<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
______________
COMMISSION FILE NUMBER 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MISSOURI 43-1627032
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1370 TIMBERLAKE MANOR PARKWAY
CHESTERFIELD, MISSOURI 63017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(636) 736-7439
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
660 MASON RIDGE CENTER DRIVE
ST. LOUIS, MISSOURI 63141
(FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
---- ----
VOTING COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 30, 1999: 39,076,988
SHARES
NON-VOTING COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 30, 1999:
7,417,496 SHARES
<PAGE> 2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
PART I - FINANCIAL INFORMATION
<S> <C>
1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-10
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-33
3 Quantitative and Qualitative Disclosures about Market Risk 33
PART II - OTHER INFORMATION
1 Legal Proceedings 34
4 Submission of Matters to a Vote of Security Holders 34
6 Exhibits and Reports on Form 8-K 34
Signatures 35
Index to Exhibits 36
</TABLE>
2
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Fixed maturity securities
Available for sale-at fair value (amortized cost of $3,942,016 and
$3,613,602 at June 30, 1999, and December 31, 1998, respectively) $ 3,873,459 $ 3,701,617
Mortgage loans on real estate 239,954 216,636
Policy loans 519,912 513,885
Funds withheld at interest 537,018 359,786
Short-term investments 171,202 314,953
Other invested assets 20,901 22,704
----------- ----------
Total investments 5,362,446 5,129,581
Cash and cash equivalents 100,873 15,966
Accrued investment income 63,812 62,447
Premiums receivable 287,611 173,935
Funds withheld 67,358 73,042
Reinsurance ceded receivables 289,349 259,688
Deferred policy acquisition costs 422,683 351,042
Other reinsurance balances 119,485 217,677
Other assets 15,267 35,175
----------- -----------
Total assets $ 6,728,884 $ 6,318,553
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 1,935,863 $ 1,585,506
Interest sensitive contract liabilities 3,117,111 2,985,515
Other policy claims and benefits 508,801 482,049
Other reinsurance balances 90,464 177,806
Deferred income taxes 96,906 121,988
Other liabilities 95,857 105,471
Long-term debt 183,824 107,994
----------- -----------
Total liabilities 6,028,826 5,566,329
Minority interest 2,400 3,747
Commitments and contingent liabilities
Stockholders' equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) - -
Common stock (par value $.01 per share; 75,000,000 shares authorized,
39,073,613 shares issued and outstanding at June 30, 1999 and 392 392
December 31, 1998, respectively)
Non-voting common stock (par value $.01 per share; 20,000,000 shares
authorized; 7,417,496 shares issued and outstanding at March 31, 1999; 74 74
and December 31, 1998)
Additional paid in capital 486,765 486,669
Retained earnings 289,588 251,512
Accumulated other comprehensive income (59,112) 30,305
----------- -----------
Total stockholders' equity before treasury stock 717,707 768,952
Less treasury shares held of 1,141,944 and 1,178,270 at cost at
June 30, 1999, and December 31, 1998, respectively (20,049) (20,475)
----------- -----------
Total stockholders' equity 697,658 748,477
----------- -----------
Total liabilities and stockholders' equity $ 6,728,884 $ 6,318,553
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- -----------------------
1999 1998 1999 1998
----------- --------- --------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 316,765 $ 237,948 $ 670,524 $ 481,025
Investment income, net of related expenses 87,491 71,807 172,534 135,054
Realized investment gains, net 578 1,797 495 2,719
Other revenue 4,473 3,875 8,861 10,098
--------- --------- --------- ---------
Total revenues 409,307 315,427 852,414 628,896
BENEFITS AND EXPENSES:
Claims and other policy benefits 246,652 185,940 547,079 383,804
Interest credited 43,691 37,845 83,243 72,357
Policy acquisition costs and other insurance expenses 56,698 46,205 105,909 85,742
Other operating expenses 15,550 12,404 31,754 27,082
Interest expense 2,273 2,187 4,229 4,212
--------- --------- --------- ---------
Total benefits and expenses 364,864 284,581 772,214 573,197
Income before income taxes and minority interest 44,443 30,846 80,200 55,699
Provision for income taxes 18,446 11,141 32,116 19,968
--------- --------- --------- ---------
Income from continuing operations before minority interest 25,997 19,705 48,084 35,731
Minority interest in earnings of consolidated subsidiaries 350 155 459 306
--------- --------- --------- ---------
Income from continuing operations 25,647 19,550 47,625 35,425
Discontinued operations:
(Loss) on discontinued accident and health operations,
net of taxes (4,971) (332) (4,992) (298)
--------- --------- --------- ---------
Net income $ 20,676 $ 19,218 $ 42,633 $ 35,127
========= ========= ========= =========
Earnings per share from continuing operations:
Basic earnings per share $ 0.57 $ 0.49 $ 1.05 $ 0.91
========= ========= ========= =========
Diluted earnings per share $ 0.56 $ 0.48 $ 1.04 $ 0.90
========= ========= ========= =========
Earnings per share from net income:
Basic earnings per share $ 0.46 $ 0.48 $ 0.94 $ 0.90
========= ========= ========= =========
Diluted earnings per share $ 0.45 $ 0.48 $ 0.93 $ 0.89
========= ========= ========= =========
Weighted average number of diluted shares outstanding
(in thousands) 45,861 40,400 45,874 39,316
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
-------------------------------
1999 1998
----------- ------------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 42,633 $ 35,127
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (1,359) (28,460)
Premiums receivable (113,394) (30,846)
Deferred policy acquisition costs (62,518) (38,516)
Funds withheld 5,684 (52,208)
Reinsurance ceded balances (29,840) (10,082)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 235,669 246,929
Deferred income taxes 27,394 18,003
Other assets and other liabilities 3,793 (59,696)
Amortization of goodwill and value of business acquired 516 839
Amortization of net investment discounts (14,132) (6,617)
Realized investment (losses) gains, net (495) (2,719)
Minority interest in earnings 459 313
Other, net (352) (936)
----------- -----------
Net cash provided by operating activities 94,058 71,131
INVESTING ACTIVITIES:
Sales of investments:
Fixed maturity securities - Available for sale 832,459 198,109
Mortgage loans 4,543 --
Maturities of fixed maturity securites - Available for sale 28,349 33,440
Purchases of fixed maturity securities - Available for sale (1,151,972) (961,386)
Cash invested in:
Mortgage loans (35,160) (56,157)
Policy loans (6,026) (6,155)
Funds withheld at interest (177,232) (6,989)
Principal payments on:
Mortgage loans 5,925 4,076
Policy loans -- 8,794
Change in short-term and other invested assets 143,732 1,492
----------- -----------
Net cash used in investing activities (355,382) (784,776)
FINANCING ACTIVITIES:
Dividends to stockholders (4,558) (3,028)
Proceeds from stock offering -- 221,837
Reissuance of treasury stock 427 598
Excess deposits on universal life and other
investment type policies and contracts 274,494 483,314
Proceeds from debt issuance 75,000 --
----------- -----------
Net cash provided by financing activities 345,363 702,721
Effect of exchange rate changes 868 243
----------- -----------
Change in cash and cash equivalents 84,907 (10,681)
Cash and cash equivalents, beginning of period 15,966 37,395
----------- -----------
Cash and cash equivalents, end of period $ 100,873 $ 26,714
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited, condensed, consolidated financial statements of
Reinsurance Group of America, Incorporated and Subsidiaries (the "Company") have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and notes thereto included in the Company's Annual Report for the
year ended December 31, 1998, as amended.
The Company has reclassified the presentation of certain prior period segment
information to conform to the 1999 presentation. The condensed consolidated
statements of income for all periods presented have been restated, as
appropriate, to reflect the accident and health division being reported as a
discontinued operation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share on income from continuing operations (in thousands except per share
information):
<TABLE>
<CAPTION>
------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings:
Income from continuing operations
(numerator for basic and diluted
calculations) $25,647 $19,550 $47,625 $35,425
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 45,348 39,948 45,341 38,899
Equivalent shares from outstanding stock
options (denominator for diluted
calculation) 513 452 533 417
------------------------------------------------------------------------
Denominator for diluted calculation 45,861 40,400 45,874 39,316
Earnings per share:
Basic $0.57 $0.49 $1.05 $0.91
Diluted $0.56 $0.48 $1.04 $0.90
------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
For the three and six months ended June 30, 1999, certain outstanding stock
options were not included in the computation of diluted earnings per share,
because the respective exercise prices were greater than the average market
price. For the three and six months ended June 30, 1999, the number of stock
options not included in the diluted computation was 0.3 million. These options
were outstanding at the end of period.
3. COMPREHENSIVE INCOME
The following schedule reflects the change in accumulated other comprehensive
income for the three and six month periods ending June 30, 1999 and 1998
(dollars in thousands):
<TABLE>
<CAPTION>
------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 20,676 $19,218 $ 42,633 $ 35,127
Accumulated other comprehensive
Income (expense):
Unrealized gains (losses) on securities (57,849) 1,303 (89,796) 8,150
Foreign currency items (81) (1,486) 379 (1,643)
------------------------------------------------------------------------
Comprehensive income $(37,254) $19,035 $(46,784) $41,634
------------------------------------------------------------------------
</TABLE>
4. SEGMENT INFORMATION
The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies in Note 2 of the 1998 Annual Report.
The Company measures segment performance based on profit or loss from operations
before income taxes and minority interest. There are no intersegment
transactions and the Company does not have any material long-lived assets.
Investment income is allocated to the segments based upon average assets and
related capital levels deemed appropriate to support the segment business
volumes.
The Company's reportable segments are strategic business units that are
segregated by geographic region. Total revenues from continuing operations are
reflected by major product divisions between reinsurance and direct insurance.
Total revenues are primarily from external customers with significant
intercompany activity eliminated through consolidation. Information related to
revenues and income (loss) before income taxes and minority interest of the
Company's continuing operations are summarized below (in thousands).
7
<PAGE> 8
<TABLE>
<CAPTION>
----------------------------------- ------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Reinsurance:
U.S. $285,088 $238,723 $622,162 $476,667
Canada 59,497 31,179 107,036 62,817
Latin America 23,420 13,065 39,477 27,213
Asia Pacific 16,926 14,201 34,030 26,686
Other international 7,291 1,671 12,410 2,202
------------------------------------------------------------------------
Total reinsurance revenues 392,222 298,839 815,115 595,585
Total direct revenues (Latin America) 13,079 14,266 29,031 29,372
Corporate 4,006 2,322 8,268 3,939
------------------------------------------------------------------------
Total from continuing operations $409,307 $315,427 $852,414 $628,896
------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST
Reinsurance:
U.S. $ 33,293 $ 27,636 $ 70,589 $ 52,057
Canada 11,970 5,511 17,168 9,131
Latin America 346 229 1,897 907
Asia Pacific (6) 171 (7,770) 153
Other international (633) (1,188) (1,233) (2,408)
Corporate (527) (1,513) (451) (4,141)
------------------------------------------------------------------------
Total from continuing operations $ 44,443 $ 30,846 $ 80,200 $ 55,699
------------------------------------------------------------------------
</TABLE>
There have been no material changes in reportable segment assets from the
amounts disclosed in Note 16 of the 1998 Annual Report.
5. SIGNIFICANT TRANSACTION
During the second quarter of 1999, the Company entered into a new agreement
reinsuring a market value adjusted annuity product. Pursuant to the terms of the
reinsurance agreement, the annuity liabilities and funds supporting the
liabilities are withheld by the ceding company. To reflect the Company's
obligations under the agreement, the amounts withheld have been reflected in
"Funds withheld at interest" and "Interest sensitive contract liabilities" on
the balance sheet. As of June 30, 1999, approximately $153.6 million and $159.0
million has been included in funds withheld at interest and interest sensitive
contract liabilities, respectively.
The Company subsequently retrocedes approximately 5/12ths of this business to a
GenAmerica corporation subsidiary and 2/12ths to a third party retrocessionaire.
The Company reports the effect of the retrocessions by reflecting a net
receivable or payable from/to the retrocessionairres in other reinsurance
balances.
8
<PAGE> 9
6. NEW ACCOUNTING STANDARD
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," effective upon issuance. SFAS No. 137
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," deferring the effective date to all fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. It also requires that gains or losses resulting from changes in the
values of those derivatives be reported depending on the use of the derivative
and whether it qualifies for hedge accounting. The Company continues to evaluate
the effect, if any, of the implementation of SFAS No. 133 on the results of
operation, financial position, or liquidity.
7. SPECIAL SHAREHOLDERS MEETING
On June 30, 1999, the Company announced a proposal to simplify its capital
structure. A special shareholders' meeting has been called to be held on
September 1, 1999 to vote on an amendment to the Company's restated articles of
incorporation, as amended, which would convert each share of the Company's
non-voting common stock into 0.97 share of its voting common stock, with cash
paid in lieu of any fractional shares.
8. LONG TERM DEBT
The Company entered into a term loan agreement dated as of June 1, 1999 with
General American Life Insurance Company ("General American"), a wholly owned
subsidiary of GenAmerica, the Company's majority shareholder, whereby it
borrowed $75.0 million to continue expansion of the Company's business.
Interest on the term loan will be payable quarterly at 100 basis points over
the British Bankers' Association three month LIBOR rate. The term loan matures
on June 30, 2004.
9. SUBSEQUENT EVENT
GenAmerica beneficially owns approximately 52% of the outstanding common
shares of the Company and approximately 64% of the outstanding voting common
stock of the Company. On August 10, 1999, General American became subject to an
order of administrative supervision from the Missouri Department of Insurance
(the "Department"). This action arose from General American's inability to meet
substantial demands for surrenders of its stable value business, also known as
funding agreement business, without jeopardizing interests of its other
policyholders. General American stated that the unexpected high volume of
withdrawal requests from its stable value investors created severe pressure on
General American's liquidity position and its ability to convert assets within
the tight timeframe required. General American stated that it is seeking
additional time to respond to the requests of the stable value clients, making
certain all obligations are honored. General American also announced it is in
discussions with several potential strategic partners and was continuing to
pursue these discussions and other options.
9
<PAGE> 10
RGA Reinsurance Company, the primary operating subsidiary of the Company
("RGA Reinsurance"), has been able to meet its obligations and has not advised
the Department of any similar difficulties.
The stable value withdrawal activity stems from recent developments associated
with the ratings of General American and ARM Financial Group, Inc., a financial
services company which marketed a highly specialized portfolio of stable value
products to institutional investors. In late July, Moody's Investor Services
downgraded General American's financial strength rating from A2 to A3. The
downgrade caused a significant number of stable value investors to recall their
funds over a short period of time, creating the liquidity pressures. Moody's
further lowered General American's rating to Ba1 on August 9, 1999 and B1 on
August 12, 1999. Moody's traditionally has rated RGA Reinsurance with the same
financial strength as General American. Consequently, RGA Reinsurance also was
subject to the downgrade by Moody's to a Ba1 rating on August 9, 1999 and Ba3 on
August 12, 1999. Additionally, Standard & Poor's and A.M. Best downgraded RGA
Reinsurance to BBB and B++ as of August 10 and August 11, 1999, respectively.
RGA Reinsurance serves as a reinsurer to General American for approximately
$1.2 billion of stable value deposits as of August 13, 1999. The Company
has assets at a level sufficient to back those deposits. As of August 13, 1999,
the Company has approximately $130 million of liquid funds raised through
recent investment sales. The Company has incurred pre-tax losses of
approximately $10 million since June 30, 1999, in connection with asset sales.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has five main operating segments segregated primarily by geographic
region: U.S., Canada, Latin America, Asia Pacific, and other international
operations. The U.S. operations provide traditional 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, bank-owned life insurance, and
annuities. The Canada operations provide insurers with traditional reinsurance
as well as assistance with capital management activity. The Latin America
operations include direct life insurance through a joint venture and
subsidiaries in Chile and Argentina. The Latin America operations also include
traditional reinsurance and reinsurance of privatized pension products primarily
in Argentina. Asia Pacific operations provide primarily traditional life
reinsurance through RGA Reinsurance Company of Australia, Limited ("RGA
Australia") and RGA Reinsurance. Other international operations include
traditional business from Europe and South Africa, in addition to other markets
being developed by the Company. The operating segment results do not include the
corporate investment activity, general corporate expenses, interest expense of
Reinsurance Group of America, Incorporated ("RGA"), and the provision for income
tax expense (benefit). In addition, the Company's discontinued accident and
health operations are not reflected in the continuing operations of the Company.
The Company measures segment performance based upon profit or loss from
operations before income taxes and minority interest.
Consolidated income from continuing operations before income taxes and minority
interest for the second quarter and first six months of 1999 increased 44.1% and
44.0%, respectively, as compared to the prior-year periods. After tax diluted
earnings per share from continuing operations were $0.56 and $1.04 for the
second quarter and first six months of 1999, respectively, compared with $0.48
and $0.90 for the comparable 1998 periods. Earnings for the second quarter and
six months were attributed primarily to the strong performance of traditional
reinsurance in the U.S. and Canada. In addition, continued growth in the
non-traditional asset-intensive product in the U.S. has contributed to the
increase. The Latin America and Asia Pacific segments had break-even earnings
for the second quarter. The other international segment reported a loss during
the current quarter, as the underlying product earnings associated with the
development of new business have not fully absorbed the burden of start-up
costs.
GenAmerica beneficially owns approximately 52% of the outstanding common
shares of the Company and approximately 64% of the outstanding voting common
stock of the Company. On August 10, 1999, General American became subject to an
order of administrative supervision from the Missouri Department of Insurance
(the "Department"). This action arose from General American's inability to meet
substantial demands for surrenders of its stable value business, also known as
funding agreement business, without jeopardizing interests of its other
policyholders. General American stated that the unexpected high volume of
withdrawal requests from its stable value investors created severe pressure on
General American's liquidity position and its ability to convert assets within
the tight timeframe required. General American stated that it is seeking
additional time to respond to the requests of the stable value clients, making
certain all
11
<PAGE> 12
obligations are honored. General American also announced it is in
discussions with several potential strategic partners and was continuing to
pursue these discussions and other options. RGA Reinsurance Company, the primary
operating subsidiary of the Company ("RGA Reinsurance"), has been able to meet
its obligations and has not advised the Department of any similar difficulties.
The stable value withdrawal activity stems from recent developments associated
with the ratings of General American and ARM Financial Group, Inc., a financial
services company which marketed a highly specialized portfolio of stable value
products to institutional investors. In late July, Moody's Investor Services
downgraded General American's financial strength rating from A2 to A3. The
downgrade caused a significant number of stable value investors to recall their
funds over a short period of time, creating the liquidity pressures. Moody's
further lowered General American's rating to Ba1 on August 9, 1999 and B1 on
August 12, 1999. Moody's traditionally has rated RGA Reinsurance with the same
financial strength as General American. Consequently, RGA Reinsurance also was
subject to the downgrade by Moody's to a Ba1 rating on August 9, 1999 and Ba3 on
August 12, 1999. Additionally, Standard & Poor's and A.M. Best downgraded RGA
Reinsurance to BBB and B++ as of August 10 and August 11, respectively,
RGA Reinsurance serves as a reinsurer to General American for approximately
$1.2 billion of stable value deposits as of August 13, 1999. The Company has
assets at a level sufficient to back those deposits. As of August 13, 1999,
the Company has approximately $130 million of liquid funds raised through
recent investment sales. The Company has incurred pre-tax losses of
approximately $10 million since June 30, 1999, in connection with asset sales.
The Company expects to be able to meet all reinsurance and debt obligations.
The Company continues to seek the most effective alternatives to meet
obligations under the reinsurance relationship with General American as those
obligations become due. RGA Reinsurance is not obligated to forward funds to
General American under the stable value reinsurance arrangements until such
time as General American pays the related contract holders. On August 9, 1999,
the Company funded approximately $413 million to General American for
settlement of client requests in the ordinary course of business. As of August
13, 1999, General American has not released those funds to its client.
One alternative for meeting the Company's payment obligations when they become
due includes additional sales of investments over time. The extent of any
additional losses upon the disposal of investments will depend on market
conditions at the time of sale.
The stable value business contributed to the Company's pre-tax earnings in the
amount of approximately $4 million during 1998, and approximately $3 million
through June 30, 1999. These amounts of pre-tax earnings will not exist in the
future for this block of business because substantially all the business has
been surrendered. For the year ended December 31, 1998 and the six months ended
June 30, 1999, all reinsurance arrangements with General American represented
approximately 5% of the Company's consolidated earnings.
The Company has several treaties that provide clients the right to recapture,
generally subject to 90 days written notice, if its ratings fall below certain
thresholds. While the Company's ratings have fallen below these thresholds as
of August 13, 1999, the Company has not been notified of any such recaptures.
Further discussion and analysis of the results for 1999 compared to 1998 are
presented by segment.
12
<PAGE> 13
U.S. OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1999
<TABLE>
<CAPTION>
--------------------------------------------------------------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $221,047 $ 530 $ - $221,577
Investment income, net of related expenses 29,643 38,653 - 68,296
Realized investment gains (losses), net (5,152) (3,673) - (8,825)
Other revenue 278 819 2,943 4,040
--------------------------------------------------------------------
Total revenues 245,816 36,329 2,943 285,088
BENEFITS AND EXPENSES:
Claims and other policy benefits 160,308 618 - 160,926
Interest credited 11,565 31,621 - 43,186
Policy acquisition costs and other insurance
expenses 40,951 525 2,205 43,681
Other operating expenses 3,792 182 28 4,002
--------------------------------------------------------------------
Total benefits and expenses 216,616 32,946 2,233 251,795
Income before income taxes and minority
interest $ 29,200 $ 3,383 $ 710 $ 33,293
--------------------------------------------------------------------
</TABLE>
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1998
<TABLE>
<CAPTION>
--------------------------------------------------------------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $174,162 $ 687 $ - $174,849
Investment income, net of related expenses 28,222 30,901 - 59,123
Realized investment gains, net 819 596 - 1,415
Other revenue (415) - 3,751 3,336
--------------------------------------------------------------------
Total revenues 202,788 32,184 3,751 238,723
BENEFITS AND EXPENSES:
Claims and other policy benefits 128,620 2,277 - 130,897
Interest credited 11,974 25,606 - 37,580
Policy acquisition costs and other insurance
expenses 34,304 1,567 2,826 38,697
Other operating expenses 3,695 185 33 3,913
--------------------------------------------------------------------
Total benefits and expenses 178,593 29,635 2,859 211,087
Income before income taxes and minority
interest $ 24,195 $ 2,549 $ 892 $ 27,636
--------------------------------------------------------------------
</TABLE>
13
<PAGE> 14
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1999
<TABLE>
<CAPTION>
--------------------------------------------------------------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $489,095 $ 843 $ - $489,938
Investment income, net of related expenses 59,833 73,620 - 133,453
Realized investment gains (losses), net (5,575) (3,374) - (8,949)
Other revenue 5 819 6,896 7,720
--------------------------------------------------------------------
Total revenues 543,358 71,908 6,896 622,162
BENEFITS AND EXPENSES:
Claims and other policy benefits 375,682 730 - 376,412
Interest credited 19,460 62,639 - 82,099
Policy acquisition costs and other insurance
expenses 75,147 1,968 5,063 82,178
Other operating expenses 10,474 352 58 10,884
--------------------------------------------------------------------
Total benefits and expenses 480,763 65,689 5,121 551,573
Income before income taxes and minority
interest $ 62,595 $ 6,219 $1,775 $ 70,589
--------------------------------------------------------------------
</TABLE>
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1998
<TABLE>
<CAPTION>
--------------------------------------------------------------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $354,537 $ 687 $ - $355,224
Investment income, net of related expenses 52,942 58,731 - 111,673
Realized investment gains, net 1,264 837 - 2,101
Other revenue (109) - 7,778 7,669
--------------------------------------------------------------------
Total revenues 408,634 60,255 7,778 476,667
BENEFITS AND EXPENSES:
Claims and other policy benefits 273,088 2,299 - 275,387
Interest credited 22,597 49,220 - 71,817
Policy acquisition costs and other insurance
expenses 60,515 2,609 5,946 69,070
Other operating expenses 7,900 370 66 8,336
--------------------------------------------------------------------
Total benefits and expenses 364,100 54,498 6,012 424,610
Income before income taxes and minority
interest $ 44,534 $ 5,757 $1,766 $ 52,057
--------------------------------------------------------------------
</TABLE>
14
<PAGE> 15
During the second quarter and first six months of 1999, income before income
taxes and minority interest for the U.S. operations increased 20.5% and 35.6%,
respectively, over the comparable prior-year periods. These increases are
primarily the result of very favorable investment and mortality results
experienced during the second quarter. U.S. operations include traditional and
non-traditional reinsurance. The components of non-traditional reinsurance are
asset-intensive and financial reinsurance. Traditional reinsurance accounts for
the majority of the growth in this segment.
Traditional Reinsurance
The U.S. traditional reinsurance subsegment is the oldest and largest subsegment
of the Company. This subsegment provides life reinsurance to domestic clients
for a variety of life products through yearly renewable term agreements,
coinsurance, and modified coinsurance arrangements. These reinsurance
arrangements may be either facultative or automatic agreements. During the
second quarter and first six months of 1999, production remained relatively
constant, totaling $17.8 billion and $52.5 billion, respectively, of new assumed
in force, compared to $24.8 billion and $55.6 billion for the same periods in
1998. Production levels are significantly influenced by large transactions and
reporting practices of ceding companies and therefore, can fluctuate from period
to period. Management believes industry consolidation, demutualizations, and the
trend towards reinsuring mortality risks should continue to provide reinsurance
opportunities, although the level of production is uncertain.
Income before income taxes and minority interest for U.S. traditional
reinsurance increased 20.7% and 40.6% in the second quarter and first six months
of 1999, respectively. The increases in income were primarily attributable to
strong premium growth, an increase in investment income and favorable mortality
experience.
Net premiums for U.S. traditional reinsurance rose 26.9% and 38.0% in the second
quarter and first six months of 1999. New premium on in force blocks of
business, renewal premium on existing blocks of business and new business
premiums from facultative and automatic treaties all contributed to this growth.
Premium levels are significantly influenced by large transactions and reporting
practices of ceding companies and therefore can fluctuate from period to period.
Net investment income increased 5.0% and 13.0% in the second quarter and first
six months of 1999. The increases were due to the continued growth of business
in this subsegment which resulted in the invested asset base, which included
total investments, cash, and accrued investment income, increasing to $1.9
billion at June 30, 1999 from $1.8 billion at June 30, 1998.
Realized net investment losses of approximately $5.6 million were reported in
the second quarter of 1999. These losses were primarily related to the write-
off of the Company's investment in Thomson Barrett Organization PLC ("TBO"), a
20% owned investee, which was partially offset by realized gains resulting
from a repositioning of the investment portfolio. TBO was an international
financial services consulting firm specializing in the development of
distributions systems. In June, the Company relinquished its 20% interest in TBO
for nominal consideration to the other shareholders. Collaborative Stragegies,
Incorporated ("CSI"), a GenAmerica subsidiary, assumed a portion of the debt of
TBO in exchange for certain assets, including the employees,
15
<PAGE> 16
and businesses of TBO. The Company then discharged the debt of TBO and
CSI in exchange for future profits on certain business initiatives. The
Company cannot predict the timing or amount, if any, of future profits related
to these initiatives. Therefore, the Company has written off its entire
investment related to this business.
The amount of claims and other policy benefits increased 24.6% and 37.6% in the
second quarter and first six months of 1999, primarily resulting from the
increased size of the business in force. Claims and other policy benefits, as a
percentage of net premiums, were 72.5% and 76.8% in the second quarter and
first six months of 1999, respectively, compared to 73.9% and 77.0% in
prior-year periods. The decrease in ratios is a result of favorable mortality
experience during the quarter. Mortality is expected to fluctuate somewhat from
period to period, but remains fairly constant over the long term. Interest
credited relates to amounts credited on the Company's cash value
products in this subsegment, which have a significant mortality component. This
amount fluctuates with the changes in cash surrender value and changes in
interest crediting rates.
The amount of policy acquisition costs and other insurance expenses rose 19.4%
and 24.2% in the second quarter and first six months of 1999, respectively, over
the comparable prior-year periods. As a percentage of net premiums, policy
acquisition costs and other insurance expenses were 18.5% and 15.4% for the
second quarter and first six months of 1999, respectively, compared to 19.7% and
17.1% in the prior-year periods. The decreases were primarily attributable to a
change in the mix of business that resulted in less acquisition costs during the
current periods. Other operating expenses increased 32.6% for the first six
months of 1999. The increase was primarily due to planned increases in costs
associated with the growth of the business and an increase in corporate costs
that are allocated based on premium or revenues. Other operating expenses for
the second quarter and first six months of 1999 and 1998 remained relatively
constant as a percentage of net premiums.
Asset-Intensive Reinsurance
The U.S. asset-intensive reinsurance subsegment includes the reinsurance of
stable value products, annuities, and bank-owned life insurance. Most of these
agreements are coinsurance of non-mortality risks such that the Company had
recognized profits or losses primarily from the spread between the investment
earnings and the interest credited on the underlying deposit liabilities.
Income before income taxes and minority interest increased 32.7% and 8.0% in the
second quarter and first six months of 1999, respectively. The growth in
earnings was attributable to the increase in the invested asset base to $2.5
billion at June 30, 1999 from $1.9 billion at June 30, 1998. Net premiums
reported in this subsegment relate to a yearly renewable term treaty that
reinsures the mortality risk of a bank-owned life insurance product. Policy
acquisition costs and other insurance expenses relate primarily to the
commission payments and premium taxes (if applicable) on deposits received.
The stable value business contributed to the Company's pre-tax earnings in the
amount of approximately $4 million during 1998, and approximately $3 million
through June 30, 1999.
16
<PAGE> 17
These amounts of pre-tax earnings will not exist in the
future for this block of business because substantially all the business has
been surrendered.
Financial Reinsurance
The U.S. financial reinsurance subsegment includes net fees earned on financial
reinsurance agreements and the equity in the unconsolidated results from the
Company's ownership in RGA/Swiss Financial Group, L.L.C. ("RGA/Swiss").
Financial reinsurance agreements represent low mortality risk business that the
Company assumes and subsequently retrocedes with a net fee earned on the
transaction. The fees earned from the assumption of the financial reinsurance
contracts are reflected in other revenues and the fees paid to
retrocessionaires are reflected in policy acquisition costs and other insurance
expenses.
Income before taxes and minority interest decreased in the second quarter 1999
and was relatively flat in the first six months of 1999, as compared to the
prior-year periods. These results were primarily attributable to the decrease
in the amount of outstanding statutory financial reinsurance and a low volume
of new contracts being established. Policy acquisition costs and other
insurance expenses include fees paid for the subsequent retrocession of
these financial reinsurance transactions. The net fees earned from U.S. based
financial reinsurance transactions were $0.7 million and $1.8 million in the
second quarter and first six months of 1999, respectively, compared to $0.9
million and $1.8 million for the second quarter and first six months of 1998.
CANADA OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $41,253 $24,328 $76,873 $49,354
Investment income, net of related
expenses 12,035 6,372 23,972 12,476
Realized investment gains, net 6,253 381 6,253 617
Other revenue (44) 98 (62) 370
---------------------------------------------------------------------------
Total revenues 59,497 31,179 107,036 62,817
BENEFITS AND EXPENSES:
Claims and other policy benefits 39,933 21,216 75,818 44,331
Interest credited 446 216 905 461
Policy acquisition costs and other
insurance expenses 5,314 2,639 9,719 5,494
Other operating expenses 1,834 1,597 3,426 3,400
---------------------------------------------------------------------------
Total benefits and expenses 47,527 25,668 89,868 53,686
Income before income taxes and minority
interest $11,970 $ 5,511 $17,168 $ 9,131
---------------------------------------------------------------------------
</TABLE>
17
<PAGE> 18
Income before income taxes and minority interest increased 117.2% and 88.0% in
the second quarter and first six months of 1999, respectively. Excluding
realized investment gains, income before income taxes and minority interest
increased 11.4% and 28.2% in the second quarter and first six month of 1999,
respectively. The increases were driven by a growth in premiums, investment
income and realized investment gains. The investment gains were realized to
realign the investment portfolio to achieve a better match of asset and
liability cash flows. The effects of changes in the foreign exchange rate during
1999 compared to 1998 are not material.
Net premiums increased 69.6% and 55.8% in the second quarter and first six
months of 1999, respectively. The increases were the result of several major
treaties being signed in 1998 that generated new premiums in the fourth quarter
of 1998 and in 1999, as well as renewal premiums generated by the segment's
production throughout 1998. Premium levels are significantly influenced by large
transactions and reporting practices of ceding companies and therefore can
fluctuate from period to period. Net investment income increased 88.9% and 92.1%
in the second quarter and first six months of 1999 due to an increase in the
invested asset base. The invested asset base growth was due to operating cash
flows on traditional reinsurance, proceeds from capital contributions made to
the segment, and interest on the growth of funds withheld at interest related to
a large in force block added in 1998.
Claims and other policy benefits increased 88.2% and 71.0% during the second
quarter and first six months of 1999. Claims and other policy benefits as a
percentage of net premiums were 96.8% and 98.6% in the second quarter and first
six months of 1999 compared to 87.2% and 89.8% in the prior-year periods. The
higher percentages experienced so far in 1999 are primarily the result of
several large in force blocks added in 1998. These blocks are mature blocks of
level premium business in which mortality as a percentage of premiums is
expected to be higher than the historical ratios. Investment income on the
accumulated assets supporting the reserve liabilities together with renewal
premiums are sufficient to provide an appropriate profit margin. The result for
the second quarter was in line with expectations. Mortality is expected to
fluctuate somewhat from period to period but remains fairly constant over the
long term.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums totaled 12.9% and 12.6% in the second quarter and first six months of
1999, respectively, compared to 10.8% and 11.1% in the prior year periods. The
increase in ratios is primarily due to the changing mix of business to
coinsurance from yearly renewable term agreements. These coinsurance agreements
tend to have higher commission costs compared to yearly renewable term
agreements.
18
<PAGE> 19
LATIN AMERICA OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1999
<TABLE>
<CAPTION>
TOTAL LATIN
DIRECT REINSURANCE AMERICA
<S> <C> <C> <C>
REVENUES:
Net premiums $ 8,237 $23,178 $31,415
Investment income (loss), net of related expenses 4,806 (26) 4,780
Realized investment gains, net - 268 268
Other revenue 36 - 36
---------------------------------------------
Total revenues 13,079 23,420 36,499
BENEFITS AND EXPENSES:
Claims and other policy benefits 10,036 21,456 31,492
Interest credited 60 - 60
Policy acquisition costs and other insurance expenses 1,081 265 1,346
Other operating expenses 1,934 1,321 3,255
---------------------------------------------
Total benefits and expenses 13,111 23,042 36,153
Income before income taxes and minority interest $ (32) $ 378 $ 346
=============================================
</TABLE>
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1998
<TABLE>
<CAPTION>
TOTAL LATIN
DIRECT REINSURANCE AMERICA
<S> <C> <C> <C>
REVENUES:
Net premiums $12,123 $12,057 $24,180
Investment income, net of related expenses 2,264 1,008 3,272
Other revenue (121) - (121)
---------------------------------------------
Total revenues 14,266 13,065 27,331
BENEFITS AND EXPENSES:
Claims and other policy benefits 11,407 11,634 23,041
Interest credited 49 - 49
Policy acquisition costs and other insurance expenses 1,009 586 1,595
Other operating expenses 1,722 695 2,417
---------------------------------------------
Total benefits and expenses 14,187 12,915 27,102
Income before income taxes and minority interest $ 79 $ 150 $ 229
=============================================
</TABLE>
19
<PAGE> 20
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1999
<TABLE>
<CAPTION>
TOTAL LATIN
DIRECT REINSURANCE AMERICA
<S> <C> <C> <C>
REVENUES:
Net premiums $22,267 $37,974 $60,241
Investment income, net of related expenses 6,674 1,235 7,909
Realized investment gains, net 12 268 280
Other revenue 78 - 78
---------------------------------------------
Total revenues 29,031 39,477 68,508
BENEFITS AND EXPENSES:
Claims and other policy benefits 23,128 35,128 58,256
Interest credited 240 - 240
Policy acquisition costs and other insurance expenses 2,074 658 2,732
Other operating expenses 3,206 2,177 5,383
---------------------------------------------
Total benefits and expenses 28,648 37,963 66,611
Income before income taxes and minority interest $ 383 $ 1,514 $ 1,897
=============================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1998
TOTAL LATIN
DIRECT REINSURANCE AMERICA
<S> <C> <C> <C>
REVENUES:
Net premiums $25,574 $25,423 $50,997
Investment income, net of related expenses 3,846 1,790 5,636
Other revenue (48) - (48)
---------------------------------------------
Total revenues 29,372 27,213 56,585
BENEFITS AND EXPENSES:
Claims and other policy benefits 23,523 23,918 47,441
Interest credited 79 - 79
Policy acquisition costs and other insurance expenses 1,987 958 2,945
Other operating expenses 3,350 1,863 5,213
---------------------------------------------
Total benefits and expenses 28,939 26,739 55,678
Income before income taxes and minority interest $ 433 $ 474 $ 907
=============================================
</TABLE>
For the Latin American operations, income before income taxes and minority
interest increased 51.1% in the second quarter and more than doubled in the
first six months of 1999 compared to the same periods in 1998. The increase for
the second quarter and first six months of 1999 was driven by a growth in
premiums of 29.9% and 18.1% and an increase in investment income of 46.1% and
40.3%, respectively, compared to the same periods in the prior year. Results
20
<PAGE> 21
improved primarily in the reinsurance operations with continued growth in
reinsurance of privatized pensions in Argentina and developing business in
Mexico. While direct insurance business in Chile continued to be profitable,
the Company has begun exploring the possibility of selling its Chilean direct
writing operations. The Company is considering this sale in an effort to focus
on reinsurance business as opposed to direct distribution.
Direct Insurance
For the second quarter of 1999, the Latin America direct business reported a
slight loss compared to income before income taxes and minority interest of $0.1
million for the same period in 1998. For the first six months of 1999, the
income before taxes and minority interest for the Latin America direct business
remained fairly level at $0.4 million. Premiums decreased in Chile and Argentina
during the second quarter and first six months of 1999 compared to the same
periods in 1998. In Chile, the sales of annuities have been decreasing due to
market conditions while less direct premiums have been earned from privatized
pensions in Argentina as no new contracts were sold since June 1998. Investment
income more than doubled during the second quarter and increased 73.5% during
the first six months of 1999. The invested assets for the subsidiaries have
increased with growth in the business and capital contributions from RGA.
Claims and other policy benefits decreased 12.0% during the second quarter and
remained fairly level during the first six months of 1999 as a result
of the decline in new business. Interest credited represents amounts credited
on Argentine universal life products. Increases in interest credited result
from increases in direct sales of this product.
Policy acquisition costs and other insurance expenses increased 7.1% during the
second quarter and remained fairly level during the first six months of 1999
compared to the same periods in 1998. As a percentage of net premiums, policy
acquisition costs and other insurance expenses represented 13.1% and 9.3% for
the second quarter and first six months of 1999, respectively, compared to 8.3%
and 7.8% in the prior year periods. The percentages can fluctuate due to
variations in the mixture of business being written in Argentina and Chile.
Other operating expenses increased $0.2 million during the second quarter of
1999, but remained fairly consistent for the first six months of 1999 compared
to the same period in 1998.
Reinsurance
Income before income taxes and minority interest increased slightly during the
second quarter and increased $1.0 million during the first six months of 1999,
primarily from reinsurance business from privatized pensions in Argentina and
developing business in Mexico and Chile.
Net premiums almost doubled during the second quarter and increased $12.6
million for the first six months of 1999. This growth was primarily from an
increase in privatized pension reinsurance in Argentina of $12.2 million and
$13.2 million for the second quarter and first six months of 1999, respectively,
as a result of new contracts since June 1998. Net investment income decreased
21
<PAGE> 22
during the second quarter and first six months of 1999 as a result of the timing
of cash flows and a decrease in investment yield. Investment income for RGA
Reinsurance is allocated to the various operating segments on the basis of net
capital and investment performance varies with the composition of investments.
The claims and other policy benefits for the reinsurance business increased $9.8
million and $11.2 million during the second quarter and first six months of
1999, respectively, as a result of the growth in new business. Claims and other
policy benefits as a percentage of net premiums totaled 92.6% and 92.5% for the
second quarter and first six months of 1999 compared to 96.5% and 94.1% in the
prior year periods, respectively. This percentage fluctuates as claims related
to the privatized pensions in Argentina continue to develop. 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.
Policy acquisition costs and other insurance expenses decreased $0.3 million
for the second quarter and first six months of 1999. Policy acquisition costs
and other insurance expenses as a percentage of net premiums represented 1.1%
and 1.7% for the second quarter and first six months of 1999 compared to 4.9%
and 3.8% in the prior year periods, respectively. These percentages decreased
primarily due to an increase in business being written on a yearly renewable
term basis. These contracts tend to have lower commission costs compared to
coinsurance agreements.
ASIA PACIFIC OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $15,912 $12,953 $32,321 $23,406
Investment income, net of related
expenses 941 655 1,356 1,152
Realized investment gains, net (21) 1 (33) 1
Other revenue 94 592 386 2,127
---------------------------------------------------------------------------
Total revenues 16,926 14,201 34,030 26,686
BENEFITS AND EXPENSES:
Claims and other policy benefits 8,425 9,603 27,164 15,156
Policy acquisition costs and other
insurance expenses 6,175 2,790 10,444 7,627
Other operating expenses 2,213 1,516 3,960 3,529
Interest expense 119 121 232 221
---------------------------------------------------------------------------
Total benefits and expenses 16,932 14,030 41,800 26,533
(Loss) income before income taxes and
minority interest $ (6) $ 171 $(7,770) $ 153
===========================================================================
</TABLE>
22
<PAGE> 23
The Company conducts reinsurance business in the Asia Pacific region through
branch operations in Hong Kong, Japan, and a new a liaison office in Taiwan
opened during the first quarter of 1999. Business is also conducted through RGA
Australia, a wholly owned subsidiary in Australia. The principal types of
reinsurance provided in the region are life, critical care, superannuation, and
financial reinsurance.
The second quarter and first six months of 1999 showed an increase in premiums
of 22.8% and 38.1%, respectively. For the second quarter of 1999, the small loss
before income taxes and minority interest was in line with expectations, with
lower than expected claims offset by increased provisions for unreported claims.
For the first six months of 1999, the loss was caused by higher than expected
claims and increases in reserves, which primarily occurred in the first quarter.
In addition, the discontinuance of a financial reinsurance treaty with a
Japanese issuer during the first quarter of 1999 negatively affected the
segment's profitability. This treaty generated profitable fees in the second
quarter and first six months of 1998, but there were no fees earned from this
treaty in the second quarter of 1999.
Renewal premiums from the existing block of business, new business premiums from
facultative and automatic treaties, and premium flows from larger blocks of
business all contributed to the premium increase. Business premium levels are
significantly influenced by large transactions and reporting practices of ceding
companies and therefore can fluctuate from period to period. Net investment
income increased during the second quarter and first six months by 43.8% and
17.7%, respectively. Investment income for RGA Reinsurance is allocated to the
various operating segments on the basis of average net capital and investment
performance varies with
the composition of investments. Other revenue during 1998 represented profit and
risk fees associated with the financial reinsurance in Japan. No such fees were
reported in the second quarter and were substantially lower in the first six
months of 1999, as discussed above.
Claims and other policy benefits decreased by 12.3% and increased by 79.2% in
the second quarter and first six months or 1999 compared to the prior year
periods. Claims and other policy benefits for 1999 include claims paid, claims
in the course of payment and establishment of additional reserves to provide for
unreported claims. Claims and other policy benefits as a percentage of net
premiums decreased to 52.9% and increased to 84.0% in the second quarter and
first six months of 1999, respectively, from 74.1% and 64.8% in 1998. The
decrease in the second quarter was caused by lower than expected claims
throughout the region offset by the establishment of additional reserves for
unreported claims in Japan and Australia. The large increase for the first six
months was caused by several large claims in Japan and Hong Kong and the
establishment of additional reserves for unreported claims in Japan and
Australia. 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 evaluate the appropriateness of
reserve levels and adjusts the reserve levels on a periodic basis.
Policy acquisition costs and other insurance expenses increased 121.3% and 36.9%
in the second quarter and first six months of 1999, respectively, over the prior
year periods. The increases are primarily attributable to the amortization of
deferred acquisition costs related to two treaties for
23
<PAGE> 24
which the allowances paid exceed the first year premium, offset by a
decrease in expenses caused by the recapture of the financial reinsurance
treaty in Japan discussed above. Policy acquisition costs and other insurance
expenses as a percentage of net premiums were 38.8% and 32.3% in the second
quarter and first six months of 1999 versus 21.5% and 32.6% in the prior year
periods, respectively. These percentages fluctuate due to the timing of client
company reporting and variations in the mixture of business being written in
Asia Pacific. Other operating expenses for the second quarter and first six
months of 1999 increased to $2.2 million and $4.0 million, respectively. As a
percentage of premiums, other operating expenses increased to 13.9% and 12.3%
in the second quarter and first six months 1999 from 11.7% and 15.1% in the
prior year periods. The Company believes that sustained growth in premiums
should lessen the burden of start-up expenses and expansion costs.
OTHER INTERNATIONAL OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $6,608 $ 1,638 $11,150 $2,044
Investment income, net of related
expenses 363 63 528 178
Realized investment gains, net 80 - 120 -
Other revenue 240 (30) 612 (20)
---------------------------------------------------------------------------
Total revenues 7,291 1,671 12,410 2,202
BENEFITS AND EXPENSES:
Claims and other policy benefits 5,877 1,183 9,429 1,489
Policy acquisition costs and other
insurance expenses 182 484 835 606
Other operating expenses 1,865 1,192 3,379 2,515
---------------------------------------------------------------------------
Total benefits and expenses 7,924 2,859 13,643 4,610
Loss before income taxes and minority
interest $ (633) $(1,188) $(1,233) $(2,408)
===========================================================================
</TABLE>
The other international segment is the newest segment of the Company. This
segment provides life reinsurance to international clients throughout Europe and
South Africa. The principal type of reinsurance being provided has been life
reinsurance for a variety of life products through yearly renewable term and
coinsurance agreements. These agreements may be either facultative or automatic
agreements. The Company has efforts underway to license a life reinsurance
subsidiary in London. In addition, the Company has offices in Cape Town and
Johannesburg, South Africa.
Net premiums increased to $6.6 million and $11.2 million in the second quarter
and first six months of 1999, respectively, primarily as a result of business
generated from an automatic treaty with a United Kingdom client. Investment
income for RGA Reinsurance is allocated to the
24
<PAGE> 25
segment on the basis of average net capital and the investment performance
varies with the composition of investments.
Claims and other policy benefits rose slightly as a percentage of premiums to
88.9% and 84.6% in the second quarter and first six months of 1999,
respectively, from 72.2% and 72.8% during the same periods in 1998. Year to year
comparisons of premiums and claims and other policy benefits are not considered
meaningful due to the start-up nature of this segment. Other operating expenses
increased $0.7 million and $0.9 million during the second quarter and first six
months of 1999, respectively, compared to the same periods in 1998. The overall
increase in operating expenses was attributed to increases in costs associated
with the expansion efforts within the segment.
CORPORATE AND OTHER SELECTED CONSOLIDATED INFORMATION
Corporate activity generally represents investment income on the undeployed
proceeds from the Company's capital raising efforts, corporate expenses that
include unallocated overhead and executive costs, as well as the interest on
corporate debt. In addition, the provision for income taxes is generally
calculated based on the overall operations of the Company.
Consolidated investment income from continuing operations increased 21.8% and
27.8% during the second quarter and first six months of 1999, respectively. The
cost basis of invested assets increased $0.8 billion, or 21.6% from June 30,
1998. The increase in the invested assets was a result of an increase in
operating cash flows, reinsurance transactions involving deposits for
asset-intensive products, and proceeds from the Company's issuance of non-voting
common stock in June 1998. The average yield earned on investments was 6.70% and
7.03% for the first six months of 1999 and 1998, respectively. The decrease in
overall yield reflected a general decline in interest rates and the increase in
assets supporting the stable value reinsurance product that are generally of a
shorter duration and carry a lower average yield. Investment income has been
allocated to the operational segments on the basis of average required capital
per segment.
Consolidated interest expense remained relatively flat during the second quarter
and first six months of 1999 and 1998. Interest expense relates primarily to the
Company's 7 1/4 % Senior Notes ("Senior Notes"), drawdowns on a bank line of
credit, and the financing of a portion of Australian Holdings. Interest related
to the Senior Notes was $1.8 million in the second quarters of 1999 and 1998.
Consolidated other expenses represent general corporate expenses that are not
allocated to the operational segments.
Consolidated provision for income taxes for continuing operations increased
65.6% and 60.8% for the second quarter and first six months of 1999,
respectively, as a result of higher pre-tax income and losses experienced in
foreign subsidiaries. Income tax expense from continuing operations represented
approximately 41.5% and 40.0% of pre-tax income for the second quarter and first
six months of 1999 as compared to 36.1% and 35.8% for 1998, respectively. The
25
<PAGE> 26
increases in the effective tax rates resulted from operating losses from foreign
subsidiaries for which deferred tax assets can not be fully established.
DISCONTINUED OPERATIONS
At December 31, 1998, the Company formally reported its accident and health
division as a discontinued operation for financial reporting purposes. The
accident and health division was placed into run-off with all treaties
(contracts) being terminated at the earliest possible date. This discontinued
segment reported a loss of $5.0 million for the second quarter and first six
months of 1999 from a loss of $0.3 million for the comparable prior year
periods resulting from adverse development on the treaties in run-off. The
nature of the underlying risks is such that the claims may take years to reach
the reinsurers involved. Thus, the Company expects to pay claims out of
existing reserves over a number of years as the level of business diminishes.
The experience on this block of business will continue to be monitored as the
business runs off.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 1999, the Company generated $94.1 million in cash
from operating activities. These increases were offset by cash used for
investing of $355.4 million, withdrawals on asset-intensive and other investment
type policies and contracts of $345.4 million, and dividends to stockholders of
$4.6 million. The sources of funds of the Company's operating subsidiaries
consist of premiums received from ceding insurers, investment income, and
proceeds from sales and redemption of investments. Premiums are generally
received in advance of related claim payments. Funds are primarily applied to
policy claims and benefits, operating expenses, income taxes, and investment
purchases.
As the Company continues its expansion efforts, management continually analyzes
capital adequacy issues. The Company has access to a $25.0 million demand line
of credit. At June 30, 1999, $15.0 million was drawn upon that line. This
liability is included in other liabilities on the balance sheet at June 30,
1999. During the second quarter of 1999, the Company borrowed $75.0 million in
the form of a term loan from General American to continue expansion of the
Company's business. The term loan is included in long term debt on the balance
sheet at June 30, 1999. The ability of the Company and Australian Holdings to
make principal and interest payments, and of the Company to continue to pay
dividends to stockholders, is ultimately dependent on the earnings and surplus
of the Company's subsidiaries, the investment earnings on the undeployed funds
at the Company, and the Company's ability to raise additional capital. At June
30, 1999, RGA Reinsurance and RGA Canada had statutory capital and surplus of
$378.3 million and $124.4 million, respectively. The transfer of funds from the
subsidiaries to the Company is subject to applicable insurance laws and
regulations. Any future increases in liquidity needs due to relatively large
policy loans or unanticipated material claim levels would be met first by
operating cash flows and then by selling fixed-income securities or short-term
investments.
RGA Reinsurance serves as reinsurer to General American for approximately $1.6
billion of stable value deposits. On August 10, 1999, General American became
subject to an order of administration supervision from the Missouri Department
of Insurance. This action arose from
26
<PAGE> 27
General American's inability to meet substantial demands for surrenders of its
stable value business, also known as funding agreement business, without
jeopardizing interests of its other policyholders. The Company has assets at a
level sufficient to back those deposits. As of August 13, 1999, the Company
has approximately $130 million of liquid funds raised through recent investment
sales. The Company has incurred pre-tax losses of approximately $10 million
since June 30, 1999, in connection with asset sales.
The Company expects to be able to meet all reinsurance and debt obligations.
The Company continues to seek the most effective alternatives to meet
obligations under the reinsurance relationship with General American as those
obligations become due. RGA Reinsurance is not obligated to forward funds to
General American under the stable value reinsurance arrangements until such
time as General American pays the related contract holders. On August 9, 1999,
the Company funded approximately $413 million to General American for
settlement of client requests in the ordinary course of business. As of August
13, 1999, General American has not released those funds to its clients.
One alternative for meeting the Company's payment obligations when they become
due includes additional sales of investments over time. The extent of any
additional losses upon the disposal of investments will depend on market
conditions at the time of sale.
INVESTMENTS
Invested assets increased to $5.4 billion at June 30, 1999, compared to $5.1
billion at December 31, 1998. The increase resulted primarily from additional
funds withheld at interest provided by a significant reinsurance transaction
during the second quarter, proceeds from a $75.0 million term loan note and
positive operating cash flows. The Company has historically generated positive
cash flows from operations.
At June 30, 1999, the Company's portfolio of fixed maturity securities available
for sale had net unrealized losses before tax of $68.6 million.
MARKET RISK
Market risk is the risk of loss that may occur when fluctuation in interest and
currency exchange rates and equity and commodity prices change the value of a
financial instrument. Both derivative and nonderivative financial instruments
have market risk so the Company's risk management extends beyond derivatives to
encompass all financial instruments held that are sensitive to market risk. RGA
is primarily exposed to interest rate risk and foreign currency risk.
Interest Rate Risk
The Company manages interest rate risk and credit risk to maximize the return on
the Company's capital and to preserve the value created by its business
operations. As such, certain management monitoring processes are designed to
minimize the impact of sudden and sustained changes in interest rates on fair
value, cash flows, and net interest income.
The Company's exposure to interest rate price risk and interest rate cash flow
risk is reviewed on a quarterly basis. Interest rate price risk exposure is
measured using interest rate sensitivity analysis to determine the change in
fair value of the Company's financial instruments in the event of a hypothetical
change in interest rates. Interest rate cash flow risk exposure is measured
using interest rate sensitivity analysis to determine the Company's variability
in cash flows in the event of a hypothetical change in interest rates. If
estimated changes of fair value, net interest
27
<PAGE> 28
income, and cash flows are not within the limits established by the Board,
the Board may direct management to adjust its asset and liability mix to
bring interest rate risk within Board-approved limits.
Interest rate sensitivity analysis is used to measure the Company's interest
rate price risk by computing estimated changes in fair value of fixed rate
assets in the event of a range of assumed changes in market interest rates. This
analysis assesses the risk of loss in market risk sensitive fixed rate
instruments in the event of a sudden and sustained 100 to 300 basis points
increase or decrease in the market interest rates. The following table presents
the Company's projected change in fair value of all financial instruments for
the various rate shock levels at June 30, 1999. All market risk sensitive
instruments presented in this table are available for sale. RGA has no trading
securities.
The calculation of fair value is based on the net present value of estimated
discounted cash flows expected over the life of the market risk sensitive
instruments, using market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources as of June
30, 1999, with adjustments made to reflect the shift in the Treasury yield curve
as appropriate.
<TABLE>
<CAPTION>
Estimated Fair Value Percentage
Percentage Change in Interest Rates of Fixed Rate Hypothetical Hypothetical
(Dollars in thousands) Instruments Change Change
- ----------------------------------- -------------------- ------------ ------------
<S> <C> <C> <C>
300 basis point rise $2,170,026 $ (586,535) -21.28%
200 basis point rise $2,334,986 $ (421,575) -15.29%
100 basis point rise $2,528,414 $ (228,147) -8.28%
Base Scenario $2,756,561 $ - 0.00%
100 basis point decline $3,028,669 $ 272,108 9.87%
200 basis point decline $3,366,532 $ 609,972 22.13%
300 basis point decline $3,823,234 $1,066,673 38.70%
</TABLE>
At June 30, 1999, the Company's estimated changes in fair value were within the
targets outlined in the Company's investment policy.
Interest rate sensitivity analysis is also used to measure the Company's
interest rate cash flow risk by computing estimated changes in the cash flows
expected in the near term attributable to floating rate assets, liabilities, and
off-balance sheet items in the event of a range of assumed changes in market
interest rates. This analysis assesses the risk of loss in cash flows in the
near term in market risk sensitive floating rate instruments in the event of a
sudden and sustained 100 to 300 basis points increase or decrease in the market
interest rates. The following table presents the Company's projected change in
cash flows in the near term associated with floating-rate instruments for
various rate shock levels at June 30, 1999. All floating rate interest sensitive
instruments presented in this table are classified as available for sale.
28
<PAGE> 29
The floating rate instruments are primarily invested to support stable value
liabilities included in interest sensitive contract liabilities on the
Company's balance sheet. See further discussion of the Company's stable value
operations beginning on page 9.
<TABLE>
<CAPTION>
Estimated Cash Flows Percentage
Percentage Change in Interest Rates of Floating Rate Hypothetical Hypothetical
(Dollars in thousands) Instruments Change Change
- ----------------------------------- -------------------- ------------ ------------
<S> <C> <C> <C>
300 basis point rise $258,683 $27,835 12.06%
200 basis point rise $249,352 $18,504 8.02%
100 basis point rise $240,439 $ 9,591 4.15%
Base Scenario $230,848 $ - 0.00%
100 basis point decline $235,289 $ 4,441 1.92%
200 basis point decline $252,998 $22,150 9.60%
300 basis point decline $260,750 $29,902 12.95%
</TABLE>
Even though the cash flows from coupon payments move in the same direction as
interest rates for the Company's floating rate instruments, the volatility in
mortgage prepayments more than offsets the cash flows from interest. At June 30,
1999, the Company's estimated changes in cash flows were within the targets
outlined in the Company's investment policy.
Computations of prospective effects of hypothetical interest rate changes are
based upon numerous assumptions, including relative levels of market interest
rates and mortgage prepayments, and should not be relied upon as indicative of
future results. Further, the computations do not contemplate any actions
management could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
computation of the estimated fair value of fixed rate instruments and the
estimated cash flows of floating rate instruments, which estimates constitute
forward-looking statements. Actual values may differ materially from the
projections presented due to a number of factors, including, without
limitation, market conditions that may vary from assumptions used in the
calculation of the fair value. In the event of a change in interest rates,
prepayments could deviate significantly from those assumed in the calculation
of fair value. Finally, the desire of many borrowers to repay their fixed-rate
mortgage loans may decrease in the event of interest rate increases.
FOREIGN CURRENCY RISK
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.
29
<PAGE> 30
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.
YEAR 2000
Many computer systems worldwide currently record years in a two-digit format. If
not addressed, such computer systems will be unable to properly interpret dates
beyond the year 1999, which could lead to business disruptions in the U.S. and
internationally (the "Year 2000" issue). The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which a company
operates. Additionally, companies must coordinate with other entities with which
they interact electronically.
The Company does not have a mainframe computer and its "legacy" systems are
based on technology that correctly handles the Year 2000 issue. A legacy system
typically represents older systems that are not currently being maintained or
enhanced. As the Company continues to grow, the steady investment in technology
has allowed it to keep its systems current and handle impending problems, such
as Year 2000, in the normal course of business.
Assessment
The Company has established a plan to address the Year 2000 issue and the work
being performed in accordance with that plan is progressing on schedule. The
Company identified all systems that are critical to the Company's reinsurance
operations and has completed substantial testing of those critical systems. As
of July 1, 1999, the Company continues to coordinate information relating to
some of its foreign subsidiaries and ventures and has completed significant
portions of the testing of its two direct writing companies in Latin America.
Inventories of substantially all software, hardware, and trading partners are
compiled in a Year 2000 database. Each of these items has been researched for
Year 2000 compliance, and all required components have been verified as Year
2000 compliant. In addition to internal systems, the Company relies on external
systems and has included in the assessment and inventories those systems of
significant external parties such as vendors, ceding companies and
retrocessionaires. There is no known method to completely determine compliance
of external systems, but an effort is being made to assure compliance of these
external systems to the extent practicable. The Company has been working with
external parties in conjunction with the Company's testing efforts; however the
Company could be adversely affected if external parties fail to comply with the
Year 2000 issue. This is a situation over which the Company has no direct
control.
30
<PAGE> 31
With respect to non-information technology systems, the Company has moved its
St. Louis office and believes that the new leased premises and all equipment
with embedded technology is upgraded and Year 2000 compliant. The Company
believes the only material non-information technology system outside of St.
Louis is in the premise utilized by the Company's Canadian segment. The Company
has received confirmation from that building's management that the building will
be functional, accessible, and not materially affected by the Year 2000 issue.
Testing
The Company completed testing of all critical systems by December 31, 1998.
These tests revealed minor issues that have been addressed. As of December 31,
1998, 100% of the core systems have been tested successfully. The Company has
since concluded gathering data from external parties. It is anticipated that the
testing and assessment of the Company's Year 2000 readiness will be completed in
1999, in accordance with the Company's plan.
Contingency Plan
An outline of a contingency plan has been developed to reduce the possibility
that any disruption caused by the Year 2000 issue would materially affect the
Company's business or results of operations; however, no assurance can be given
that the contingency plan would be successful. A more detailed version of the
contingency plan is being developed, and will be completed by the end of the 3rd
quarter of 1999. The contingency plan was formulated in conjunction with the
compliance testing process. The plan includes an assessment of the Company's
ability to manually enter data for clients that cannot provide electronic data,
to estimate data for clients that have Year 2000 issues and cannot provide data
to the Company, and to implement a recovery plan in the case of certain Year
2000 failures.
Costs
The Company expects to incur most of the costs of the Year 2000 effort
primarily from testing of the administrative systems in St. Louis and Montreal.
These systems support the administration of the majority of the Company's
business. Therefore, the combined costs of these two locations would
effectively represent substantially all of the Company's Year 2000 costs. The
Company is continuing to work with its subsidiaries to ensure their compliance
with the Year 2000 effort. Costs for St. Louis and Montreal were approximately
$300,000 through December 31, 1998. The Company incurred costs of
approximately $55,000 during 1999 and anticipates that the remaining costs for
the project will be approximately $150,000 for the remainder of 1999 and
$85,000 in 2000, respectively. The Company has estimated future costs based on
its current knowledge and testing.
The Company met its goal to be substantially Year 2000 compliant by June 30,
1999. However, key external parties or service providers may fail to make their
systems Year 2000 compliant by the necessary dates. There can be no assurances
that this goal will be met or that there will not be failures on the part of
external parties. The failure to correct a material Year 2000 problem could
result in an interruption in, or failure of, certain normal business activities
and operations. Such failures could adversely affect the Company's results of
operations, liquidity and financial
31
<PAGE> 32
condition, particularly as a result of the uncertainty of the Year 2000
readiness of third-party suppliers and clients. The Company believes that, with
the completion of the compliance effort, the possibility of significant
interruptions of normal operations will be significantly reduced. The Company
also believes that a reasonably likely worst case scenario would occur in the
event that clients are unable to provide data to process the reinsurance
activity. In this event, the Company would estimate existing business based on
the historical information in the Company's database. New business would be
calculated based on the initial information used by the Company during its
evaluation of the client's business. In these scenarios, the Company believes
it can still administer reinsurance business based on estimates until reliable
client data can be received.
NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," effective upon issuance. SFAS No. 137
amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," deferring the effective date to fiscal quarters beginning after
June 15, 2000. SFAS No. 133 requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair value. It also requires
that gains or losses resulting from changes in the values of those derivatives
be reported depending on the use of the derivative and whether it qualifies for
hedge accounting. The Company has not yet determined the effect, if any, of the
implementation of SFAS No. 133 on the results of operation, financial position,
or liquidity. The Company plans to adopt the provisions of SFAS No. 133 in 2000.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements included in this Form 10-Q regarding future financial
performance and results and the other statements that are not historical facts
are "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These "forward-looking" statements include,
without limitation, certain statements in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Such statements
also may include, but are not limited to, statements regarding the Company's
ability to meet reinsurance and debt obligations, projections of earnings,
revenues, income or loss, estimated fair values of fixed rate instruments,
estimated cash flows of floating rate instruments, capital expenditures,
plans for future operations and financing needs or plans, growth prospects and
targets, industry trends, trends in or expectations regarding operations and
capital commitments, the sufficiency of claims reserves, and Year 2000
compliance as well as assumptions relating to the foregoing. The words "expect,"
"project," "estimate," "anticipate," "should," "believe" and similar expressions
also are intended to identify forward-looking statements. Forward-looking
statements are inherently subject to risks and uncertainties, some of which
cannot be predicted or quantified. Future events and actual results, performance
and achievements could differ materially from those set forth in, contemplated
by or underlying the forward-looking statements.
32
<PAGE> 33
Numerous factors could cause actual results and events to differ materially
from those expressed or implied by forward-looking statements including,
without limitation, (1) the timing of reinsurance funding obligations arising
out of arrangements with General American, (2) market conditions and the timing
of sales of investment securities, (3) regulatory action taken by the Missouri
Department of Insurance with respect to General American or the Company or its
subsidiaries, (4) changes in the Company's credit ratings and the effect of
recent ratings downgrades on the Company's future results of operations and
financial condition, (5) material changes in mortality and claims experience,
(6) competitive factors and competitors' responses to the Company's
initiatives, (7) general economic conditions affecting the demand for insurance
and reinsurance in the Company's current and planned markets, (8) successful
execution of the Company's entry into new markets (9) successful development
and introduction of new products, (10) the stability of governments and
economies in foreign markets, (11) fluctuations in U.S. and foreign currency
exchange rates, interest rates and securities and real estate markets, (12) the
success of the Company's clients, including General American Life Insurance
Company ("General American") and its affiliates, and (13) changes in laws,
regulations and accounting standards applicable to the Company and its
subsidiaries. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF JUNE 30, 1999. ALL SUBSEQUENT WRITTEN AND
ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON
ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THIS CAUTIONARY
STATEMENT. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO RELEASE PUBLICLY
ANY REVISIONS TO SUCH FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS AND
CIRCUMSTANCES AFTER THE DATE HEREOF TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Item 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Market Risk" and "--Foreign Currency Risk" which are
incorporated by reference herein.
33
<PAGE> 34
PART II - OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, the Company is subject to litigation and arbitration related
to its reinsurance business and to employment-related matters in the normal
course of its business. Management does not believe that the Company is a party
to any such pending litigation or arbitration that would have a material adverse
effect on its future operations.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders was held on May 26, 1999
(b) At the Annual Meeting, the following proposals were voted upon by the
shareholders as indicated below:
1. To elect three directors to serve terms ending in 2002.
<TABLE>
<CAPTION>
Directors Voted For Withheld
- --------- --------- --------
<S> <C> <C>
J. Cliff Eason 35,583,678 115,504
Leonard M. Rubenstein 35,583,603 115,579
H. Edwin Trusheim 35,583,763 115,419
</TABLE>
2. To authorize the sale of the Company's Voting Common Stock or Non-voting
Common Stock from time to time to GenAmerica Corporation, a significant
shareholder of the Company, or its affiliates.
<TABLE>
<CAPTION>
Voted
Voted For Against Abstained No Vote
- --------- ------- --------- -------
<S> <C> <C> <C>
28,942,015 5,224,924 110,735 1,421,508
</TABLE>
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) See index to exhibits.
(b) No reports were filed on Form 8-K during the three months ended June 30,
1999.
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Reinsurance Group of America, Incorporated
By: /s/ A. Greig Woodring August 16, 1999
-----------------------------------------
A. Greig Woodring
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Jack B. Lay August 16, 1999
-----------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
35
<PAGE> 36
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation of Reinsurance Group of
America, Incorporated, as amended, incorporated by reference to
Exhibit 3.1 to Registration Statement on Form S-1 (No. 33-58960)
filed on March 2, 1993 and Exhibit 3.3 to Registration Statement
on Form S-3 (No. 333-5177) filed on June 4, 1998
3.2 Bylaws of RGA incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-1 (No. 33-58960) filed on
March 2, 1993
3.3 Form of Certificate of Designations for Series A Junior
Participating Preferred Stock incorporated by reference to
Exhibit 3.3 to Amendment No. 1 to Registration Statement on
Form S-1 (No. 33-58960) filed on April 14, 1993
27.1 Financial Data Schedule
36
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated financial statements of the registrant and is qualified
in its entirety by reference to such financial statements
</LEGEND>
<CIK> 0000898174
<NAME> REINSURANCE GROUP OF AMERICA
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 3,873,459
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,781
<MORTGAGE> 239,954
<REAL-ESTATE> 2,435
<TOTAL-INVEST> 5,362,446
<CASH> 100,873
<RECOVER-REINSURE> 289,349
<DEFERRED-ACQUISITION> 422,683
<TOTAL-ASSETS> 6,728,884
<POLICY-LOSSES> 5,052,974
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 508,801
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 183,824
0
0
<COMMON> 466
<OTHER-SE> 697,192
<TOTAL-LIABILITY-AND-EQUITY> 6,728,884
670,524
<INVESTMENT-INCOME> 172,534
<INVESTMENT-GAINS> 495
<OTHER-INCOME> 8,861
<BENEFITS> 630,322
<UNDERWRITING-AMORTIZATION> 46,424
<UNDERWRITING-OTHER> 59,485
<INCOME-PRETAX> 80,200
<INCOME-TAX> 32,116
<INCOME-CONTINUING> 47,625
<DISCONTINUED> (4,992)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,633
<EPS-BASIC> 0.94
<EPS-DILUTED> 0.93
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
