<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 OCTOBER 31, 2000: 49,258,319
SHARES.
<PAGE> 2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
ITEM PAGE
---- ----
PART I - FINANCIAL INFORMATION
1 Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income (Unaudited)
Three and nine months ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine months ended September 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial
Statements (Unaudited) 6-10
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-24
3 Qualitative and Quantitative Disclosures About Market Risk 24
PART II - OTHER INFORMATION
1 Legal Proceedings 25
6 Exhibits and Reports on Form 8-K 25
Signatures 26
Index to Exhibits 27
2
<PAGE> 3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Fixed maturity securities
Available for sale-at fair value (amortized cost of $2,649,621 and
$2,087,540 at September 30, 2000, and December 31, 1999, respectively) $ 2,545,285 $ 1,876,166
Mortgage loans on real estate 128,528 213,187
Policy loans 668,057 660,062
Funds withheld at interest 924,483 797,949
Short-term investments 85,817 238,424
Other invested assets 25,232 26,069
----------- -----------
Total investments 4,377,402 3,811,857
Cash and cash equivalents 124,120 24,316
Accrued investment income 73,697 37,175
Premiums receivable 230,658 295,153
Reinsurance ceded receivables 313,148 295,460
Deferred policy acquisition costs 586,733 478,389
Other reinsurance balances 189,112 164,294
Other assets 27,291 17,099
----------- -----------
Total assets $ 5,922,161 $ 5,123,743
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 1,874,297 $ 1,870,099
Interest sensitive contract liabilities 2,138,413 1,545,893
Other policy claims and benefits 518,774 582,066
Other reinsurance balances 82,883 53,866
Deferred income taxes 130,497 67,914
Other liabilities 85,325 83,238
Long-term debt 262,073 183,954
----------- -----------
Total liabilities 5,092,262 4,387,030
Minority interest 309 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 September 30, 2000 and December 31, 1999,) 511 511
Additional paid in capital 611,049 611,016
Retained earnings 341,880 282,389
Accumulated other comprehensive income (loss):
Accumulated currency translation adjustment, net of income taxes (17,295) (9,909)
Unrealized depreciation of securities, net (66,923) (131,341)
----------- -----------
Total stockholders' equity before treasury stock 869,222 752,666
Less treasury shares held of 1,794,954 and 1,112,820 at cost at
September 30, 2000, and December 31, 1999, respectively (39,632) (19,718)
----------- -----------
Total stockholders' equity 829,590 732,948
----------- -----------
Total liabilities and stockholders' equity $ 5,922,161 $ 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 Nine months ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 316,116 $ 295,079 $ 991,059 $ 965,603
Investment income, net of related expenses 82,118 91,697 238,420 264,231
Realized investment losses, net (2,821) (62,239) (18,345) (61,744)
Other revenue 6,949 1,707 12,637 10,568
----------- ----------- ----------- -----------
Total revenues 402,362 326,244 1,223,771 1,178,658
BENEFITS AND EXPENSES:
Claims and other policy benefits 242,921 229,684 776,326 776,763
Interest credited 26,087 43,898 74,562 127,141
Policy acquisition costs and other insurance expenses 57,595 49,324 171,257 155,233
Other operating expenses 19,964 19,408 59,189 51,162
Interest expense 5,108 2,475 12,417 6,704
----------- ----------- ----------- -----------
Total benefits and expenses 351,675 344,789 1,093,751 1,117,003
----------- ----------- ----------- -----------
Income (loss) before income taxes and minority interest 50,687 (18,545) 130,020 61,655
Provision (benefit) for income taxes 19,011 (4,950) 52,743 27,166
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before minority interest 31,676 (13,595) 77,277 34,489
Minority interest in earnings of consolidated subsidiaries 306 342 593 801
----------- ----------- ----------- -----------
Income (loss) from continuing operations 31,370 (13,937) 76,684 33,688
Discontinued operations:
Loss on discontinued accident and health operations,
net of income taxes (2,261) (3,212) (8,249) (8,204)
----------- ----------- ----------- -----------
Net income (loss) $ 29,109 $ (17,149) $ 68,435 $ 25,484
=========== =========== =========== ===========
Earnings (loss) per share from continuing operations:
Basic earnings (loss) per share $ 0.64 $ (0.31) $ 1.55 $ 0.74
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.63 $ (0.31) $ 1.53 $ 0.73
=========== =========== =========== ===========
Earnings (loss) per share from net income:
Basic earnings (loss) per share $ 0.59 $ (0.38) $ 1.38 $ 0.56
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.59 $ (0.38) $ 1.37 $ 0.56
=========== =========== =========== ===========
Weighted average number of diluted shares outstanding
(in thousands) 49,720 45,311 49,961 45,854
=========== =========== =========== ===========
</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>
Nine months ended
September 30,
---------------------------------
2000 1999
----------- -----------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 68,435 $ 25,484
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (36,522) 3,504
Premiums receivable 64,113 (159,719)
Deferred policy acquisition costs (115,859) (111,722)
Funds withheld (19,346) 10,457
Reinsurance ceded balances (17,688) (31,554)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 138,667 311,234
Deferred income taxes 31,091 42,032
Other assets and other liabilities (140) 88,321
Amortization of net investment discounts (22,340) (17,320)
Realized investment losses, net 9,710 61,744
Realized loss on sale of business - net 8,635 --
Other, net (11,454) 2,615
----------- -----------
Net cash provided by operating activities 97,302 225,076
INVESTING ACTIVITIES:
Proceeds from sale of business 26,509 --
Sales of investments:
Fixed maturity securities - Available for sale 439,148 2,706,080
Mortgage loans 1,745 4,543
Maturities of fixed maturity securities - Available for sale 13,784 37,075
Purchases of fixed maturity securities - Available for sale (1,106,216) (1,355,448)
Cash invested in:
Mortgage loans (21,951) (51,954)
Policy loans (7,995) (93,371)
Funds withheld at interest (127,086) (27,466)
Principal payments on:
Mortgage loans 4,321 15,159
Change in short-term and other invested assets 137,870 187,623
----------- -----------
Net cash provided by (used in) investing activities (639,871) 1,422,241
FINANCING ACTIVITIES:
Dividends to stockholders (8,944) (7,274)
Borrowings under debt agreements 78,119 --
Proceeds from debt issuance -- 75,000
Purchase of treasury stock (20,000) --
Reissuance of treasury stock 119 454
Exchange of voting for non-voting shares -- (665)
Excess deposits (withdrawals) on universal life and other
investment type policies and contracts 592,520 (1,616,479)
----------- -----------
Net cash provided by (used in) financing activities 641,814 (1,548,964)
Effect of exchange rate changes 559 59
----------- -----------
Change in cash and cash equivalents 99,804 98,412
Cash and cash equivalents, beginning of period 24,316 15,966
----------- -----------
Cash and cash equivalents, end of period $ 124,120 $ 114,378
=========== ===========
</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 nine month periods ending
September 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 information to
conform to the 2000 presentation.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share from continuing operations (in thousands except per share
information):
<TABLE>
<CAPTION>
-------------------------- --------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Earnings:
Income (loss) from continuing operations
(numerator for basic and diluted
calculations) $ 31,370 $(13,937) $ 76,684 $ 33,688
Shares:
Weighted average outstanding shares
(denominator for basic calculation) 49,286 45,311 49,625 45,331
Equivalent shares from outstanding stock
options 434 -- 336 523
-------- -------- -------- --------
Denominator for diluted calculation 49,720 45,311 49,961 45,854
Earnings (loss) per share:
Basic $ 0.64 $ (0.31) $ 1.55 $ 0.74
Diluted $ 0.63 $ (0.31) $ 1.53 $ 0.73
-------- -------- -------- --------
</TABLE>
6
<PAGE> 7
The calculation of equivalent shares from outstanding stock options does not
include the impact of options having a strike price which exceeds the average
stock price for the earnings period, as the result would be antidilutive. For
the three and nine month periods ended September 30, 2000, approximately 0.3
million and 0.4 million, respectively, in outstanding stock options were not
included in the calculation of common equivalent shares. For the three month
period ended September 30, 1999, approximately 0.3 million in outstanding stock
options were not included in the calculation of common equivalent shares. These
options were outstanding at the end of their respective periods.
3. COMPREHENSIVE INCOME (LOSS)
The following schedule reflects the change in accumulated other comprehensive
income (loss) for the three and nine-month periods ended September 30, 2000 and
1999 (in thousands):
<TABLE>
<CAPTION>
-------------------------------- -------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $ 29,109 $ (17,149) $ 68,435 $ 25,484
Accumulated other comprehensive
income (loss):
Unrealized gains (losses) on securities 31,068 (30,278) 64,418 (120,074)
Foreign currency items (4,633) (301) (7,386) 78
--------- --------- --------- ---------
Comprehensive income (loss) $ 55,544 $ (47,728) $ 125,467 $ (94,512)
--------- --------- --------- ---------
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES
U.S $ 294,044 $ 213,816 $ 897,820 $ 835,978
Canada 55,287 56,954 172,224 163,990
Latin America 13,624 25,961 55,745 94,469
Asia Pacific 27,096 19,380 71,110 53,410
Other international 9,620 8,191 22,464 20,601
Corporate 2,691 1,942 4,408 10,210
---------- ---------- ---------- ----------
Total from continuing operations $ 402,362 $ 326,244 $1,223,771 $1,178,658
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
--------------------------------- ---------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES AND
MINORITY INTEREST
Reinsurance:
U.S. $ 50,198 $ (23,884) $ 129,075 $ 46,705
Canada 4,961 9,997 26,491 27,165
Latin America 527 2,128 (6,638) 4,025
Asia Pacific 1,640 (217) 1,297 (7,987)
Other international (1,678) (2,279) (3,514) (3,512)
Corporate (4,961) (4,290) (16,691) (4,741)
---------- ---------- ---------- ----------
Total from continuing operations $ 50,687 $ (18,545) $ 130,020 $ 61,655
---------- ---------- ---------- ----------
</TABLE>
During the first nine 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 nine months of 2000.
5. STOCK REPURCHASE PROGRAM
Reinsurance Group of America, Incorporated purchased 689,953 shares of treasury
stock at an aggregate cost of $20.0 million during the first nine months of
2000. The Company plans to use the repurchased shares to support the future
exercise of options granted under its stock option plan.
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, under which 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 September
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 $22.0 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 September 30, 2000, the Company had borrowed
(pound)6.0 million (approximately $8.8 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 October 25, 2000. This dividend will be payable on November 27, 2000 to
shareholders of record as of November 6, 2000.
9. NEW ACCOUNTING STANDARDS
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities". SFAS No. 140 revises the standards
for accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of the
provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
March 31, 2001 and is effective for recognition and reclassification of
9
<PAGE> 10
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000.
In June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities--an Amendment to FASB
Statement No. 133". This Statement addresses a limited number of issues causing
implementation difficulties for numerous entities that apply Statement 133.
Statement 138 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000.
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.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"), which is
effective on January 1, 2001. Codification provides a comprehensive guide of
statutory accounting principles. However, individual states retain the right to
adopt Codification in whole or in part. The impact of adopting Codification will
be reported as an adjustment to statutory surplus by insurance enterprises on
the effective date.
The Company is currently evaluating the potential impact, if any, that these
accounting pronouncements will have on its financial condition or results of
operations.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has five main operating segments segregated primarily by geographic
region: U.S., Canada, Latin America, Asia Pacific, and other international
operations. The U.S. operations provide traditional life reinsurance and
non-traditional reinsurance to domestic clients. Non-traditional business
includes asset-intensive and financial reinsurance. Asset-intensive products
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 subsidiary in
Argentina. The Company sold its joint venture and subsidiaries in Chile in April
2000. 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 third quarter and first nine months of 2000 increased $69.2
million and $68.4 million, respectively, compared to the prior-year periods.
Diluted earnings per share from continuing operations were $0.63 and $1.53 for
the third quarter and first nine months of 2000, respectively, compared with
$(0.31) and $0.73 for the comparable 1999 periods. Earnings during 2000 are
attributable primarily to traditional reinsurance in the U.S. and Canada. The
increase in earnings for the third quarter and nine months was significantly
affected by realized capital losses on sales of securities incurred during 1999
comparable periods associated with the recapture by General American Life
Insurance Company ("General American") of all funding agreement business
reinsured by the Company. Excluding realized investment losses, consolidated
income from continuing operations before income taxes and minority interest for
the third quarter and first nine months of 2000 increased $9.8 million and $25.0
million, respectively, as compared to the prior-year periods.
Further discussion and analysis of the results for 2000 compared to 1999 are
presented by segment.
11
<PAGE> 12
U.S. OPERATIONS (dollars in thousands)
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
----------- --------------------------- ------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 230,921 $ 522 $ -- $ 231,443
Investment income, net of related expenses 31,831 27,603 60 59,494
Realized investment losses, net (1,304) (579) -- (1,883)
Other revenue 657 (197) 4,530 4,990
--------- --------- --------- ---------
Total revenues 262,105 27,349 4,590 294,044
BENEFITS AND EXPENSES:
Claims and other policy benefits 166,564 2,176 -- 168,740
Interest credited 11,898 14,696 -- 26,594
Policy acquisition costs and other insurance
expenses 32,183 6,966 1,539 40,688
Other operating expenses 6,489 237 1,098 7,824
--------- --------- --------- ---------
Total benefits and expenses 217,134 24,075 2,637 243,846
Income before income taxes and minority interest $ 44,971 $ 3,274 $ 1,953 $ 50,198
--------- --------- --------- ---------
</TABLE>
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
----------- --------------------------- ------------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
----------- --------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 207,125 $ (62) $ -- $ 207,063
Investment income, net of related expenses 30,678 36,851 -- 67,529
Realized investment losses, net (9,413) (53,065) -- (62,478)
Other revenue (1,526) (18) 3,246 1,702
--------- --------- --------- ---------
Total revenues 226,864 (16,294) 3,246 213,816
BENEFITS AND EXPENSES:
Claims and other policy benefits 153,635 167 -- 153,802
Interest credited 9,752 33,319 -- 43,071
Policy acquisition costs and other insurance
expenses 31,045 727 2,371 34,143
Other operating expenses 6,415 231 38 6,684
--------- --------- --------- ---------
Total benefits and expenses 200,847 34,444 2,409 237,700
Income (loss) before income taxes and minority $ 26,017 $ (50,738) $ 837 $ (23,884)
interest --------- --------- --------- ---------
</TABLE>
12
<PAGE> 13
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
----------- --------------------------- -----------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 727,449 $ 1,566 $ -- $ 729,015
Investment income, net of related expenses 102,273 64,302 60 166,635
Realized investment losses, net (5,718) (664) -- (6,382)
Other revenue 621 201 7,730 8,552
--------- --------- --------- ---------
Total revenues 824,625 65,405 7,790 897,820
BENEFITS AND EXPENSES:
Claims and other policy benefits 549,921 2,918 -- 552,839
Interest credited 34,803 37,760 -- 72,563
Policy acquisition costs and other insurance
expenses 102,498 16,765 3,500 122,763
Other operating expenses 18,931 514 1,135 20,580
--------- --------- --------- ---------
Total benefits and expenses 706,153 57,957 4,635 768,745
Income before income taxes and minority interest $ 118,472 $ 7,448 $ 3,155 $ 129,075
--------- --------- --------- ---------
</TABLE>
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
----------- --------------------------- -----------
TRADITIONAL NON-TRADITIONAL TOTAL
ASSET- FINANCIAL U.S.
INTENSIVE REINSURANCE
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 696,220 $ 781 $ -- $ 697,001
Investment income, net of related expenses 90,511 110,471 -- 200,982
Realized investment losses, net (14,988) (56,439) -- (71,427)
Other revenue (1,521) 801 10,142 9,422
--------- --------- --------- ---------
Total revenues 770,222 55,614 10,142 835,978
BENEFITS AND EXPENSES:
Claims and other policy benefits 529,317 897 -- 530,214
Interest credited 29,212 95,958 -- 125,170
Policy acquisition costs and other insurance
expenses 106,192 2,695 7,434 116,321
Other operating expenses 16,889 583 96 17,568
--------- --------- --------- ---------
Total benefits and expenses 681,610 100,133 7,530 789,273
Income (loss) before income taxes and minority
interest $ 88,612 $ (44,519) $ 2,612 $ 46,705
--------- --------- --------- ---------
</TABLE>
During the third quarter and first nine months of 2000, income before income
taxes and minority interest for U.S. operations increased $74.1 million and
$82.4 million, respectively, over the comparable prior-year periods. The
increase over prior periods is primarily due to the realized loss recognized
during the third quarter of 1999 on the recapture of the General American
funding agreement business. During the third quarter and first nine months of
2000, operating
13
<PAGE> 14
income before realized losses increased 34.9% and 14.7%, respectively, over the
comparable prior-year periods. These increases are primarily the result of
favorable mortality experience on the core traditional block of business and
emerging profits from the large in force blocks reinsured over the last several
years. U.S. operations include traditional and non-traditional reinsurance. The
components of non-traditional reinsurance are asset-intensive and financial
reinsurance.
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. 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 11.5% and 4.5% in the third
quarter and first nine months of 2000. The increase in the third quarter relates
primarily to an increase in the core traditional block. Net premiums for the
first nine months of 1999 include the impact of two large in force blocks of
business, which contributed over $55 million in premium in the first quarter of
1999. Gross assumed in force increased $8.0 billion and $45.9 billion,
respectively, in the third quarter and first nine months of 2000. 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 13.0% during the first nine 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 8.4% and 3.9% in the
third quarter and first nine months of 2000. Claims and other policy benefits,
as a percentage of net premiums, were 72.1% and 75.6% in the third quarter and
first nine months of 2000, respectively, compared to 74.2% and 76.0% 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 19.1% the first nine 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 nine months of 2000 as compared to 1999 was primarily due
to increased deposits on certain cash value 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 13.9% and 14.1% for the third quarter and first nine months of
2000, respectively, compared to
14
<PAGE> 15
15.0% and 15.3% in the prior-year periods. The decreases were primarily
attributable to the change in the mix of business that has been processed in the
current periods.
Asset-Intensive Reinsurance
The U.S. asset-intensive reinsurance subsegment includes the reinsurance of
annuities and bank-owned life insurance. 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. As of September 30, 1999, the Company no longer reinsured funding
agreement products.
Income before income taxes and minority interest increased in the third quarter
and first nine 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 and interest credited. During the first nine months of 2000,
operating income before realized losses decreased 31.9% over the prior-year
period. This decrease was partially offset by a new coinsurance agreement on a
block of single premium deferred annuities. Total assets decreased during the
third quarter of 1999 approximately $1.8 billion because of the recapture of the
funding agreement business, but increased during the second quarter of 2000
approximately $.5 billion due to the new annuity block mentioned above. Net
premiums reported in this subsegment relate to a yearly renewable term treaty
that reinsures the mortality risk of a bank-owned life insurance product. Policy
acquisition costs and other insurance expenses relate primarily to the
commission payments and premium taxes (if applicable) on deposits received. The
increase in these expenses for the nine and three months ended September 30,
2000 over prior year primarily relates to the increase in net acquisition costs
of two annuity blocks.
Financial Reinsurance
The U.S. financial reinsurance subsegment includes net fees earned on financial
reinsurance agreements and the investment in RGA/Swiss Financial Group, L.L.C.
("RGA/Swiss"). Effective July 1, 2000, the Company increased its ownership of
RGA/Swiss from 40% to 80%. For 1999 and the first six months of 2000, the
Company included its equity in the earnings of RGA/Swiss in other income due to
the 40% ownership. For the third quarter 2000, results were consolidated and
minority interest expense was recorded for the 20% not owned by the Company.
Subsequent to the end of the third quarter, the Company acquired the remaining
20% interest and changed the name of RGA/Swiss to RGA Financial Group, L.L.C.
Financial reinsurance agreements represent low mortality risk business. The
Company retrocedes most of this business and earns a fee 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 income taxes and minority interest increased in the third quarter
of 2000 and in the first nine months of 2000, as compared to the prior-year
periods. These results were primarily attributable to the purchase of an
additional 40% interest in RGA/Swiss. A decrease in outstanding statutory
financial reinsurance partially offset the earnings increase. Policy
15
<PAGE> 16
acquisition costs and other insurance expenses include fees paid for the
subsequent retrocession of these financial reinsurance transactions.
CANADA OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
------------------------------- --------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 39,683 $ 42,763 $ 126,856 $ 119,636
Investment income, net of related expenses 15,325 14,153 45,609 38,125
Realized investment (losses) gains, net (163) -- (810) 6,253
Other revenue 442 38 569 (24)
--------- --------- --------- ---------
Total revenues 55,287 56,954 172,224 163,990
BENEFITS AND EXPENSES:
Claims and other policy benefits 44,822 37,072 124,787 112,890
Interest credited 141 451 635 1,356
Policy acquisition costs and other
insurance expenses 3,316 7,442 14,096 17,161
Other operating expenses 2,047 1,992 6,215 5,418
--------- --------- --------- ---------
Total benefits and expenses 50,326 46,957 145,733 136,825
Income before income taxes and
minority interest $ 4,961 $ 9,997 $ 26,491 $ 27,165
--------- --------- --------- ---------
</TABLE>
Income before income taxes and minority interest decreased 50.4% and 2.5% in the
third quarter and first nine months of 2000, respectively. Excluding realized
investment gains (losses), income before income taxes and minority interest
decreased 48.7% and increased 30.6% in the third quarter and first nine months
of 2000, respectively. The decrease in the third quarter is the result of higher
than expected claims. The increase in the first nine months of 2000 was driven
by a growth in premiums and investment income. The effects of changes in the
foreign exchange rate during 2000 compared to 1999 are not material.
Net premiums decreased 7.2% and increased 6.0% in the third quarter and first
nine months of 2000, respectively. 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 8.3% and
19.6% in the third quarter and first nine 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 20.9% and 10.5% during the third
quarter and first nine months of 2000. Claims and other policy benefits as a
percentage of net premiums were
16
<PAGE> 17
113.0% and 98.4% in the third quarter and first nine months of 2000 compared to
86.7% and 94.4% in the prior-year periods. The higher percentage in the third
quarter of 2000 is the result of higher than expected mortality. For the first
nine months, mortality was consistent with expectations. Mortality is expected
to fluctuate somewhat from period to period but remains fairly constant over the
long term.
Policy acquisition costs and other insurance expenses as a percentage of net
premiums totaled 8.4% and 11.1% in the third quarter and first nine months of
2000, respectively, compared to 17.4% and 14.3% in the prior year periods. The
decrease in the third quarter and first nine months of 2000 is primarily due to
a different mix of business processed 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)
<TABLE>
<CAPTION>
------------------------------- -------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 11,623 $ 18,239 $ 49,885 $ 78,480
Investment income, net of related expenses 1,881 7,822 14,505 15,731
Realized investment (losses) gains, net (42) -- (8,960) 280
Other revenue 162 (100) 315 (22)
-------- -------- -------- --------
Total revenues 13,624 25,961 55,745 94,469
BENEFITS AND EXPENSES:
Claims and other policy benefits 10,572 19,485 47,646 77,741
Interest credited (648) 376 1,364 616
Policy acquisition costs and other
insurance expenses 856 1,369 4,721 4,101
Other operating expenses 2,317 2,603 8,652 7,986
-------- -------- -------- --------
Total benefits and expenses 13,097 23,833 62,383 90,444
Income (loss) before income taxes
and minority interest $ 527 $ 2,128 $ (6,638) $ 4,025
-------- -------- -------- --------
</TABLE>
For the Latin America operations, income before income taxes and minority
interest decreased in the third quarter primarily as a result of the losses in
the direct operations in Argentina offsetting earnings in the reinsurance
operations. During the first nine months of 2000, income decreased compared to
the same period in 1999 due to a loss reported on the sale of the Chilean
companies during the second quarter of 2000. Profit from the reinsurance
operations increased primarily as a result of growth in the Mexican and
Argentine business. For the reinsurance of privatized pensions in Argentina,
management has limited the number of contracts in which the Company
17
<PAGE> 18
participates while seeking traditional reinsurance opportunities in other areas.
This strategy contributes to the fluctuation in net premiums compared to the
prior year as the number of active treaties has decreased with continuing
refunds to ceding companies related to experience on existing treaties.
For the direct operations, premiums for the first nine months have decreased
primarily as a result of declining production due in part to sluggish market
conditions in Argentina and sale of operations in Chile during the second
quarter of 2000.
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 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 25,181 $ 18,867 $ 66,384 $ 51,188
Investment income, net of related expenses 1,422 256 3,473 1,612
Realized investment losses, net (25) -- (6) (33)
Other revenue 518 257 1,259 643
-------- -------- -------- --------
Total revenues 27,096 19,380 71,110 53,410
BENEFITS AND EXPENSES:
Claims and other policy benefits 13,313 14,078 37,951 41,242
Policy acquisition costs and other
insurance expenses 9,532 3,749 24,200 14,193
Other operating expenses 2,356 1,647 7,110 5,607
Interest expense 255 123 552 355
-------- -------- -------- --------
Total benefits and expenses 25,456 19,597 69,813 61,397
Income (loss) before income taxes
and minority interest $ 1,640 $ (217) $ 1,297 $ (7,987)
-------- -------- -------- --------
</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.
18
<PAGE> 19
The third quarter and first nine months of 2000 showed an increase in premiums
of 33.5% and 29.7%, 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 third quarter and first nine months primarily from
the larger base of business. 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 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 decreased to
52.9% and 57.2% in the third quarter and first nine months of 2000,
respectively, from 74.6% and 80.6% in 1999. The decrease in the nine 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 37.9% and 36.5% in the third quarter and first nine months of 2000
versus 19.9% and 27.7% 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 third quarter and first nine months of 2000 increased
by 43.0% and 26.8%, respectively. As a percentage of premiums, other operating
expenses were 9.4% and 10.7% in the third quarter and first nine months 2000
versus 8.7% and 11.0% in the prior year periods. The Company believes that
sustained growth in premiums should lessen the burden of start-up expenses and
expansion costs.
19
<PAGE> 20
OTHER INTERNATIONAL OPERATIONS (dollars in thousands)
<TABLE>
<CAPTION>
------------------------------ ------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums $ 8,186 $ 8,148 $ 18,919 $ 19,298
Investment income, net of related expenses 619 80 1,310 608
Realized investment gains, net 121 155 439 275
Other revenue 694 (192) 1,796 420
-------- -------- -------- --------
Total revenues 9,620 8,191 22,464 20,601
BENEFITS AND EXPENSES:
Claims and other policy benefits 5,474 5,247 13,103 14,676
Policy acquisition costs and other
insurance expenses 3,203 2,621 5,477 3,456
Other operating expenses 2,315 2,602 7,092 5,981
Interest expense 306 -- 306 --
-------- -------- -------- --------
Total benefits and expenses 11,298 10,470 25,978 24,113
Loss before income taxes and
minority interest $ (1,678) $ (2,279) $ (3,514) $ (3,512)
-------- -------- -------- --------
</TABLE>
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 from year to year were unchanged in the third quarter but decreased
$0.4 million in the first nine months of 2000 primarily as a result of an
automatic treaty with a U.K. client first processed during the third 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 66.9% and 69.3%
in the third quarter and first nine months of 2000, respectively, compared to
64.4% and 76.0% 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 $1.1
million in the first nine months of 2000 from $6.0 million in
20
<PAGE> 21
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 10.4% and
9.8% during the third quarter and first nine 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 7.29% and 6.96% for the third
quarters of 2000 and 1999, respectively. The increase in overall yield reflected
a general increase in interest rates and the impact on the third quarter of 1999
of the funding agreement reinsurance products 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.
Consolidated provision for income taxes for continuing operations increased
$24.0 million and $25.6 million for the third quarter and first nine months of
2000, respectively, primarily a result of higher pretax income. The effective
tax rates for all periods presented were affected by realized capital losses and
operating losses from foreign subsidiaries for which deferred tax assets cannot
be fully established. Excluding realized capital losses, the effective tax rate
would have been approximately 38.5% and 38.0% for the third quarter and first
nine months of 2000, respectively, compared to 38.5% and 39.5% for the prior
year periods.
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 $2.3 million and $8.2 million for the
third quarter and first nine months of 2000, compared to $3.2 million and $8.2
million for the comparable prior year periods, primarily a result of adverse
development on the treaties in run-off. The calculation of the liability for
claims on the entire portfolio of accident and health business requires
management to make estimates and assumptions that affect the reported liability
for claims. 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
21
<PAGE> 22
the liability for claims. Due to the significant uncertainty associated with the
run-off of this business, net income in future periods could be affected. 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 nine months of 2000, the Company generated $97.3 million in
cash from operating activities, used $639.9 million of cash in investing
activities and generated $641.8 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 September 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 $22.0 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
September 30, 2000, the Company had (pound)6.0 million (approximately $8.8
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 September 30, 2000, RGA Reinsurance and RGA Canada had statutory
capital and surplus of $438.2 million and $164.6 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,
22
<PAGE> 23
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
September 30, 2000, the maximum amount available for dividends by RGA Canada
under the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR")
is approximately $40.2 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 September 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 September 30, 2000, the Company's portfolio of fixed maturity securities
available for sale had net unrealized losses before income taxes of $104.3
million.
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.
There has been no significant change in the Company's quantitative or
qualitative aspects of market risk during the quarter ended September 30, 2000
from that disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
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 and growth potential,
increases in premiums, the effect of mortality rates and experience, claims
levels, opportunities related to in force transactions, its views on the life
23
<PAGE> 24
reinsurance industry, 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.
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, 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 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 September 30, 2000:
None.
25
<PAGE> 26
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 November 10, 2000
-----------------------------------------------------
A. Greig Woodring
President & Chief Executive Officer
(Principal Executive Officer)
/s/ Jack B. Lay November 10, 2000
-----------------------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 27
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.
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 April 14, 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 May 21, 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 June 4,
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.
27
