<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 MARCH 31, 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)
660 MASON RIDGE CENTER DRIVE
ST. LOUIS, MISSOURI 63141
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(314) 453-7439
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-----------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
VOTING COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF APRIL 30, 1999:
37,929,669 SHARES
NON-VOTING COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF
APRIL 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> <C>
1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income (Unaudited)
Three months ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-9
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-27
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 27
6 Exhibits and Reports on Form 8-K 28
Signatures 29
Index to Exhibits 30
</TABLE>
2
<PAGE> 3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Dollars in thousands)
ASSETS
<S> <C> <C>
Fixed maturity securities
Available for sale-at fair value (amortized cost of $3,628,435 and
$3,613,602 at March 31, 1999, and December 31, 1998, respectively) $ 3,658,689 $ 3,701,617
Mortgage loans on real estate 221,956 216,636
Policy loans 513,886 513,885
Funds withheld at interest 381,605 359,786
Short-term investments 377,673 314,953
Other invested assets 22,016 22,704
------------ -----------
Total investments 5,175,825 5,129,581
Cash and cash equivalents 30,632 15,966
Accrued investment income 78,089 62,447
Premiums receivable 222,370 173,935
Funds withheld 67,987 73,042
Reinsurance ceded receivables 288,998 259,688
Deferred policy acquisition costs 380,679 351,042
Other reinsurance balances 135,945 217,677
Other assets 30,196 35,175
------------ -----------
Total assets $ 6,410,721 $ 6,318,553
============ ===========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Future policy benefits $ 1,701,060 $ 1,585,506
Interest sensitive contract liabilities 2,975,468 2,985,515
Other policy claims and benefits 494,005 482,049
Other reinsurance balances 107,988 177,806
Deferred income taxes 108,408 121,988
Other liabilities 173,852 105,471
Long-term debt 109,771 107,994
------------ -----------
Total liabilities 5,670,552 5,566,329
Minority interest 3,069 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 March 31, 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, 1999)
Additional paid in capital 486,704 486,669
Retained earnings 271,184 251,512
Accumulated other comprehensive income (1,182) 30,305
------------- ------------
Total stockholders' equity before treasury stock 757,172 768,952
Less treasury shares held of 1,143,944 and 1,178,270 at cost at
March 31, 1999, and December 31, 1998, respectively (20,072) (20,475)
------------- ------------
Total stockholders' equity 737,100 748,477
------------- ------------
Total liabilities and stockholders' equity $ 6,410,721 $ 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 ending March 31, 1999 1998
(Dollars in thousands, except per share data) ---- ----
<S> <C> <C>
REVENUES:
Net premiums $ 353,759 $243,077
Investment income, net of related expenses 85,043 63,247
Realized investment gains (losses), net (83) 922
Other revenue 4,388 6,223
---------- --------
Total revenues 443,107 313,469
BENEFITS AND EXPENSES:
Claims and other policy benefits 300,427 197,864
Interest credited 39,552 34,512
Policy acquisition costs and other insurance expenses 49,211 39,537
Other operating expenses 16,204 14,678
Interest expense 1,956 2,025
---------- --------
Total benefits and expenses 407,350 288,616
---------- --------
Income before income taxes and minority interest 35,757 24,853
Provision for income taxes 13,670 8,827
---------- --------
Income from continuing operations before minority interest 22,087 16,026
Minority interest in earnings of consolidated subsidiaries 109 151
---------- --------
Income from continuing operations 21,978 15,875
Discontinued operations:
(Loss) on / income from discontinued accident and health
operations, net of taxes (21) 34
---------- --------
Net income $ 21,957 $ 15,909
========== ========
Earnings per share from continuing operations:
Basic earnings per share $ 0.48 $ 0.42
========== ========
Diluted earnings per share $ 0.48 $ 0.42
========== ========
Earnings per share from net income:
Basic earnings per share $ 0.48 $ 0.42
========== ========
Diluted earnings per share $ 0.48 $ 0.42
========== ========
Weighted average number of diluted shares outstanding
(in thousands) 45,874 38,232
========== ========
</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>
Three months ended
March 31,
--------------------------------
1999 1998
-------- ---------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 21,957 $ 15,909
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (15,628) (16,496)
Premiums receivable (48,232) 1,078
Deferred policy acquisition costs (29,227) (21,028)
Funds withheld 5,055 (14,798)
Reinsurance ceded balances (29,375) (24,235)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 141,786 124,553
Deferred income taxes 1,756 8,538
Other assets and other liabilities 73,265 (51,980)
Amortization of goodwill and value of business acquired 202 316
Amortization of net investment discounts 721 (581)
Realized investment (losses) gains, net 83 (922)
Minority interest in earnings 109 153
Other, net (3,275) (458)
---------- ---------
Net cash provided by operating activities 119,197 20,049
INVESTING ACTIVITIES:
Sales of investments:
Fixed maturity securities - Available for sale 392,613 110,752
Mortgage loans 1,736 -
Maturities of fixed maturity securites - Available for sale 17,512 19,176
Purchases of fixed maturity securities - Available for sale (408,820) (526,902)
Cash invested in:
Mortgage loans (11,474) (23,767)
Funds withheld at interest (21,820) (2,394)
Principal payments on:
Mortgage loans 2,338 511
Policy loans - 8,794
Change in short-term and other invested assets (64,463) 85,735
---------- ---------
Net cash used in investing activities (92,378) (328,095)
FINANCING ACTIVITIES:
Dividends to stockholders (2,285) (1,514)
Reissuance of treasury stock 438 387
Excess (withdrawals) deposits on universal life and other
investment type policies and contracts (10,047) 310,998
---------- ---------
Net cash (used in) provided by financing activities (11,894) 309,871
Effect of exchange rate changes (259) 107
---------- ---------
Change in cash and cash equivalents 14,666 1,932
Cash and cash equivalents, beginning of period 15,966 37,395
---------- ---------
Cash and cash equivalents, end of period $ 30,632 $ 39,327
========== =========
</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
MARCH 31, 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 three months ended March 31, 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.
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 accounted for as
a discontinued operation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share information):
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $21,957
- ---------------------------------------------------------------------------------------------------------------------
BASIC EPS:
Net earnings available to common
shareholders 21,957 45,334 $0.48
EFFECT OF DILUTIVE SECURITIES:
Stock options 540
- ---------------------------------------------------------------------------------------------------------------------
DILUTED EPS:
Net earnings available to common
shareholders and assumed full conversions $21,957 45,874 $0.48
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE> 7
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Income Shares Per Share
(numerator) (denominator) Amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME $15,909
- ---------------------------------------------------------------------------------------------------------------------
BASIC EPS:
Net earnings available to common shareholders 15,909 37,827 $0.42
EFFECT OF DILUTIVE SECURITIES:
Stock options 405
- ---------------------------------------------------------------------------------------------------------------------
DILUTED EPS:
Net earnings available to common
shareholders and assumed full conversions $15,909 38,232 $0.42
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
3. COMPREHENSIVE INCOME
Total comprehensive (loss) income for the three months ended March 31, 1999 and
1998 was a loss of $9.5 million and income of $22.6 million, respectively.
The following schedule reflects the change in accumulated other comprehensive
income for the period ending March 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
ACCUMULATED
UNREALIZED OTHER
FOREIGN GAINS (LOSSES) COMPREHENSIVE
CURRENCY ITEMS ON SECURITIES INCOME (LOSS)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1998 $(14,968) $45,273 $30,305
Current period change 460 (31,947) (31,487)
--- -------- --------
Balance at March 31, 1999 $(14,508) $13,326 $(1,182)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The following schedule reflects the change in accumulated other comprehensive
income for the period ending March 31, 1998 (dollars in thousands):
7
<PAGE> 8
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
ACCUMULATED
UNREALIZED OTHER
FOREIGN GAINS ON COMPREHENSIVE
CURRENCY ITEMS SECURITIES INCOME
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at December 31, 1997 $(8,201) $67,290 $59,089
Current period change (157) 6,847 6,690
----- ----- -----
Balance at March 31, 1998 $(8,358) $74,137 $65,779
- ----------------------------------------------------------------------------------------------------------------
</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).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDING MARCH 31, 1999 1998
<S> <C> <C>
REVENUES
Reinsurance:
U.S. $337,074 $ 237,944
Canada 47,539 31,638
Latin America 16,057 14,148
Asia Pacific 17,104 12,485
Other international 5,119 531
-------- ---------
Total reinsurance revenues 422,893 296,746
Direct insurance:
Latin America 15,952 15,106
-------- ---------
Total direct revenues 15,952 15,106
Corporate 4,262 1,617
Total from continuing operations $443,107 $ 313,469
==================================
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDING MARCH 31, 1999 1998
(Dollars in thousands)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST
<S> <C> <C>
U.S. $ 37,296 $ 24,421
Canada 5,198 3,620
Latin America 1,551 678
Asia Pacific (7,764) (18)
Other international (600) (1,220)
Corporate 76 (2,628)
-----------------------------------
Total from continuing operations $ 35,757 $ 24,853
===================================
</TABLE>
There have been no material changes in reportable segment assets from the
amounts disclosed in Note 16 of the 1998 Annual Report.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has five main operational 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 Company ("RGA Reinsurance"). Other
international operations include traditional business from Europe and South
Africa, in addition to other markets being developed by the Company. The
operational segment results do not include the corporate investment activity,
general corporate expenses, interest expense of 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 on profit or loss from
operations before income taxes and minority interest.
Consolidated income from continuing operations before income taxes and minority
interest increased 43.9% in 1999. After tax diluted earnings per share from
continuing operations were $0.48 for 1999 compared with $0.42 for 1998. Earnings
were attributed primarily to the strong performance of traditional reinsurance
in the U.S. and Canada. In addition, continued growth in non-traditional
products in the U.S. and developing business in Latin America has contributed to
the increase. For the Asia Pacific segment, results were lower with a loss in
Australia and losses from the Japan and Hong Kong operations due to adverse
mortality. For the other international segment, the underlying product earnings
associated with the development of new business are beginning to emerge, however
the segment reported a loss during the current quarter. The Company believes
that the sustained growth in premiums will continue to lessen the burden of
start-up costs. Further discussion and analysis of the results for 1999 compared
to 1998 are presented by segment.
10
<PAGE> 11
U.S. OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1999
<TABLE>
<CAPTION>
-------------------------------------------------------------------
NON-TRADITIONAL
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 268,049 $ 312 $ - $ 268,361
Investment income, net of related expenses 29,493 35,664 - 65,157
Realized investment gains, net (423) 299 - (124)
Other revenue (272) - 3,952 3,680
-------------------------------------------------------------------
Total revenues 296,847 36,275 3,952 337,074
BENEFITS AND EXPENSES:
Claims and other policy benefits 215,374 112 - 215,486
Interest credited 7,894 31,019 - 38,913
Policy acquisition costs and other insurance
expenses 34,197 1,444 2,857 38,498
Other operating expenses 6,681 170 30 6,881
-------------------------------------------------------------------
Total benefits and expenses 264,146 32,745 2,887 299,778
Income before income taxes and minority
interest $ 32,701 $ 3,530 $ 1,065 $ 37,296
====================================================================
</TABLE>
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1998
<TABLE>
<CAPTION>
-------------------------------------------------------------------
NON-TRADITIONAL
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 180,375 $ - $ - $ 180,375
Investment income, net of related expenses 24,720 27,830 - 52,550
Realized investment gains, net 445 241 - 686
Other revenue 306 - 4,027 4,333
-------------------------------------------------------------------
Total revenues 205,846 28,071 4,027 237,944
BENEFITS AND EXPENSES:
Claims and other policy benefits 144,468 22 - 144,490
Interest credited 10,623 23,614 - 34,237
Policy acquisition costs and other insurance
expenses 26,211 1,042 3,120 30,373
Other operating expenses 4,205 185 33 4,423
-------------------------------------------------------------------
Total benefits and expenses 185,507 24,863 3,153 213,523
Income before income taxes and minority
interest $ 20,339 $ 3,208 $ 874 $ 24,421
====================================================================
</TABLE>
11
<PAGE> 12
During the first quarter of 1999, income before income taxes and minority
interest for the U.S. operations increased 52.7%, to $37.3 million from $24.4
million for the same period in 1998. U.S. operations include traditional and
non-traditional reinsurance. The components of non-traditional reinsurance are
asset-intensive and financial reinsurance. Each line within the U.S. operations
increased, but traditional reinsurance accounts for the majority of the growth
in this segment.
Traditional Reinsurance
The U.S. traditional reinsurance segment is the oldest and largest segment of
the Company. This segment 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 first quarter of 1999,
production totaled $34.7 billion of new assumed in force, compared to $30.9
billion for the same period in 1998. This increase was attributed to the
processing of several in force blocks of business and continued strong
production on new and existing treaties. 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 60.8% to $32.7 million in the first quarter 1999 from
$20.3 million for the same period in 1998. The increase in income was primarily
attributable to strong premium growth and the increase in investment income
driven by new business transactions, coupled with good mortality experience.
Net premiums for U.S. traditional reinsurance rose 48.6% to $268.0 million in
the first quarter of 1999 from $180.4 million for the same period in 1998. 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. 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 19.3% to
$29.5 million in the first quarter of 1999 from $24.7 million for the same
period in 1998. This increase was due to the continued growth of business in
this segment which resulted in the invested asset base, which included total
investments, cash, and accrued investment income, increasing to $1.7 billion in
the first quarter of 1999 from $1.5 billion for the same period in 1998.
The amount of claims and other policy benefits increased 49.1% to $215.4 million
in the first quarter of 1999 from $144.5 million for the same period in 1998,
primarily resulting from the increased size of the business in force. Claims and
other policy benefits, as a percentage of net premiums, were 80.3% and 80.1%, in
the first quarter of 1999 and 1998, respectively. 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 segment, which have a significant mortality component.
This amount fluctuates with the changes in cash surrender value and changes in
interest crediting rates.
12
<PAGE> 13
The amount of policy acquisition costs and other insurance expenses rose 30.5%
to $34.2 million in the first quarter of 1999 from $26.2 million for the same
period in 1998. As a percentage of net premiums, policy acquisition costs and
other insurance expenses were 12.8% and 14.5% for the first quarter of 1999 and
1998, respectively. The decrease was primarily attributable to a change in the
mix of business that resulted in less acquisition costs during the current
period. Other operating expenses increased 58.9% to $6.7 million for the first
quarter of 1999 from $4.2 million for the same period in 1998. Other operating
expenses for the first quarter of 1999 and 1998 remained relatively constant at
2.5% and 2.3% of premium, respectively. The increases in expenses were primarily
due to the 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.
Asset-Intensive Reinsurance
The U.S. asset-intensive reinsurance segment 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
recognizes profits 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 10.0% to $3.5 million
in the first quarter of 1999 from $3.2 million for the same period of 1998.
Earnings for this segment are generated based on the spread between the
investment earnings and the interest credited. The growth in earnings was
attributable to the increase in the invested asset base to $2.2 billion in the
first quarter of 1999 from $1.7 billion for the same period in 1998. Net
premiums in this segment 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.
Financial Reinsurance
The U.S. financial reinsurance segment 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.
The increase in income before taxes and minority interest between the first
quarter 1999 and 1998 was primarily attributable to an increase in the earnings
of RGA/Swiss. Other revenue included fees of $3.1 million and $3.4 million for
the first quarter of 1999 and 1998, respectively, from the assumption of
financial reinsurance transactions. 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 $0.2 million and $0.3 million for the first
quarter of 1999 and 1998, respectively.
13
<PAGE> 14
CANADA OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1999 1998
REVENUES:
<S> <C> <C>
Net premiums $ 35,620 $ 25,026
Investment income, net of related expenses 11,937 6,104
Realized investment gains, net - 236
Other revenue (18) 272
------------------------------
Total revenues 47,539 31,638
BENEFITS AND EXPENSES:
Claims and other policy benefits 35,884 23,115
Interest credited 458 245
Policy acquisition costs and other insurance expenses 4,406 2,855
Other operating expenses 1,593 1,803
------------------------------
Total benefits and expenses 42,341 28,018
Income before income taxes and minority interest $ 5,198 $ 3,620
==============================
</TABLE>
Income before income taxes and minority interest increased 43.6% in the first
quarter of 1999. The increase was driven by a growth in premiums of 42.3% and an
increase in investment income of 95.6% compared to the same period in prior
year. The effects of changes in the foreign exchange rate during 1999 are not
material.
Net premiums increased 42.3% to $35.6 million during 1999. The increase was the
result of several major treaties being signed in 1998 that generated new
premiums in the first quarter of 1999, as well as renewal premiums generated by
the segment's production in 1998. 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
95.6% in the current quarter 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 during the second and fourth
quarter of 1998, 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 55.2% during the first quarter of
1999. Claims and other policy benefits as a percentage of net premiums were
100.7% of first quarter 1999 net premiums compared to 92.4% in 1998. The
increase was mainly due to higher than expected claims in the first quarter of
1999 and is not expected to be a trend for the rest of the year. 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 12.4% in the first quarter of 1999 compared
to 11.4% in 1998. The increase in
14
<PAGE> 15
this ratio in 1999 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.
LATIN AMERICA OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1999
<TABLE>
<CAPTION>
TOTAL LATIN
DIRECT REINSURANCE AMERICA
<S> <C> <C> <C>
REVENUES:
Net premiums $ 14,030 $ 14,797 $ 28,827
Investment income, net of related expenses 1,868 1,260 3,128
Realized investment gains, net 12 - 12
Other revenue 42 - 42
------------------------------------------------
Total revenues 15,952 16,057 32,009
BENEFITS AND EXPENSES:
Claims and other policy benefits 13,092 13,673 26,765
Interest credited 180 - 180
Policy acquisition costs and other insurance expenses 992 393 1,385
Other operating expenses 1,272 856 2,128
------------------------------------------------
Total benefits and expenses 15,536 14,922 30,458
Income before income taxes and minority interest $ 416 $ 1,135 $ 1,551
================================================
</TABLE>
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1998
<TABLE>
<CAPTION>
TOTAL LATIN
DIRECT REINSURANCE AMERICA
REVENUES:
<S> <C> <C> <C>
Net premiums $ 13,451 $ 13,366 $ 26,817
Investment income, net of related expenses 1,582 782 2,364
Other revenue 73 - 73
--------------------------------------------------
Total revenues 15,106 14,148 29,254
BENEFITS AND EXPENSES:
Claims and other policy benefits 12,116 12,284 24,400
Interest credited 30 - 30
Policy acquisition costs and other insurance expenses 978 372 1,350
Other operating expenses 1,628 1,168 2,796
--------------------------------------------------
Total benefits and expenses 14,752 13,824 28,576
Income before income taxes and minority interest $ 354 $ 324 $ 678
==================================================
</TABLE>
15
<PAGE> 16
For the Latin American operations, income before income taxes and minority
interest more than doubled in the first quarter of 1999 compared to the same
period in 1998. The increase was driven by a growth in premiums of 7.5% and an
increase in investment income of 32.3% compared to the same period in prior
year. Results improved primarily in the reinsurance operations with continued
growth in privatized pensions in Argentina and developing business in Mexico. In
addition, direct insurance business in Chile continued to be profitable.
Direct Insurance
For 1999, the income before taxes and minority interest for the Latin America
direct business remained fairly level during 1999 at $0.4 million. Premiums
increased slightly during the first quarter of 1999 compared to the same period
in 1998 with an increase in single premium annuities sold in Chile. Investment
income increased 18.1% during 1999. The invested assets for the subsidiaries
have increased with growth in the business and capital contributions from RGA.
Claims and other policy benefits increased 8.1% during 1999 as a result of new
business and the continued growth in Chilean single premium annuities. 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 remained level during
1999. As a percentage of net premiums, policy acquisition costs and other
insurance expenses represented 7.1%, and 7.3% of net premiums for 1999 and 1998,
respectively. These expenses have remained fairly level with the comparable
growth in business. The percentages can also fluctuate due to variations in the
mixture of business being written in Argentina and Chile. Other operating
expenses decreased $0.4 million during 1999. The overall decrease was attributed
to a decrease in Chilean overhead for the current period.
Reinsurance
Income before income taxes and minority interest increased $0.8 million during
1999 primarily from reinsurance business from privatized pensions in Argentina
and developing business in Mexico and Chile.
Net premiums increased $1.4 million during 1999 primarily from an increase in
privatized pension reinsurance in Argentina of $1.3 million. Net investment
income increased 61.1% during 1999. 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. This increase
was due to the continued growth of business in this segment that resulted in the
invested asset base, which included total investments, cash, and accrued
investment income, increasing to $57.5 million in 1999 from $46.7 million in
1998.
16
<PAGE> 17
The claims and other policy benefits for the reinsurance business increased $1.4
million during 1999. Claims and other policy benefits as a percentage of net
premiums totaled 92.4%, and 91.9% for 1999 and 1998, 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 remained level for 1999.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums represented 2.7% and 2.8% for 1999 and 1998, respectively. These
percentages fluctuate due to the timing of client company reporting and
variations in the mixture of business being written. Other operating expenses
decreased $0.3 million during 1999 as a result of a decrease in overhead
allocation in the current period. The Company believes sustained growth in
premiums will lessen the burden of start-up expenses and expansion costs.
ASIA PACIFIC OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998
REVENUES:
<S> <C> <C>
Net premiums $ 16,409 $ 10,453
Investment income, net of related expenses 415 497
Realized investment (losses), net (12) -
Other revenue 292 1,535
-----------------------------------
Total revenues 17,104 12,485
BENEFITS AND EXPENSES:
Claims and other policy benefits 18,740 5,553
Policy acquisition costs and other insurance expenses 4,269 4,837
Other operating expenses 1,746 2,013
Interest expense 113 100
-----------------------------------
Total benefits and expenses 24,868 12,503
(Loss) before income taxes and minority interest $ (7,764) $ (18)
===================================
</TABLE>
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 first quarter showed an increase of 57.0% in premiums, but a loss for the
segment. The loss before income taxes and minority interest was $7.8 million in
1999 versus break-even results in
17
<PAGE> 18
1998. The loss was caused by higher than expected claims and increases in
reserves. In addition, during the first quarter of 1998 there was a full year of
fees earned from a Japanese financial reinsurance treaty. This treaty was
recaptured in the first quarter of 1999, and the fees earned in 1999 were
consequently much lower.
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 decreased during the quarter by 16.5%, reflecting the overall lower level
of interest rates. 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; these fees were substantially lower in 1999 as discussed above. Fees
paid to retrocessionaires that were included in policy acquisition costs and
other insurance expenses partially offset these fees earned.
Claims and other policy benefits more than doubled to $18.7 million in the first
quarter of 1999. This amount includes 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
increased to 114.2% in 1999 from 53.1% in 1998. The large increase 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 decreased 11.7% in 1999.
The primary cause of the decrease is the recapture of the financial reinsurance
treaty discussed above. Excluding the costs associated with the financial
reinsurance treaty, policy acquisition costs and other insurance expenses as a
percentage of net premiums were 26.0% in 1999 versus 41.5% in 1998. 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 decreased 13.3% in 1999 to $1.7 million. As a percentage of
premiums, other operating expenses decreased to 10.6% in 1999 from 19.3% in
1997. The Company believes that sustained growth in premiums should lessen the
burden of start-up expenses and expansion costs.
18
<PAGE> 19
OTHER INTERNATIONAL OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1999 1998
<S> <C> <C>
REVENUES:
Net premiums $ 4,542 $ 406
Investment income, net of related expenses 165 115
Realized investment gains, net 40 -
Other revenue 372 10
-----------------------------
Total revenues 5,119 531
BENEFITS AND EXPENSES:
Claims and other policy benefits 3,552 306
Policy acquisition costs and other insurance expenses 653 122
Other operating expenses 1,514 1,323
-----------------------------
Total benefits and expenses 5,719 1,751
(Loss) before income taxes and minority interest $ (600) $ (1,220)
-----------------------------
</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 continues its expansion plans, with efforts underway to
license a life reinsurance subsidiary in London. In addition, the Company
established RGA South Africa, with offices in Cape Town and Johannesburg to
promote life reinsurance in South Africa.
Net premiums increased to $4.5 million in the first quarter of 1999 primarily as
a result of business generated from an automatic treaty with a United Kingdom
client. Investment income for the segment is allocated 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
78.2% in the first quarter of 1999 from 75.4% during the same period 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 $0.2 million during the first quarter of 1999
compared to the same period in 1998. The overall increase in operating expenses
was attributed to increases in costs associated with the expansion efforts
within the segment.
19
<PAGE> 20
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
expense related to the 7 1/4% Senior Notes ("Senior Notes") issued in 1996. In
addition, the provision for income taxes is generally calculated based on the
overall operations of the Company and allocated to the segments. Tax expense
(benefit) is not used as a basis of measuring segment profit/loss.
Consolidated investment income from continuing operations increased 34.5% during
1999. The cost basis of invested assets increased $1.3 billion, or 33.6% from
March 31, 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 from ceding companies, primarily stable value product
deposits, and proceeds from the Company's issuance of non-voting common stock in
June 1998. The average yield earned on investments was 6.69% for the first
quarter of 1999 compared with 7.06% for the same period in 1998. The decrease in
overall yield reflected 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 capital per
segment.
Consolidated interest expense remained level at $2.0 million during the first
quarter of 1999 and 1998. Interest expense relates primarily to the Senior
Notes, drawdowns on a line of credit, and the financing of a portion of
Australian Holdings. Interest related to the Senior Notes was $1.8 million in
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
54.9% in the first quarter of 1999 as a result of higher pre-tax income. Income
tax expense from continuing operations represented approximately 38.2% and 35.5%
of pre-tax income for 1999 and 1998, respectively. The increase in the effective
tax rate 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 break-even results for the first quarter of 1999 and 1998. 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
20
<PAGE> 21
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 quarter of 1999, the Company generated $119.2 million in cash
from operating activities. These increases were offset by cash used for
investing of $92.4 million, withdrawals on asset-intensive and other investment
type policies and contracts of $10.0 million, and dividends to stockholders of
$2.3 million. The sources of funds of RGA's operating subsidiaries consist of
premiums received from ceding insurers, investment income, and proceeds from
sales and redemption of investments. Premiums are generally received in advance
of related claim payments. Funds are primarily applied to policy claims and
benefits, operating expenses, income taxes, and investment purchases.
As RGA continues its expansion efforts, management continually analyzes capital
adequacy issues. The Company has access to a line of credit. At March 31, 1999,
$15.0 million was drawn upon that line. This liability is included in other
liabilities on the balance sheet at March 31, 1999. The ability of RGA and
Australian Holdings to make principal and interest payments, and to continue to
pay dividends to stockholders, is ultimately dependent on the earnings and
surplus of RGA's subsidiaries, the investment earnings on the undeployed funds
at RGA, and the Company's ability to raise additional capital. The transfer of
funds from the subsidiaries to RGA is subject to applicable insurance laws and
regulations. Any future increases in liquidity needs due to relatively large
policy loans or unanticipated material claim levels would be met first by
operating cash flows and then by selling fixed-income securities or short-term
investments.
INVESTMENTS
Invested assets remained fairly level at $5.2 billion at March 31, 1999,
compared to $5.1 billion at December 31, 1998. The increase resulted primarily
from positive operating cash flows. The Company has historically generated
positive cash flows from operations, and expects to do so in the future.
At March 31, 1999, the Company's portfolio of fixed maturity securities
available for sale had net unrealized losses before tax of $30.3 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.
21
<PAGE> 22
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 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, 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 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
March 31, 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 March
31, 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
----------- ------ ------
<C> <C> <C> <C>
300 basis point rise $ 2,357,595 $(550,399) -18.93%
200 basis point rise $ 2,515,488 $(392,506) -13.50%
100 basis point rise $ 2,697,933 $(210,061) -7.22%
Base Scenario $ 2,907,994 $ - 0.00%
100 basis point decline $ 3,151,512 $ 243,518 8.37%
200 basis point decline $ 3,447,010 $ 539,016 18.54%
300 basis point decline $ 3,828,760 $ 920,766 31.66%
</TABLE>
22
<PAGE> 23
At March 31, 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 March 31, 1999. All floating rate interest
sensitive instruments presented in this table are classified as available for
sale.
<TABLE>
<CAPTION>
Estimated Cash Flows Percentage
of Floating Rate Hypothetical Hypothetical
Percentage Change in Interest Rates Instruments Change Change
- ----------------------------------- -------------------- ------------ ------------
<S> <C> <C> <C>
300 basis point rise $ 244,439 $ 19,112 8.48%
200 basis point rise $ 237,155 $ 11,828 5.25%
100 basis point rise $ 230,661 $ 5,334 2.37%
Base Scenario $ 225,327 $ - 0.00%
100 basis point decline $ 252,587 $ 27,260 12.10%
200 basis point decline $ 256,419 $ 31,092 13.80%
300 basis point decline $ 268,453 $ 43,126 19.14%
</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 March
31, 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
23
<PAGE> 24
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.
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 of the world's computer systems currently record years in a two-digit
format. If not addressed, such computer systems will be unable to properly
interpret dates beyond the year 1999, which could lead to business disruptions
in the U.S. and internationally (the "Year 2000" issue). The potential costs and
uncertainties associated with the Year 2000 issue will depend on a number of
factors, including software, hardware and the nature of the industry in which a
company operates. Additionally, companies must coordinate with other entities
with which they electronically interact.
The Company 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 May 1, 1999, the Company continues to coordinate information relating to some
of its foreign subsidiaries and ventures and plans to review the testing of its
two direct writing companies in Latin America before June 30, 1999. Inventories
of substantially all software, hardware, and trading partners are compiled in a
Year 2000 database.
24
<PAGE> 25
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.
With respect to non-information technology systems, the Company is moving its
St. Louis office in August 1999 and it is anticipated that the new leased
premises and all equipment with embedded technology will be upgraded and Year
2000 compliant. The Company believes the only material non-information
technology system outside of St. Louis is the premise occupied by the Company's
operation in Canada. 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. 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 $50,000 during 1999 and
anticipates that the remaining
25
<PAGE> 26
costs for the project will be approximately $250,000 for the remainder of 1999
and $100,000 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 March 31,
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 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 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
fiscal years beginning after June 15, 1999, and is effective for interim periods
in the initial year of adoption. SFAS No. 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. It also requires that gains or losses resulting from changes in the
values of those derivatives be reported depending on the use of the derivative
and whether it qualifies for hedge accounting. The Company has not yet
determined the effect 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, 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
26
<PAGE> 27
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.
Numerous factors could cause actual results and events to differ materially from
those expressed or implied by forward-looking statements including, without
limitation, (1) general economic conditions affecting the demand for insurance
and reinsurance in the Company's (as hereinafter defined) current and planned
markets, (2) material changes in mortality and claims experience, (3)
competitive factors and competitors' responses to the Company's initiatives, (4)
successful execution of the Company's entry into new markets, (5) successful
development and introduction of new products, (6) the stability of governments
and economies in foreign markets, (7) fluctuations in U.S. and foreign currency
exchange rates, interest rates and securities and real estate markets, (8) the
success of the Company's clients, including General American Life Insurance
Company ("General American") and its affiliates, and (9) 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 APRIL 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.
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.
27
<PAGE> 28
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) See index to exhibits.
(b) A report on Form 8-K was filed with the Securities and Exchange
Commission on February 1, 1999, regarding the three-for-two stock
split of all classes of the registrant's Common Stock. The stock
split was in the form of a stock dividend payable February 26,
1999, to stockholders of record on February 5, 1999. No other
reports on Form 8-K were filed during the three months ended March
31, 1999.
28
<PAGE> 29
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 5/7/99
----------------------------------
A. Greig Woodring
President & Chief Executive Officer
(Principal & Chief Executive Officer)
/s/ Jack B. Lay 5/7/99
----------------------------------
Jack B. Lay
Executive Vice President & Chief Financial
Officer
(Principal Financial and Accounting Officer)
29
<PAGE> 30
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation of RGA incorporated by reference
to Exhibit 3.1 to Registration Statement on Form S-1 (No. 33-58960)
filed on March 2, 1993
3.2 Bylaws of RGA incorporated by reference to Exhibit 3.2 to
Registration Statement on Form S-1 (No. 33-58960) filed on March 2,
1993
3.3 Form of Certificate of Designations for Series A Junior
Participating Preferred Stock incorporated by reference to
Exhibit 3.3 to Amendment No. 1 to Registration Statement
on Form S-1 (No. 33-58960) filed on April 14, 1993
27.1 Financial Data Schedule
30
<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
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 3,658,689
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 9,951
<MORTGAGE> 221,956
<REAL-ESTATE> 1,456
<TOTAL-INVEST> 5,175,825
<CASH> 30,632
<RECOVER-REINSURE> 288,998
<DEFERRED-ACQUISITION> 380,679
<TOTAL-ASSETS> 6,410,721
<POLICY-LOSSES> 4,676,528
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 494,005
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 109,771
0
0
<COMMON> 466
<OTHER-SE> 736,634
<TOTAL-LIABILITY-AND-EQUITY> 6,410,721
353,759
<INVESTMENT-INCOME> 85,043
<INVESTMENT-GAINS> (83)
<OTHER-INCOME> 4,388
<BENEFITS> 339,979
<UNDERWRITING-AMORTIZATION> 21,952
<UNDERWRITING-OTHER> 27,259
<INCOME-PRETAX> 35,757
<INCOME-TAX> 13,670
<INCOME-CONTINUING> 21,978
<DISCONTINUED> (21)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,957
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.48
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
