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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 Commission file number 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact name of registrant as specified in its charter)
MISSOURI 43-1627032
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1370 TIMBERLAKE MANOR PARKWAY, CHESTERFIELD, MISSOURI 63017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (636) 736-7439
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------- --------------------
Common Stock, par value $0.01 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on March 1,
2001, as reported on the New York Stock Exchange was approximately $786,050,442.
As of March 1, 2001, Registrant had outstanding 49,375,609 shares of common
stock.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2001
Annual Meeting of Shareholders ("the Proxy Statement") which will be filed with
the Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year ended December 31, 2000, are incorporated by reference
in Part III of this Form 10-K.
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REINSURANCE GROUP OF AMERICA, INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 2000
INDEX
ITEM PAGE
NUMBER OF THIS FORM
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PART I
1. BUSINESS............................................................... 4
2. PROPERTIES............................................................. 21
3. LEGAL PROCEEDINGS...................................................... 22
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 22
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS................................................. 22
6. SELECTED FINANCIAL DATA................................................ 22
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................. 24
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. 42
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................ 42
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 73
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................... 73
11. EXECUTIVE COMPENSATION................................................. 75
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......... 75
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 75
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........ 75
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Item 1. BUSINESS
A. OVERVIEW
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company formed December 31, 1992. On December 31, 2000, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
49.0% of the outstanding shares of common stock of RGA. Equity Intermediary
Company is a wholly owned subsidiary of General American Life Insurance Company
("General American"), a Missouri life insurance company, which in turn is a
wholly owned subsidiary of GenAmerica Financial Corporation ("GenAmerica"), a
Missouri corporation. GenAmerica was acquired and became a wholly owned
subsidiary of Metropolitan Life Insurance Company ("MetLife"), a New York life
insurance company, on January 6, 2000. As a result of MetLife's ownership of
GenAmerica and its own direct investment in RGA, MetLife now beneficially owns
58.7% of the outstanding shares of common stock of RGA.
The consolidated financial statements include the assets, liabilities,
and results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"); RGA Australian Holdings PTY, Limited ("Australian Holdings"); RGA
Reinsurance Company (Barbados) Ltd. ("RGA Barbados"); RGA International, Ltd.
("RGA International"), a New Brunswick company that serves as a Canadian
marketing and insurance holding company for RGA's Canadian operations; RGA
Sudamerica, S.A., a Chilean holding company; RGA Holdings Limited ("RGA UK"), a
United Kingdom holding company; General American Argentina Seguros de Vida, S.A.
("GA Argentina"), an Argentine life insurance company; RGA South African
Holdings (Pty) Ltd. ("RGA South Africa"), a South African holding company;
Benefit Resource Life Insurance Company (Bermuda) Ltd. ("RGA Bermuda"); RGA
Americas Reinsurance Company, Ltd.; and Triad Re, Ltd. In addition, the
consolidated financial statements include the subsidiaries of RCM, Australian
Holdings, RGA International, RGA UK, RGA Sudamerica, S.A., and RGA South Africa
subject to an ownership position of fifty percent or more (collectively, the
"Company"). In 2000, the Company sold its interest in RGA Sudamerica, S.A. and
its subsidiaries, and RGA Bermuda.
During October 2000, the Company acquired the remaining 60 percent
interest in RGA/Swiss Financial Group, L.L.C. that it did not already own, and
has changed the name to RGA Financial Group, L.L.C.
The Company is primarily engaged in life reinsurance and international
life and disability insurance on a direct and reinsurance basis. In addition,
the Company provides reinsurance of non-traditional business including
asset-intensive products and financial reinsurance. RGA and its predecessor, the
Reinsurance Division of General American ("Reinsurance Division"), have been
engaged in the business of life reinsurance since 1973. As of December 31, 2000,
the Company had approximately $6.1 billion in consolidated assets.
Reinsurance is an arrangement under which an insurance company, the
"reinsurer," agrees to indemnify another insurance company, the "ceding
company," for all or a portion of the insurance risks underwritten by the ceding
company. Reinsurance is designed to (i) reduce the net liability on individual
risks, thereby enabling the ceding company to increase the volume of business it
can underwrite, as well as increase the maximum risk it can underwrite on a
single life or risk; (ii) stabilize operating results by leveling fluctuations
in the ceding company's loss experience; (iii) assist the ceding company to meet
applicable regulatory requirements; and (iv) enhance the ceding company's
financial strength and surplus position.
Life reinsurance primarily refers to reinsurance of individual term
life insurance policies, whole life insurance policies, universal life insurance
policies, and joint and survivor insurance policies. Ceding companies typically
contract with more than one company to reinsure their business. Reinsurance may
be written on an indemnity or an assumption basis. Indemnity reinsurance does
not discharge a ceding company from liability to the policyholder. A ceding
company is required to pay the full amount of its insurance obligations
regardless of whether it is entitled or able to receive payments from its
reinsurers. In the case of assumption reinsurance, the ceding company is
discharged from liability to the policyholder, with such liability passed to the
reinsurer. Reinsurers also may purchase reinsurance, known as retrocession
reinsurance, to cover their own risk exposure. Reinsurance companies enter into
retrocession agreements for reasons similar to those that cause primary insurers
to purchase reinsurance.
Reinsurance also may be written on a facultative basis or an automatic
treaty basis. Facultative reinsurance is individually underwritten by the
reinsurer for each policy to be reinsured, with the pricing and other terms
established at the time the policy is underwritten based upon rates negotiated
in advance. Facultative reinsurance normally is purchased by insurance companies
for medically impaired lives, unusual risks, or liabilities in excess of binding
limits on their automatic treaties.
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An automatic reinsurance treaty provides that the ceding company will
cede risks to a reinsurer on specified blocks of business where the underlying
policies meet the ceding company's underwriting criteria. In contrast to
facultative reinsurance, the reinsurer does not approve each individual risk.
Automatic reinsurance treaties generally provide that the reinsurer will be
liable for a portion of the risk associated with the specified policies written
by the ceding company. Automatic reinsurance treaties specify the ceding
company's binding limit, which is the maximum amount of risk on a given life
that can be ceded automatically and that the reinsurer must accept. The binding
limit may be stated either as a multiple of the ceding company's retention or as
a stated dollar amount.
Facultative and automatic reinsurance may be written as yearly
renewable term, coinsurance, or modified coinsurance, which vary with the type
of risk assumed and the manner of pricing the reinsurance. Under a yearly
renewable term treaty, the reinsurer assumes only the mortality or morbidity
risk. Under a coinsurance arrangement, depending upon the terms of the contract,
the reinsurer may share in the risk of loss due to mortality or morbidity,
lapses, and the investment risk, if any, inherent in the underlying policy.
Modified coinsurance differs from coinsurance in that the assets supporting the
reserves are retained by the ceding company while the risk is transferred to the
reinsurer.
Generally, the amount of life reinsurance ceded under facultative and
automatic reinsurance agreements is stated on either an excess or a quota share
basis. Reinsurance on an excess basis covers amounts in excess of an agreed-upon
retention limit. Retention limits vary by ceding company and also vary by age
and underwriting classification of the insured, product, and other factors.
Under quota share reinsurance, the ceding company states its retention in terms
of a fixed percentage of the risk that will be retained, with the remainder up
to the maximum binding limit to be ceded to one or more reinsurers.
Reinsurance agreements, whether facultative or automatic, may provide
for recapture rights on the part of the ceding company. Recapture rights permit
the ceding company to reassume all or a portion of the risk formerly ceded to
the reinsurer after an agreed-upon period of time (generally 10 years), subject
to certain other conditions. Recapture of business previously ceded does not
affect premiums ceded prior to the recapture of such business.
The potential adverse effects of recapture rights are mitigated by the
following factors: (i) recapture rights vary by treaty and the risk of recapture
is a factor which is taken into account when pricing a reinsurance agreement;
(ii) ceding companies generally may exercise their recapture rights only to the
extent they have increased their retention limits for the reinsured policies;
and (iii) ceding companies generally must recapture all of the policies eligible
for recapture under the agreement in a particular year if any are recaptured,
which prevents a ceding company from recapturing only the most profitable
policies. In addition, when a ceding company increases its retention and
recaptures reinsured policies, the reinsurer releases the reserves it maintained
to support the recaptured portion of the policies. Also, some reinsurance
treaties provide provisions to allow the ceding companies to recapture if
certain ratings or other financial triggers are met.
B. CORPORATE STRUCTURE
RGA is a holding company, the principal assets of which consist of the
common stock of RCM, RGA Barbados, and RGA International, as well as investments
in several other subsidiaries or joint ventures. The primary source of funds for
RGA to make dividend distributions and to fund debt service is dividends paid to
RGA by its operating subsidiaries, securities maintained in its investment
portfolio, and proceeds from securities offerings. RCM's primary sources of
funds are dividend distributions paid by RGA Reinsurance Company ("RGA
Reinsurance") whose principal source of funds is derived from current
operations. RGA International's principal source of funds is dividends on its
equity interest in RGA Canada Management Company, Ltd. ("RGA Canada
Management"), whose principal source of funds is dividends paid by RGA Life
Reinsurance Company of Canada ("RGA Canada"). RGA Canada's principal source of
funds is derived from current operations.
As of December 31, 1998, the Company formally reported its accident and
health division as a discontinued operation. The accident and health operation
was placed into run-off and all treaties (contracts) were terminated at the
earliest possible date. RGA gave notice to all reinsureds and retrocessionaires
that all treaties were cancelled at the expiration of their term. If the treaty
was continuous, a written Preliminary Notice of Cancellation was given, followed
by a final notice within 90 days of the expiration date. The nature of the
underlying risks is such that the claims may take years to reach the reinsurers
involved. Thus, the Company expects to pay claims out of existing reserves over
a number of years as the level of business diminishes.
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The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and other
international operations. The U.S. operations provide traditional life
reinsurance and non-traditional reinsurance to domestic clients. Non-traditional
business includes asset-intensive and financial reinsurance. Asset-intensive
products primarily include reinsurance of corporate-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. The Company sold its Chilean
interests during 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.
Prior to September 1999, the U.S. Operations reinsured approximately
25% of General American's funding agreement business, an asset intensive
product. Effective September 29, 1999, General American completed the recapture
of the entire block of funding agreement business it had reinsured with the
Company. The transaction resulted in the Company's transfer to General American
of all remaining liabilities related to the recaptured block and the underlying
assets supporting it. The Company transferred primarily investments in fixed
maturity securities and cash with a total market value of $1.8 billion in
satisfaction of all funding agreement liabilities. The associated liquidation of
investment securities and the transfer of assets to General American caused the
Company to incur an after tax net capital loss of approximately $33.2 million,
$26.0 million of which was associated with the recapture transaction alone.
Consolidated income from continuing operations before income taxes and
minority interest increased 88.4% in 2000 and decreased 32.6% in 1999. Diluted
earnings per share from continuing operations were $2.12 for 2000 compared to
$1.15 for 1999 and $2.08 for 1998. Earnings were attributed primarily to the
strong performance of traditional reinsurance in the U.S. and Canada. Earnings
during 1999 were affected by the investment losses incurred in connection with
the recapture of the funding agreement business. Further discussion and analysis
of the results for 2000 compared to 1999 and 1998 are presented by segment.
The U.S. operations represented 74.0% of the Company's business as
measured by 2000 net premiums. The U.S. operations market life reinsurance,
reinsurance of asset-intensive products, and financial reinsurance through RGA
Reinsurance, primarily to the largest U.S. life insurance companies. RGA
Reinsurance, a Missouri domiciled stock life insurance company, is wholly owned
by RCM, a wholly owned subsidiary of RGA. As of December 31, 2000, RGA
Reinsurance and RCM had regulatory capital and surplus of $499.1 million and
$493.0 million, respectively.
The Company's Canada operations, which represented 12.6% of the
Company's business as measured by 2000 net premiums, is conducted primarily
through RGA Canada, an indirect subsidiary of RGA International. RGA
International, a wholly owned subsidiary of RGA, is a federally incorporated,
marketing and insurance holding company which owns 100% of RGA Canada
Management, also a federally incorporated holding company, which in turn owns
100% of RGA Canada. The Canada operations provide insurers with traditional
reinsurance as well as assistance with capital management activity. As of
December 31, 2000, RGA Canada had regulatory capital and surplus of $167.7
million.
The Company's Latin America operations represented 4.6% of the
Company's business as measured by 2000 net premiums. The Company conducts
reinsurance business in the Latin America region through RGA Reinsurance.
Representative offices were opened in Mexico City and Buenos Aires in 1998 and
1999, respectively, to more directly assist clients in these markets.
Historically, the Latin America reinsurance operations have derived revenue
primarily from the reinsurance of privatized pension products in Argentina.
Since 1999, the Company has reduced its participation in these types of treaties
and is more actively marketing additional types of reinsurance in the region
such as traditional individual life, credit, and group life insurance as well as
non-traditional reinsurance transactions in Argentina and Mexico. It is
anticipated that the mix of business will continue to evolve in the upcoming
years. Latin America direct business primarily includes Chilean single premium
annuities and Argentine group life and individual universal life products. RGA
operates in Argentina through GA Argentina, a wholly owned subsidiary
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that markets and sells individual, group, credit and universal life
and disability insurance. During 2000, the Company sold its Chilean interests.
The Company's Asia Pacific operations represented 6.7% of the Company's
business as measured by total net premiums in 2000. The Company conducts
reinsurance business in the Asia Pacific region through branch operations in
Hong Kong, an office in Japan and an office in Taiwan. In January 1996, RGA
formed Australian Holdings, a wholly owned holding company, and RGA Australia, a
wholly owned reinsurance company of Australian Holdings licensed to assume life
reinsurance in Australia. Business is also conducted through Malaysian Life
Reinsurance Group Berhad ("MLRe"), a joint venture in Malaysia. The principal
types of reinsurance provided in the region are life, critical care,
superannuation, and financial reinsurance. Superannuation funds accumulate
retirement funds for employees, and in addition, offer life and disability
insurance coverage.
The Company's other international operations represented 2.1% of the
Company's total net premiums for 2000. This segment provides life reinsurance to
international clients throughout Europe and South Africa. The principal type of
reinsurance being provided has been life reinsurance for a variety of life
products through yearly renewable term and coinsurance agreements. These
agreements may be either facultative or automatic agreements. In April 2000, the
Company's UK subsidiary, RGA Reinsurance UK Limited, obtained approval as a
licensed UK life reinsurer. The company also opened a representative office in
Spain during the second quarter of 2000. In addition, the Company conducts
reinsurance through its wholly owned subsidiary, RGA Reinsurance Company of
South Africa, Limited, with offices in Cape Town and Johannesburg, South Africa.
RGA Barbados and RGA Americas were formed and capitalized in 1995 and
1999, respectively, primarily providing reinsurance for a portion of certain
business assumed by RGA Reinsurance and other RGA insurance subsidiaries.
Intercorporate Relationships
As a result of various transactions with General American, including
capital contributions and transfer of the business of the Reinsurance Division
from General American to the Company on January 1, 1993, the Company has all the
economic benefits and risks of certain reinsurance agreements entered into by
General American, although General American currently remains the contracting
party with some of the underlying ceding companies.
RGA operates on a stand-alone basis; however, General American and its
affiliates continue to provide certain administrative and selected investment
management and advisory services to the Company pursuant to service agreements.
The transfer of the Reinsurance Division to RGA has had no material
effect on the existing reinsurance business of the Reinsurance Division. A small
percentage of RGA Reinsurance's business is written through General American
pursuant to a marketing agreement. The marketing agreement expired on January 1,
2000. Under the marketing agreement, General American agreed to amend and
terminate its existing assumed and retroceded reinsurance agreements pursuant to
the Retrocession Agreements only at the direction of RGA Reinsurance, thus
giving RGA Reinsurance the contractual right to direct future changes to
existing reinsurance agreements. Existing reinsurance agreements executed
pursuant to the marketing agreement will continue, but upon the expiration of
the marketing agreement, General American was no longer obligated to assume
reinsurance business on the Company's behalf or contractually precluded from
competing with the Company. The management of General American and MetLife,
however, has no current plans to compete with RGA Reinsurance. Moreover, given
MetLife's beneficial ownership of RGA's Shares, it would be contrary to
MetLife's economic interests for it to compete with RGA Reinsurance. Although
primary insurers must look to General American for payment in the first instance
with respect to existing reinsurance business written through General American,
the Company will be ultimately liable to General American with respect to such
reinsurance. General American charges RGA Reinsurance quarterly an amount equal
to, on an annual basis, 0.25% of specified policy-related liabilities that are
associated with existing reinsurance treaties written by General American for
the benefit of RGA Reinsurance.
The Company has reinsurance agreements with MetLife and certain of its
subsidiaries. As of December 31, 2000, the Company had assets and liabilities
related to these agreements totaling $103.3 million and $114.1 million,
respectively. Under these agreements, the Company reflected net premiums of
approximately $144.0 million, $130.3 million, and $111.5 million in 2000, 1999,
and 1998, respectively. The net premiums reflect the net of business assumed
from and ceded to MetLife and its subsidiaries, including GenAmerica. The
pre-tax gain (loss) on this business was approximately $17.8 million, ($31.0)
million, and $17.7 million in 2000, 1999, and 1998, respectively.
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Ratings
The ability of RGA Reinsurance to write reinsurance partially depends
on its financial condition and its ratings. In December 2000, RGA Reinsurance's
and RGA Canada's ratings were upgraded to "A+" (Superior) from "A" (Excellent).
The rating actions reflect the Company's strong franchise in the North American
life reinsurance market, high level of expertise in assessing mortality risk
which has led to sustained earnings growth in its core businesses, high quality
balance sheet, and strong risk-adjusted capitalization. In addition, the ratings
reflect the implicit and explicit benefits the Company derives from its
affiliation with MetLife, the second largest life insurance company in the U.S.,
based on assets. A.M. Best's ratings are based upon an insurance company's
ability to pay policyholder obligations and are not directed toward the
protection of investors. A.M. Best's ratings for insurance companies currently
range from "A++" to "F", and some companies are not rated. Publications of A.M.
Best indicate that "A+" and "A" ratings are assigned to companies that have, on
balance, superior and excellent financial strength, operating performance and
market profile, respectively, when compared to the standards established by the
A.M. Best Company. Additionally, the publications indicate that companies with
"A+" and "A" ratings generally have a very strong or strong ability,
respectively, to meet their ongoing obligations to policyholders. In evaluating
a company's financial strength and operating performance, A.M. Best reviews the
company's profitability, leverage, and liquidity as well as its spread of risk,
the quality and appropriateness of its reinsurance program, the quality and
diversification of its assets, the adequacy of its policy or loss reserves, the
adequacy of its surplus, its capital structure, management's experience and
objectives, and its perception of policyholders' confidence.
RGA Reinsurance also maintains ratings from Standard & Poor's ("S & P")
and Moody's Investor Services ("Moody's"). S & P has assigned RGA Reinsurance a
financial strength rating of "AA". A rating of "AA" by S & P means that, in S &
P's opinion, the insurer has very strong financial security characteristics,
differing only slightly from those rated higher. Moody's has assigned RGA
Reinsurance a rating of "A1". A Moody's "A1" rating means that Moody's believes
that the insurance company offers good financial security; however, elements may
be present which suggest a susceptibility to impairment sometime in the future.
These ratings are based on an insurance company's ability to pay policyholder
obligations and are not directed toward the protection of investors.
Additionally, RGA has an "A" and "A3" long-term debt rating from S&P and
Moody's, respectively.
A security rating is not a recommendation to buy, sell or hold
securities. It is subject to revision or withdrawal at any time by the assigning
rating organization, and each rating should be evaluated independently of any
other rating.
Regulation
RGA Reinsurance and RCM; RGA Canada; GA Argentina; RGA Barbados, RGA
Americas, and Triad Re, Ltd.; RGA Australia; RGA South Africa; and RGA UK; are
regulated by authorities in Missouri, Canada, Argentina, Barbados, Australia,
South Africa, and the United Kingdom, respectively. RGA Reinsurance is subject
to regulations in the other jurisdictions in which it is licensed or authorized
to do business. Insurance laws and regulations, among other things, establish
minimum capital requirements and limit the amount of dividends, distributions,
and intercompany payments affiliates can make without prior regulatory approval.
Missouri law imposes restrictions on the amounts and type of investments
insurance companies like RGA Reinsurance may hold.
General
The insurance laws and regulations, as well as the level of supervisory
authority that may be exercised by the various insurance departments, vary by
jurisdiction, but generally grant broad powers to supervisory agencies or
regulators to examine and supervise insurance companies and insurance holding
companies with respect to every significant aspect of the conduct of the
insurance business, including approval or modification of contractual
arrangements. These laws and regulations generally require insurance companies
to meet certain solvency standards and asset tests, to maintain minimum
standards of business conduct, and to file certain reports with regulatory
authorities, including information concerning their capital structure,
ownership, and financial condition, and subject insurers to potential
assessments for amounts paid by guarantee funds.
RGA Reinsurance, RCM, and RGA Canada are required to file annual,
semi-annual, or quarterly statutory financial statements in each jurisdiction in
which they are licensed. Additionally, RGA Reinsurance, RCM, and RGA Canada are
subject to periodic examination by the insurance departments of the
jurisdictions in which each is licensed, authorized, or accredited. The most
recent examination of RGA Reinsurance by the Missouri Department of Insurance
was completed for the year ended
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December 31, 1999. The result of this examination contained no material adverse
findings. RCM was licensed in April 2000 and has not subsequently been examined
by the Missouri Department of Insurance. RGA Canada, which was formed in 1992,
was last reviewed by the Canadian Superintendent of Financial Institutions for
the year ended December 31, 1999. The result of this examination contained no
material adverse findings.
RGA Australia is required to file a quarterly statistical return and
annual financial statement with the Australian Prudential Regulation Authority
("APRA"). RGA Australia is subject to additional reviews by the APRA on an as
required basis. In August 1997, RGA Australia was reviewed by the APRA's
predecessor, the Insurance and Superannuation Commission of Australia with no
material adverse findings.
RGA UK is required to file a quarterly statistical return and annual
financial statement with the Financial Services Authority ("FSA").
RGA South Africa is required to file a quarterly statistical return and
annual financials statement with the Financial Services Board ("FSB").
RGA Barbados, RGA Americas, and Triad Re, Ltd., are required to file an
annual financial statement with the Office of the Supervisor of Insurance of
Barbados.
GA Argentina as a direct life insurance company is required to file
annual and quarterly statutory financial statements in Argentina which are
reviewed by external auditors and filed with the Superintendencia de Seguros de
la Nacion ("Superintendencia-Argentina"). Additionally, GA Argentina is subject
to periodic examination by the Superintendencia-Argentina. The most recent
examination by the Superintendencia-Argentina was in May 2000. The results of
this examination were discussed with management and all adjustments, which were
not material to the Company's results of operations, were reflected during 2000.
Although some of the rates and policy terms of U.S. direct
insurance agreements are regulated by state insurance departments, the rates,
policy terms, and conditions of reinsurance agreements generally are not subject
to regulation by any regulatory authority. However, the NAIC Model Law on Credit
for Reinsurance, which has been adopted in most states, imposes certain
requirements for an insurer to take reserve credit for reinsurance ceded to a
reinsurer. Generally, the reinsurer is required to be licensed or accredited in
the insurer's state of domicile, or security must be posted for reserves
transferred to the reinsurer in the form of letter of credit or assets placed in
trust. The NAIC Life and Health Reinsurance Agreements Model Regulation, which
has been passed in most states, imposes additional requirements for insurers to
claim reserve credit for reinsurance ceded (excluding YRT reinsurance and
non-proportional reinsurance). These requirements include bona fide risk
transfer, an insolvency clause, written agreements, and filing of reinsurance
agreements involving in force business, among other things.
In recent years, the NAIC and insurance regulators increasingly have
been re-examining existing laws and regulations and their application to
insurance companies. In particular, this re-examination has focused on insurance
company investment and solvency issues, and, in some instances, has resulted in
new interpretation of existing law, the development of new laws, and the
implementations of non-statutory guidelines. The NAIC has formed committees and
appointed advisory groups to study and formulate regulatory proposals on such
diverse issues as the use of surplus debentures, accounting for reinsurance
transactions, and the adoption of risk-based capital rules. It is not possible
to predict the future impact of changing state and federal regulation on the
operations of RGA or its subsidiaries.
As a result of this review, the NAIC adopted the Valuation of Life
Insurance Policies Model Regulation (the "Model Regulation"). Several states
have subsequently enacted legislation based on the Model Regulation, and other
states are considering enacting similar legislation. Legislation based on the
Model Regulation primarily impacts level term life insurance products with
current premiums guaranteed for more than five years. Companies with these
products generally will have to increase reserves above the current levels or
limit the period of guaranteed premiums to five years. The Model Regulation also
affects the reserve requirements for other increasing premium products,
deficiency reserves and certain benefit guarantees in universal life products.
The Model Regulation does not affect the financial statements of the Company
prepared in accordance with GAAP; however, the Model Regulation may affect the
statutory financial statements of the subsidiaries.
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In addition to the above regulatory changes being reexamined and
considered by the NAIC, the NAIC has completed its codification of statutory
accounting principles. The purpose of such codification is to establish a
uniform set of accounting rules and regulations ("SSAP") for use by insurance
companies in financial report preparation in connection with financial
reporting to regulatory authorities. The effective date of the uniform
statutory accounting principles is January 1, 2001. As of December 31, 2000,
the State of Missouri has not amended its laws and rules to closely mirror
SSAP, but the Missouri Department of Insurance has instructed its domestic
insurers to conform to the new codified SSAP in anticipation of changes to
applicable Missouri laws and rules during 2001. However, the Missouri
Department of Insurance cannot determine to what extent the amended Missouri
laws and rules will mirror SSAP. The Company has determined that the net effect
of codification in accordance with the NAIC's SSAP would not be material to the
Company's financial position or results of operations.
Capital Requirements
Guidelines on Minimum Continuing Capital and Surplus Requirements
("MCCSR") became effective for Canadian insurance companies in December 1992,
and Risk-Based Capital ("RBC") guidelines promulgated by the National
Association of Insurance Commissioners ("NAIC") became effective for U.S.
companies in 1993. The MCCSR risk-based capital guidelines, which are applicable
to RGA Canada, prescribe surplus requirements and consider both assets and
liabilities in establishing solvency margins. The RBC guidelines, applicable to
RGA Reinsurance and RCM, similarly identify minimum capital requirements based
upon business levels and asset mix. RGA Canada, RCM, and RGA Reinsurance
maintain capital levels in excess of the amounts required by the applicable
guidelines. Regulations in Argentina, Australia, Barbados, South Africa and
United Kingdom also require certain minimum capital levels, and subject the
companies operating there to oversight by the applicable regulatory bodies. The
Company's subsidiaries in Argentina, Australia, Barbados, South Africa and
United Kingdom meet the minimum capital requirements in their respective
jurisdiction. The Company cannot predict the effect that any proposed or future
legislation or rule making in the countries in which the Company operates may
have on the financial condition or operations of the Company or its
subsidiaries.
Insurance Holding Company Regulations
RGA is regulated in Missouri as an insurance holding company. The
Company is subject to regulation under the insurance and insurance holding
company statutes of Missouri. The Missouri insurance holding company laws and
regulations generally require insurance and reinsurance subsidiaries of
insurance holding companies to register with the Missouri Department of
Insurance and to file with the Missouri Department of Insurance certain reports
describing, among other information, their capital structure, ownership,
financial condition, certain intercompany transactions, and general business
operations. The Missouri insurance holding company statutes and regulations also
require prior approval of, or in certain circumstances, prior notice to the
Missouri Department of Insurance of certain material intercompany transfers of
assets, as well as certain transactions between insurance companies, their
parent companies and affiliates.
Under Missouri insurance laws and regulations, unless (i) certain
filings are made with the Missouri Department of Insurance, (ii) certain
requirements are met, including a public hearing, and (iii) approval or
exemption is granted by the Missouri Director of Insurance, no person may
acquire any voting security or security convertible into a voting security of an
insurance holding company, such as RGA, which controls a Missouri insurance
company, or merge with such a holding company, if as a result of such
transaction such person would "control" the insurance holding company. "Control"
is presumed to exist under Missouri law if a person directly or indirectly owns
or controls 10% or more or the voting securities of another person.
Certain state legislatures have considered or enacted laws that alter,
and in many cases increase, state regulation of insurance holding companies. In
recent years, the NAIC and state legislators have begun re-examining existing
laws and regulations, specifically focusing on insurance company investments and
solvency issues, risk-based capital guidelines, intercompany transactions in a
holding company system, and rules concerning extraordinary dividends. Canadian
federal insurance laws and regulations do not contain automatic registration and
reporting requirements applicable to insurance holding companies, although such
companies, together with all affiliates of a Canadian insurance company, may be
required to supply such information to the Canadian Superintendent of Financial
Institutions upon request.
Transactions whereby a person or entity would acquire control of or a
significant interest in, or increase (by more than an insignificant amount) its
existing interest in, a Canadian insurance company are subject to the prior
approval of the Canadian
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Minister of Finance. "Significant interest" in an insurance company means the
beneficial ownership of shares representing 10% or more of a given class, while
"control" of an insurance company is presumed to exist when a person
beneficially owns shares representing more than 50% of the votes entitled to be
cast for the election of directors and such votes are sufficient to elect a
majority of the directors of the insurance company. Any transaction or
series of transactions with the same person involving the acquisition or
disposition by a Canadian insurance company of assets (other than the payment
of dividends) the aggregate value of which, over a twelve-month period, exceeds
10% of such company's total assets are also subject to the prior approval of
the Canadian Superintendent of Financial Institutions.
In addition, Canadian federal insurance laws and regulations generally
prohibit transactions between insurance companies and related parties, with
certain specified exceptions. Permitted related-party transactions must be on
terms that are at least as favorable to the insurance company as market terms
and conditions as defined in the Canadian federal insurance laws and
regulations. Reinsurance agreements pursuant to which an insurance company
causes itself to be reinsured with related parties are restricted unless (i) the
reinsurance is taken out in the ordinary course of business, and (ii) the
related party is either a Canadian insurance company or a foreign insurance
company duly registered in Canada or receives prior regulatory approval.
Reinsurance agreements pursuant to which an insurance company reinsures risks
undertaken by a related party are restricted unless the reinsurance is taken out
in the ordinary course of business.
Restrictions on Dividends and Distributions
Current Missouri law (applicable to Reinsurance Group of America,
Incorporated, RCM, and RGA Reinsurance) permits the payment of dividends or
distributions which, together with dividends or distributions paid during the
preceding twelve months, do not exceed the greater of (i) 10% of statutory
capital and surplus as of the preceding December 31, or (ii) statutory net gain
from operations for the preceding calendar year. Any proposed dividend in excess
of this amount is considered an "extraordinary dividend" and may not be paid
until it has been approved, or a 30-day waiting period has passed during which
it has not been disapproved, by the Missouri Director of Insurance. RCM's
allowable dividend without prior approval for 2001 is approximately $49.3
million pursuant to this calculation. RGA Reinsurance's allowable dividend
without prior approval for 2001 is approximately $80.6 million pursuant to this
calculation. Dividends may be paid only to the extent the insurer has unassigned
surplus (as opposed to contributed surplus). As of December 31, 2000, RCM and
RGA Reinsurance had unassigned surplus of approximately $38.9 million and $67.1
million, respectively. Any dividends paid by RGA Reinsurance would be paid to
RCM, who in turn has the ability to pay dividends to RGA.
In contrast to current Missouri law, the NAIC Model Insurance Holding
Company Act (the "Model Act") defines an extraordinary dividend as a dividend or
distribution which, together with dividends or distributions paid during the
preceding twelve months, exceeds the lesser of (i) 10% of statutory capital and
surplus as of the preceding December 31, or (ii) statutory net gain from
operations for the preceding calendar year. The Company is unable to predict
whether, when, or in what form Missouri will enact a new measure for
extraordinary dividends. The maximum amount available for payment on dividends
in 2001 by RGA Reinsurance under the Model Act without prior approval of the
Missouri Director of Insurance would have been $49.9 million at December 31,
2000. RCM would not be able to pay a dividend under this formula due to its loss
from operations during 2000.
In addition to the foregoing, Missouri insurance laws and regulations
require that the statutory surplus of RCM and RGA Reinsurance following any
dividend or distribution be reasonable in relation to its outstanding
liabilities and adequate to meet its financial needs. The Missouri Director of
Insurance may bring an action to enjoin or rescind the payment of a dividend or
distribution by RGA Reinsurance or RCM that would cause its statutory surplus to
be inadequate under the standards of Missouri.
Under the corporate law and regulations of New Brunswick applicable to
RGA International and RGA Canada Management, dividends may be declared and paid
unless there are reasonable grounds for believing either that the corporation
is, or would after the payment be, unable to pay its liabilities when due or
that the realizable value of its assets would be less than the aggregate of its
liabilities and stated capital of all classes. RGA Canada may not pay a dividend
if there are reasonable grounds for believing that RGA Canada is, or the payment
of the dividend would cause RGA Canada to be, in contravention of any regulation
made by the Governor in Council and the guidelines adopted by the Superintendent
of Financial Institutions respecting the maintenance by life companies of
adequate and appropriate forms of liquidity. The Canadian MCCSR guidelines
consider both assets and liabilities in establishing solvency margins, the
effect of which could limit the maximum amount of dividends that may be paid by
RGA Canada. RGA Canada's ability to declare and pay dividends in the future will
be affected by its continued ability to
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comply with such guidelines. Moreover, RGA Canada must give notice to the
Superintendent of Financial Institutions of the declaration of any dividend at
least ten days prior to the day fixed for its payment. The maximum amount
available for payment of dividends by RGA Canada to RGA Canada Management under
the Canadian MCCSR guidelines was $28.7 million at December 31, 2000.
Default or Liquidation
In the event of a default on any debt that may be incurred by RGA or
the bankruptcy, liquidation, or other reorganization of RGA, the creditors and
stockholders of RGA will have no right to proceed against the assets of RCM, RGA
Reinsurance, RGA Canada, or other insurance or reinsurance company subsidiaries
of RGA. If RCM or RGA Reinsurance were to be liquidated, such liquidation would
be conducted by the Missouri Director of Insurance as the receiver with respect
to such insurance company's property and business. If RGA Canada were to be
liquidated, such liquidation would be conducted pursuant to the general laws
relating to the winding-up of Canadian federal companies. In both cases, all
creditors of such insurance company, including, without limitation, holders of
its reinsurance agreements and, if applicable, the various state guaranty
associations, would be entitled to payment in full from such assets before RGA,
as a direct or indirect stockholder, would be entitled to receive any
distributions made to it prior to commencement of the liquidation proceedings,
and, if the subsidiary was insolvent at the time of the distribution,
shareholders of RGA might likewise be required to refund dividends subsequently
paid to them.
In addition to RCM, RGA Reinsurance and RGA Canada, the Company has an
interest in licensed insurance subsidiaries in Australia, Argentina, Malaysia,
South Africa, and the United Kingdom. In the event of default or liquidation,
the rules and regulations of the appropriate governing body in the country of
incorporation would be followed.
Federal Regulation
Discussions continue in the Congress of the United States concerning
the future of the McCarran-Ferguson Act, which exempts the "business of
insurance" from most federal laws, including anti-trust laws, to the extent such
business is subject to state regulation. Judicial decisions narrowing the
definition of what constitutes the "business of insurance" and repeal or
modification of the McCarran-Ferguson Act may limit the ability of the Company,
and RGA Reinsurance in particular, to share information with respect to matters
such as rate-setting, underwriting, and claims management. It is not possible to
predict the effect of such decisions or change in the law on the operation of
the Company.
Risk Management
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of benefits paid
by ceding reinsurance to other insurance enterprises or reinsurers under excess
coverage and coinsurance contracts. The Company retains a maximum of $2.5
million of coverage per individual life. Effective January 1, 2001, the Company
increased its retention to $4.0 million of coverage per individual life. The
Company has a number of retrocession arrangements whereby certain business in
force is retroceded on an automatic or facultative basis.
Generally, RGA's insurance subsidiaries retrocede amounts in excess of
their retention to RGA Reinsurance or RGA Americas. Retrocessions are arranged
through the Company's retrocession pools for amounts in excess of its retention.
As of December 31, 2000, substantially all retrocession pool members in this
excess retention pool followed by the A.M. Best Company were rated "A-" or
better. The Company also retrocedes most of its financial reinsurance business
to other insurance companies to alleviate the strain on statutory surplus
created by this business. For a majority of the retrocessionaires that were not
rated, security in the form of letters of credit or trust assets has been given
as additional security in favor of RGA Reinsurance. In addition, the Company
performs annual financial and in force reviews of its retrocessionaires to
evaluate financial stability and performance.
The Company has never experienced a material default in connection with
retrocession arrangements, nor has it experienced any difficulty in collecting
claims recoverable from retrocessionaires; however, no assurance can be given as
to the future performance of such retrocessionaires or as to recoverability of
any such claims.
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The Company has catastrophe insurance coverage issued by 6 insurers
rated "A" or higher by A.M. Best as of December 31, 2000, that provides benefits
of up to $100.0 million per occurrence for claims involving three or more deaths
in a single accident, with a deductible of $1.5 million per occurrence. This
coverage is terminable annually as of August 13 with 90 days prior notice. The
Company believes such catastrophe insurance coverage adequately protects it from
risks associated with multiple deaths in a single accident of reinsured lives.
Additionally, through December 31, 2000, the Company retained a maximum of $2.5
million of coverage per individual life. Effective January 1, 2001, the Company
increased its retention to $4.0 million of coverage per individual life.
RGA Canada's policy is normally to retain up to C$100,000 of individual
life and up to C$100,000 of Accidental Death and Dismemberment liability on any
one life. RGA Canada retrocedes amounts in excess of its retention mostly to RGA
Reinsurance directly or through General American. Retrocessions are arranged
through RGA Reinsurance's retrocession pool. RGA Canada has never experienced a
default in connection with its retrocession arrangements, nor has it experienced
any difficulty in collecting claims recoverable from its retrocessionaires.
However, no assurance can be given as to the future performance of such
retrocessionaires or as to the recoverability of any such claims.
For other international business, the Company retains up to $2.5
million for U.S., Canadian, Australian, and New Zealand currency-denominated
business. For other currencies and for countries with higher risk factors, the
Company systematically reduces its retention. The Argentine subsidiary cedes
business in excess of $40,000. RGA Australia has a retrocession arrangement with
RGA Reinsurance in which life risks above $100,000 Australian dollars are
retroceded to RGA Reinsurance. RGA UK has a retrocession arrangement such that
life risks above (pound)100,000 are retroceded to RGA Americas. RGA South Africa
has a retrocession arrangement such that life risks above R200,000 are
retroceded to RGA Americas. On an aggregate basis among all of its subsidiaries,
the Company does not retain more than $2.5 million on any one life.
Underwriting
Facultative. Senior management has developed underwriting guidelines,
policies, and procedures with the objective of controlling the quality of
business written as well as its pricing. The Company's underwriting process
emphasizes close collaboration among its underwriting, actuarial, and operations
departments. Management periodically updates these underwriting policies,
procedures, and standards to account for changing industry conditions, market
developments, and changes occurring in the field of medical technology; however,
no assurance can be given that all relevant information has been analyzed or
that additional risks will not materialize. These policies, procedures, and
standards are documented in an on-line underwriting manual.
The Company's management determines whether to accept facultative
reinsurance business on a prospective insured by reviewing the client company's
applications and medical requirements, and assessing financial information and
any medical impairments. Most facultative applications involve a prospective
insured with multiple impairments, such as heart disease, high blood pressure,
and diabetes, requiring a difficult underwriting assessment. To assist its
underwriters in making this assessment, the U.S. life operations employ two
full-time and one part-time medical directors, as well as a medical consultant.
Automatic. The Company's management determines whether to write
automatic reinsurance business by considering many factors, including the types
of risks to be covered; the ceding company's retention limit and binding
authority, product, and pricing assumptions; and the ceding company's
underwriting standards, financial strength and distribution systems. For
automatic business, the Company ensures that the underwriting standards and
procedures of its ceding companies are compatible with those of RGA. To this
end, the Company conducts periodic reviews of the ceding companies' underwriting
and claims personnel and procedures.
AIDS. Since 1987, the U.S. life insurance industry has implemented the
practice of antibody blood testing to detect the presence of the HIV virus
associated with Acquired Immune Deficiency Syndrome ("AIDS"). Prior to the onset
of routine antibody testing, it was possible for applicants with AIDS to
purchase significant amounts of life insurance. Since 1987, the Company has
adopted guidelines used by all operations regarding HIV testing for life
insurance risks.
The Company believes that the antibody test for AIDS is effective. No
assurance can be given, however, that additional AIDS-related death claims
involving insureds who test negative for AIDS at the time of underwriting will
not arise in the future.
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The Company believes that its primary exposure to the AIDS risk is related to
business issued before the onset of AIDS antibody testing in 1987. Each
year, this business represents a smaller portion of RGA's reinsurance in force.
Competition
Reinsurers compete on the basis of many factors, including financial
strength, pricing and other terms and conditions of reinsurance agreements,
reputation, service, and experience in the types of business underwritten. The
U.S. and Canadian life reinsurance markets are served by numerous international
and domestic reinsurance companies. The Company believes that RGA Reinsurance's
primary competitors in the U.S. life reinsurance market are currently
Transamerica Occidental Life
Insurance Company, Swiss Re Life of America, ING Re, and Lincoln National
Corporation. However, within the reinsurance industry, this can change from year
to year. The Company believes that RGA Canada's major competitors in the
Canadian life reinsurance market are Employers Reassurance Corporation, Lincoln
National Life Insurance Company, Munich Reinsurance Company, and Swiss Re Life
and Health Canada.
The international life operations compete with subsidiaries of several
U.S. individual and group life insurers and reinsurers and other internationally
based insurers and reinsurers, some of which are larger and have access to
greater resources than the Company. Competition is primarily on the basis of
price, service, and financial strength.
Employees
As of December 31, 2000, the Company had 601 employees located in the
United States, Canada, Argentina, Mexico, Hong Kong, Australia, Japan, Taiwan,
South Africa, and the United Kingdom. None of these employees are represented by
a labor union. The Company believes that employee relations at all of its
subsidiaries are good.
C. SEGMENTS
The Company obtains substantially all of its revenues through
reinsurance agreements that cover a portfolio of life insurance products,
including term life, credit life, universal life, whole life, and joint and last
survivor insurance, as well as annuities, financial reinsurance, and direct
premiums which include single premium pension annuities, universal life, and
group life. Generally, the Company, through a subsidiary, has provided
reinsurance and, to a lesser extent, insurance for mortality and morbidity risks
associated with such products. With respect to asset-intensive products, the
Company has also provided reinsurance for investment-related risks. RGA
Reinsurance has written a small amount of primary insurance on General American
directors and officers, and a small amount of short-term life insurance.
The following table sets forth the Company's gross and net premiums
attributable to each of its segments for the periods indicated:
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GROSS AND NET PREMIUMS BY SEGMENT
(dollars in millions)
Year Ended December 31,
------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
GROSS PREMIUMS:
U.S. operations $1,210.9 74.5 $1,158.2 73.1 $ 902.9 71.4
Canada operations 218.0 13.4 219.1 13.8 192.9 15.2
Latin America operations 64.2 4.0 105.5 6.7 108.3 8.6
Asia Pacific operations 100.7 6.2 76.6 4.8 56.9 4.5
Other international operations 30.5 1.9 25.4 1.6 3.7 0.3
-------- ----- -------- ----- -------- -----
Total $1,624.3 100.0 $1,584.8 100.0 $1,264.7 100.0
======== ===== ======== ===== ======== =====
NET PREMIUMS:
U.S. operations $1,038.9 74.0 $ 950.4 72.2 $ 716.2 70.5
Canada operations 176.3 12.6 162.5 12.4 144.8 14.2
Latin America operations 64.9 4.6 104.2 7.9 98.7 9.7
Asia Pacific operations 94.3 6.7 73.9 5.6 53.0 5.2
Other international operations 29.7 2.1 24.6 1.9 3.7 0.4
-------- ----- -------- ----- -------- -----
Total $1,404.1 100.0 $1,315.6 100.0 $1,016.4 100.0
======== ===== ======== ===== ======== =====
The following table sets forth selected information concerning assumed
reinsurance business in force for the Company's U.S., Canada, Latin America,
Asia Pacific, and other international segments for the indicated periods. (The
term "in force" refers to face amounts or net amounts at risk.)
REINSURANCE BUSINESS IN FORCE BY SEGMENT
(dollars in billions)
Year Ended December 31,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
U.S. operations $412.7 75.6 $345.7 77.4 $255.7 77.3
Canada operations 54.3 10.0 45.8 10.2 35.5 10.7
Latin America operations 44.6 8.2 31.9 7.1 35.1 10.7
Asia Pacific operations 31.9 5.8 22.1 5.0 3.8 1.1
Other international operations 2.4 0.4 1.4 0.3 0.5 0.2
------ ----- ------ ----- ------ -----
Total $545.9 100.0 $446.9 100.0 $330.6 100.0
====== ===== ====== ===== ====== =====
Reinsurance business in force reflects the addition or acquisition of
new reinsurance business, offset by terminations (e.g., voluntary surrenders of
underlying life insurance policies, lapses of underlying policies, deaths of
insureds, the exercise of recapture options, changes in foreign exchange, and
any other changes in the amount of insurance in force). As a result of
terminations, assumed in force amounts at risk of $59.3 billion, $48.6 billion,
and $21.6 billion were released in 2000, 1999, and 1998, respectively.
The following table sets forth selected information concerning assumed
new business volume for the Company's U.S., Canada, Latin America, Asia Pacific,
and other international operations for the indicated periods. (The term "volume"
refers to face amounts or net amounts at risk.)
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NEW BUSINESS VOLUME BY SEGMENT
(dollars in billions)
Year Ended December 31,
------------------------------------------------
2000 1999 1998
-------------- -------------- --------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
U.S. operations $115.7 71.8 $121.3 73.6 $102.7 82.2
Canada operations 13.8 8.6 9.4 5.7 12.8 10.2
Latin America operations 21.3 13.2 20.6 12.5 7.2 5.8
Asia Pacific operations 9.7 6.0 12.5 7.5 2.2 1.8
Other international operations 0.6 0.4 1.1 0.7 0.1 --
------ ----- ------ ----- ------ -----
Total $161.1 100.0 $164.9 100.0 $125.0 100.0
====== ===== ====== ===== ====== =====
Additional information regarding the operations of the Company's segments and
geographic operations is contained in Note 17 to the Consolidated Financial
Statements within Item 8 of Part II.
U.S. Operations
The U.S. operations represented 74.0%, 72.2%, and 70.5%, of the
Company's net premiums in 2000, 1999, and 1998, respectively. The U.S.
operations market life reinsurance, reinsurance of asset-intensive products and
financial reinsurance through RGA Reinsurance, primarily to the largest U.S.
life insurance companies.
Traditional
The U.S. traditional reinsurance subsegment provides life reinsurance
to domestic clients for a variety of life products through yearly renewable term
agreements, coinsurance, and modified coinsurance. This business has been
accepted under many different rate scales, with rates often tailored to suit the
underlying product and the needs of the ceding company. Premiums typically vary
for smokers and non-smokers, males and females, and may include a preferred
underwriting class discount. Reinsurance premiums are paid in accordance with
the treaty, regardless of the premium mode for the underlying primary insurance.
This business is made up of facultative and automatic treaty business.
In addition, several of the Company's U.S. clients have purchased life
insurance policies insuring the lives of their executives. These policies have
generally been issued to fund deferred compensation plans and have been
reinsured with the Company. As of December 31, 2000, reinsurance of such
policies was reflected in interest sensitive contract reserves of approximately
$1,217.5 million and policy loans of $706.9 million.
The U.S. facultative reinsurance operation involves the assessment of
the risks inherent in (i) multiple impairments, such as heart disease, high
blood pressure, and diabetes; (ii) cases involving large policy face amounts;
and (iii) financial risk cases, i.e., cases involving policies
disproportionately large in relation to the financial characteristics of the
proposed insured. The U.S. operation's marketing efforts have focused on
developing facultative relationships with client companies because management
believes facultative reinsurance represents a substantial segment of the
reinsurance activity of many large insurance companies and has been an effective
means of expanding the U.S. operation's automatic business. In 2000, 1999, and
1998, approximately 29.1%, 30.2%, and 35.5%, respectively, of the U.S. gross
premiums were written on a facultative basis. The U.S. operations have
emphasized personalized service and prompt response to requests for facultative
risk assessment. This percentage has decreased over the past several years due
to the increase in premiums from large automatic treaties on in force business.
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Only a portion of approved facultative applications result in paid
reinsurance. This is because applicants for impaired risk policies often submit
applications to several primary insurers, which in turn seek facultative
reinsurance from several reinsurers. Ultimately, only one insurance company and
one reinsurer are likely to obtain the business. The Company tracks the
percentage of declined and placed facultative applications on a client-by-client
basis and generally works with clients to seek to maintain such percentages at
levels deemed acceptable.
Mortality studies performed by the Company have shown that its
facultative mortality experience is comparable to its automatic mortality
experience relative to expected mortality rates. Because the Company applies its
underwriting standards to each application submitted to it facultatively, it
generally does not require ceding companies to retain a portion of the
underlying risk when business is written on a facultative basis.
Automatic business, including financial reinsurance treaties, is
generated pursuant to treaties, which generally require that the underlying
policies meet the ceding company's underwriting criteria, although a number of
such policies may be rated substandard. In contrast to facultative reinsurance,
reinsurers do not engage in underwriting assessments of the risks assumed
through an automatic treaty.
Because the Company does not apply its underwriting standards to each
policy ceded to it under automatic treaties, the U.S. operations generally
require ceding companies to keep a portion of the business written on an
automatic basis, thereby increasing the ceding companies' incentives to
underwrite risks with due care and, when appropriate, to contest claims
diligently.
Non-traditional Business
The Company also provides non-traditional reinsurance of
asset-intensive products and financial reinsurance. Asset-intensive business
includes the reinsurance of corporate-owned life insurance and annuities. The
Company earns investment income on the deposits underlying the asset-intensive
products, which is largely offset by earnings credited and paid to the ceding
companies. Financial reinsurance assists ceding companies in meeting applicable
regulatory requirements and enhances ceding companies' financial strength and
regulatory surplus position.
Asset Intensive Business
Reinsurance business in which the investment risk is reinsured is
referred to as asset-intensive business. Asset-intensive business includes the
reinsurance of corporate-owned life insurance and annuities. Most of these
agreements are coinsurance or modified coinsurance of nonmortality risks such
that the Company recognizes profits or losses primarily from the spread between
the investment earnings and the interest credited on the underlying deposit
liabilities.
Asset-intensive business that does not produce mortality risk
(annuities) is normally limited by size of the deposit, from any one depositor.
Business which does produce mortality risks (corporate-owned and bank-owned)
normally involves a large number of insureds associated with each deposit.
Underwriting of these deposits also limits the size of any one deposit but the
individual policies associated with any one deposit are typically issued within
pre-set guaranteed issue parameters.
The Company looks for highly rated, financially secure companies as
clients for asset-intensive business. These companies may wish to limit their
own exposure to certain products. Ongoing asset/liability analysis is required
for the management of asset-intensive business. The Company performs this
analysis itself, in conjunction with asset/liability analysis performed by the
ceding companies.
Financial Reinsurance
The Company's financial reinsurance subsegment assists ceding companies
in meeting applicable regulatory requirements while enhancing the ceding
companies' financial strength and regulatory surplus position. The Company
commits cash or assumes insurance liabilities from the ceding companies.
Generally, such amounts are offset by receivables from ceding companies that are
repaid by the future profits from the reinsured block of business. The Company
structures its financial reinsurance transactions so that the projected future
profits of the underlying reinsured business significantly exceed the amount of
regulatory surplus provided to the ceding company.
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18
The Company primarily targets highly rated insurance companies for
financial reinsurance. A careful analysis is performed before providing any
surplus enhancement to the ceding company. This analysis assures that the
Company understands the risks of the underlying insurance product and that the
surplus has a high likelihood of being repaid through the future profits of
the business. A staff of actuaries and accountants is required to track
experience on a quarterly basis in comparison to expected models. The Company
also retrocedes most of its financial reinsurance business to other insurance
companies to alleviate the strain on statutory surplus created by this business.
CUSTOMER BASE
The U.S. reinsurance operation markets life reinsurance primarily to
the largest U.S. life insurance companies and currently has treaties with most
of the top 100 companies. These treaties generally are terminable by either
party on 90 days written notice, but only with respect to future new business;
existing business generally is not terminable, unless the underlying policies
terminate or are recaptured. In 2000, 54 clients had annual gross premiums of $5
million or more and the aggregate gross premiums from these clients represented
approximately 91.2% of 2000 U.S. life gross premiums. For the purpose of this
disclosure, companies that are within the same holding company structure are
combined.
In 2000, no single non-affiliated U.S. client accounted for more than
10% of the Company's consolidated gross premiums; however, three non-affiliated
clients ceded more than 5% of U.S. life gross premiums. Together they ceded
$253.1 million, or 20.9%, of U.S. operations gross premiums in 2000.
MetLife and its affiliates generated approximately $174.9 million or
14.4% of U.S. operation's gross premium for 2000.
OPERATIONS
During 2000, substantially all gross U.S. life business was obtained
directly, rather than through brokers. The Company has an experienced marketing
staff that works to maintain existing relationships and to provide responsive
service.
The Company's auditing, valuation and accounting department is
responsible for treaty compliance auditing, financial analysis of results,
generation of internal management reports, and periodic audits of administrative
practices and records. A significant effort is focused on periodic audits of
administrative and underwriting practices, records, and treaty compliance of
reinsurance clients.
The Company's claims department (i) reviews and verifies reinsurance
claims, (ii) obtains the information necessary to evaluate claims, (iii)
determines the Company's liability with respect to claims, and (iv) arranges for
timely claims payments. Claims are subjected to a detailed review process to
ensure that the risk was properly ceded, the claim complies with the contract
provisions, and the ceding company is current in the payment of reinsurance
premiums to the Company's operations. The claims department also investigates
claims generally for evidence of misrepresentation in the policy application and
approval process. In addition, the claims department monitors both specific
claims and the overall claims handling procedure of ceding companies.
Claims personnel work closely with their counterparts at client
companies to attempt to uncover fraud, misrepresentation, suicide, and other
situations where the claim can be reduced or eliminated. By law, the ceding
company cannot contest claims made after two years of the issuance of the
underlying insurance policy. By developing good working relationships with the
claims departments of client companies, major claims or problem claims can be
addressed early in the investigation process. Claims personnel review material
claims presented to the Company in detail to find potential mistakes such as
claims ceded to the wrong reinsurer and claims submitted for improper amounts.
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Canada Operations
The Canada operation represented 12.6%, 12.4%, and 14.2%, of the
Company's net premiums in 2000, 1999, and 1998, respectively. In 2000, the
Canadian life operations assumed $13.8 billion in new business. Of this amount,
$8.5 billion was recurring new business and $5.3 billion resulted from new
assumed in force blocks. Approximately 88% of the 2000 recurring new business
was written on an automatic basis.
The Company operates in Canada primarily through RGA Canada, a
wholly-owned company. RGA Canada is a leading life reinsurer in Canada and is
primarily engaged in traditional individual life reinsurance, including
preferred underwriting products, as well as creditor and critical illness
products. More than 90% of RGA Canada's premium income is derived from the life
reinsurance products.
Clients include virtually all of Canada's principal life insurers. In
2000, no Canadian client accounted for more than 10% of the Company's
consolidated gross premiums. However, one client accounted for more than 10% of
the Canada operation's gross premiums. This client ceded $66.7 million, or
30.6%, of the Canada operation's gross premiums in 2000. No other clients
represented more than 5% of Canada's gross premiums. The Canada operation
competes with a small number of individual and group life reinsurers. The Canada
operation competes primarily on the basis of price, service, and financial
strength.
RGA Canada maintains a staff of sixty-three people at the Montreal
office and fourteen people in an office in Toronto. RGA Canada employs its own
underwriting, actuarial, claims, pricing, accounting, systems, marketing and
administrative staff.
RGA's Canadian life reinsurance business was originally conducted by
General American. General American entered the Canadian life reinsurance market
in 1978 and was primarily engaged in the retrocession business, writing only a
small amount of business with primary Canadian insurers. In April 1992, General
American, through RGA Canada, purchased the life reinsurance assets and business
of National Reinsurance Company of Canada ("National Re"), including C$26.0
million of Canadian life reinsurance gross in force premiums. National Re had
been engaged in the life reinsurance business in Canada since 1972, writing
reinsurance on a direct basis with primary Canadian insurers.
Latin America Operations
The Latin American operations represented 4.6%, 7.9%, and 9.7%, of the
Company's net premiums in 2000, 1999, and 1998, respectively. The Company
conducts reinsurance business in the Latin American region through RGA
Reinsurance. During 1999, a representative office was opened in Buenos Aires and
during 1998 a representative office was opened in Mexico City to more directly
assist clients in these markets. Historically, the Latin American reinsurance
operations have derived revenue primarily from the reinsurance of privatized
pension products in Argentina. Since 1999, the Company has reduced its
participation in these types of treaties and is more actively marketing
additional types of reinsurance in the region such as traditional individual
life, credit, and group life insurance as well as non-traditional reinsurance
transactions in Argentina and Mexico. It is anticipated that the mix of business
will continue to evolve in the upcoming years.
Direct insurance has been generated primarily from subsidiaries in
Chile and Argentina. During April 2000, the Company sold its Chilean interests.
In 1994, to develop markets in Argentina, RGA formed GA Argentina. GA
Argentina writes direct life insurance primarily related to group life and
disability insurance for the Argentine privatized pension system as well as
traditional group life insurance. Effective July 1998, GA Argentina no longer
had new contracts related to the privatized pension system, but continues to
market group and individual life products.
The Latin American reinsurance operations are primarily supported by
the Latin American Division of RGA Reinsurance based in St. Louis with a staff
of ten people in St. Louis, four people in a representative office in Mexico and
three people in a representative office in Argentina. The division provides
bilingual underwriting, actuarial, claims, pricing, marketing, and
administrative support. Claims, accounting, and systems support are provided on
a corporate basis through the Company's operations in St. Louis. GA Argentina
maintains a staff of 70 people in Buenos Aires, Argentina, and employs its own
underwriting, actuarial, claims, pricing, accounting, systems, marketing and
administrative staff.
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Asia Pacific Operations
The Asia Pacific operations represented 6.7%, 5.6%, and 5.2%, of the
Company's net premiums in 2000, 1999, and 1998, respectively. The Company has a
presence in the Asia Pacific region with a licensed branch office in Hong Kong
and representative offices in Tokyo and Taiwan. The Company also established a
reinsurance subsidiary in Australia in January 1996.
Within the Asia Pacific segment, seven people were on staff in the Hong
Kong office, nine people were on staff in the Tokyo office, six people were on
staff in the Taiwan office, and RGA Australia maintained a staff of twenty-two
people in Sydney. The Hong Kong, Tokyo and Taiwan offices primarily provide
marketing and underwriting service to the direct life insurance companies with
other service support provided directly by the Company's St. Louis operations.
RGA Australia directly maintains its own underwriting, actuarial, claims,
pricing, accounting, systems, marketing and administration service with
additional support provided by the Company's St. Louis operations.
Other International Operations
The other international operations represented 2.1%, 1.9%, and 0.4% of
the Company's net premiums in 2000, 1999, and 1998 respectively. This segment
provides life reinsurance to clients located in Europe (primarily in the United
Kingdom and Spain) and South Africa. The principal type of reinsurance being
provided has been life reinsurance for a variety of life products through yearly
renewable term and coinsurance agreements. These agreements may be either
facultative or automatic agreements.
During 2000, the Company's United Kingdom subsidiary, RGA Reinsurance
UK Limited ("RGA UK"), obtained approval as a licensed United Kingdom life
reinsurer, operating in the United Kingdom. The Company opened a representative
office in Spain during the second quarter of 2000. In 1998, the Company had
established RGA South Africa, with offices in Cape Town and Johannesburg to
promote life reinsurance in South Africa. The Company also participates as a
Corporate Name supporting life syndicate 429 at Lloyd's of London.
In the United Kingdom, an increasing number of insurers are ceding the
mortality and accelerated critical illness (pays on earlier of death or critical
illness) covers on a quota share basis creating reinsurance opportunities. The
reinsurers present in the market include the main global players with which RGA
competes in other markets as well.
In South Africa, the Company's subsidiary has managed to establish a
substantial position in the facultative market, through excellent service and
competitive pricing. The Company is concentrating on the life insurance market,
as opposed to competitors that are also in the health market.
The Company's subsidiaries in the United Kingdom and South Africa
employ their own underwriting, actuarial, claims pricing, accounting, marketing
and administration staff. Divisional management through RGA International based
in Toronto provides additional services for existing and future markets. RGA
International had a staff of thirteen people, operations in the United Kingdom
maintained a staff of twelve people, RGA South Africa maintained a staff of
twenty-one people, and two people were on staff in the Madrid office.
Discontinued Operations
As of December 31, 1998, the Company formally reported its accident and
health division as a discontinued operation. More information about the
Company's discontinued accident and health divisions may be found in Note 21 to
the Consolidated Financial Statements within Item 8 of Part II.
D. FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS
The Company's foreign operations are primarily in Canada, Latin
America, the Asia Pacific region, which includes Australia, and Europe. Revenue,
income (loss) which includes net realized gains (losses) before income tax and
minority interest, and identifiable assets attributable to these geographic
regions were identified in Note 17 to the Consolidated Financial Statements
within Item 8 of Part II.
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E. EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding the executive officers of the Company, see
Part III, Item 10, entitled "Directors and Executive Officers of the
Registrant."
Item 2. PROPERTIES
RGA Reinsurance houses its employees and the majority of RGA's officers
in approximately 116,000 square feet of office space at 1370 Timberlake Manor
Parkway, Chesterfield, Missouri. These premises are leased through August 31,
2009, at annual rents ranging from approximately $2,000,000 to $2,400,000.
RGA Reinsurance also conducts business from approximately 1,400 square
feet in Norwalk, Connecticut, 2,979 square feet of office space located in Hong
Kong, approximately 2,900 square feet of office space located in Tokyo, Japan,
and 2,800 square feet of office space in Taipei, Taiwan. The rental expenses
paid by RGA Reinsurance under these leases during 2000 were approximately
$22,000, $166,000, $293,000, and $51,000 for Norwalk, Hong Kong, Tokyo, and
Taipei, respectively. RGA Australia conducts business from approximately 20,700
square feet of office space located in Sydney, Australia and paid approximately
$98,000 during 2000 for lease expense. The Norwalk, Hong Kong, Tokyo, and Taipei
leases expire in December 2002, October 2002, January 2002, and October, 2003,
respectively. The Sydney lease expires in October 2003.
RGA Reinsurance also conducts business from approximately 1,500 square
feet of office space in Mexico City, Mexico. The rental expenses paid by RGA
Reinsurance under the lease during 2000 were approximately $22,000. The lease
expires in December 2001.
General American Argentina conducts business from approximately 11,000
square feet of office space in Buenos Aires, Argentina, pursuant to several
leases. Rental expense paid for the office was approximately $179,000 during
2000. Two of the Buenos Aires leases expire in 2001, and three in 2002.
RGA Argentina conducts business from approximately 800 square feet of
office space in Buenos Aires, Argentina. The rental expenses paid by RGA
Argentina under the lease during 2000 were approximately $28,000. The lease
expires in December 2001.
RGA Canada's operations are conducted from approximately 12,480 square
feet of office space located in Montreal, Canada. The lease with respect to such
space expires in 2010. Rental expenses paid by RGA Canada under the lease during
2000 were approximately $289,000. RGA Canada also sub-leased approximately 800
square feet of space in Montreal, Canada. The sub-lease expired in 2000. The
rental expenses paid by RGA Canada under the sub-lease during 2000 were
approximately $10,000. RGA Canada also leases approximately 5,900 square feet of
space in Toronto, Canada. This lease expires in 2005. The rental expenses paid
by RGA Canada under the Toronto lease during 2000 were approximately $155,000.
RGA International conducts operations from approximately 9,800 square feet of
office space located in Toronto, Canada. The lease with respect to such space
expires in 2007. The rental expenses paid by RGA International under the lease
during 2000 were approximately $285,000.
RGA UK Reinsurance conducts business from approximately 3,000 square
feet of office space in London, England. The rental expenses paid by RGA UK
Reinsurance under the lease during 2000 were approximately $328,000. The lease
expires in 2009.
RGA South Africa conducts business from approximately 5,300 square feet
of office space in Cape Town and 3,600 square feet of office space located in
Johannesburg, South Africa. The rental expenses paid by RGA South Africa under
the leases during 2000 were approximately $20,000 and $24,000 for Cape Town and
Johannesburg respectively. The leases expire in September 2003 and May 2004 for
Cape Town and Johannesburg respectively.
The Company believes its facilities have been generally well maintained
and are in good operating condition. The Company believes the facilities are
sufficient for our current and projected future requirements.
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Item 3. LEGAL PROCEEDINGS
The Company is currently a party in arbitrations that involve three
separate group medical reinsurance coverages as discussed in Note 21 to the
consolidated financial statements. 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. While it is not
feasible to predict or determine the ultimate outcome of the pending arbitration
or legal proceedings or provide reasonable ranges of potential losses, it is the
opinion of Management that their outcomes after consideration of the provisions
made in the Company's consolidated financial statements would not have a
material adverse effect on its consolidated financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of security holders
during the fourth quarter of 2000.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On November 23, 1999, RGA completed a private placement of securities
in which it sold 4,784,689 shares of the Company's common stock, $0.01 par value
per share, to Metropolitan Life Insurance Company. The price per share was
$26.125, and the aggregate value of the transaction was approximately $125
million, paid in cash. These shares were not registered under the Securities Act
of 1933, as amended ("the Act"), and were sold on reliance on the exemption from
registration contained in Section 4(2) of the Act. Proceeds from the private
placement will be used for general corporate purposes, including the immediate
capital needs associated with the Company's primary businesses.
Information about the market price of the Company's common equity,
dividends and related stockholder matters is contained in Item 8 under the
caption "Quarterly Data (Unaudited)" and in Item 1 under caption "Restrictions
on Dividends and Distributions". Additionally, Insurance companies are subject
to statutory regulations that restrict the payment of dividends. See Item I
under the caption "Restrictions on Dividends and Distributions".
Item 6. SELECTED FINANCIAL DATA
The selected financial data presented for, and as of the end of, each
of the years in the five-year period ended December 31, 2000, have been prepared
in accordance with accounting principals generally accepted in the United States
of America for stock life insurance companies. All amounts shown are in
millions, except per share and operating data. The following data should be read
in conjunction with the Consolidate Financial Statements and the Notes to the
Consolidated Financial Statements appearing in Part II Item 8 and Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing in Part II Item 7.
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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(Dollars in millions, except per share and operating data)
YEARS ENDING DECEMBER 31, 2000 1999 1998 1997 1996
Income Statement Data
Revenues:
Net premiums $ 1,404.1 $ 1,315.6 $ 1,016.4 $ 744.8 $ 617.7
Investment income, net of related expenses 326.5 340.3 301.8 187.1 135.8
Realized capital (losses) gains (28.7) (75.3) 3.1 0.3 0.9
Other income 23.8 26.5 23.2 46.0 16.8
---------- ---------- ---------- ---------- ----------
Total revenue 1,725.7 1,607.1 1,344.5 978.2 771.2
Benefits and expenses:
Claims and other policy benefits 1,103.6 1,067.1 797.9 569.1 463.5
Interest credited 104.8 153.1 153.2 92.3 54.7
Policy acquisition costs and other insurance expenses 243.5 218.3 188.5 148.1 118.1
Other expenses 80.9 64.5 58.0 47.5 37.5
Interest expense 17.6 11.0 8.8 7.8 6.2
---------- ---------- ---------- ---------- ----------
Total benefits and expenses 1,550.4 1,514.0 1,206.4 864.8 680.0
---------- ---------- ---------- ---------- ----------
Income from continuing operations before income
taxes and minority interest 175.3 93.1 138.1 113.4 91.2
Provision for Income taxes 69.2 39.1 49.1 40.4 33.1
---------- ---------- ---------- ---------- ----------
Income from continuing operations before minority interest 106.1 54.0 89.0 73.0 58.1
Minority interest in earnings (losses) of consolidated
subsidiaries 0.3 1.0 (0.7) 0.4 0.3
---------- ---------- ---------- ---------- ----------
Income from continuing operations 105.8 53.0 89.7 72.6 57.8
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (28.1) (12.1) (27.6) (18.0) (2.7)
---------- ---------- ---------- ---------- ----------
Net income $ 77.7 $ 40.9 $ 62.1 $ 54.6 $ 55.1
========== ========== ========== ========== ==========
BASIC EARNINGS PER SHARE
Continuing operations $ 2.14 $ 1.16 $ 2.11 $ 1.91 $ 1.53
Discontinued operations $ (0.57) $ (0.27) $ (0.61) $ (0.47) $ (0.08)
---------- ---------- ---------- ---------- ----------
Net income $ 1.57 $ 0.89 $ 1.50 $ 1.44 $ 1.45
DILUTED EARNINGS PER SHARE
Continuing operations $ 2.12 $ 1.15 $ 2.08 $ 1.89 $ 1.52
Discontinued operations $ (0.56) $ (0.27) $ (0.60) $ (0.47) $ (0.08)
---------- ---------- ---------- ---------- ----------
Net income $ 1.56 $ 0.88 $ 1.48 $ 1.42 $ 1.44
Weighted average diluted shares, in thousands 49,920 46,246 42,559 38,406 38,114
Dividends per share on common stock(1) $ 0.24 $ 0.22 $ 0.17 $ 0.15 $ 0.13
BALANCE SHEET DATA
Total investments $ 4,560.2 $ 3,811.9 $ 5,129.6 $ 3,634.0 $ 2,272.0
Total assets 6,061.9 5,123.7 6,318.6 4,673.6 2,893.7
Policy liabilities 4,617.7 3,998.1 5,053.1 3,558.7 2,068.6
Total long-term debt 272.3 184.0 108.0 106.8 106.5
Stockholders' equity 862.9 732.9 748.5 499.3 425.6
Stockholders' equity per share $ 17.51 $ 14.68 $ 16.52 $ 13.21 $ 11.14
OPERATING DATA (IN BILLIONS)
Assumed ordinary life reinsurance business in force $ 545.9 $ 446.9 $ 330.6 $ 227.3 $ 168.3
Assumed new business production 161.1 164.9 125.0 75.9 37.9
(1) Dividends are payable on voting and non-voting shares of common stock.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
The statements included in this Annual Report regarding the Company's business
which are not historical facts, including, without limitations, statements and
information relating to future financial performance, growth potential, 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 "Letter to Shareholders," "Divisional Highlights," and "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, or capital expenditures; estimated fair values of
fixed rate instruments; estimated cash flows of floating rate instruments; plans
for future operations and financing needs, 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 "intend," "expect," "project," "estimate," "predict,"
"anticipate," "should," "believe" and other 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.
Important factors that could cause actual results and events to differ
materially from those expressed or implied by forward-looking statements
including, without limitation, (1) market conditions and the timing of sales of
investment securities, (2) regulatory action taken by the New York or Missouri
Departments of Insurance with respect to Metropolitan Life Insurance Company
("MetLife") or General American Life Insurance Company ("General American") or
the Company or its subsidiaries, (3) changes in the credit ratings of the
Company, MetLife or General American and the effect of such changes on the
Company's future results of operations and financial condition, (4) material
changes in mortality and claims experience, (5) competitive factors and
competitors' responses to the Company's initiatives, (6) general economic
conditions affecting the demand for insurance and reinsurance in the Company's
current and planned markets, (7) successful execution of the Company's entry
into new markets, (8) successful development and introduction of new products,
(9) the stability of governments and economies in foreign markets in which we
operate, (10) fluctuations in U.S. and foreign currency exchange rates, interest
rates, and securities and real estate markets, (11) the success of the Company's
clients, (12) changes in laws, regulations, and accounting standards applicable
to the Company and its subsidiaries, and (13) other risks and uncertainties
described in this Annual Report and in the Company's other filings with the
Securities and Exchange Commission.
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 THE CAUTIONARY STATEMENTS ABOVE. READERS ARE CAUTIONED NOT TO PLACE
UNDUE RELIANCE ON SUCH STATEMENTS, WHICH SPEAK ONLY AS OF MARCH 1, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding
company formed December 31, 1992. On December 31, 2000, Equity Intermediary
Company, a Missouri holding company, directly owned approximately 49.0% of the
outstanding shares of common stock of RGA. Equity Intermediary Company is a
wholly owned subsidiary of General American, a Missouri life insurance company,
which in turn is a wholly owned subsidiary of GenAmerica Financial Corporation
("GenAmerica"), a Missouri corporation. GenAmerica was acquired and became a
wholly owned subsidiary of MetLife, a New York life insurance company, on
January 6, 2000. On April 7, 2000, MetLife completed a demutualization and
became a subsidiary of MetLife, Inc., a publicly traded company. As a result of
MetLife's ownership of GenAmerica and its own direct investment in RGA, MetLife
beneficially owns 58.7% of the outstanding shares of common stock of RGA at
December 31, 2000.
The consolidated financial statements include the assets, liabilities, and
results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"); RGA Australian Holdings PTY, Limited ("Australian Holdings"); RGA
Reinsurance Company (Barbados) Ltd. ("RGA Barbados"); RGA International, Ltd.
("RGA International"), a New Brunswick company that serves as a
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Canadian marketing and insurance holding company for RGA's Canadian operations;
RGA Sudamerica, S.A., a Chilean holding company; RGA Holdings Limited
("RGA UK"), a United Kingdom holding company; General American Argentina
Seguros de Vida, S.A. ("GA Argentina"), an Argentine life insurance company;
RGA South African Holdings (Pty) Ltd. ("RGA South Africa"), a South African
holding company; Benefit Resource Life Insurance Company (Bermuda) Ltd. ("RGA
Bermuda"); RGA Americas Reinsurance Company, Ltd.; and Triad Re, Ltd. In
addition, the consolidated financial statements include the subsidiaries of
RCM, Australian Holdings, RGA International, RGA UK, RGA Sudamerica, S.A., and
RGA South Africa subject to an ownership position of fifty percent or more
(collectively, the "Company"). During 2000, the Company sold its interest in
RGA Sudamerica, S.A. and its subsidiaries, and RGA Bermuda.
RESULTS OF OPERATIONS
The Company derives revenues primarily from renewal premiums from existing
reinsurance treaties, new business premiums from existing or new reinsurance
treaties, and income earned on invested assets.
The Company's primary business is life reinsurance, which involves reinsuring
life insurance policies that are often in force for the remaining lifetime of
the underlying individual insureds, with premiums earned typically over a period
of 10 to 30 years. Each year, however, a portion of the business under existing
treaties terminates due to, among other things, voluntary surrenders of
underlying life insurance policies, lapses of underlying policies, deaths of
underlying insureds, and the exercise of recapture options by the ceding
companies.
Assumed insurance in force for the Company increased $99.0 billion to $545.9
billion at December 31, 2000. Assumed new business production for 2000 totaled
$161.1 billion compared to $164.9 billion in 1999 and $125.0 billion in 1998.
Significant growth in assumed new business in the U.S. and Canada operations of
$129.5 billion provided most of this increase in 2000.
As is customary in the reinsurance business, life insurance clients continually
update, refine, and revise reinsurance information provided to the Company. Such
revised information is used by the Company in the preparation of its financial
statements and the financial effects resulting from the incorporation of revised
data are reflected currently.
The Company's profitability primarily depends on the volume and amount of death
claims incurred. While death claims are reasonably predictable over a period of
many years, claims become less predictable over shorter periods and are subject
to fluctuation from quarter to quarter and year to year. A significant
fluctuation from period to period could adversely affect the results of
operations. The Company has catastrophe insurance coverage issued by 6 insurers
rated "A" or higher by A.M. Best as of December 31, 2000, that provides benefits
of up to $100.0 million per occurrence for claims involving three or more deaths
in a single accident, with a deductible of $1.5 million per occurrence. This
coverage is terminable annually as of August 13 with 90 days prior notice. The
Company believes such catastrophe insurance coverage adequately protects it from
risks associated with multiple deaths in a single accident of reinsured lives.
Additionally, through December 31, 2000, the Company retained a maximum of $2.5
million of coverage per individual life. Effective January 1, 2001, the Company
increased its retention to $4.0 million of coverage per individual life.
The Company has foreign currency risk on business conducted in foreign
currencies to the extent that the exchange rates of the foreign currencies are
subject to adverse change over time. The Company's operations in Canada transact
business in Canadian dollars. The exchange rate from Canadian to U.S. currency
was 0.6676, 0.6876, and 0.6535 at December 31, 2000, 1999, and 1998,
respectively. The Company's Latin America operations primarily conduct business
in Argentine pesos and, prior to the sale of RGA Sudamerica, S.A., Chilean
pesos. The exchange rate from these currencies to the U.S. currency remained
relatively stable during 2000, 1999, and 1998. The business generated from the
Asia Pacific region is primarily denominated in U.S. dollars, Australian
dollars, and Japanese yen. Additionally, the Company processes business in other
international currencies including the Great British Pound Sterling and South
African Rand. The Company was not materially affected by the decline in the
foreign exchange rates during 2000 and 1999.
Since December 31, 1998, the Company has formally reported its accident and
health division as a discontinued operation. The accident and health business
was placed into run-off, and all treaties were terminated at the earliest
possible date. Notice was given to all cedants and retrocessionaires that all
treaties were being cancelled at the expiration of their terms. If a treaty was
continuous, a written Preliminary Notice of Cancellation was given, followed by
a final notice within 90 days of the expiration date. The nature of the
underlying risks is such that the claims may take several years to reach the
reinsurers involved. Thus, the Company expects
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to pay claims out of existing reserves over a number of years as the
level of business diminishes. During 2000, the accident and health division
lost $28.1 million, including a pre-tax charge of $25.0 million to strengthen
its reserves.
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Latin America, Asia Pacific, and other
international operations. The U.S. operations provide traditional life
reinsurance and non-traditional reinsurance to domestic clients. Non-traditional
business includes asset-intensive and financial reinsurance. Asset-intensive
products primarily include reinsurance of corporate-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. The Company sold its Chilean
interests during 2000. Asia Pacific operations provide primarily traditional
life reinsurance through RGA Reinsurance Company of Australia, Limited ("RGA
Australia") and RGA Reinsurance Company ("RGA Reinsurance"). Other international
operations include traditional business from Europe and South Africa, in
addition to other markets being developed by the Company. The operational
segment results do not include the corporate investment activity, general
corporate expenses, interest expense of RGA, and the provision for income tax
expense (benefit). In addition, the Company's discontinued accident and health
operations are not reflected in the continuing operations of the Company. The
Company measures segment performance based on profit or loss from operations
before income taxes and minority interest.
Prior to September 29, 1999, the U.S. Operations reinsured funding agreements,
an asset intensive product from General American. Effective September 29, 1999,
General American completed the recapture of the entire block of General
American's funding agreement business reinsured by the Company. Prior to the
recapture, the Company reinsured approximately 25% of General American's funding
agreement business. Pursuant to the recapture transaction, the Company
transferred all remaining liabilities related to the funding agreement business
and an equivalent amount of assets to General American. In the third quarter of
1999, the Company transferred to General American approximately $1.8 billion in
market value of assets. Those assets, consisting primarily of investments in
fixed maturity securities and cash, were transferred in satisfaction of $1.8
billion in funding agreement liabilities. The Company incurred an after tax net
capital loss of approximately $33.2 million associated with the liquidation of
investment securities and the transfer of assets to General American during the
third quarter of 1999.
Consolidated income from continuing operations increased 99.4% in 2000 to $105.8
million and decreased 40.9% in 1999 to $53.0 million. Diluted earnings per share
from continuing operations were $2.12 for 2000 compared to $1.15 for 1999 and
$2.08 for 1998. Earnings during these years were attributed primarily to the
strong performance of traditional reinsurance in the U.S. and Canada. Earnings
during 1999 were affected by the investment losses incurred in connection with
the recapture of the funding agreement business. Further discussion and analysis
of the results for 2000 compared to 1999 and 1998 are presented by segment.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
26
27
U.S. OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(Dollars in thousands)
--------------------------------------------------------
TRADITIONAL Non-traditional Total
ASSET- FINANCIAL
INTENSIVE REINSURANCE U.S.
----------- ----------- ----------- -----------
REVENUES:
Net premiums $ 1,036,656 $ 2,216 $ -- $ 1,038,872
Investment income, net of related expenses 139,688 89,001 (37) 228,652
Realized investment losses, net (12,206) (1,066) -- (13,272)
Other revenue 321 686 16,370 17,377
----------- ----------- ----------- -----------
Total revenues 1,164,459 90,837 16,333 1,271,629
BENEFITS AND EXPENSES:
Claims and other policy benefits 793,494 (95) -- 793,399
Interest credited 47,445 55,006 -- 102,451
Policy acquisition costs and other insurance expenses 150,347 23,446 5,457 179,250
Other operating expenses 25,244 802 3,274 29,320
----------- ----------- ----------- -----------
Total benefits and expenses 1,016,530 79,159 8,731 1,104,420
Income before income taxes and minority interest $ 147,929 $ 11,678 $ 7,602 $ 167,209
----------- ----------- ----------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1999
(Dollars in thousands)
--------------------------------------------------------
TRADITIONAL Non-traditional Total
ASSET- FINANCIAL
INTENSIVE REINSURANCE U.S.
----------- ----------- ----------- -----------
REVENUES:
Net premiums $ 949,054 $ 1,380 $ -- $ 950,434
Investment income, net of related expenses 125,745 124,713 -- 250,458
Realized investment losses, net (17,043) (65,844) -- (82,887)
Other revenue (597) 12,655 13,180 25,238
----------- ----------- ----------- -----------
Total revenues 1,057,159 72,904 13,180 1,143,243
BENEFITS AND EXPENSES:
Claims and other policy benefits 740,339 1,009 -- 741,348
Interest credited 40,240 109,644 -- 149,884
Policy acquisition costs and other insurance expenses 145,529 2,850 9,370 157,749
Other operating expenses 23,002 623 100 23,725
----------- ----------- ----------- -----------
Total benefits and expenses 949,110 114,126 9,470 1,072,706
Income (loss) before income taxes and minority interest $ 108,049 $ (41,222) $ 3,710 $ 70,537
----------- ----------- ----------- -----------