatives are
included in other invested assets on the consolidated balance sheet. The
Company uses both exchange-traded and customized, over-the-counter derivative
financial instruments. RGA Reinsurance has established minimum credit quality
standards for counterparties and seeks to obtain collateral or other credit
support. The Company limits its total financial exposure to counterparties.
The Company's use of exchange-traded and customized over-the-counter
derivatives is currently not significant.
<PAGE> 21
- -------------------------------------------------------------------------- 39.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment income is recognized as it accrues or is legally due.
Realized gains and losses on sales of investments are included in net income,
as are write-downs of securities where declines in value are deemed to be
other than temporary in nature. The cost of investment securities sold is
determined based upon the specific identification method. Unrealized gains
and losses on marketable equity securities and fixed maturity securities,
less applicable deferred income taxes, are reflected as a direct charge or
credit to stockholders' equity.
Additional Information Regarding Statements of Cash Flows. Cash and
cash equivalents include cash on deposit and highly liquid debt instruments
purchased with an original maturity of three months or less.
Funds Withheld. For reinsurance transactions executed prior to December
31, 1994, assets and liabilities related to treaties written on a modified
coinsurance basis with funds withheld are reported gross. Assets equal to the
statutory reserves are held and legally owned by the ceding company and are
reflected as funds withheld at interest on the balance sheet. Interest
accrues to these assets at a stated rate, which adjusts annually, based on
the underlying assets retained by the ceding company. For reinsurance
transactions executed subsequent to December 31, 1994, assets and liabilities
from reinsurance agreements written on a modified coinsurance basis with
funds withheld have been netted and included in other reinsurance balances on
the balance sheet, where a right of offset exists.
Deferred Policy Acquisition Costs. Costs of acquiring new business,
which vary with and are primarily related to the production of new business,
have been deferred to the extent that such costs are deemed recoverable from
future premiums or gross profits. Such costs include commissions and
allowances as well as certain costs of policy issuance and underwriting.
Periodically, the Company performs tests to determine that the cost of
business acquired remains recoverable.
Deferred costs related to traditional life insurance are amortized over
the premium paying period of the related policies in proportion to the ratio
of annual premium revenues to total anticipated premium revenues. Such
anticipated premium revenues are estimated using the same assumptions used
for computing liabilities for future policy benefits.
Deferred costs related to interest sensitive life and investment-type
policies are amortized over the lives of the policies, in relation to the
present value of estimated gross profits from mortality, investment income,
and expense margins.
Other Reinsurance Balances. The Company assumes and retrocedes
financial reinsurance contracts which represent low mortality risk
reinsurance treaties. These contracts are reported as deposits and included
in other reinsurance assets/liabilities. The amount of revenue reported on
these contracts represents fees and the cost of insurance under the terms of
the reinsurance agreement.
Goodwill and Value of Business Acquired. Goodwill representing the
excess of purchase price over the fair value of net assets acquired is
amortized on a straight-line basis over ten to twenty years. The value of
business acquired is amortized in proportion to the ratio of annual premium
revenues to total anticipated premium revenues. Anticipated premium revenues
have been estimated using assumptions consistent with those used in
estimating reserves for future policy benefits. The carrying value is
reviewed periodically for indicators of impairment in value.
Future Policy Benefits and Interest Sensitive Contract Liabilities.
Liabilities for future benefits on life policies are established in an amount
adequate to meet the estimated future obligations on policies in force.
Liabilities for future policy benefits under long-term life insurance
policies have been computed based upon expected investment yields, mortality
and withdrawal rates, and other assumptions. These assumptions include a
margin for adverse deviation and vary with the characteristics of the plan of
insurance, year of issue, age of insured, and other appropriate factors.
Interest rates range from 6.6% to 11.0%. The mortality and withdrawal
assumptions are based on the Company's experience as well as industry
experience and standards. Liabilities for future benefits on interest
sensitive life and investment-type contract liabilities are carried at the
accumulated contractholder values without reduction for potential surrender
or withdrawal charges.
Other Policy Claims and Benefits. Claims payable for incurred but not
reported losses are determined using case basis estimates and lag studies of
past experience. These estimates are periodically reviewed and required
adjustments to such estimates are reflected in current operations. The
Company has no material policy contract liability balances that would require
fair value disclosure under Statement of Financial Accounting Standards No.
107.
Investment Contracts. The Company began reinsuring asset-intensive
products, including stable value products, annuities and bank owned and
corporate owned life insurance, on a coinsurance basis in 1995. The product
investment portfolios are segregated within the general fund of RGA
Reinsurance. The stable value portfolio is primarily invested in fixed
maturity securities classified as available for sale and has an effective
duration of one year or less. The carrying value of the asset-intensive
products investments and related liabilities approximates fair value. The
liabilities for the asset-intensive reinsurance contracts are included in
interest sensitive contract liabilities.
<PAGE> 22
40.
Income Taxes. RGA and its U.S. subsidiaries file separate federal
income returns. RGA Barbados also files a U.S. tax return. The Company's
Canadian, Argentine, Australian, Bermudan, Chilean, Malaysian and United
Kingdom subsidiaries are taxed under applicable local statutes.
The Company uses the asset and liability method to record deferred
income taxes. Accordingly, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, using enacted tax rates.
Foreign Currency Translation. The functional currency is the Argentine
dollar for the Company's Argentine operations, the Australian dollar for the
Company's Australian operations, the Canadian dollar for the Company's
Canadian operations, the Chilean peso for the Company's Chilean operations,
and the British Pound Sterling for the Company's United Kingdom operations.
The translation of the foreign currency into U.S. dollars is performed for
balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted average
exchange rate during each year. Gains or losses resulting from such
translation are included in stockholders' equity.
Retrocession Arrangements. The Company reports retrocession activity on
a gross basis. Amounts paid or deemed to have been paid for reinsurance are
reflected in reinsurance receivables. The cost of reinsurance related to
long-duration contracts is recognized over the terms of the reinsured
policies on a basis consistent with the reporting of those policies.
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of benefits
paid by ceding reinsurance to other insurance enterprises or reinsurers under
excess coverage and coinsurance contracts. The Company retains a maximum of
$2.5 million of coverage per individual life. RGA Reinsurance has a number of
retrocession arrangements whereby certain business in force is retroceded on
an automatic or facultative basis. All of the U.S. retrocessionaires under
such arrangements were rated A- or better by the A.M. Best Company as of
December 31, 1996. In some instances, security in the form of letters of
credit or trust assets have been given by retrocessionaires as additional
security in favor of RGA Reinsurance.
Generally, RGA's insurance subsidiaries retrocede amounts in excess of
their retention to RGA Reinsurance. Retrocessions are arranged through RGA
Reinsurance's retrocession pool for amounts in excess of its retention.
RGA Reinsurance has never experienced a default in connection with
retrocession arrangements, nor has it experienced any difficulty in
collecting claims recoverable from retrocessionaires; however, no assurance
can be given as to the future performance of such retrocessionaires or as to
recoverability of any such claims.
Recognition of Revenues and Related Expenses. Revenues and expenses are
reported gross, except that initial reserves are netted against premiums when
an in force block of business is reinsured. Life and health premiums are
recognized as revenue over the premium paying periods of the policies.
Benefits and expenses are associated with earned premiums so that profits are
recognized over the life of the related contract. This association is
accomplished through the provision for future policy benefits and the
amortization of deferred policy acquisition costs. Other revenue includes
items such as treaty recapture fees, profit and risk fees associated with
financial reinsurance as well as earnings in unconsolidated subsidiaries.
Revenues for interest-sensitive and investment-type products consist of
policy charges for the cost of insurance, policy administration, and
surrenders that have been assessed against policy account balances during the
period. Interest-sensitive contract liabilities for these products represent
policy account balances before applicable surrender charges. Deferred policy
acquisition costs are recognized as expense over the term of the policies.
Policy benefits and claims that are charged to expense include claims
incurred in the period in excess of related policy account balances and
interest credited to policy account balances. The weighted average interest
crediting rates for interest-sensitive products were 6.8%, 6.7%, and 6.7%
during 1997, 1996, and 1995, respectively. Interest crediting rates for
investment-type contracts ranged from 5.7% to 6.2% during 1997 and 1996 and
from 6.2% to 6.5% during 1995.
Net Earnings Per Share In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share." SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic earnings per share and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. Earnings per share amounts for all
periods presented have been restated to conform to the provisions of SFAS No.
128.
New Accounting Standards. In June 1997, the Financial Accounting
Standards Board issued 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
<PAGE> 23
- -------------------------------------------------------------------------- 41.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
unrealized gains and losses on securities as well as the change in foreign
currency translation, both of which items historically have been reported
only as a component of stockholders' equity. The adoption of SFAS No. 130
will not affect the Company's 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 the Company's results of operations
or financial position, but will affect the disclosure of segment information.
Reclassification. The Company has reclassified the presentation of
certain prior period information to conform with the 1997 presentation.
Note 3. Subsidiary Transactions
In October 1993, RGA, through RGA Sudamerica, S.A., entered into a
joint venture, BHIF America Seguros de Vida, S.A. (BHIF America), with local
investors in Santiago, Chile. During 1994, RGA and the local investors funded
the venture, which sells primarily single premium immediate annuities, with
approximately $4,000,000 and $3,000,000 of initial capital contributions,
respectively. For contributions made, each party received a 50% ownership
interest in the venture. The excess of cost over fair value of net assets
acquired, totaling $500,000, has been treated as goodwill and is being
amortized over ten years. During 1996 and 1995, RGA contributed $1,275,000
and $565,000, respectively, in additional capital to BHIF America.
In May 1994, RGA formed Manantial, a joint venture, with several local
investors in Buenos Aires, Argentina. During 1994, RGA and the local
investors funded the venture, which is a direct life insurance company, with
approximately $5,000,000 and $275,000 of initial capital contributions,
respectively. For contributions made, each party received a 50% ownership
interest in the venture. In June 1996, RGA purchased the remaining shares of
Manantial for $4,500,000. The excess of cost over fair value of net assets
acquired, totaling $4,246,000, has been treated as goodwill and is being
amortized over ten years. During 1997, RGA infused $1,000,000 of additional
capital contributions as a result of changing capital requirements in
Argentina.
In January 1996, RGA formed Australian Holdings, a wholly owned holding
company and RGA Reinsurance Company of Australia, Limited (RGA Australia), a
wholly owned reinsurance company of Australian Holdings licensed to assume
life reinsurance in Australia. During 1996, RGA funded Australian Holdings
with approximately $14,800,000, of which approximately one half represents
debt as discussed in Note 13. During 1997, approximately $1,950,000 was
funded through the debt facility.
In July 1996, RGA, through RGA Sudamerica, S.A., formed RGA Reinsurance
Company Chile S.A., a wholly owned reinsurance company licensed to assume
life reinsurance business in Chile. During 1996, RGA funded the subsidiary
with approximately $6,300,000 and reinsured single premium immediate annuity
business written by BHIF America. During 1997, additional capital
contributions of approximately $5,800,000 were made to support the continued
growth in business.
In July 1997, RGA entered into a joint venture, Malaysian Life
Reinsurance Group Berhad (MLRG), with 18 local insurance companies in Kuala
Lumpur, Malaysia. RGA funded approximately $6,000,000 in return for a 30%
ownership interest in MLRG. MLRG is a licensed life reinsurance company in
Malaysia.
In November 1997, RGA, through RGA UK, invested approximately
$4,250,000 in Thomson Barrett Organization Plc (TBO) for a 20% ownership
interest. TBO is an international financial services consulting firm based in
the United Kingdom specializing in insurance distribution. The excess of cost
over fair value of net assets acquired, totaling $4,250,000, has been treated
as goodwill and is being amortized over twenty years.
In December 1997, RGA Reinsurance was notified by members of management
of Fairfield Management Group, Inc. (Fairfield), a holding company for RGA
Reinsurance's accident and health intermediaries and underwriting /
management subsidiaries, of their intent to exercise their put options for
their 49% minority ownership interest. Fairfield is a 51% owned holding
company of RGA Reinsurance and the put options are exerciseable as of January
1, 1998. Based upon the Company's decision to cease marketing accident and
health business, the Company established a reserve of approximately
$3,000,000 against the intangible asset that will arise related to the excess
of the purchase price over the fair value of net assets acquired for these
put options.
<PAGE> 24
42.
The excess of purchase price over the fair value of net assets acquired
and goodwill totaling approximately $9,050,000 and $6,175,000 at December 31,
1997 and 1996, respectively, are included in other assets on the consolidated
balance sheets.
Note 4. Investments
Major categories of net investment income consist of the following
(in thousands):
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Fixed maturity securities $133,533 $ 92,721 $53,910
Mortgage loans 5,335 2,510 450
Policy loans 34,326 29,116 26,020
Short-term investments 4,164 3,523 2,829
Funds withheld at interest 11,976 9,813 7,481
Other 688 406 66
- ---------------------------------------------------------------------------------------------------------
Investment revenue 190,022 138,089 90,756
Investment expense 1,689 1,261 639
- ---------------------------------------------------------------------------------------------------------
Net investment income $188,333 $136,828 $90,117
=========================================================================================================
</TABLE>
The amortized cost, gross unrealized gains and losses, and estimated
fair values of investments in fixed maturity securities at December 31, 1997
and 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale
U.S. government and agencies $ 90,902 $ 1,627 $ 330 $ 92,199
Canadian government 19,779 3,602 7 23,374
Canadian provinces and municipalities 147,098 65,283 740 211,641
Argentine government and agencies 452 - - 452
Chilean government and agencies 27,265 - - 27,265
Australian government agencies 7,412 323 - 7,735
Commercial and industrial 747,505 24,733 5,890 766,348
Finance 300,527 6,228 773 305,982
Public utilities 126,355 19,668 161 145,862
Mortgage-backed securities 889,319 9,639 12,169 886,789
Asset-backed securities 59,694 949 - 60,643
- --------------------------------------------------------------------------------------------------------------------------
$2,416,308 $132,052 $20,070 $2,528,290
==========================================================================================================================
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
Available for sale
U.S. government and agencies $ 66,236 $ 359 $ 273 $ 66,322
Canadian government 17,531 2,082 - 19,613
Canadian provinces and municipalities 139,701 33,778 466 173,013
Argentine government and agencies 451 - - 451
Chilean government and agencies 28,591 - - 28,591
Australian government agencies 9,115 280 20 9,375
Commercial and industrial 409,823 11,827 3,277 418,373
Finance 116,500 2,843 451 118,892
Public utilities 76,699 1,877 562 78,014
Mortgage-backed securities 552,296 2,782 3,297 551,781
Asset-backed securities 52,706 161 28 52,839
- --------------------------------------------------------------------------------------------------------------------------
$1,469,649 $ 55,989 $ 8,374 $1,517,264
==========================================================================================================================
</TABLE>
<PAGE> 25
- -------------------------------------------------------------------------- 43.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were no investments in any entity in excess of 10% of
stockholders' equity at December 31, 1997 or 1996, other than investments
issued or guaranteed by the U.S. government. Publicly traded fixed maturity
securities are valued based upon quoted market prices. Private placement
securities are valued based on the credit quality and duration of marketable
securities deemed comparable by the Company, which may be of another issuer.
At December 31, 1997 and 1996, the aggregate fair value of policy loans
approximates the carrying value reflected on the consolidated balance sheet.
Policy loans typically carry an interest rate that is tied to the crediting
rate applied to the related policy and contract reserves.
The carrying value of short-term investments at December 31, 1997 and
1996, approximates fair value. Equity investments and derivative financial
instruments included in other invested assets are reflected at fair value on
the consolidated balance sheets. The cost of these equity investments at
December 31, 1997 and 1996, was $12,128,000 and $5,997,000, respectively,
which approximates fair value. The cost and fair value of the derivative
financial instruments at December 31, 1997, was $3,255,000 and $4,849,000,
respectively. The cost of the derivative financial instruments at December
31, 1996, was approximately $662,000, which approximated fair value.
At December 31, 1997, the contractual maturities of investments in
fixed maturity securities were as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Available for sale:
Due in one year or less $ 21,149 $ 21,407
Due after one year through five years 230,610 236,136
Due after five years through ten years 454,495 471,300
Due after ten years 820,735 912,658
Mortgage-backed securities 889,319 886,789
---------------------------------------------------------------------------------------------------
$2,416,308 $2,528,290
===================================================================================================
</TABLE>
Included in net realized losses is a permanent write-down of one fixed
maturity of approximately $2.5 million during 1997. Net realized gains from
sales of investments in fixed maturity securities and equity securities, all
of which represent activity in the investments held for sale, consist of the
following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Fixed maturities:
Realized gains $ 4,120 $ 5,182 $ 2,462
Realized losses (3,789) (3,972) (2,431)
Other 3 (280) -
- ---------------------------------------------------------------------------------------------------------------------------
Net gains $ 334 $ 930 $ 31
- ---------------------------------------------------------------------------------------------------------------------------
Change in net unrealized gains (losses) were as follows (in thousands):
Years Ended December 31 1997 1996 1995
Fixed maturity securities held to maturity $ - $ - $ 2,182
Fixed maturity securities available for sale 64,367 (5,528) 90,651
Derivative securities 888 - -
- ---------------------------------------------------------------------------------------------------------------------------
$65,255 $(5,528) $92,833
===========================================================================================================================
</TABLE>
Effective December 31, 1995, the Company reclassified its entire
portfolio of fixed maturities held to maturity as available for sale. Fixed
maturity securities with an amortized cost of $113,485,918 and unrealized
gains of $19,405,392 were transferred from the held to maturity
classification to available for sale.
Securities with an amortized cost of $2,370,000 were on deposit with
various state or governmental insurance departments to comply with applicable
insurance laws at December 31, 1997 and 1996. Securities with an amortized
cost of approximately $90,159,000 were held in trust in Canada to satisfy
collateral requirements for reinsurance business conducted in Canada.
<PAGE> 26
44.
All the Company's mortgage loans are amortizing loans. As of December
31, 1997 and 1996, the Company's mortgage loans were distributed as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
Carrying Percentage Carrying Percentage
Value of Total Value of Total
<S> <C> <C> <C> <C>
United States:
Arizona $ 12,884 7.77% $15,554 15.79%
California 23,174 13.97 4,957 5.03
Colorado 2,009 1.21 3,374 3.42
Florida - - 1,694 1.72
Georgia 3,169 1.91 5,038 5.11
Illinois 4,472 2.70 4,575 4.64
Kansas 1,633 0.98 1,750 1.78
Maryland 5,308 3.20 - -
Missouri 7,896 4.76 6,406 6.50
Nevada 1,602 0.96 - -
North Carolina 14,236 8.58 - -
Oklahoma - - 2,488 2.52
Pennsylvania 5,535 3.34 - -
South Carolina 476 0.29 - -
Texas - - 3,794 3.85
Utah 1,918 1.15 - -
Virginia - - 3,129 3.17
Washington 7,859 4.74 6,209 6.30
Chile 73,727 44.44 39,597 40.17
- --------------------------------------------------------------------------------------------------------------------------
$165,898 100.00% 98,565 100.00%
Less: Allowance 446 303
- --------------------------------------------------------------------------------------------------------------------------
Total $165,452 $98,262
==========================================================================================================================
<CAPTION>
1997 1996
Carrying Percentage Carrying Percentage
Value of Total Value of Total
<S> <C> <C> <C> <C>
Property Type
Apartment $ 1,349 0.81% $ 6,452 6.55%
Retail 83,125 50.11 57,367 58.19
Office building 33,970 20.48 19,473 19.76
Industrial 27,782 16.75 7,853 7.97
Other commercial 19,672 11.85 7,420 7.53
- --------------------------------------------------------------------------------------------------------------------------
165,898 100.00% 98,565 100.00%
Less: Allowance 446 303
- --------------------------------------------------------------------------------------------------------------------------
Total $165,452 $98,262
==========================================================================================================================
</TABLE>
<PAGE> 27
- -------------------------------------------------------------------------- 45.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company makes mortgage loans on income producing properties, such
as apartments, retail and office buildings, light warehouses and light
industrial facilities. Loan to value ratios at the time of loan approval are
75 percent or less for domestic and Chilean mortgages.
The estimated fair value of the Company's mortgage loan portfolio at
December 31, 1997 and 1996, was approximately $172.2 million and $100.1
million, respectively.
All domestic mortgage loans were originated in 1997 and 1996. There
were no loans delinquent at December 31, 1997. The Company recorded a
valuation allowance of $446,000 and $303,000 in 1997 and 1996, respectively,
to be used against possible future losses on the loan portfolio.
The maturities of the mortgage loans are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Due one year through five years $ 3,689 $ 3,299
Due after five years 162,209 95,266
- --------------------------------------------------------------------------------------
165,898 98,565
Less: Allowance 446 303
- --------------------------------------------------------------------------------------
Total $165,452 $98,262
======================================================================================
</TABLE>
The Company participates in a securities lending program. The amounts
involved during the year are not significant and the amount on loan at
December 31, 1997 was $13.8 million and was appropriately collateralized.
Note 5. Reinsurance
On January 1, 1993, RGA Reinsurance entered into an indemnity
reinsurance agreement with General American pursuant to which all of the
business of General American's reinsurance division was transferred to RGA
Reinsurance, net of the financial effects of all other retrocession
agreements of the reinsurance division. As a result of the indemnity
reinsurance agreement and certain other related transactions, the Company has
all of the economic benefits and risks of the reinsurance agreements whether
under facultative or automatic reinsurance treaties. The amounts stated in
the consolidated financial statements reflect the aggregate amounts of all
such business retroceded to the Company.
Reinsurance contracts do not relieve the Company from its obligations
to direct writing companies. Failure of retrocessionaires to honor their
obligations could result in losses to the Company; consequently, allowances
would be established for amounts deemed uncollectible. At December 31, 1997
and 1996, no allowances were deemed necessary. The Company evaluates the
financial condition of its reinsurers annually.
At December 31, 1997, there were no reinsurance premium receivables
associated with a single reinsurer with a carrying value in excess of 5% of
total assets.
The effect of reinsurance on premiums and amounts earned is as follows
(in thousands):
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Direct premiums and amounts assessed against policyholders $ 64,998 $ 44,210 $ 36,385
Reinsurance assumed 1,023,805 840,349 711,876
Reinsurance ceded (253,343) (209,674) (178,271)
- --------------------------------------------------------------------------------------------------------------------------
Net premiums and amounts earned $ 835,460 $ 674,885 $ 569,990
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The effect of reinsurance on policyholder claims and other policy benefits
is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Direct $ 34,286 $ 41,598 $ 31,431
Reinsurance assumed 870,112 557,055 502,676
Reinsurance ceded (264,336) (92,914) (104,036)
- --------------------------------------------------------------------------------------------------------------------------
Net policyholder claims and benefits $ 640,062 $505,739 $ 430,071
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 28
46.
The impact of reinsurance on life insurance in force is shown in the
following schedule (in millions):
<TABLE>
<CAPTION>
Life Insurance In Force Direct Assumed Ceded Net Assumed/
Net %
<S> <C> <C> <C> <C> <C>
December 31, 1997 $83 $227,260 $28,720 $198,623 114.42%
December 31, 1996 85 168,339 39,050 129,374 130.12%
December 31, 1995 85 153,861 25,275 128,671 119.58%
</TABLE>
At December 31, 1997, the Company has provided $530,000,000 of
statutory financial reinsurance to other insurance companies under financial
reinsurance transactions to assist ceding companies in meeting applicable
regulatory requirements and enhancing ceding companies' financial strength.
Generally, such financial reinsurance is provided by the Company committing
cash or assuming insurance liabilities, which are secured by future profits
on the reinsured business. The Company has retroceded $450,000,000 of its
assumed financial reinsurance to third party companies and $67,000,000 to
General American. The Company earns a return based on the amount of net
outstanding financial reinsurance.
Note 6. Deferred Policy Acquisition Costs
The following reflects the amounts of policy acquisition costs deferred
and amortized (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Deferred acquisition cost
Assumed $ 297,351 $241,978 $192,116
Retroceded (7,509) (8,413) (5,303)
- --------------------------------------------------------------------------------------------------------------------------
Net $ 289,842 $233,565 $186,813
=======================================================================================================================
Beginning of year $ 233,565 $186,813 $157,159
Capitalized
Assumed 163,150 115,732 78,847
Retroceded (29,884) (16,993) (7,860)
Amortized
Assumed (107,777) (65,870) (49,402)
Retroceded 30,788 13,883 8,069
--------------------------------------------------------------------------------------------------------------------
End of year $ 289,842 $233,565 $186,813
==========================================================================================================================
</TABLE>
Note 7. Income Tax
Income tax expense attributable to income from operations consists of
the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Current income tax $ 8,613 $15,776 $11,406
Deferred income tax 12,919 10,211 12,289
Foreign current tax 4,562 2,216 1,374
Foreign deferred tax 2,656 3,484 2,079
- --------------------------------------------------------------------------------------------------------------------------
Total income tax $28,750 $31,687 $27,148
==========================================================================================================================
</TABLE>
Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 35% to pre-tax income as a result of the
following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Computed "expected" tax expense $29,425 $30,471 $26,117
Increase in income taxes resulting from:
Foreign tax rate in excess of U.S. tax rate 556 941 763
Foreign tax credit (594) - -
Other, net (637) 275 268
--------------------------------------------------------------------------------------------------------------------
Total tax expense $28,750 $31,687 $27,148
=================================================================================================================
</TABLE>
<PAGE> 29
- -------------------------------------------------------------------------- 47.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996 1995
<S> <C> <C> <C>
Income tax from continuing operations: $28,750 $31,687 $27,148
Income tax from stockholders' equity
Unrealized holding gain or loss on debt and
equity securities recognized for financial reporting purposes 26,330 (910) 33,496
Exercise of stock options (436) (1,023) -
Foreign currency translation (4,416) - -
- --------------------------------------------------------------------------------------------------------------------------
Total income tax provided $50,228 $29,754 $60,644
==========================================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996, are presented below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31 1997 1996
<S> <C> <C>
Deferred tax assets:
Nondeductible accruals $ 6,631 $ 3,067
Differences in foreign currency translation 4,416 -
Deferred acquisition costs capitalized for tax 10,318 8,323
Net operating loss 39,828 21,876
----------------------------------------------------------------------------------------------------------------------
Subtotal 61,193 33,266
Valuation allowance (347) (371)
----------------------------------------------------------------------------------------------------------------------
Total deferred assets $ 60,846 $ 32,895
===================================================================================================================
Deferred tax liabilities:
Deferred acquisition costs capitalized for financial reporting $101,445 $101,708
Differences between tax and financial reporting amounts
concerning certain reinsurance transactions and reserve for policies 24,382 (14,991)
Pension plan overfunding 231 231
Differences in the tax basis of cash and invested assets 45,551 19,222
----------------------------------------------------------------------------------------------------------------------
Total deferred liabilities 171,609 106,170
-------------------------------------------------------------------------------------------------------------------
Net deferred liabilities $110,763 $ 73,275
-------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, and 1996, a valuation allowance for deferred
tax assets of $347,166 and $370,581, respectively, was provided on the net
operating losses of RGA Australia, Manantial, and RGA UK. The Company has not
recognized a deferred tax liability for the undistributed earnings of its
wholly owned domestic and foreign subsidiaries because the Company currently
does not expect those unremitted earnings to become taxable to the Company in
the foreseeable future. This is due to the fact that the unremitted earnings
will not be repatriated in the foreseeable future, or because those
unremitted earnings that may be repatriated will not be taxable through the
application of tax planning strategies that management would utilize.
At December 31, 1997, the Company had capital loss carry forwards of
$778,000. During 1997, 1996, and 1995, the Company made approximately
$15,037,000, $8,585,000, and $18,948,000 in income tax payments,
respectively. At December 31, 1997, the Company recognized deferred tax
assets associated with net operating losses of approximately $115,700,000.
This net operating loss is expected to be utilized in the normal course of
business during the period allowed for carryforwards and in any event, will
not be lost due to the application of tax planning strategies that management
would utilize.
<PAGE> 30
48.
Note 8. Employee Benefit Plans
Most of the Company's U.S. employees participate in a non-contributory
multi-employer defined benefit pension plan jointly sponsored by RGA
Reinsurance and General American. The benefits are based on years of service
and compensation levels. RGA Reinsurance's funding policy is to contribute
the maximum amount deductible for federal income tax purposes annually.
Also, certain management individuals participate in several
nonqualified defined benefit and defined contribution plans sponsored by
General American and RGA Reinsurance. Those plans are unfunded and are
deductible for federal income tax purposes when the benefits are paid.
Additionally, full-time salaried employees with at least one year of service
participate in a profit-sharing plan sponsored by RGA Reinsurance which is
tied to RGA's operating results. Contributions to that plan have been
determined annually by the RGA Board of Directors and are based upon the
salaries of eligible employees. Full vesting occurs after five years of
continuous service.
The Company also provides certain health care and life insurance
benefits for retired employees through a self-insured unfunded plan.
Employees become eligible for these benefits if they meet minimum age and
service requirements. The retiree's cost for health care benefits varies
depending upon the credited years of service. The liabilities and periodic
pension costs associated with these plans are not material to the
consolidated financial statements.
Note 9. Related Party Transactions
The Company and General American are parties to shareholder agreements
with the minority shareholders of Fairfield, which afford the minority
shareholders certain preferential shareholder rights (put and first refusal
rights) which were exercised by the minority shareholders on January 1, 1998.
The Company established a reserve for $3,000,000 in 1997 associated with
intangible assets arising from the exercise of the preferential shareholder
rights.
Conning Asset Management Company (Conning), a majority indirectly owned
subsidiary of General American, provides investment management and advisory
services to RGA, RGA Reinsurance, RGA Barbados, Australian Holdings and RGA
Life Reinsurance Company of Canada (RGA Canada). These services are provided
pursuant to agreements at the rate of 0.09% of fixed maturity assets managed
and 0.22% of mortgage loans managed, payable quarterly, based on the average
book value of the portfolios managed during each calendar quarter. The cost
for the years ended December 31, 1997, 1996, and 1995, was approximately
$1,701,000, $1,160,000, and $616,000, respectively.
Subject to written agreements with RGA and RGA Reinsurance, General
American has historically provided certain administrative services to RGA and
RGA Reinsurance. Such services include legal, treasury, employee benefit,
payroll, and personnel. The cost for the years ended December 31, 1997, 1996,
and 1995, was approximately $1,837,000, $1,786,000, and $1,474,000,
respectively. Management does not believe that the various amounts charged by
General American to the Company would be materially different if they had
been incurred from an unrelated third party.
Pursuant to a marketing agreement, beginning January 1, 1993, General
American agreed to amend and terminate its assumed and retrocession
reinsurance agreements only at the direction of RGA Reinsurance, thus giving
RGA Reinsurance the contractual right to direct future changes to existing
reinsurance agreements. General American charges RGA Reinsurance quarterly an
amount equal to, on an annual basis, 0.25% of specified policy-related
liabilities that are associated with existing and future treaties written by
General American for the benefit of RGA Reinsurance. RGA Reinsurance is
currently writing reinsurance business for its own account, and may, at its
sole option, terminate the marketing agreement at any time before its
expiration date of January 1, 2000. Payment under the agreement for the years
ended December 31, 1997, 1996, and 1995, was $157,000, $186,000, and
$196,000, respectively.
The Company has utilized the services of a consulting firm, a former
principal of which is an executive officer of RGA. The Company has used the
consulting firm primarily for market research and development. Payments under
consulting agreements for the years ended December 31, 1997, 1996, and 1995,
were approximately $234,000, $588,000, and $606,000, respectively.
The Company conducts its business primarily from premises leased by RGA
Reinsurance. RGA Reinsurance made rental payments in 1997, 1996, and 1995 to
General American principally for office space of approximately $1,599,000,
$1,458,000, and $952,000, respectively.
<PAGE> 31
- -------------------------------------------------------------------------- 49.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also has direct policies and reinsurance agreements with
General American and its subsidiaries. Under these agreements, the Company
reflected earned premiums of approximately $32,146,000, $20,640,000, and
$32,107,000 in 1997, 1996, and 1995, respectively. Underwriting (loss) gain
on this business was approximately $(413,000), $1,162,000, and $183,000 in
1997, 1996, and 1995, respectively. Also, the Company's stable value
products are reinsured from General American. Deposits from stable value
products totaled approximately $483.0 million and $429.3 million during 1997
and 1996, respectively. 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 $124.4 million as of December 31,
1997.
Note 10. Lease Commitments
The Company leases office space and furniture and equipment under
non-cancelable operating lease agreements which expire at various dates.
Future minimum office space annual rentals under non-cancelable operating
leases at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $2,174,191
1999 814,392
2000 742,953
2001 719,746
2002 455,897
</TABLE>
Rent expenses amount to approximately $2,885,000, $2,551,000, and
$1,630,000 for the years ended December 31, 1997, 1996, and 1995,
respectively.
Note 11. Financial Condition and Net Income on a Statutory
Basis-Subsidiaries
The statutory basis financial condition of RGA Reinsurance and RGA
Canada, as of December 31, 1997 and 1996 was as follows (in thousands):
<TABLE>
<CAPTION>
RGA Reinsurance RGA Canada
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Admitted assets $3,430,501 $1,972,598 $347,778 $187,908
Liabilities 3,181,169 1,766,731 $283,314 151,540
- --------------------------------------------------------------------------------------------------------------------------
Total capital and surplus $ 249,332 $ 205,867 $ 64,464 $ 36,368
==========================================================================================================================
</TABLE>
The statutory basis net income of RGA Reinsurance and RGA Canada for
the periods indicated was as follows (in thousands):
<TABLE>
<CAPTION>
RGA Reinsurance RGA Canada
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net income $12,059 $25,988 $25,422 $12,512 $4,389 $3,464
==========================================================================================================================
</TABLE>
RGA Reinsurance is subject to statutory regulations that restrict the
payment of dividends. It may not pay dividends in any 12-month period in
excess of the greater of the prior year's statutory operating income or 10%
of capital and surplus at the preceding year-end, without regulatory
approval. Accordingly, dividends from RGA Reinsurance to its parent in 1998
are limited to $24.9 million without such regulatory approval. RGA
Reinsurance has made no dividend payments to RGA to date. The maximum amount
available for dividends by RGA Canada under the Canadian Minimum Continuing
Capital and Surplus Requirements (MCCSR) is $15.5 million.
Note 12. Commitments and Contingent Liabilities
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 which would have a
material adverse effect on its future operations.
The Company has obtained letters of credit in favor of various
unaffiliated insurance companies from which the Company assumes business.
This allows the ceding company to take statutory reserve credit. The letters
of credit issued by banks represent a guarantee of performance under the
reinsurance agreements. At December 31, 1997, there was approximately
$23,199,000 outstanding bank letters of credit to the favor of unaffiliated
entities.
<PAGE> 32
50.
Note 13. Financing Activities
On March 19, 1996, RGA issued 7 1/4% Senior Notes with a face value of
$100,000,000 in accordance with Rule 144A of the Securities Act of 1933, as
amended. The net proceeds from the offering were approximately $98,943,000,
and interest is payable semiannually on April 1 and October 1, with the
principal amount due April 1, 2006. The estimated fair value of the debt as
of December 31, 1997, was approximately $103.2 million. The ability of the
Company to make debt principal and interest payments as well as make dividend
payments to shareholders is ultimately dependent on the earnings and surplus
of subsidiaries and the investment earnings on the undeployed debt proceeds.
The transfer of funds from the insurance subsidiaries to RGA is subject to
applicable insurance laws and regulations. In addition, the debt agreement
contains certain restrictions related to liens and the issuance and
disposition of stock of restricted subsidiaries. The Company must also comply
with specific reporting requirements with notices given to the fiscal agent
at prescribed dates. As of December 31, 1997, the Company was in compliance
with all covenants under the debt agreement.
On January 8, 1996, Australian Holdings established a $15,894,000
unsecured, three month, revolving line of credit. The debt is guaranteed by
the Company and is utilized to provide operating capital to RGA Australia.
The outstanding balance as of December 31, 1997 and 1996, was $7,804,000 and
$7,550,000, respectively, which approximates fair value. Principal repayments
are due in April 1998 and are expected to be renewed under the terms of the
line of credit. Interest is paid every three months at a current rate of
5.46% as of December 31, 1997. This agreement contains various restrictive
covenants which primarily pertain to limitations on the quality and types of
investments, minimum requirements of net worth, and minimum rating
requirements. Additionally, the Company must comply with several financial
covenant restrictions under the revolving credit agreement which include
defined ratios of consolidated funded debt to total capitalization for RGA
and for Australian Holdings. As of December 31, 1997, the Company was in
compliance with all covenants under the debt agreement.
Interest paid on debt during 1997 and 1996 was $7,718,000 and
$6,169,000 respectively.
Note 14. Segment Information
The following summarizes the Company's principal operations (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
<S> <C> <C> <C>
U.S. operations:
Revenues $ 734,825 $ 613,285 $ 496,156
Income before income taxes and minority interest 109,759 84,492 63,427
Total assets 3,730,158 2,250,654 1,559,811
Aggregate depreciation and amortization 38,112 34,582 32,793
Canadian operations:
Revenues $ 120,145 $ 78,549 $ 60,315
Income before income taxes and minority interest 15,082 13,436 10,880
Total assets 580,599 321,314 247,432
Aggregate depreciation and amortization 11,084 1,969 2,463
Accident and health operations:
Revenues $ 93,322 $ 58,869 $ 48,852
(Loss)before income taxes and minority interest (29,342) (4,120) (698)
Total assets 84,839 48,818 53,656
Aggregate depreciation and amortization 25,260 15,888 6,827
Other international operations:
Revenues $ 118,358 $ 74,327 $ 61,597
(Loss)/income before income taxes and minority interest (8,177) (4,051) 1,791
Total assets 267,606 170,656 103,590
Aggregate depreciation and amortization 3,493 578 454
Adjustments and elimination:
Revenues $ 4,865 $ 4,999 $ 1,212
(Loss) before income taxes and minority interest (3,251) (2,696) (781)
Total assets 10,348 102,212 25,445
</TABLE>
Capital expenditures of each reporting segment were insignificant in the
periods noted.
<PAGE> 33
- ------------------------------------------------------------------------- 51.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Stock Options
The Company adopted the RGA Flexible Stock Plan (the Plan) in February
1993. The Plan provides for the award of benefits (collectively Benefits) of
various types, including stock options, stock appreciation rights (SARs),
restricted stock, performance shares, cash awards, and other stock based
awards. Options are granted with an exercise price equal to the stock's fair
value at the date of grant. Information with respect to grants follows.
<TABLE>
<CAPTION>
Shares Options Outstanding Weighted-Average
Available Shares Exercise Price Exercise Price
<S> <C> <C> <C> <C>
Balance at December 31, 1994 519,825 779,550 $17.33 - 18.33 $17.69
Additional authorized 64,970 --
Granted (48,231) 48,232 18.33 18.33
Exercised -- (12,750) 17.33 17.33
Forfeited 21,150 (21,150) 17.33 - 18.33 17.87
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 557,714 793,882 17.33 - 18.33 17.73
- -------------------------------------------------------------------------------------------------------------------------
Additional authorized 68,217 --
Granted (179,930) 179,930 23.42 - 30.33 29.50
Exercised -- (231,000) 17.33 17.33
Forfeited 19,814 (19,814) 17.33 - 18.33 18.18
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 465,815 722,998 17.33 - 30.33 20.77
- -------------------------------------------------------------------------------------------------------------------------
Additional authorized 71,628
Granted (185,700) 185,700 30.42 30.42
Exercised -- (61,921) 17.33 - 18.33 17.38
Forfeited 1,950 (1,950) 30.42 30.42
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 353,693 844,827 $17.33 - 30.33 $23.12
=========================================================================================================================
</TABLE>
Options granted in May 1993 are currently exercisable with respect to
100% of the shares covered. The January 1994 and 1995 options represent
multiple-year block grants which vest over a period of two to eight years.
The options are exercisable for a period of up to ten years after the date of
grant. The 158,250 options granted in December 1996 vest in December 1999 and
are exercisable until May 2003. These options represent a noncash stock
transfer of a portion of the May 1993 options. The 21,680 options granted in
January 1996 and 185,700 options granted in January 1997 vest over a period
of one to six years. The options are exercisable for a period of up to ten
years after the date of grant.
At December 31, 1997, there were 353,693 additional shares available
for grant under the Plan. The per share weighted-average fair value of stock
options granted during 1997, 1996 and 1995 was $11.46, $7.20 and $7.03 on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1997-expected dividend yield of 0.7%, risk-free
interest rate of 6.63%, expected life of 6.0 years, and an expected rate of
volatility of the stock of 26% over the expected life of the options;
1996-expected dividend yield of 0.7%, risk-free interest rate of 5.90%, expected
life of 3.3 years, and an expected rate of volatility of the stock of 26%
over the expected life of the options: 1995-expected dividend yield of 0.7%,
risk-free interest rate of 7.72%, expected life of 5.5 years, and an expected
rate of volatility of the stock of 26% over the expected life of the options.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options
in the financial statements. Had the Company determined compensation cost
based on the fair value at the grant date for its stock options under
Statement of Financial Accounting Standards No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below. The effects of applying Statement of Financial Accounting
Standards No. 123 may not be representative of the effects on reported net
income for future years.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C> <C>
Net income (in thousands) As reported $54,619 $55,072
Pro forma $54,129 $54,950
Basic earnings per share As reported $ 2.15 $ 2.18
Pro forma $ 2.13 $ 2.18
</TABLE>
<PAGE> 34
52.
At December 31, 1997 and 1996, the number of options exercisable under
the Flexible Stock Plan was 219,975 and 253,931 respectively, and the
weighted-average exercise price of those options was $17.48 and $17.36,
respectively. At December 31, 1997 and 1996, the range of exercise prices and
weighted-average remaining contractual life of exercisable options was $17.33
to $18.33, and 8.45 years, and $17.33 to $18.33 and 7.18 years, respectively.
The weighted-average remaining contractual life of outstanding options at
December 31, 1997 and 1996, was 6.3 years and 6.6 years, respectively.
Effective January 1, 1997, the Company adopted a Flexible Stock Plan
for Directors (the Directors Plan). The Directors Plan provides for the
award of benefits (collectively Benefits) of various types to non-employee
directors, including stock options, SARs, restricted stock, performance
shares, cash awards and other stock-based awards. Options are granted with
an exercise price equal to the stock's fair value at the date of grant.
Under the Directors Plan, 75,000 post-split shares are available for grant
and only treasury stock may be used for Benefits. In May 1997, the Company
granted options to purchase 9,000 shares at an exercise price of $36.50. The
options vest in May 1998 and are exercisable for a period of ten years after
the date of grant. At December 31, 1997, there were 61,660 additional shares
available for grant under the Directors Plan.
In January 1998, the Board approved an additional 138,437 stock options
and 10,000 shares of restricted stock at $39.50 per share under the Company's
Flexible Stock Plan. The options vest in 20% increments beginning January
1999.
Note 16. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share data):
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
<S> <C>
Numerator:
Net income $54,619 $55,072 $47,291
Numerator for basic earning per share-income available
to common stockholders 54,619 55,072 47,291
Effect of dilutive securities -- -- --
--------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share-income available
to common stockholders after assumed conversions $54,619 $55,072 $47,291
-----------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share-
weighted average shares 25,394 25,252 25,242
Effect of dilutive securities:
Employee stock options 210 158 50
-----------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 210 158 50
Denominator for diluted earnings per share
adjusted weighted average shares and assumed conversions 25,604 25,410 25,292
-----------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 2.15 $ 2.18 $ 1.87
Diluted earnings per share $ 2.13 $ 2.17 $ 1.87
</TABLE>
Note 17. Parent Company Financial Information
The following are the condensed balance sheets as of December 31, 1997,
1996, and 1995, and condensed statements of income and cash flows for the
periods ended December 31, 1997, 1996, and 1995, for Reinsurance Group of
America, Incorporated (parent company only)(in thousands of dollars):
<PAGE> 35
- ------------------------------------------------------------------------- 53.
PARENT COMPANY FINANCIAL INFORMATION
<TABLE>
Condensed Balance Sheets
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Assets:
Fixed-maturity securities (available for sale) $ -- $ 82,571 $ 11,518
Short-term investments 2,575 14,979 10,823
Cash 232 (44) 32
Investment in subsidiaries 548,261 423,278 352,055
Other assets 43,809 4,706 2,246
------------------------------------------------------------------------------------------------------------------
Total assets $594,877 $525,490 $376,674
===============================================================================================================
Liabilities and stockholders' equity:
Long-term debt 99,027 98,943 --
Other liabilities (3,471) 989 (255)
Stockholders' equity 499,321 425,558 376,929
------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $594,877 $525,490 $376,674
===============================================================================================================
Condensed Statements of Income
Interest income $ 5,584 $5,151 $1,559
Realized investments gains/(losses), net 827 (150) (409)
Operating expenses (3,067) (2,051) (2,037)
Interest expense (7,333) (5,685) --
---------------------------------------------------------------------------------------------------------------------
Income before income tax and
undistributed earnings of subsidiaries (3,989) (2,735) (887)
Income tax benefit (1,616) (1,003) (344)
---------------------------------------------------------------------------------------------------------------------
Net income before undistributed
earnings of subsidiaries (2,373) (1,732) (543)
Equity in undistributed earnings of subsidiaries 56,992 56,804 47,834
---------------------------------------------------------------------------------------------------------------------
Net income $ 54,619 $ 55,072 $ 47,291
==================================================================================================================
Condensed Statements of Cash Flows
Operating activities:
Net income $ 54,619 $ 55,072 $ 47,291
Equity in earnings of subsidiaries (56,992) (56,804) (47,834)
Other, net (239) 1,939 1,161
------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (2,612) 207 618
Investing activities:
Sales of fixed maturity securities available for sale 60,257 24,444 23,623
Purchases of fixed maturity securities available for sale (16,991) (95,959) --
Change in short-term investments 12,404 (4,156) (10,358)
Payment for purchase of stock in subsidiaries -- (4,482) (5,259)
Capital contributions to subsidiaries (35,230) (18,054) (2,000)
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 20,440 (98,207) 6,006
Financing activities:
Dividends to stockholders (5,758) (5,050) (4,376)
Acquisition of treasury stock (12,877) -- (2,422)
Reissuance of treasury stock 1,083 4,031 196
Proceeds from long-term debt issuance, net -- 98,943 --
------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (17,552) 97,924 (6,602)
Net change in cash and cash equivalents 276 (76) 22
Cash and cash equivalents at beginning of year (44) 32 10
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 232 $ (44) $ 32
=====================================================================================================================
</TABLE>
<PAGE> 36
54.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Reinsurance Group of America, Incorporated:
We have audited the accompanying consolidated balance sheets of
Reinsurance Group of America, Incorporated and subsidiaries (the Company) as
of December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Reinsurance Group of America, Incorporated and subsidiaries as of December
31, 1997 and 1996, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
St. Louis, Missouri
January 29, 1998
<PAGE> 37
- ------------------------------------------------------------------------- 55.
REPORT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
The consolidated balance sheets of Reinsurance Group of America,
Incorporated and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, cash flows and stockholders'
equity for the years ended December 31, 1997, 1996, and 1995, have been
prepared by management, which is responsible for their integrity and
objectivity. The statements have been prepared in accordance with generally
accepted accounting principles and include some amounts that are based upon
management's best estimates and judgments. The financial information
contained elsewhere in this annual report is consistent with that contained
in the financial statements.
Management is responsible for establishing and maintaining a system of
internal control designed to provide reasonable assurance as to the integrity
and reliability of financial reporting. The concept of reasonable assurance
is based on the recognition that there are inherent limitations in all
systems of internal control, and that the cost of such systems should not
exceed the benefits derived therefrom. A professional staff of internal
auditors reviews, on an ongoing basis, the related internal control system
design, the accounting policies and procedures supporting this system, and
compliance therewith. Management believes this system of internal control
effectively meets its objective of reliable financial reporting.
In connection with annual audits, independent certified public
accountants perform an examination in accordance with generally accepted
auditing standards, which includes the consideration of the system of
internal control to the extent necessary to form an independent opinion on
the financial statements prepared by management.
The Board of Directors, through its Audit Committee which is composed
solely of directors who are not employees of the Company or its affiliates,
is responsible for overseeing the integrity and reliability of the Company's
accounting and financial reporting practices and the effectiveness of its
system of internal controls. The independent certified public accountants and
internal auditors meet regularly with, and have access to, this committee,
with and without management present, to discuss the results of their audit
work.
/s/ Richard A. Liddy /s/ A. Greig Woodring
Richard A. Liddy A. Greig Woodring
Chairman of the Board of Directors President and Chief Executive Officer
/s/ Jack B. Lay /s/ Todd C. Larson
Jack B. Lay Todd C. Larson
Executive Vice President Vice President and Controller
and Chief Financial Officer
<PAGE> 38
56.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The consolidated selected financial data presented below for, and as of
the end of, each of the years in the five-year period ended December 31,
1997, have been prepared in accordance with generally accepted accounting
principles prescribed for stock life companies. In 1993, the reinsurance
operations were transferred or contributed to RGA from General American along
with the related assets and liabilities of the reinsurance operations. All
amounts shown are in millions, except per share and operating data. The
following selected financial data should be read in conjunction with the
Notes to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income Statement Data
Revenues:
Net premiums $ 835.5 $ 674.9 $ 570.0 $ 451.7 $ 379.9
Net investment income 188.3 136.8 90.1 71.3 60.3
Realized investment gains, net 0.3 0.9 - 0.8 3.6
Other revenue 47.4 17.4 8.0 1.9 2.7
---------------------------------------------------------------------------------------------------------------------
Total revenues 1,071.5 830.0 668.1 525.7 446.5
==================================================================================================================
Benefits and expenses:
Claims and other policy benefits 640.1 505.7 430.0 329.4 276.4
Interest credited 92.0 54.7 33.8 28.8 24.7
Accident and health pool charge 18.0 - - - -
Policy acquisition costs and other insurance expenses 176.5 136.5 98.1 78.6 70.9
Other operating expenses 53.0 39.8 31.6 24.5 19.6
Interest expense 7.8 6.2 - - -
---------------------------------------------------------------------------------------------------------------------
Total benefits and expenses 987.4 742.9 593.5 461.3 391.6
==================================================================================================================
Income before income taxes and minority interest 84.1 87.1 74.6 64.4 54.9
Income tax expense 28.8 31.7 27.1 23.7 20.2
Minority interest 0.7 0.3 0.2 0.3 0.6
---------------------------------------------------------------------------------------------------------------------
Net income $ 54.6 $ 55.1 $ 47.3 $ 40.4 $ 34.1
---------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 2.15 $ 2.18 $ 1.87 $ 1.57 $ 1.50
Diluted earnings per share $ 2.13 $ 2.17 $ 1.87 $ 1.57 $ 1.50
Cash dividends per share $ 0.23 $ 0.20 $ 0.17 $ 0.16 $ 0.08
- ------------------------------------------------------------------------------------------------------------------------
Weighed average diluted shares, in thousands 25,604 25,410 25,292 25,728 22,736
---------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Total investments $3,634.0 $2,272.0 $1,405.5 $1,016.6 $ 920.6
Total assets 4,673.6 2,893.7 1,989.9 1,394.3 1,249.6
Policy liabilities 3,558.7 2,068.6 1,408.3 1,043.9 886.5
Total debt 106.8 106.5 -- -- --
Stockholders' equity 499.3 425.6 376.9 276.8 279.4
Stockholders' equity per share $ 19.81 $ 16.69 $ 14.94 $ 10.91 $ 10.73
Operating Data (in billions)
Assumed ordinary life reinsurance business in force $ 227.3 $ 168.3 $ 153.9 $ 142.4 $ 114.7
Assumed new business production 75.9 37.9 36.0 43.2 24.7
</TABLE>
<PAGE> 39
- ------------------------------------------------------------------------- 57.
QUARTERLY DATA (UNAUDITED - SEE ACCOMPANYING AUDITORS' REPORT)
<TABLE>
<CAPTION>
Years Ended December 31
(Dollars in thousands, except per share data)
1997 First Second Third Fourth
<S> <C> <C> <C> <C>
Total revenues $ 251,763 $ 252,931 $ 249,027 317,794
Income before income taxes and minority interest 2,947 23,981 22,303 34,840
Net income $ 2,828 $ 15,095 $ 14,372 $ 22,324
Outstanding common shares<F1> 25,468,344 25,405,494 25,291,342 25,204,840
Basic earnings per share<F2> $ 0.11 $ 0.59 $ 0.57 $ 0.88
Diluted earnings per share<F2> $ 0.11 $ 0.59 $ 0.56 $ 0.88
Market price of common stock
Quarter end<F1> 32 1/3 38 1/3 40 7/8 42 9/16
Common stock price, high<F1> 32 5/6 38 1/3 41 37/64 46 7/16
Common stock price, low<F1> 20 11/12 31 1/12 37 1/2 37 13/16
1996
Total revenues $ 200,422 $ 201,491 $ 192,038 $ 236,078
Income before income taxes and minority interest 17,028 21,608 20,679 27,746
Net income $ 10,536 $ 13,460 $ 12,617 $ 18,459
Outstanding common shares<F1> 25,236,594 25,244,694 25,250,844 25,465,344
Basic earnings per share<F2> $ 0.42 $ 0.53 $ 0.50 $ 0.73
Diluted earnings per share<F2> $ 0.42 $ 0.53 $ 0.50 $ 0.73
Market price of common stock:
Quarter end<F1> 24 5/12 25 1/6 29 1/4 31 5/12
Common stock price, high<F1> 27 5/12 27 3/4 29 1/2 33
Common stock price, low<F1> 22 7/12 24 5/12 24 7/12 28 5/6
<FN>
<F1> Share and stock price information have been restated to reflect the
three-for-two stock split on August 29, 1997.
<F2> In the fourth quarter of 1997, the Company adopted SFAS No. 128, as
required. The previously reported earnings per share, and share
outstanding information, have been restated as required by SFAS No. 128.
</TABLE>
Reinsurance Group of America, Incorporated common stock is traded on
the New York Stock Exchange (NYSE) under the symbol "RGA." There were 143
stockholders of record of RGA's common stock on March 1, 1998.
<PAGE> 40
58. --------------------------------------------------------------------------
MANAGEMENT AND SHAREHOLDERS' INFORMATION
Directors and Executive Officers<F*>
J. Cliff Eason
Director
President and Chief Executive Officer,
Southwestern Bell Telephone Company
Bernard A. Edison
Director
Former President,
Edison Brothers Stores, Inc.
Stuart Greenbaum
Director
Dean of the John M. Olin School of Business,
Washington University in St. Louis
Richard A. Liddy
Chairman of the Board and Director
Chairman, President and Chief Executive Officer,
General American Life Insurance Company
Chairman, President and Chief Executive Officer,
GenAmerica Corporation
William A. Peck, M.D.
Director
Executive Vice Chancellor for Medical Affairs
and Dean of the School of Medicine,
Washington University in St. Louis
Leonard M. Rubenstein
Director
Chairman and Chief Executive Officer,
Conning Corporation
William P. Stiritz
Director
Chairman,
Ralston Purina Company
H. Edwin Trusheim
Director
Retired Chairman of the Board,
General American Life Insurance Company
A. Greig Woodring
President,
Chief Executive Officer and Director
David B. Atkinson
Executive Vice President
and Chief Operating Officer
Bruce E. Counce
Executive Vice President and
Chief Corporate Operating Officer
Jack B. Lay
Executive Vice President and
Chief Financial Officer
Graham S. Watson
Executive Vice President and
Chief Marketing Officer
Andre St-Amour
President and Chief Executive Officer,
RGA Life Reinsurance Company of Canada
Brendan J. Galligan
Senior Vice President
Asia Pacific Division
Joel S. Iskiwitch
Senior Vice President
Accident and Health Division
Paul Nitsou
Senior Vice President
Market Development Division
Paul A. Schuster
Senior Vice President
U.S. Division
Roberto Baron
Vice President
Latin America Division
Kenneth D. Sloan
Senior Vice President
U.S. Facultative Division
Matthew P. McCauley
General Counsel and Secretary
[FN]
<F*>senior vice presidents and above
are considered executive officers
Shareholder Information
Annual Meeting:
The annual meeting of the shareholders will be held
Wednesday May, 27, 1998 at 2:00 p.m.
at the Ritz-Carlton Hotel
100 Carondelet Plaza St. Louis, Missouri
Transfer Agent:
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07760
888.213.0965
http://www.chasemellon.com
Independent Auditors:
KPMG Peat Marwick LLP
Annual Report on Form 10-K:
Reinsurance Group of America, Incorporated
files with the Securities and Exchange Commission
an Annual Report (Form 10-K). Shareholders
may obtain a copy of the Form 10-K
without charge by writing to:
Jack B. Lay
Chief Financial Officer
660 Mason Ridge Center Drive
St. Louis, Missouri 63141
Or, shareholders may request financial reports
through our Internet site at http://www.rgare.com
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF
REINSURANCE GROUP OF AMERICA, INCORPORATED
RGA International, Limited, New Brunswick corporation
RGA Canada Management Company, Ltd., New Brunswick corporation
RGA Life Reinsurance Company of Canada, Quebec corporation
Manantial Seguros de Vida, S.A., Argentine corporation
RGA Australian Holdings PTY, Limited, Australian corporation
RGA Reinsurance Company of Australia Limited, Australian corporation
RGA Holdings Limited (U.K.), United Kingdom corporation
RGA Managing Agency Limited U.K., United Kingdom corporation
RGA Capital Limited U.K., United Kingdom corporation
RGA Reinsurance Company, Missouri corporation
Fairfield Management Group, Inc., Missouri corporation
Great Rivers Reinsurance Management, Inc., Missouri corporation
Reinsurance Partners, Inc., Missouri corporation
RGA (U.K.) Underwriting Agency Ltd., United Kingdom corporation
RGA Reinsurance Company (Barbados) Ltd., Barbados corporation
RGA Insurance Company (Bermuda) Ltd., Bermuda corporation
RGA Sudamerica, S.A., Chilean corporation
RGA Reinsurance Company Chile S.A., Chilean corporation
BHIF America Seguros de Vida S.A., Chilean corporation
83
<PAGE> 1
Exhibit 23.1
Board of Directors and Stockholders
Reinsurance Group of America, Incorporated:
We consent to incorporation by reference in the registration statement (No.
33-62274) on Form S-8 and registration statement (No. 333-27167) on Form S-8
of Reinsurance Group of America, Incorporated of our reports dated January
29, 1998, relating to the consolidated balance sheets of Reinsurance Group of
America, Incorporated and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997,
and all related schedules, which reports appear in the December 31, 1997,
annual report on Form 10-K of Reinsurance Group of America, Incorporated.
/s/ KPMG Peat Marwick LLP
St. Louis, Missouri
March 24, 1998
84
<PAGE> 1
Exhibit 24.1
REINSURANCE GROUP OF AMERICA, INCORPORATED
POWER OF ATTORNEY
------------------
I, the undersigned, as a director or officer of Reinsurance Company of
America, Incorporated hereby constitute David B. Atkinson, Jack B. Lay and
Matthew P. McCauley, and each of them singly, with full power to sign for me,
in my name and in the capacity checked below, the annual report of
Reinsurance Group of America, Incorporated for fiscal year 1997 on Form 10-K
and any and all amendments to this report with the Securities and Exchange
Commission and I hereby ratify and confirm my signature as it may be signed
by the above-mentioned people to said Form 10-K and to any and all amendments
thereto.
Witness my hand on the date set forth below.
Signature
- ---------
/s/ H. Edwin Trusheim Director / X / Officer / /
- ----------------------------
H. Edwin Trusheim
- -----------------------
Name (Typed or printed)
Date 3/18/98
-----------------
85
<PAGE> 2
Exhibit 24.1
REINSURANCE GROUP OF AMERICA, INCORPORATED
POWER OF ATTORNEY
------------------
I, the undersigned, as a director or officer of Reinsurance Company of
America, Incorporated hereby constitute David B. Atkinson, Jack B. Lay and
Matthew P. McCauley, and each of them singly, with full power to sign for me,
in my name and in the capacity checked below, the annual report of
Reinsurance Group of America, Incorporated for fiscal year 1997 on Form 10-K
and any and all amendments to this report with the Securities and Exchange
Commission and I hereby ratify and confirm my signature as it may be signed
by the above-mentioned people to said Form 10-K and to any and all amendments
thereto.
Witness my hand on the date set forth below.
Signature
- ---------
/s/ W. P. Stiritz Director / X / Officer / /
- ----------------------------
William P. Stiritz
- -----------------------
Name (Typed or printed)
Date 1/26/98
-----------------
86
<PAGE> 3
Exhibit 24.1
REINSURANCE GROUP OF AMERICA, INCORPORATED
POWER OF ATTORNEY
------------------
I, the undersigned, as a director or officer of Reinsurance Company of
America, Incorporated hereby constitute David B. Atkinson, Jack B. Lay and
Matthew P. McCauley, and each of them singly, with full power to sign for me,
in my name and in the capacity checked below, the annual report of
Reinsurance Group of America, Incorporated for fiscal year 1997 on Form 10-K
and any and all amendments to this report with the Securities and Exchange
Commission and I hereby ratify and confirm my signature as it may be signed
by the above-mentioned people to said Form 10-K and to any and all amendments
thereto.
Witness my hand on the date set forth below.
Signature
- ---------
/s/ Leonard M. Rubenstein Director / X / Officer / /
- ----------------------------
Leonard M. Rubenstein
- -----------------------
Name (Typed or printed)
Date 2/12/98
-----------------
87
<PAGE> 4
Exhibit 24.1
REINSURANCE GROUP OF AMERICA, INCORPORATED
POWER OF ATTORNEY
------------------
I, the undersigned, as a director or officer of Reinsurance Company of
America, Incorporated hereby constitute David B. Atkinson, Jack B. Lay and
Matthew P. McCauley, and each of them singly, with full power to sign for me,
in my name and in the capacity checked below, the annual report of
Reinsurance Group of America, Incorporated for fiscal year 1997 on Form 10-K
and any and all amendments to this report with the Securities and Exchange
Commission and I hereby ratify and confirm my signature as it may be signed
by the above-mentioned people to said Form 10-K and to any and all amendments
thereto.
Witness my hand on the date set forth below.
Signature
- ---------
/s/ William A. Peck Director / X / Officer / /
- ----------------------------
William A. Peck
- -----------------------
Name (Typed or printed)
Date 1/26/98
-----------------
88
<PAGE> 5
Exhibit 24.1
REINSURANCE GROUP OF AMERICA, INCORPORATED
POWER OF ATTORNEY
------------------
I, the undersigned, as a director or officer of Reinsurance Company of
America, Incorporated hereby constitute David B. Atkinson, Jack B. Lay and
Matthew P. McCauley, and each of them singly, with full power to sign for me,
in my name and in the capacity checked below, the annual report of
Reinsurance Group of America, Incorporated for fiscal year 1997 on Form 10-K
and any and all amendments to this report with the Securities and Exchange
Commission and I hereby ratify and confirm my signature as it may be signed
by the above-mentioned people to said Form 10-K and to any and all amendments
thereto.
Witness my hand on the date set forth below.
Signature
- ---------
/s/ S. I. Greenbaum Director / X / Officer / /
- ----------------------------
Stuart I. Greenbaum
- -----------------------
Name (Typed or printed)
Date 1/28/98
-----------------
89
<PAGE> 6
Exhibit 24.1
REINSURANCE GROUP OF AMERICA, INCORPORATED
POWER OF ATTORNEY
------------------
I, the undersigned, as a director or officer of Reinsurance Company of
America, Incorporated hereby constitute David B. Atkinson, Jack B. Lay and
Matthew P. McCauley, and each of them singly, with full power to sign for me,
in my name and in the capacity checked below, the annual report of
Reinsurance Group of America, Incorporated for fiscal year 1997 on Form 10-K
and any and all amendments to this report with the Securities and Exchange
Commission and I hereby ratify and confirm my signature as it may be signed
by the above-mentioned people to said Form 10-K and to any and all amendments
thereto.
Witness my hand on the date set forth below.
Signature
- ---------
/s/ Bernard A. Edison Director / X / Officer / /
- ----------------------------
Bernard A. Edison
- -----------------------
Name (Typed or printed)
Date Jan. 28, 1998
-----------------
90
<PAGE> 7
Exhibit 24.1
REINSURANCE GROUP OF AMERICA, INCORPORATED
POWER OF ATTORNEY
------------------
I, the undersigned, as a director or officer of Reinsurance Company of
America, Incorporated hereby constitute David B. Atkinson, Jack B. Lay and
Matthew P. McCauley, and each of them singly, with full power to sign for me,
in my name and in the capacity checked below, the annual report of
Reinsurance Group of America, Incorporated for fiscal year 1997 on Form 10-K
and any and all amendments to this report with the Securities and Exchange
Commission and I hereby ratify and confirm my signature as it may be signed
by the above-mentioned people to said Form 10-K and to any and all amendments
thereto.
Witness my hand on the date set forth below.
Signature
- ---------
/s/ J. C. Eason Director / X / Officer / /
- ----------------------------
J. Cliff Eason
- -----------------------
Name (Typed or printed)
Date 2/2/98
-----------------
91
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 2,528,290
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,757
<MORTGAGE> 165,452
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,634,001
<CASH> 37,395
<RECOVER-REINSURE> 316,156
<DEFERRED-ACQUISITION> 289,842
<TOTAL-ASSETS> 4,673,550
<POLICY-LOSSES> 3,213,811
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 344,848
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 106,830
0
0
<COMMON> 261
<OTHER-SE> 499,060
<TOTAL-LIABILITY-AND-EQUITY> 4,673,550
835,460
<INVESTMENT-INCOME> 188,333
<INVESTMENT-GAINS> 334
<OTHER-INCOME> 47,388
<BENEFITS> 658,062
<UNDERWRITING-AMORTIZATION> 76,989
<UNDERWRITING-OTHER> 99,493
<INCOME-PRETAX> 84,071
<INCOME-TAX> 0
<INCOME-CONTINUING> 55,321
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,619
<EPS-PRIMARY> 2.15
<EPS-DILUTED> 2.13
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
