<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, 2000
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)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 31, 2000: 49,336,472
SHARES.
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income (Unaudited)
Three and six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial
Statements (Unaudited) 6-9
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-27
3 Qualitative and Quantitative Disclosures About Market Risk 27
PART II - OTHER INFORMATION
1 Legal Proceedings 28
4 Submission of Matters to a Vote of Security Holders 28
6 Exhibits and Reports on Form 8-K 29
Signatures 30
Index to Exhibits 31
</TABLE>
2
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Fixed maturity securities
Available for sale-at fair value (amortized cost of $2,652,993 and
$2,087,540 at June 30, 2000, and December 31, 1999, respectively) $ 2,492,369 $ 1,876,166
Mortgage loans on real estate 128,441 213,187
Policy loans 668,053 660,062
Funds withheld at interest 905,618 797,949
Short-term investments 144,372 238,424
Other invested assets 23,221 26,069
------------- -------------
Total investments 4,362,074 3,811,857
Cash and cash equivalents 67,787 24,316
Accrued investment income 64,826 37,175
Premiums receivable 281,690 295,153
Funds withheld 20,659 13,294
Reinsurance ceded receivables 305,024 295,460
Deferred policy acquisition costs 562,912 478,389
Other reinsurance balances 140,834 151,000
Other assets 6,510 17,099
------------- -------------
Total assets $ 5,812,316 $ 5,123,743
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 1,835,477 $ 1,870,099
Interest sensitive contract liabilities 2,113,882 1,545,893
Other policy claims and benefits 521,891 582,066
Other reinsurance balances 84,095 53,866
Deferred income taxes 108,858 67,914
Other liabilities 105,279 83,238
Long-term debt 263,364 183,954
------------- -------------
Total liabilities 5,032,846 4,387,030
Minority interest - 3,765
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,
51,053,273 shares issued at June 30, 2000 and December 31, 1999,
respectively) 511 511
Additional paid in capital 611,022 611,016
Retained earnings 315,729 282,389
Accumulated other comprehensive income:
Accumulated currency translation adjustment, net of taxes (12,662) (9,909)
Unrealized appreciation (depreciation) of securities, net of taxes (97,991) (131,341)
------------- -------------
Total stockholders' equity before treasury stock 816,609 752,666
Less treasury shares held of 1,718,120 and 1,112,820 at cost at
June 30, 2000, and December 31, 1999, respectively (37,139) (19,718)
------------- -------------
Total stockholders' equity 779,470 732,948
------------- -------------
Total liabilities and stockholders' equity $ 5,812,316 $ 5,123,743
============= =============
</TABLE>
See accompanying notes to unaudited 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,
------------------------ --------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 345,400 $ 316,765 $ 674,943 $ 670,524
Investment income, net of related expenses 82,292 87,491 156,302 172,534
Realized investment gains/(losses), net (10,892) 578 (15,524) 495
Other revenue 2,475 4,473 5,688 8,861
----------- ---------- ----------- -----------
Total revenues 419,275 409,307 821,409 852,414
BENEFITS AND EXPENSES:
Claims and other policy benefits 267,666 246,652 533,405 547,079
Interest credited 27,176 43,691 48,475 83,243
Policy acquisition costs and other insurance expenses 62,179 56,698 113,662 105,909
Other operating expenses 19,260 15,550 39,225 31,754
Interest expense 3,775 2,273 7,309 4,229
----------- ---------- ----------- -----------
Total benefits and expenses 380,056 364,864 742,076 772,214
----------- ---------- ----------- -----------
Income before income taxes and minority interest 39,219 44,443 79,333 80,200
Provision for income taxes 18,084 18,446 33,732 32,116
----------- ---------- ----------- -----------
Income from continuing operations before minority
interest 21,135 25,997 45,601 48,084
Minority interest in earnings of consolidated subsidiaries (275) 350 287 459
----------- ---------- ----------- -----------
Income from continuing operations 21,410 25,647 45,314 47,625
Discontinued operations:
Loss on discontinued accident and health operations,
net of taxes (2,506) (4,971) (5,988) (4,992)
----------- ---------- ----------- -----------
Net income $ 18,904 $ 20,676 $ 39,326 $ 42,633
=========== ========== =========== ===========
Earnings per share from continuing operations:
Basic earnings per share $ 0.43 $ 0.57 $ 0.91 $ 1.05
=========== ========== =========== ===========
Diluted earnings per share $ 0.43 $ 0.56 $ 0.90 $ 1.04
=========== ========== =========== ===========
Earnings per share from net income:
Basic earnings per share $ 0.38 $ 0.46 $ 0.79 $ 0.94
=========== ========== =========== ===========
Diluted earnings per share $ 0.38 $ 0.45 $ 0.79 $ 0.93
=========== ========== =========== ===========
Weighted average number of diluted shares outstanding
(in thousands) 50,043 45,861 50,085 45,874
=========== ========== =========== ===========
</TABLE>
See accompanying notes to unaudited 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,
-------------------------------------
2000 1999
--------------- ---------------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 39,326 $ 42,633
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (27,651) (1,359)
Premiums receivable 13,082 (113,394)
Deferred policy acquisition costs (88,046) (62,518)
Funds withheld (7,365) 5,684
Reinsurance ceded balances (9,564) (29,840)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 119,814 235,669
Deferred income taxes 17,329 27,394
Other assets and other liabilities 32,146 3,793
Amortization of net investment discounts (15,901) (13,616)
Realized investment (gains)/losses, net 6,889 (495)
Realized loss on sale of business - net 8,635 -
Other, net 1,088 107
--------------- ---------------
Net cash provided by operating activities 89,782 94,058
INVESTING ACTIVITIES:
Proceeds from sale of business 26,509 -
Sales of investments:
Fixed maturity securities - Available for sale 410,762 832,459
Mortgage loans 1,700 4,543
Maturities of fixed maturity securities - Available for sale 2,963 28,349
Purchases of fixed maturity securities - Available for sale (1,074,283) (1,151,972)
Cash invested in:
Mortgage loans (19,244) (35,160)
Policy loans (7,991) (6,026)
Funds withheld at interest (107,669) (177,232)
Principal payments on:
Mortgage loans 4,272 5,925
Change in short-term and other invested assets 92,526 143,732
--------------- ---------------
Net cash used in investing activities (670,455) (355,382)
FINANCING ACTIVITIES:
Dividends to stockholders (5,986) (4,558)
Borrowings under debt agreements 79,409 -
Proceeds from debt issuance - 75,000
Purchase of treasury stock (17,421) -
Reissuance of treasury stock 24 427
Excess deposits on universal life and other
investment type policies and contracts 567,990 274,494
--------------- ---------------
Net cash provided by financing activities 624,016 345,363
Effect of exchange rate changes 128 868
--------------- ---------------
Change in cash and cash equivalents 43,471 84,907
Cash and cash equivalents, beginning of period 24,316 15,966
--------------- ---------------
Cash and cash equivalents, end of period $ 67,787 $ 100,873
=============== ===============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE> 6
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 conformity with accounting principles generally accepted in the
United States of America 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 accounting
principles generally accepted in the United States of America 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 and six month periods ending June
30, 2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's 1999 Annual Report, which is filed as an exhibit to
the Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The accompanying unaudited condensed consolidated financial statements include
the accounts of Reinsurance Group of America, Incorporated and its Subsidiaries.
All material intercompany accounts and transactions have been eliminated. The
Company has reclassified the presentation of certain prior period segment
information to conform to the 2000 presentation.
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, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Earnings:
Income from continuing operations
(numerator for basic and diluted
calculations) $ 21,410 $ 25,647 $ 45,314 $ 47,625
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 49,656 45,348 49,795 45,341
Equivalent shares from outstanding stock
options 387 513 290 533
---------- ---------- ---------- ---------
Denominator for diluted calculation 50,043 45,861 50,085 45,874
Earnings per share:
Basic $ 0.43 $ 0.57 $ 0.91 $ 1.05
Diluted $ 0.43 $ 0.56 $ 0.90 $ 1.04
========== ========== ========== =========
</TABLE>
6
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The calculation of diluted earnings per share does not include common stock
equivalent shares, the impact of which would be antidilutive. For the three and
six months ended June 30, 2000, approximately 0.4 million and 0.6 million,
respectively, in outstanding stock options were not included in the calculation
of common equivalent shares as their respective exercise prices were greater
than the average market price. These options were outstanding at the end of
period.
3. COMPREHENSIVE INCOME
The following schedule reflects the change in accumulated other comprehensive
income (loss) for the three and six month periods ended June 30, 2000 and 1999
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 18,904 $ 20,676 $ 39,326 $ 42,633
Accumulated other comprehensive
(Expense) income:
Unrealized (losses) gains on securities (24,427) (57,849) 33,349 (89,796)
Foreign currency items (1,891) (81) (2,752) 379
--------- --------- --------- ---------
Comprehensive (loss) income $ (7,414) $ (37,254) $ 69,923 $ (46,784)
========= ========= ========= =========
</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 1999 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 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, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Reinsurance:
U.S. $ 306,822 $ 285,088 $ 603,776 $ 622,162
Canada 61,303 59,497 116,937 107,036
Latin America 13,633 23,420 21,587 39,477
Asia Pacific 23,882 16,926 44,014 34,030
Other international 6,002 7,291 12,844 12,410
---------- ---------- ---------- ----------
Total reinsurance revenues 411,642 392,222 799,158 815,115
Total direct revenues (Latin America) 6,228 13,079 20,534 29,031
Corporate 1,405 4,006 1,717 8,268
---------- ---------- ---------- ----------
Total from continuing operations $ 419,275 $ 409,307 $ 821,409 $ 852,414
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST
Reinsurance:
U.S. $ 44,900 $ 33,293 $ 78,877 $ 70,589
Canada 9,300 11,970 21,530 17,168
Latin America (9,021) 346 (7,165) 1,897
Asia Pacific 375 (6) (343) (7,770)
Other international (895) (633) (1,836) (1,233)
Corporate (5,440) (527) (11,730) (451)
--------- --------- --------- ---------
Total from continuing operations $ 39,219 $ 44,443 $ 79,333 $ 80,200
========= ========= ========= =========
</TABLE>
During the first six months, the Latin America segment reported a reduction in
total assets of approximately $0.2 billion, primarily due to the sale of Chilean
operations. U.S. Operations showed an increase of approximately $0.9 billion in
total assets, primarily a result of assuming a new block of single-premium
annuities, and normal business operations during the first six months of 2000.
5. STOCK REPURCHASE PROGRAM
On March 16, 2000, the Company's Board of Directors approved a stock repurchase
program under which the Company may use up to $20 million to purchase
outstanding shares of stock. The Company plans to use the repurchased shares to
support the future exercise of options granted under its stock option plan.
Under the program, 607,300 shares at an aggregate cost of $17.4 million were
repurchased and transferred to the Company's treasury during the first six
months of 2000.
8
<PAGE> 9
6. SALE OF CHILEAN OPERATIONS
As of April 1, 2000, the Company reached an agreement to sell its interest in
several Chilean subsidiaries including: RGA Sudamerica, S.A., RGA Reinsurance
Company Chile, S.A. and Bhif America Seguros de Vida, S.A. The transaction
closed on April 27, 2000. The Company received approximately $26.5 million in
proceeds and recorded a loss on the sale of approximately $8.6 million,
primarily consisting of the realization of accumulated foreign currency
depreciation on the Company's net investment.
7. FINANCING ACTIVITIES
On May 24, 2000, the Company entered into a credit agreement (the "Credit
Agreement") with a bank syndicate, whereby it may borrow up to $140.0 million to
continue expansion of the Company's business. Interest on borrowings is payable
quarterly at rates based either on the prime, federal funds or LIBOR rates plus
a base rate margin defined in the Credit Agreement. As of June 30, 2000, the
Company had approximately $70.0 million outstanding under the Credit Agreement.
The termination date of the Credit Agreement is May 24, 2003.
On May 8, 2000, RGA Holdings Limited, a wholly-owned subsidiary of the Company,
entered into a revolving credit facility (the "U.K. Credit Agreement"), whereby
it may borrow up to (pound)15.0 million (approximately $22.5 million) for
expansion of the Company's business in the United Kingdom. Interest on
borrowings is payable quarterly at LIBOR rates plus a base rate margin defined
in the U.K. Credit Agreement. As of June 30, 2000, the Company had borrowed
(pound)6.0 million (approximately $9.1 million) under the U.K. Credit Agreement.
The termination date of the U.K. Credit Agreement is May 8, 2003, extendable for
two, one year terms.
8. DIVIDENDS
The Board of Directors declared a dividend of six cents per share of common
stock on July 26, 2000. This dividend will be payable on August 28, 2000 to
shareholders of record as of August 7, 2000.
9. NEW ACCOUNTING STANDARDS
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). The SAB summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101 provides that if registrants have not applied the accounting
therein they should implement the SAB and report a change in accounting
principle. SAB 101, as subsequently amended, will be effective for the Company
no later than the fourth quarter of 2000. The Company is currently evaluating
the potential impact, if any, that adoption of SAB 101 will have on its
financial condition or results of operations.
9
<PAGE> 10
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
primarily include reinsurance of 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 traditional reinsurance, reinsurance of privatized pension products
primarily in Argentina, and direct life insurance through a joint venture and
subsidiaries in Chile and 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 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 for the second quarter and first six months of 2000 decreased 11.8% and
1.0%, respectively, as compared to the prior-year periods. Diluted earnings per
share from continuing operations were $0.43 and $0.90 for the second quarter and
first six months of 2000, respectively, compared with $0.56 and $1.04 for the
comparable 1999 periods. The decrease in earnings for the second quarter and
first six months of 2000 was primarily attributable to $15.5 million and $10.9
million in realized investment losses, respectively. These investment losses
include approximately $8.6 million from the sale of Chilean operations with the
remainder relating to sales and write-downs of investments. Excluding realized
investment losses, earnings for the second quarter and six months were
attributed primarily to the strong performance of traditional reinsurance in the
U.S. and Canada.
Further discussion and analysis of the results for 2000 compared to 1999 are
presented by segment.
10
<PAGE> 11
U.S. OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 2000
<TABLE>
<CAPTION>
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 249,786 $ 426 $ - $ 250,212
Investment income, net of related expenses 37,330 19,265 - 56,595
Realized investment losses, net (1,595) (1) - (1,596)
Other revenue (370) 443 1,538 1,611
-------------- ------------ -------------- -------------
Total revenues 285,151 20,133 1,538 306,822
BENEFITS AND EXPENSES:
Claims and other policy benefits 183,798 634 - 184,432
Interest credited 11,479 13,683 - 25,162
Policy acquisition costs and other insurance 41,634 3,482 837 45,953
expenses
Other operating expenses 6,219 138 18 6,375
-------------- ------------ -------------- -------------
Total benefits and expenses 243,130 17,937 855 261,922
Income before income taxes and minority
interest $ 42,021 $ 2,196 $ 683 $ 44,900
============== ============ ============== =============
</TABLE>
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 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>
11
<PAGE> 12
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 2000
<TABLE>
<CAPTION>
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
-------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 496,528 $ 1,044 $ - $ 497,572
Investment income, net of related expenses 70,441 36,700 - 107,141
Realized investment losses, net (4,414) (85) - (4,499)
Other revenue (77) 399 3,240 3,562
-------------- ------------ ------------- -------------
Total revenues 562,478 38,058 3,240 603,776
BENEFITS AND EXPENSES:
Claims and other policy benefits 383,357 742 - 384,099
Interest credited 22,905 23,064 - 45,969
Policy acquisition costs and other insurance 70,315 9,799 1,961 82,075
expenses
Other operating expenses 12,442 277 37 12,756
-------------- ------------ ------------- -------------
Total benefits and expenses 489,019 33,882 1,998 524,899
Income before income taxes and minority
interest $ 73,459 $ 4,176 $ 1,242 $ 78,877
============= ============ ============== =============
</TABLE>
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 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 75,147 1,968 5,063 82,178
expenses
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>
During the second quarter and first six months of 2000, income before income
taxes and minority interest for U.S. operations increased 34.9% and 11.7%,
respectively, over the comparable prior-year periods. These increases are
primarily the result of favorable mortality experience on the core traditional
block of business, investment income earnings on the core traditional block of
business, emerging profits from the large inforce blocks reinsured over the last
several years, and a decrease in net realized investment losses. U.S. operations
include traditional and non-
12
<PAGE> 13
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 first
six months of 2000 and 1999, production of new assumed in force remained
relatively constant, totaling $53.8 billion and $52.5 billion, respectively.
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 future production is uncertain.
Net premiums for U.S. traditional reinsurance rose 13.0% and 1.5% in the second
quarter and first six months of 2000. The increase in the second quarter relates
to an increase in the core traditional block. Two large in force blocks of
business totaling over $55 million in premium were processed in the first
quarter of 1999, resulting in only a slight increase in premiums for the first
six months. 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 25.9% and 17.7% in the second quarter and first
six months of 2000. The increases were due to the growth in the invested asset
base, primarily due to increased operating cash flows on traditional reinsurance
and increased required capital to support the business.
The amount of claims and other policy benefits increased 14.7% and 2.0% in the
second quarter and first six months of 2000. Claims and other policy benefits,
as a percentage of net premiums, were 73.6% and 77.2% in the second quarter and
first six months of 2000, respectively, compared to 72.5% and 76.8% in
prior-year periods. Mortality is expected to fluctuate somewhat from period to
period, but remains fairly constant over the long term.
The amount of interest credited increased 17.7% the first six months of 2000.
Interest credited relates to amounts credited on the Company's cash value
products in this subsegment, which have a significant mortality component. The
increase in the first six months of 2000 as compared to 1999 was primarily due
to increased crediting rates and deposits on certain universal life policies.
This amount fluctuates with the changes in deposit levels, cash surrender values
and interest crediting rates.
As a percentage of net premiums, policy acquisition costs and other insurance
expenses were 16.7% and 14.2% for the second quarter and first six months of
2000, respectively, compared to 18.5% and 15.4% in the prior-year periods. The
decreases were primarily attributable to the mix
13
<PAGE> 14
of business that resulted in less acquisition costs during the current periods.
Asset-Intensive Reinsurance
The U.S. asset-intensive reinsurance subsegment includes the reinsurance of
annuities and bank-owned life insurance. As of September 30, 1999, the Company
no longer reinsured funding agreement products. Most of these agreements are
coinsurance or modified coinsurance of non-mortality risks such that the Company
has 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 decreased in the second quarter
and first six months of 2000. The recapture of the funding agreement business in
the third quarter of 1999 was primarily responsible for the decrease in
investment income, interest credited and earnings. This decrease was partially
offset by a new coinsurance agreement on a block of single premium deferred
annuities. 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.
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 of
2000 and in the first six months of 2000, as compared to the prior-year periods.
These results were primarily attributable to the decrease in earnings from
RGA/Swiss and the net fees earned on financial reinsurance agreements. A
decrease in outstanding statutory financial reinsurance also contributed to the
earnings decrease. Policy acquisition costs and other insurance expenses include
fees paid for the subsequent retrocession of these financial reinsurance
transactions.
14
<PAGE> 15
CANADA OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 46,146 $ 41,253 $ 87,173 $ 76,873
Investment income, net of related expenses 15,301 12,035 30,284 23,972
Realized investment (losses) gains, net (201) 6,253 (647) 6,253
Other revenue 57 (44) 127 (62)
---------- ---------- ---------- ----------
Total revenues 61,303 59,497 116,937 107,036
BENEFITS AND EXPENSES:
Claims and other policy benefits 42,702 39,933 79,965 75,818
Interest credited 149 446 494 905
Policy acquisition costs and other
insurance expenses 7,134 5,314 10,780 9,719
Other operating expenses 2,018 1,834 4,168 3,426
---------- ---------- ---------- ----------
Total benefits and expenses 52,003 47,527 95,407 89,868
Income before income taxes and minority
interest $ 9,300 $ 11,970 $ 21,530 $ 17,168
========== ========== ========== ==========
</TABLE>
Income before income taxes and minority interest decreased 22.3% and increased
25.4% in the second quarter and first six months of 2000, respectively.
Excluding realized investment gains (losses), income before income taxes and
minority interest increased 66.2% and 103.2% in the second quarter and first six
months of 2000, respectively. The increases were driven by a growth in premiums
and investment income together with favorable mortality for the first six
months. The effects of changes in the foreign exchange rate during 2000 compared
to 1999 are not material.
Net premiums increased 11.9% and 13.4% in the second quarter and first six
months of 2000, respectively. The increases were the result of new business
premiums in 2000, as well as renewal premiums. 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
27.1% and 26.3% in the second quarter and first six months of 2000 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.
Claims and other policy benefits increased 6.9% and 5.5% during the second
quarter and first six months of 2000. Claims and other policy benefits as a
percentage of net premiums were 92.5% and 91.7% in the second quarter and first
six months of 2000 compared to 96.8% and 98.6% in
15
<PAGE> 16
the prior-year periods. The lower percentages experienced so far in 2000 is the
result of better than expected mortality for the first six months. 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 15.5% and 12.4% in the second quarter and first six months of
2000, respectively, compared to 12.9% and 12.6% in the prior year periods. The
increase in ratio in the second quarter is primarily due to a different mix of
business processed in the second quarter, although the trend is expected to be
in line with the prior year as the general mix of business increases to yearly
renewable term from coinsurance agreements. These yearly renewable term
agreements tend to have lower commission costs compared to coinsurance
agreements.
LATIN AMERICA OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 2000
<TABLE>
<CAPTION>
TOTAL LATIN
DIRECT REINSURANCE AMERICA
------------- -------------- -------------
<S> <C> <C> <C>
REVENUES:
Net premiums $ 9,743 $ 11,866 $ 21,609
Investment income, net of related expenses 5,038 1,916 6,954
Realized investment losses, net (8,519) (163) (8,682)
Other revenue (34) 14 (20)
------------- -------------- -------------
Total revenues 6,228 13,633 19,861
BENEFITS AND EXPENSES:
Claims and other policy benefits 14,001 9,040 23,041
Interest credited 277 1,588 1,865
Policy acquisition costs and other insurance expenses 217 686 903
Other operating expenses 2,318 755 3,073
------------- -------------- -------------
Total benefits and expenses 16,813 12,069 28,882
(Loss) income before income taxes and minority interest $ (10,585) $ 1,564 $ (9,021)
============= ============= =============
</TABLE>
16
<PAGE> 17
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
(Loss) income before income taxes and minority interest $ (32) $ 378 $ 346
============ ============= ===========
</TABLE>
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 2000
<TABLE>
<CAPTION>
TOTAL LATIN
DIRECT REINSURANCE AMERICA
------------ -------------- -------------
<S> <C> <C> <C>
REVENUES:
Net premiums $ 19,670 $ 18,592 $ 38,262
Investment income, net of related expenses 9,229 3,395 12,624
Realized investment losses, net (8,503) (415) (8,918)
Other revenue 138 15 153
------------ -------------- -------------
Total revenues 20,534 21,587 42,121
BENEFITS AND EXPENSES:
Claims and other policy benefits 22,525 14,549 37,074
Interest credited 417 1,595 2,012
Policy acquisition costs and other insurance expenses 2,289 1,576 3,865
Other operating expenses 4,793 1,542 6,335
------------ -------------- -------------
Total benefits and expenses 30,024 19,262 49,286
(Loss) income before income taxes and minority interest $ (9,490) $ 2,325 $ (7,165)
============ ============= ============
</TABLE>
17
<PAGE> 18
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>
For the Latin America operations, income before income taxes and minority
interest decreased in the second quarter and the first six months of 2000
compared to the same period in 1999 primarily as a result of the loss reported
on the sale of the Chilean companies during the current quarter. Profit from the
reinsurance operations increased primarily as a result of growth in the Mexican
and Argentine business. Participation in the reinsurance of privatized pensions
in Argentina is decreasing as management seeks traditional reinsurance
opportunities in other areas. This had a negative impact on net premiums
compared to the prior year due to reduced quota share participation in several
privatized pension contracts in Argentina, effective July 1, 1999, and refunds
to ceding companies related to experience on existing treaties.
For the direct operations, profitable operating results from Chile were offset
in part by losses in Argentina. Although premiums increased for the current
quarter, year to date premiums decreased in the direct operations as a result of
declining production due in part to sluggish market conditions in Chile and
Argentina.
The Company finalized the sale of its interests in RGA Sudamerica, S.A.,
Bhifamerica Seguros de Vida, S.A., and RGA Reinsurance Company Chile S.A. during
the second quarter. This sale resulted in an $8.6 million realized loss on a
pre-tax basis. That loss relates primarily to the realization of accumulated
foreign currency depreciation over the holding period of the Company's net
investment in the Chilean operations. The Company's decision to sell its
interest
18
<PAGE> 19
in Chile reflects an effort to focus on the reinsurance business in that market
as opposed to direct distribution.
ASIA PACIFIC OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 22,126 $ 15,912 $ 41,203 $ 32,321
Investment income, net of related expenses 1,097 941 2,051 1,356
Realized investment gains (losses, net 2 (21) 19 (33)
Other revenue 657 94 741 386
---------- ---------- ---------- -----------
Total revenues 23,882 16,926 44,014 34,030
BENEFITS AND EXPENSES:
Claims and other policy benefits 13,119 8,425 24,638 27,164
Policy acquisition costs and other
insurance expenses 7,930 6,175 14,668 10,444
Other operating expenses 2,281 2,213 4,754 3,960
Interest expense 177 119 297 232
---------- ---------- ---------- -----------
Total benefits and expenses 23,507 16,932 44,357 41,800
Income (loss) before income taxes and
minority interest $ 375 $ (6) $ (343) $ (7,770)
========== ========== ========== ===========
</TABLE>
The Company conducts reinsurance business in the Asia Pacific region through
branch operations in Hong Kong, Japan, and a liaison office in Taiwan. Business
is also conducted through RGA Australia, a wholly owned subsidiary in Australia,
and through a joint venture in Malaysia. 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 2000 showed an increase in premiums
of 39.1% and 27.5%, respectively. Renewal premiums from the existing block of
business, new business premiums from facultative and automatic treaties, premium
flows from larger blocks of business, and acquisition of blocks of in-force
business all contributed to the premium increase. Business premium levels are
significantly influenced by large transactions and reporting practices of ceding
companies and therefore can fluctuate from period to period. Net investment
income increased during the second quarter and first six months by 16.6% and
51.3%, respectively. Investment income is allocated to the various operating
segments on the basis of average net capital and investment performance varies
with the composition of investments and the relative allocation of capital to
units. Other revenue predominantly represents profit and risk fees
19
<PAGE> 20
associated with a financial reinsurance transaction in Taiwan that was executed
during the fourth quarter of 1999.
Claims and other policy benefits as a percentage of net premiums increased to
59.3% and decreased to 59.8% in the second quarter and first six months of 2000,
respectively, from 52.9% and 84.0% in 1999. The decrease in the six months
results versus 1999 was caused by mortality returning to expected levels. During
1999 there were several large first quarter claims in Japan and Hong Kong. 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.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums were 35.8% and 35.6% in the second quarter and first six months of 2000
versus 38.8% and 32.3% 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 2000 increased
by 3.1% and 20.1%, respectively. As a percentage of premiums, other operating
expenses decreased to 10.3% and 11.5% in the second quarter and first six months
2000 from 13.9% and 12.3% 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, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 5,307 $ 6,608 $ 10,733 $ 11,150
Investment income, net of related expenses 473 363 691 528
Realized investment gains, net 54 80 318 120
Other revenue 168 240 1,102 612
--------- --------- --------- ----------
Total revenues 6,002 7,291 12,844 12,410
BENEFITS AND EXPENSES:
Claims and other policy benefits 4,372 5,877 7,629 9,429
Policy acquisition costs and other
insurance expenses 259 182 2,274 835
Other operating expenses 2,266 1,865 4,777 3,379
--------- --------- --------- ----------
Total benefits and expenses 6,897 7,924 14,680 13,643
Loss before income taxes and minority
interest $ (895) $ (633) $ (1,836) $ (1,233)
========= ========= ========= ==========
</TABLE>
20
<PAGE> 21
This segment provides life reinsurance to international clients throughout
Europe and South Africa in addition to business received as a Corporate Name
supporting a life syndicate at Lloyd's of London. 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. In April, the
Company obtained a license for a life reinsurance subsidiary in London.
Net premiums decreased to $5.3 million and $10.7 million in the second quarter
and first six months of 2000, respectively, primarily as a result of an
automatic treaty with a U.K. client first processed during the second quarter of
1999. The Company's offices in Cape Town and Johannesburg, South Africa
contributed to new business premium in 2000 mainly through the facultative
market. Investment income is allocated to the segment on the basis of average
net capital and the investment performance varies with the composition of
investments.
Claims and other policy benefits as a percentage of premiums are 82.4% and 71.1%
in the second quarter and first six months of 2000, respectively, compared to
88.9% and 84.6% during the same periods in 1999. 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 to
$2.3 million and $4.8 million during the second quarter and first six months of
2000, respectively, compared to $1.9 million and $3.4 million in the same
periods in 1999. 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 and corporate investment
income allocation, 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 decreased 5.9% and
9.4% during the second quarter and first six months of 2000. Investment income
was negatively affected by a reduction in invested assets related to the
recapture of the funding agreement business by General American on September 29,
1999. The average yield earned on investments was 7.36% and 6.70% for the second
quarters of 2000 and 1999, respectively. The increase in overall yield reflected
a general increase in interest rates and the impact on the second quarter of
1999 of the funding agreements reinsurance product that were generally of a
shorter duration and carried a lower average yield. Investment income has been
allocated to the operational segments on the basis of average required capital
per segment.
Consolidated other expenses represent general corporate expenses that are not
allocated to the operational segments.
21
<PAGE> 22
The Consolidated effective tax rate for income taxes for continuing operations
represented 46.8% and 42.1% for the second quarter and first six months of 2000,
compared to 41.5% and 40.0% in the comparable prior-year periods. The increase
in the effective tax rate is primarily a result of tax implications on the $8.6
million loss on the sale of the Chilean operation.
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 an after tax loss of $2.5 million and $6.0 million for the
second quarter and first six months of 2000, compared to $5.0 million for the
comparable prior year periods, primarily a result of adverse development on the
treaties in run-off. The calculation of the claim reserve liability for the
entire portfolio of accident and health business requires management to make
estimates and assumptions that affect the reported claim reserve levels.
Management must make estimates and assumptions based on historical loss
experience, changes in the nature of the business, anticipated outcome of claim
disputes and claims for rescission, and projected future premium run-off, all of
which may affect the level of the claim reserve liability. Due to the
significant uncertainty associated with the run-off of this business, net income
in future periods could be affected positively or negatively. The consolidated
income statements for all periods presented reflect this line of business being
reported as a discontinued operation. For further discussion, see Note 21
starting on page 68 of the Company's 1999 Annual Report to Shareholders.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2000, the Company generated $89.8 million in cash
from operating activities, used $670.5 million in cash from investing activities
and generated $624.0 million in cash from financing activities, primarily
deposits received on asset intensive products. The sources of funds of the
Company's operating subsidiaries consist of premiums and deposits 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, interest
credited, operating expenses, income taxes, and investment purchases.
As the Company continues its expansion efforts, management continually analyzes
capital adequacy issues. During the second quarter of 2000, the Company entered
into a credit agreement (the "Credit Agreement") with a bank syndicate, whereby
it may borrow up to $140.0 million to continue expansion of the Company's
business. Interest on borrowings is payable quarterly at rates based either on
the prime, federal funds or LIBOR rates plus a base rate margin defined in the
Credit Agreement. As of June 30, 2000, the Company had approximately $70.0
million outstanding under the Credit Agreement, $15.0 million of which was
rolled into the Credit Agreement from a demand line of credit that has since
been terminated. The termination date of the Credit Agreement is May 24, 2003.
On May 8, 2000, RGA Holdings Limited, a
22
<PAGE> 23
wholly-owned subsidiary of the Company, entered into a revolving credit facility
(the "U.K. Credit Agreement"), whereby it may borrow up to (pound)15.0 million
(approximately $22.5 million) for expansion of the Company's business primarily
in the United Kingdom. Interest on borrowings is payable quarterly at LIBOR
rates plus a base rate margin defined in the U.K. Credit Agreement. As of June
30, 2000, the Company had (pound)6.0 million (approximately $9.1 million)
outstanding under the U.K. Credit Agreement. The termination date of the U.K.
Credit Agreement is May 8, 2003. The Credit Agreement and the U.K. Credit
Agreement contain covenants that are considered usual and customary for
facilities of these sizes, types, and purposes.
The ability of the Company and its subsidiaries to make principal and interest
payments, and of the Company to continue to pay dividends to stockholders, is
ultimately dependent on the earnings and statutory surplus of the Company's
subsidiaries and their ability to pay dividends, the investment earnings on the
undeployed funds at the Company, and the Company's ability to raise additional
capital. At June 30, 2000, RGA Reinsurance and RGA Canada had statutory capital
and surplus of $441.0 million and $166.7 million, respectively. RGA Reinsurance
may not pay dividends in any 12-month period in excess of the greater of the
prior year's statutory operating income or 10% of capital and surplus at the
preceding year-end, without regulatory approval. RGA Reinsurance's allowable
dividend without prior approval for 2000 is $43.5 million pursuant to this
calculation. The applicable statutory provisions, however, only permit an
insurer to pay a shareholder dividend from earned surplus. As of December 31,
1999, RGA Reinsurance had an earned surplus deficit; however, given RGA
Reinsurance's total surplus position, management believes any reasonable
dividend requests would be approved. As of June 30, 2000, the maximum amount
available for dividends by RGA Canada under the Canadian Minimum Continuing
Capital and Surplus Requirements ("MCCSR") is approximately $51.4 million.
Dividend payments from other subsidiaries and joint ventures are subject to
regulations in the country of domicile. The Company expects 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.
The Company has several treaties that provide clients the right to recapture,
generally subject to 90 days written notice, if the Company's ratings fall below
certain thresholds. The extent of any realized gains or losses associated with
such recaptures would depend on market conditions at the time of recapture.
INVESTMENTS
Invested assets increased to $4.4 billion at June 30, 2000, compared to $3.8
billion at December 31, 1999. The increase resulted primarily from excess
deposits on universal life and other investment type policies and contracts and
positive operating cash flows. The Company has historically generated positive
cash flows from operations.
At June 30, 2000, the Company's portfolio of fixed maturity securities available
for sale had net unrealized losses before tax of $160.6 million.
23
<PAGE> 24
MARKET RISK
Market risk is the risk of loss that may occur when fluctuations 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 income, and cash flows are not
within the limits, 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, 2000. 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, 2000, with adjustments made to reflect the shift in the Treasury yield curve
as appropriate.
24
<PAGE> 25
<TABLE>
<CAPTION>
Percentage
Estimated Fair Value of Hypothetical
Percentage Change in Interest Rates Fixed Rate Instruments Hypothetical Change Change
----------------------------------- ---------------------- ------------------- ------
(Dollars in thousands)
<C> <C> <C> <C>
300 basis point rise $ 1,953,292 $(596,317) -23.39%
200 basis point rise $ 2,119,760 $(429,849) -16.86%
100 basis point rise $ 2,316,302 $(233,307) -9.15%
Base Scenario $ 2,549,609 $ - 0.00%
100 basis point decline $ 2,828,034 $ 278,425 10.92%
200 basis point decline $ 3,163,909 $ 614,300 24.09%
300 basis point decline $ 3,579,348 $ 1,029,739 40.39%
</TABLE>
Interest rate sensitivity analysis is also used to measure the Company's
interest rate cash flow risk by computing estimated changes in the annual cash
flows expected 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 of 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 estimated change in annual cash flows
associated with floating-rate instruments for various rate shock levels at June
30, 2000. All floating rate interest sensitive instruments presented in this
table are classified as available for sale.
<TABLE>
<CAPTION>
Percentage
Estimated Annual Cash Flows Hypothetical
Percentage Change in Interest Rates of Floating Rate Instruments Hypothetical Change Change
----------------------------------- ---------------------------- ------------------- ------
(Dollars in thousands)
<C> <C> <C> <C>
300 basis point rise $ 49,741 $ 4,267 9.38%
200 basis point rise $ 48,183 $ 2,709 5.96%
100 basis point rise $ 47,181 $ 1,707 3.75%
Base Scenario $ 45,474 $ - 0.00%
100 basis point decline $ 44,335 $(1,139) -2.50%
200 basis point decline $ 43,125 $(2,349) -5.17%
300 basis point decline $ 41,823 $(3,651) -8.03%
</TABLE>
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.
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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.
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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements included in this Form 10-Q regarding the Company's business which
are not historical facts, including, without limitation, statements and
information relating to future financial performance, growth potential and
expectations, the effect of mortality rates and experience, claims levels, and
other statements related to the Company's business 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 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.
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Numerous factors could cause actual results and events to differ materially from
those expressed or implied by forward-looking statements including, without
limitation, (1) impact of the acquisition of GenAmerica Financial Corporation by
Metropolitan Life Insurance Company ("MetLife"), (2) market conditions and the
timing of sales of investment securities, (3) regulatory action taken by the New
York or Missouri Departments of Insurance with respect to MetLife or General
American or the Company or its subsidiaries, (4) changes in the Company's credit
ratings and the effect of such changes 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 MetLife and its affiliates, and (13)
changes in laws, regulations, and accounting standards applicable to the Company
and its subsidiaries.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. 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.
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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 four directors to serve terms ending in 2002.
Directors Voted For Withheld
--------- --------- --------
Stuart I. Greenbaum 43,594,216 81,013
Richard A. Liddy 43,578,056 97,173
Terrence I. Lennon 43,593,090 82,139
Judy E. Weiss 43,593,641 81,588
2. To amend the Company's Flexible Stock Option Plan, authorizing the
issuance of additional options under the Plan.
Voted
Voted For Against Abstained No Vote
--------- ------- --------- -------
36,901,476 6,760,395 13,358 0
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ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) See index to exhibits.
(b) The following report on Form 8-K was filed with the Securities and
Exchange Commission during the three months ended June 30, 2000:
The Company filed a Current Report on Form 8-K on April 6, 2000, dated
as of March 30, 2000, to report under Item 4 that the Company had
changed its certifying accountant. The Company additionally reported
under Item 5 that it reached an agreement with Ohio National Financial
Services Inc., whereby Ohio National will purchase the Company's
interest in several Chilean operations.
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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 11, 2000
-------------------------------------------
A. Greig Woodring
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Jack B. Lay August 11, 2000
----------------------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
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INDEX TO EXHIBITS
Exhibit
Number Description
3.1 Restated Articles of Incorporation of Reinsurance Group of
America, Incorporated, as amended, incorporated by reference to
Form 10-Q for the quarter ended September 30, 1999 (No. 1-11848)
filed on November 12, 1999 at the corresponding exhibit.
3.2 Bylaws of Reinsurance Group of America, Incorporated, as amended,
incorporated by reference to Form 10-Q for the quarter ended
September 30, 1999 (No. 1-11848) filed on November 12, 1999 at the
corresponding exhibit.
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 Form 10-Q for the quarter ended
June 30, 1997 (No. 1-11848) filed May 21, 1997.
4.1 Form of Specimen Certificate for Common Stock of RGA, incorporated
by reference to Amendment No. 1 to Registration Statement on Form
S-1 (No. 33-58960), filed on 14 April 1993 at the corresponding
exhibit.
4.2 Rights Agreement dated as of May 4, 1993, between RGA and
ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
incorporated by reference to Amendment No. 1 to Form 10-Q for the
quarter ended June 30, 1997 (No. 1-11848) filed on 21 May 1997 at
the corresponding exhibit.
4.3 Second Amendment to Rights Agreement, dated as of April 22, 1998,
between RGA and ChaseMellon Shareholder Services, L.L.C. (as
successor to Boatmen's Trust Company), as Rights Agent,
incorporated by reference to Registration Statement on Form S-3
(No. 333-5177) filed on 4 June 1998 at the corresponding exhibit.
4.4 Third Amendment to Rights Agreement dated as of August 12, 1999,
between Reinsurance Group of America, Incorporated and ChaseMellon
Shareholder Services, L.L.C. (as successor to Boatmen's Trust
Company), as Rights Agent, incorporated by reference to Exhibit
4.4 to Form 8-K dated August 10, 1999 (No. 1-11848), filed August
25, 1999.
4.5 Fourth Amendment to Rights Agreement dated as of August 23, 1999,
between Reinsurance Group of America, Incorporated and ChaseMellon
Shareholder Services, L.L.C. (as successor to Boatmen's Trust
Company), as Rights Agent, incorporated by reference to Exhibit
4.1 to Form 8-K dated August 26, 1999 (No. 1-11848), filed
September 10, 1999.
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10.1 Credit Agreement dated as of May 24, 2000 between Reinsurance
Group of America, Incorporated, as borrower, the financial
institutions listed on the signature pages thereof, The Bank of
New York, as Administrative Agent, Bank of America, N.A., as
Syndication Agent, Fleet National Bank, as Documentation Agent and
Royal Bank of Canada, as Co-Agent.
32
