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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, 2002
___ 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
Trust Preferred Income Equity Redeemable
Securities (PIERS (sm)) Units 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. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes _X_ No ___
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 June 30,
2002, as reported on the New York Stock Exchange was $615,225,696.
As of March 1, 2003, Registrant had outstanding 49,612,997 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2003
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, 2002, are incorporated by reference
in Part III of this Form 10-K.
2
REINSURANCE GROUP OF AMERICA, INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 2002
INDEX
ITEM PAGE
NUMBER OF THIS FORM
- ------ ------------
PART I
1. BUSINESS............................................................................. 4
2. PROPERTIES........................................................................... 17
3. LEGAL PROCEEDINGS.................................................................... 17
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 17
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.......................................................... 18
6. SELECTED FINANCIAL DATA.............................................................. 18
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................ 20
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............................................................... 74
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS...................................... 74
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................... 74
14. CONTROLS AND PROCEDURES.............................................................. 74
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K..................... 75
3
Item 1. BUSINESS
A. OVERVIEW
Reinsurance Group of America, Incorporated ("RGA") is an insurance
holding company formed December 31, 1992. On December 31, 2002, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
48.8% 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 beneficially owns 59.1%
of the outstanding shares of common stock of RGA as of December 31, 2002.
During 2002, MetLife Inc. purchased 327,600 additional common shares of
RGA. The purchases were intended to offset potential future dilution of
MetLife's holding of RGA stock arising from the issuance of convertible
securities by RGA in December 2001.
The consolidated financial statements include the assets, liabilities,
and results of operations of RGA; Reinsurance Company of Missouri, Incorporated
("RCM"), RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life
Reinsurance Company of Canada ("RGA Canada") and RGA Americas Reinsurance
Company, Ltd. ("RGA Americas"), as well as several other subsidiaries, subject
to an ownership position of greater than fifty percent (collectively, the
"Company"). During 2000, the Company sold its interest in RGA Sudamerica, S.A.,
and its subsidiaries, and Benefit Resource Life Insurance Company (Bermuda) Ltd.
The Company is primarily engaged in traditional life, asset-intensive,
and financial reinsurance. RGA and its predecessor, the Reinsurance Division of
General American, have been engaged in the business of life reinsurance since
1973. Approximately 79.8% of the Company's 2002 net premiums were from its more
established operations in the U.S. and Canada. In 1994, the Company began
expanding into international markets and now has subsidiaries, branch
operations, or representative offices in Asia Pacific, including Australia,
Latin America, Europe and South Africa. The Company is considered one of the
leading life reinsurers in the North American market based on premiums and
inforce business. As of December 31, 2002, the Company had approximately $8.9
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 in
meeting 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. Asset-intensive reinsurance
primarily refers to reinsurance of corporate-owned life insurance and annuities.
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 the
binding limits specified in their automatic reinsurance treaties.
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
4
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, which 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) or in some cases due to changes in the financial
condition or ratings of the reinsurer. Recapture of business previously ceded
does not affect premiums ceded prior to the recapture of such business, but
would reduce premiums in subsequent periods. Additionally, some treaties give
the ceding company the right to request the Company to place assets in trust for
its benefit to support reserve credits, in the event of a downgrade of the
Company's ratings to specified levels. As of December 31, 2002, these treaties
had approximately $294.7 million in reserves. Assets placed in trust continue to
be owned by the Company, but their use is restricted based on the terms of the
trust agreement. Securities with an amortized cost of $532.8 million were held
in trust for the benefit of certain subsidiaries of the Company to satisfy
collateral requirements for reinsurance business at December 31, 2002.
Additionally, securities with an amortized cost of $931.6 million, as of
December 31, 2002, were held in trust to satisfy collateral requirements under
certain third-party reinsurance treaties. Under certain conditions, RGA may be
obligated to move reinsurance from one RGA subsidiary company to another RGA
subsidiary or make payments under the treaty. These conditions generally include
unusual or remote circumstances, such as change in control, insolvency,
nonperformance under a treaty, or loss of the reinsurance license of such
subsidiary.
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 considered 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.
B. CORPORATE STRUCTURE
RGA is a holding company, the principal assets of which consist of the
common stock of Reinsurance Company of Missouri, Incorporated ("RCM"), RGA
Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life Reinsurance
Company of Canada ("RGA Canada") and RGA Americas Reinsurance Company, Ltd.
("RGA Americas"), as well as investments in several other wholly-owned
subsidiaries, subject to an ownership position greater than 50%. The primary
sources of funds for RGA to make dividend distributions and to fund debt service
obligations are 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. Dividends paid by the Company's reinsurance
subsidiaries are subject to regulatory restrictions of the respective governing
bodies where each reinsurance subsidiary is domiciled.
As of December 31, 1998, the Company formally reported its accident and
health division as a discontinued operation. The accident and health operations
were 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. The nature of
the underlying risks is such that the claims may take years to reach the
reinsurers involved.
5
Thus, the Company expects to pay claims over a number of years as the level of
business diminishes. The Company will report a loss to the extent claims exceed
established reserves.
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Europe & South Africa, Asia Pacific, and Latin
America. The Europe & South Africa, Asia Pacific, and Latin America operational
segments are presented herein as one reportable segment, Other International.
The operational segment results do not include the corporate investment
activity, general corporate expenses, or interest expense of RGA. 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 primarily based on profit or loss from operations before income
taxes.
The U.S. operations represented 70.7% of the Company's consolidated net
premiums in 2002. The U.S. operations market life reinsurance, reinsurance of
asset-intensive products, and financial reinsurance primarily through RGA
Reinsurance, principally to the largest life insurance companies in the U.S.
Asset-intensive products primarily include reinsurance of corporate-owned life
insurance and annuities. RGA Reinsurance, a Missouri domiciled stock life
insurance company, is wholly owned by RCM, a wholly owned subsidiary of RGA.
The Company's Canada operations, which represented 9.1% of consolidated
net premiums in 2002, are conducted primarily through RGA Canada. The Canada
operations assist clients with capital management activity and mortality risk
management and provide traditional individual life reinsurance, including
preferred underwriting products, as well as creditor and critical illness
products.
The Company's Europe & South Africa operations represented 11.5% of
consolidated net premiums in 2002. This segment provides life and critical
illness reinsurance to clients throughout Europe and South Africa through yearly
renewable term and coinsurance agreements. These agreements may be either
facultative or automatic agreements covering primarily individual products but
also some group contracts. The Company conducts reinsurance through its
wholly-owned United Kingdom subsidiary, RGA Reinsurance (UK) Limited ("RGA UK"),
a South African wholly-owned subsidiary, RGA Reinsurance Company of South
Africa, Limited ("RGA South Africa") and a representative office in Spain. Also
in 2002, the Company opened a representative office in India to focus on the
Indian market.
The Company's Asia Pacific operations represented 8.1% of the Company's
consolidated net premiums in 2002. The Company conducts reinsurance business in
the Asia Pacific region through branch operations in Hong Kong and New Zealand,
and representative offices in Japan, Taiwan, and South Korea. In January 1996,
RGA formed RGA Australian Holdings Pty, Limited, a wholly-owned holding company,
and RGA Reinsurance Company of Australia Limited ("RGA Australia"), a
wholly-owned reinsurance company of RGA Australian Holdings Pty, Limited,
licensed to assume life reinsurance in Australia. Business is also conducted
through Malaysian Life Reinsurance Group Berhad ("MLRe"), a joint venture in
Malaysia in which the Company holds a 30% interest. 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 Latin America operations represented 0.6% of the
Company's consolidated net premiums in 2002. 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 effective July 1,
2001, ceased all treaty renewals. Due to the economic uncertainty in Argentina
and losses associated with the Argentine privatized pension system, the Company
has scaled back its operations in Argentina. The Company continues to market
additional types of reinsurance in the region such as traditional individual
life, credit, and group life insurance in Mexico and Chile. Through its
wholly-owned subsidiary, General American Argentina Seguros de Vida, S.A. ("GA
Argentina"), the Company also markets and sells direct policies including
individual, group, credit, universal life and disability insurance. However, the
current economic situation in Argentina has had a negative impact on growth
opportunities for direct insurance. The Company had direct and local reinsurance
operations in Chile until 2000 when those operations were sold.
RGA Barbados and RGA Americas were formed and capitalized in 1995 and
1999, respectively, providing reinsurance for a portion of certain business
assumed by RGA Reinsurance and other RGA insurance subsidiaries, as well as
assuming life reinsurance directly from clients.
6
Intercorporate Relationships
The Company has reinsurance agreements with MetLife and certain of its
subsidiaries. As of December 31, 2002, the Company had assets and liabilities
related to these agreements totaling $78.5 million and $183.1 million,
respectively. Under these agreements, the Company reflected net premiums of
approximately $172.1 million, $149.3 million, and $144.0 million in 2002, 2001,
and 2000, respectively. The premiums reflect the net of business assumed from
and ceded to MetLife and its subsidiaries, including General American. The
pre-tax gain on this business was approximately $25.9 million, $26.1 million,
and $17.8 million in 2002, 2001, and 2000, respectively.
Ratings
The ability of RGA Reinsurance to write reinsurance partially depends
on its financial condition and its ratings. RGA Reinsurance and RGA Canada have
been assigned ratings of "A+" (Superior) by A.M. Best Company. The ratings
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, as well as the implicit and explicit
benefits the Company derives from its affiliation with MetLife. 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 senior
long-term debt ratings of "A-" from S&P, "Baa1" from Moody's and "a" from A.M.
Best.
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 December 31, 1999. The report on 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, 2001. The report on this examination contained no material adverse findings.
The Company's other operating reinsurance subsidiaries are also subject to
periodic reporting requirements and regulatory examinations.
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
7
regulatory authority. However, the National Association of Insurance
Commissioners ("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
letters 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 yearly renewable term 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.
RGA Reinsurance and RCM prepare statutory financial statements in
conformity with accounting practices prescribed or permitted by the State of
Missouri. Beginning in 2001, the State of Missouri required that insurance
companies domiciled in the State of Missouri prepare their statutory basis
financial statements in accordance with the NAIC Accounting Practices and
Procedures manual - Version effective March 2002, subject to any deviations
prescribed or permitted by the State of Missouri insurance commissioner.
Accounting changes adopted to conform to the provisions of the NAIC
Accounting Practices and Procedures manual - Version effective March 2002 are
reported as changes in accounting principles. The cumulative effect of changes
in accounting principles is reported as an adjustment to unassigned funds
(surplus) in the period of the change in accounting principle. There were no
adjustments made to statutory surplus in 2002 as a result of implementing the
new standards.
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.
insurance 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 the 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 the 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 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 and 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 of the voting securities of another person.
8
The Company owns other international holding companies in addition to
RGA. These international holding companies are subject to various regulations in
their respective jurisdictions.
Restrictions on Dividends and Distributions
Current Missouri law (applicable to 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 2003
is approximately $64.0 million pursuant to this calculation. RGA Reinsurance's
allowable dividend without prior approval for 2003 is approximately $63.4
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, 2002, RCM and RGA Reinsurance had unassigned surplus of
approximately $28.9 million and $67.8 million, respectively. Any dividends paid
by RGA Reinsurance would be paid to RCM, which in turn has the ability to pay
dividends to RGA. Historically, RGA has not relied on dividends from its
subsidiaries to fund its obligations. However, the regulatory limitations
described here could limit the Company's financial flexibility in the future
should it choose to or need to use subsidiary dividends as a funding source for
its obligations.
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.
Missouri insurance laws and regulations also 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 call for a rescission of
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 the Missouri
insurance regulations.
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 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 payment. The maximum amount available for payment of
dividends by RGA Canada under the Canadian MCCSR guidelines was $33.4 million at
December 31, 2002. Dividend payments from other subsidiaries are subject to the
regulations in the country of domicile.
RGA Americas and RGA Barbados do not have material restrictions on
their ability to pay dividends out of retained earnings
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.
9
In addition to RCM, RGA Reinsurance and RGA Canada, the Company has an
interest in licensed insurance subsidiaries in Australia, Argentina, Barbados,
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 $4.0
million of coverage per individual life. For other currencies and for countries
with higher risk factors, the Company systematically reduces its retention. 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, RGA Barbados, or RGA Americas. Retrocessions
are arranged through the Company's retrocession pools for amounts in excess of
its retention. As of December 31, 2002, all retrocession pool members in this
excess retention pool reviewed by the A.M. Best Company were rated "B++" 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 the recoverability
of any such claims.
The Company maintains catastrophe insurance under a program that renews
on August 13th of each year. The program provides up to $50 million of coverage
per occurrence for events involving ten or more deaths. Under this program the
Company retains the first $20 million in claims, $10 million of the next $20
million, and none of the next $40 million in claims. Acts of terrorism are
covered except when arising from the use of nuclear, chemical, or biological
weapons. This insurance is provided through seven insurance companies and eight
Lloyds Syndicates with no single insurer providing more than $10 million of the
$50 million coverage.
Underwriting
Facultative. The Company 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 between 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 regularly performs internal reviews of its underwriters and underwriting
process.
The Company's management determines whether to accept facultative
reinsurance business on a prospective insured by reviewing the application,
medical information and all underwriting requirements based on age and the face
amount of the application. An assessment of medical and financial history
follows with decisions based on underwriting knowledge, manual review and
consultation with the Medical Directors as necessary. Most facultative
applications involve individuals with multiple medical impairments, such as
heart disease, high blood pressure, and diabetes, which require a difficult
underwriting/mortality assessment. To assist its underwriters in making these
assessments, RGA Reinsurance employs three full-time medical directors, as well
as a medical consultant.
10
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.
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 its primary
competitors in the U.S. life reinsurance market are currently Transamerica
Occidental Life Insurance Company, a subsidiary of Aegon N.V., Swiss Re Life of
America, ING Re, Munich American Reinsurance Company, and Employers Reinsurance
Company. However, within the reinsurance industry, this can change from year to
year. The Company believes that its major competitors in the Canadian life
reinsurance market are Munich Reinsurance Company, Employers Reassurance
Corporation, and Swiss Re Life and Health Canada.
The Company's international operations compete with subsidiaries of
several U.S. life insurers and reinsurers and other internationally based
insurers and reinsurers, some of which are larger, more established in their
markets, and have access to greater resources than RGA. Competition is based
primarily on the basis of price, service, and financial strength.
Employees
As of December 31, 2002, the Company had 684 employees located in the
United States, Canada, Argentina, Mexico, Hong Kong, Korea, Australia, Japan,
Taiwan, South Africa, Spain, India 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, morbidity, and
lapse risks associated with such products. With respect to asset-intensive
products, the Company has also provided reinsurance for investment-related
risks. The following table sets forth the Company's premiums attributable to
each of its segments for the periods indicated on both a gross assumed basis and
net of premiums ceded to third-parties:
GROSS AND NET PREMIUMS BY SEGMENT
(in millions)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
GROSS PREMIUMS:
U.S. $1,659.4 71.2 $1,366.7 73.9 $1,210.9 74.4
Canada 210.2 9.0 200.2 10.8 218.0 13.4
Europe & South Africa 272.0 11.7 96.2 5.2 30.5 1.9
Asia Pacific 175.4 7.5 135.6 7.3 100.7 6.2
Latin America 13.4 0.6 51.9 2.8 66.1 4.1
-------- ----- -------- ----- -------- -----
Total $2,330.4 100.0 $1,850.6 100.0 $1,626.2 100.0
======== ===== ======== ===== ======== =====
NET PREMIUMS:
U.S. $1,399.8 70.7 $1,222.9 73.6 $1,038.9 74.0
Canada 181.2 9.1 173.3 10.4 176.3 12.6
Europe & South Africa 226.9 11.5 94.8 5.7 29.7 2.1
Asia Pacific 160.2 8.1 119.7 7.2 94.3 6.7
Latin America 12.6 0.6 51.1 3.1 64.9 4.6
-------- ----- -------- ----- -------- -----
Total $1,980.7 100.0 $1,661.8 100.0 $1,404.1 100.0
======== ===== ======== ===== ======== =====
11
The following table sets forth selected information concerning assumed
reinsurance business in force by segment for the indicated periods. (The term
"in force" refers to insurance policy face amounts or net amounts at risk.)
REINSURANCE BUSINESS IN FORCE BY SEGMENT
(in billions)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
U.S. $ 540.0 71.2 $ 468.1 76.0 $ 412.7 75.6
Canada 64.5 8.5 55.8 9.1 54.3 10.0
Europe & South Africa 92.7 12.2 40.5 6.6 2.4 0.4
Asia Pacific 57.0 7.5 44.1 7.1 31.9 5.8
Latin America 4.7 0.6 7.5 1.2 44.6 8.2
-------- ----- -------- ----- -------- -----
Total $ 758.9 100.0 $ 616.0 100.0 $ 545.9 100.0
======== ===== ======== ===== ======== =====
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, and 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 $91.3 billion, $98.0 billion,
and $59.3 billion were released in 2002, 2001, and 2000, respectively.
The following table sets forth selected information concerning assumed
new business volume by segment for the indicated periods. (The term "volume"
refers to insurance policy face amounts or net amounts at risk.)
NEW BUSINESS VOLUME BY SEGMENT
(in billions)
Year Ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
U.S. $ 146.9 63.9 $ 99.5 58.2 $ 115.7 71.8
Canada 11.3 4.9 8.5 5.0 13.8 8.6
Europe & South Africa 56.3 24.4 33.6 19.6 0.6 0.4
Asia Pacific 12.1 5.3 19.3 11.3 9.7 6.0
Latin America 3.4 1.5 10.2 5.9 21.3 13.2
-------- ----- -------- ----- -------- -----
Total $ 230.0 100.0 $ 171.1 100.0 $ 161.1 100.0
======== ===== ======== ===== ======== =====
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 70.7%, 73.6%, and 74.0% of the
Company's net premiums in 2002, 2001, and 2000, respectively. The U.S.
operations market life reinsurance, reinsurance of asset-intensive products and
financial reinsurance primarily to the largest U.S. life insurance companies.
Traditional
The U.S. traditional reinsurance sub-segment 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.
12
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, 2002, reinsurance of such
policies was reflected in interest-sensitive contract reserves of approximately
$896.6 million and policy loans of $841.1 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 also serves as an
effective means of expanding the U.S. operation's automatic business. In 2002,
2001, and 2000, approximately 21.5%, 21.8%, and 29.1%, 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. The amount of facultative business as a percent of premiums has
decreased over the past several years due to the increase in premiums from
automatic treaties on in force business.
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.
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 non-mortality 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. As of December 31, 2002, reinsurance of such policies was reflected
in interest-sensitive contract liabilities of approximately $2.5 billion.
Asset-intensive business that does not produce mortality risk
(annuities) is normally limited by size of the deposit, from any one depositor.
Business that does produce mortality risks (corporate-owned and bank-owned life
insurance) 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. A significant amount of this
business is written on a modified coinsurance or coinsurance with funds withheld
basis. See Management's Discussion and Analysis of Financial Condition and
Results of Operations--Investments appearing in Item 7 and Note 5 to the
Consolidated Financial Statements included in Item 8 of Part II for additional
information.
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
13
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 sub-segment 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.
The Company primarily targets highly rated insurance companies for
financial reinsurance due to the credit risk associated with this business. 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. If the future profits
of the business are not sufficient to repay the Company or if the ceding company
becomes financially distressed and is unable to make payments under the treaty,
the Company may incur losses. A staff of actuaries and accountants tracks
experience for each treaty 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 largest 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 2002, 53 clients generated annual gross premiums
of $5 million or more for the Company and the aggregate gross premiums from
these clients represented approximately 75.1% of 2002 U.S. life gross premiums.
For the purpose of this disclosure, companies that are within the same holding
company structure are combined.
In 2002, no single non-affiliated U.S. client accounted for more than
10% of the Company's consolidated gross premiums; however, one non-affiliated
U.S. client ceded more than 5% of U.S. life gross premiums. The client ceded
$92.1 million or 5.6% of U.S. operations gross premiums in 2002.
MetLife and its affiliates generated approximately $262.8 million or
15.9% of U.S. operation's gross premium for 2002.
Operations
During 2002, 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 departments are
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.
14
CANADA OPERATIONS
The Canada operations represented 9.1%, 10.4%, and 12.6% of the
Company's net premiums in 2002, 2001, and 2000, respectively. In 2002, the
Canadian life operations assumed $11.3 billion in new business, all of which
resulted from recurring new business. Approximately 88% of the 2002 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 assisting
clients with capital management activity and mortality risk management and is
primarily engaged in traditional individual life reinsurance, including
preferred underwriting products, as well as creditor and critical illness
products. Approximately 90% of RGA Canada's premium income is derived from life
reinsurance products.
Clients include most of the life insurers in Canada. During 2002, two
clients accounted for more than 10% of the Canada operation's gross premiums,
consisting of $62.5 million and $26.5 million, or 29.7% and 12.6%, respectively.
Six other clients, including General American, a related party, individually
accounted for more than 5% of Canada's gross premiums. The Canada operations
compete with a small number of individual and group life reinsurers primarily on
the basis of price, service, and financial strength.
RGA Canada has two offices and maintains a staff of seventy-three
people at the Montreal office and seventeen people at the office in Toronto. RGA
Canada employs its own underwriting, actuarial, claims, pricing, accounting,
systems, marketing and administrative staff.
EUROPE & SOUTH AFRICA OPERATIONS
The Europe & South Africa operations represented 11.5%, 5.7%, and 2.1%
of the Company's net premiums in 2002, 2001, and 2000, 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 and the reinsurance of
accelerated critical illness coverage (pays on the earlier of death or diagnosis
of a pre-defined critical illness). These agreements may be either facultative
or automatic agreements. During 2002, two clients of the Company's UK operations
generated approximately $156.4 million, or 57.5% of the total gross premiums for
the Europe & South Africa operations.
During 2000, RGA UK obtained approval as a licensed United Kingdom life
reinsurer, operating in the United Kingdom. In the United Kingdom, an increasing
number of insurers are ceding the mortality and accelerated critical illness
covers of individual life products 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 1998, the Company established RGA South Africa, with offices in Cape
Town and Johannesburg to promote life reinsurance in South Africa. In South
Africa, the Company's subsidiary has managed to establish a substantial position
in the individual facultative market, through excellent service and competitive
pricing as well as gaining an increasing share in the automatic market. Also,
life reinsurance is provided to Group Covers. The Company is concentrating on
the life insurance market, as opposed to competitors that are also in the health
market. The Company has a small portion of accelerated critical illness business
in South Africa.
In Spain, the Company has business relationships with more than twenty
of the leading companies covering both individual and group life business. In
2002, RGA opened a representative office in India.
The Company's subsidiaries in the United Kingdom and South Africa
employ their own underwriting, actuarial, claims, pricing, accounting,
marketing, and administration staff with additional support provided by the
Company's St. Louis operations. Divisional management through RGA International
Corporation (Nova Scotia ULC) ("RGA International") based in Toronto, provides
additional services for existing and future markets. The Toronto staff consists
of eleven people, operations in the United Kingdom maintains a staff of
twenty-six people, RGA South Africa maintains a staff of thirty-two people, five
people are on staff in the Spain office and four in the India office.
ASIA PACIFIC OPERATIONS
The Asia Pacific operations represented 8.1%, 7.2%, and 6.7% of the
Company's net premiums in 2002, 2001, and 2000, respectively. The Company has a
presence in the Asia Pacific region with licensed branch offices in Hong Kong
and New Zealand and representative offices in Tokyo, Taiwan, and South Korea,
and a regional office in Sydney. The Company also established a reinsurance
subsidiary in Australia in January 1996. During 2002, two clients, one each in
Australia and Hong Kong, generated approximately $52.9 million, or 30.2% of the
total gross premiums for the Asia Pacific operations.
15
Within the Asia Pacific segment, eight people are on staff in the Hong
Kong office, thirteen people are on staff in the Japan office, seven people are
on staff in the Taiwan office, four people are on staff in the South Korean
Office, five people are on staff in the Sydney regional office and RGA
Australian Holdings maintains a staff of twenty-five people. The Hong Kong,
Tokyo, Taiwan, and South Korea offices primarily provide marketing and
underwriting services to the direct life insurance companies with other service
support provided directly by the Company's St. Louis and Sydney regional
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 and Sydney regional
operations.
LATIN AMERICA OPERATIONS
The Latin America operations represented 0.6%, 3.1%, and 4.6% of the
Company's net premiums in 2002, 2001, and 2000, respectively. The Company
conducts reinsurance business in the Latin America region through RGA
Reinsurance Company. 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 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 effective July 1, 2001, the
Company ceased renewal of reinsurance treaties associated with privatized
pension contracts in Argentina because of adverse experience on this business,
as several aspects of the pension fund claims flow did not develop as was
contemplated when the reinsurance programs were initially priced. Due to the
economic uncertainty in Argentina and losses associated with the Argentine
privatized pension system, the Company has scaled back its operations in
Argentina. The Company continues to market additional types of reinsurance in
the region such as traditional life, credit and group life reinsurance
transactions in Mexico and Chile.
Direct insurance has been generated primarily from subsidiaries in
Argentina and Chile. During April 2000, the Company sold its Chilean interests.
In 1994, to develop markets in Argentina, RGA formed GA Argentina. GA
Argentina writes direct individual and group life insurance and 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 entered into new contracts related to the
privatized pension system, but continues to market individual universal life and
group products. However, the current economic situation in Argentina has had a
negative impact on growth opportunities for direct insurance.
The Latin America reinsurance operations are primarily supported by the
Latin America Division of RGA Reinsurance based in St. Louis with a staff of
seven people in St. Louis, and four people in a representative office in Mexico.
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 fifty-one people in Buenos Aires, Argentina,
and employs its own underwriting, actuarial, claims, pricing, accounting,
systems, marketing and administrative staff. The Company's net investment in GA
Argentina was approximately $7.2 million as of December 31, 2002.
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 (including Australia, and Europe & South
Africa. Revenue, income (loss) which includes net realized gains (losses) before
income tax, interest expense, depreciation and amortization, and identifiable
assets attributable to these geographic regions are identified in Note 17 to the
Consolidated Financial Statements within Item 8 of Part II.
E. AVAILABLE INFORMATION
Copies of the Company's Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports are
available free of charge through the Company's website (www.rgare.com) as soon
as reasonably practicable after the Company electronically files such reports
with the Securities and Exchange Commission.
16
Item 2. PROPERTIES
U.S. segment and corporate
RGA Reinsurance houses its employees and the majority of RGA's officers in
approximately 136,000 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 $2,500,000 to $2,800,000. RGA
Reinsurance also conducts business from approximately 1,400 square feet of
office space in Norwalk, Connecticut and North Palm Beach, Florida. These
premises are leased through December 2003, at an annual rent of approximately
$36,000.
Canada segment
RGA Canada conducts business from approximately 29,000 square feet of office
space in Montreal and Toronto, Canada. These premises are leased through
November 2016, at annual rents ranging from approximately $345,000 to $490,000.
Other International segment
RGA Reinsurance also conducts business from a total of approximately 16,000
square feet of office space in Mexico City, Madrid, Hong Kong, Tokyo, Taipei,
Seoul, and Mumbai. These premises are leased through October 2005, at annual
rents of approximately $859,000. GA Argentina conducts business from
approximately 5,400 square feet of office space in Buenos Aires. These premises
are leased through July 2005, at annual rents of approximately $19,000. RGA
International conducts business from approximately 9,800 square feet of office
space in Toronto. These premises are leased through August 2007, at annual rents
of approximately $338,000. RGA UK conducts business from approximately 3,000
square feet of office space in London. These premises are leased through
September 2009, at annual rents of approximately $290,000. RGA South Africa
conducts business from approximately 10,900 square feet of office space in Cape
Town and Johannesburg. These premises are leased through September 2004, at
annual rents of approximately $144,000. RGA Australia conducts business from
approximately 9,000 square feet of office space in Sydney. These premises are
leased through July 2009, at annual rents of approximately $219,000.
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.
Item 3. LEGAL PROCEEDINGS
The Company is currently a party to various litigation and arbitrations
that involve medical reinsurance arrangements, personal accident business, and
aviation bodily injury carve-out business. As of January 31, 2003, the ceding
companies involved in these disputes have raised claims that are $41.7 million
in excess of the amounts held in reserve by the Company. The Company believes it
has substantial defenses upon which to contest these claims, including but not
limited to misrepresentation and breach of contract by direct and indirect
ceding companies. In addition, the Company is in the process of auditing ceding
companies which have indicated that they anticipate asserting claims in the
future against the Company that are $8.5 million in excess of the amounts held
in reserve by the Company. Depending upon the audit findings in these cases,
they could result in litigation or arbitrations in the future. See Note 21 to
the Consolidated Financial Statements, "Discontinued Operations" for more
information. 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 litigation or
arbitrations or provide reasonable ranges of potential losses, it is the opinion
of management, after consultation with counsel, 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 2002.
17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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 the 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, 2002, 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 Consolidated Financial Statements and the Notes to
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.
18
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in millions, except per share and operating data)
YEARS ENDING DECEMBER 31, 2002 2001 2000 1999 1998
INCOME STATEMENT DATA
Revenues:
Net premiums $ 1,980.7 $ 1,661.8 $ 1,404.1 $ 1,315.6 $ 1,016.4
Investment income, net of related expenses 374.5 340.6 326.5 340.3 301.8
Realized investment (losses) gains, net (14.6) (68.4) (28.7) (75.3) 3.1
Other revenues 41.4 34.3 23.8 26.5 23.2
--------- --------- --------- --------- ---------
Total revenues 2,382.0 1,968.3 1,725.7 1,607.1 1,344.5
Benefits and expenses:
Claims and other policy benefits 1,539.5 1,376.8 1,103.6 1,067.1 797.9
Interest credited 126.7 111.7 104.8 153.1 153.2
Policy acquisition costs and other insurance expenses 391.5 304.2 243.5 218.3 188.5
Other operating expenses 94.8 91.3 81.2 65.5 57.3
Interest expense 35.5 18.1 17.6 11.0 8.8
--------- --------- --------- --------- ---------
Total benefits and expenses 2,188.0 1,902.1 1,550.7 1,515.0 1,205.7
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes 194.0 66.2 175.0 92.1 138.8
Provision for income taxes 65.5 26.3 69.2 39.1 49.1
--------- --------- --------- --------- ---------
Income from continuing operations 128.5 39.9 105.8 53.0 89.7
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (5.7) (6.9) (28.1) (12.1) (27.6)
--------- --------- --------- --------- ---------
Net income $ 122.8 $ 33.0 $ 77.7 $ 40.9 $ 62.1
========= ========= ========= ========= =========
BASIC EARNINGS PER SHARE
Continuing operations $ 2.60 $ 0.81 $ 2.14 $ 1.16 $ 2.11
Discontinued operations (0.11) (0.14) (0.57) (0.27) (0.61)
--------- --------- --------- --------- ---------
Net income $ 2.49 $ 0.67 $ 1.57 $ 0.89 $ 1.50
DILUTED EARNINGS PER SHARE
Continuing operations $ 2.59 $ 0.80 $ 2.12 $ 1.15 $ 2.08
Discontinued operations (0.12) (0.14) (0.56) (0.27) (0.60)
--------- --------- --------- --------- ---------
Net income $ 2.47 $ 0.66 $ 1.56 $ 0.88 $ 1.48
Weighted average diluted shares, in thousands 49,648 49,905 49,920 46,246 42,559
Dividends per share on common stock $ 0.24 $ 0.24 $ 0.24 $ 0.22 $ 0.17
BALANCE SHEET DATA
Total investments $ 6,650.2 $ 5,088.4 $ 4,560.2 $ 3,811.9 $ 5,129.6
Total assets 8,892.6 7,016.1 6,090.0 5,077.6 6,318.6
Policy liabilities 6,603.7 5,077.1 4,617.7 3,998.1 5,053.1
Long-term debt 327.8 323.4 272.3 184.0 108.0
Total stockholders' equity 1,222.5 1,005.6 862.9 732.9 748.5
Total stockholders' equity per share $ 24.72 $ 20.30 $ 17.51 $ 14.68 $ 16.52
OPERATING DATA (IN BILLIONS)
Assumed ordinary life reinsurance in force $ 758.9 $ 616.0 $ 545.9 $ 446.9 $ 330.6
Assumed new business production 230.0 171.1 161.1 164.9 125.0
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
including, among others, statements relating to projections of the earnings,
revenues, income or loss, future financial performance, and growth potential of
Reinsurance Group of America, Incorporated and its subsidiaries (which we refer
to in the following paragraphs as "we," "us," or "our"). 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.
Numerous important factors could cause actual results and events to
differ materially from those expressed or implied by forward-looking statements
including, without limitation, (1) material changes in mortality and claims
experience, (2) market or economic conditions that adversely affect our ability
to make timely sales of investment securities, (3) competitive factors and
competitors' responses to our initiatives, (4) general economic conditions
affecting the demand for insurance and reinsurance in our current and planned
markets, (5) changes in our financial strength and credit ratings or those of
Metropolitan Life Insurance Company ("MetLife") or General American Life
Insurance Company ("General American"), and their respective affiliates, and the
effect of such changes on our future results of operations and financial
condition, (6) fluctuations in U.S. or foreign currency exchange rates, interest
rates, or securities and real estate markets, (7) changes in investment
portfolio yields or values due to interest rate or credit quality changes, (8)
the stability of governments and economies in the markets in which we operate,
(9) adverse litigation or arbitration results, (10) the success of our clients,
(11) successful execution of our entry into new markets, (12) successful
development and introduction of new products and distribution opportunities,
(13) regulatory action that may be taken by state Departments of Insurance with
respect to us, MetLife, or General American, (14) changes in laws, regulations,
and accounting standards applicable to us, our subsidiaries, or our business,
and (15) other risks and uncertainties described in this Annual Report and in
our other filings with the Securities and Exchange Commission ("SEC").
Forward-looking statements should be evaluated together with the many
risks and uncertainties that affect our business, including those mentioned in
this document and the cautionary statements described in the periodic reports we
file with the SEC. You are cautioned not to place undue reliance on the forward-
looking statements, which speak only as of the date on which they are made. We
do not undertake any obligations to update these forward-looking statements,
even though our situation may change in the future. We qualify all of our
forward-looking statements by these cautionary statements. For a discussion of
these risks and uncertainties that could cause actual results to differ
materially from those contained in the forward-looking statements, you are
advised to consult the sections named "Risk Factors" and "Cautionary Statement
Regarding Forward-Looking Statements" contained in our prospectus dated December
3, 2001, filed with our prospectus supplements, each dated December 12, 2001,
and filed with the SEC.
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, 2002, Equity
Intermediary Company, a Missouri holding company, directly owned approximately
48.8% 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 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 beneficially owns 59.1% of the outstanding shares of common stock
of RGA at December 31, 2002.
The consolidated financial statements include the assets, liabilities,
and results of operations of RGA, Reinsurance Company of Missouri, Incorporated
("RCM"), RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life
Reinsurance Company of Canada ("RGA Canada") and RGA Americas Reinsurance
Company, Ltd. ("RGA Americas"), as well as several other subsidiaries and a
joint venture, subject to an ownership position of greater than fifty percent
(collectively, the "Company").
20
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are described in Note 2 to the
Consolidated Financial Statements included in Item 8 of Part II. The Company
believes its most critical accounting policies include the capitalization and
amortization of deferred acquisition costs, the establishment of liabilities for
future policy benefits, other policy claims and benefits, including incurred but
not reported claims, the valuation of investment impairments, and the
establishment of arbitration or litigation reserves. The balances of these
accounts are significant to the Company's financial position and require
extensive use of assumptions and estimates, particularly related to the future
performance of the underlying business.
Additionally, for each of its reinsurance contracts, the Company must
determine if the contract provides indemnification against loss or liability
relating to insurance risk, in accordance with applicable accounting standards.
The Company must review all contractual features, particularly those that may
limit the amount of insurance risk to which the Company is subject or features
that delay the timely reimbursement of claims. If the Company determines that a
contract exposes it to a reasonable possibility of a significant loss from
insurance risk only under remote circumstances, the Company records the contract
on a deposit method of accounting with the net amount payable / receivable
reflected in other reinsurance assets or liabilities on the consolidated balance
sheet. Fees earned on the contracts are reflected as other revenues, as opposed
to premiums, on the consolidated statements of income.
Costs of acquiring new business, which vary with and are primarily
related to the production of new business, have been deferred to the extent that
such costs are deemed recoverable from future premiums or gross profits.
Deferred policy acquisition costs ("DAC") reflect our expectations about the
future experience of the business in force and include commissions and
allowances as well as certain costs of policy issuance and underwriting. Some of
the assumptions that can affect the carrying value of DAC include mortality,
interest spreads and policy lapse rates. The Company performs periodic tests to
determine that DAC remains recoverable, and the cumulative amortization is
re-estimated and, if necessary, adjusted by a cumulative charge or credit to
current operations. For the years ended December 31, 2002 and 2001, the Company
reflected charges of $1.0 million and $3.1 million, respectively, for
unrecoverable deferred policy acquisition costs. No such charges were reflected
in 2000 results. As of December 31, 2002, the Company estimates that
approximately 50 percent of its DAC balance is collateralized by surrender fees
due to the Company and the reduction of policy liabilities, in excess of
termination values, upon surrender or lapse of a policy.
The Company periodically reviews actual and anticipated experience
compared to the assumptions used to establish policy benefits. The Company
establishes premium deficiency reserves if actual and anticipated experience
indicates that existing policy liabilities together with the present value of
future gross premiums will not be sufficient to cover the present value of
future benefits, settlement and maintenance costs and to recover unamortized
acquisition costs. The premium deficiency reserve is established by a charge to
income, as well as a reduction in unamortized acquisition costs and, to the
extent there are no unamortized acquisition costs, an increase in future policy
benefits.
Claims payable for incurred but not reported losses are determined
using case basis estimates and lag studies of past experience. These estimates
are periodically reviewed and required adjustments to such estimates are
reflected in current operations.
The Company primarily invests in fixed maturity securities. The Company
monitors its fixed maturity securities to determine impairments in value. In
conjunction with its external investment managers, the Company evaluates factors
such as the financial condition of the issuer, payment performance, the extent
to which the market value has been below amortized cost, compliance with
covenants, general market conditions and industry sector, the intent and ability
to hold securities, and various other subjective factors. Securities, based on
management's judgments, with an other than temporary impairment in value are
written down to management's estimate of net realizable value.
Differences in actual experience compared with the assumptions and
estimates utilized in the justification of the recoverability of deferred
acquisition costs, in establishing reserves for future policy benefits and claim
liabilities, or in the determination of other than temporary impairments to
investment securities can have a material impact on the Company's results of
operations and financial condition.
The Company is currently a party to various litigation and
arbitrations. While it is not feasible to predict or determine the ultimate
outcome of the pending litigation or arbitrations or provide reasonable ranges
of potential losses, it is the opinion of management, after consultation with
counsel, 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. See Note 21 to the Consolidated
Financial Statements in Item 8 of Part II.
21
RESULTS OF OPERATIONS
The Company derives revenues primarily from renewal premiums from
existing reinsurance treaties, new business premiums from existing or new
reinsurance treaties, income earned on invested assets, and fees earned on
financial reinsurance.
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 individuals insured, 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, lapses or
surrenders of underlying policies, deaths of policyholders, and the exercise of
recapture options by the ceding companies.
Assumed insurance in force for the Company increased $142.9 billion to
$758.9 billion at December 31, 2002. Assumed new business production for 2002
totaled $230.0 billion compared to $171.1 billion in 2001 and $161.1 billion 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 significant fluctuation from quarter to quarter and year to year.
The Company maintains catastrophe insurance under a program that renews on
August 13th of each year. The program provides up to $50 million of coverage per
occurrence for events involving ten or more deaths. Under its current program
the Company retains the first $20 million in claims, $10 million of the next $20
million, and none of the next $40 million in claims. Acts of terrorism are
covered except when arising from the use of nuclear, chemical, or biological
weapons. This insurance is provided through seven insurance companies and eight
syndicates through Lloyds of London, with no single insurer providing more than
$10 million of the $50 million.
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. Additionally, the Company is exposed to the
economic and political risk associated with its net investment in foreign
locations. The Company's most significant foreign operations are in Canada. The
exchange rate from Canadian to U.S. currency was 0.6362, 0.6277, and 0.6676 at
December 31, 2002, 2001, and 2000, respectively. The Company's Latin America
operations primarily conduct business in Argentine and Mexican pesos. The
business generated from the Asia Pacific region is primarily denominated in U.S.
dollars, Australian dollars, and Japanese yen. Additionally, the Company
reinsures business in other international currencies including the Great British
pound and South African rand.
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. The
nature of the underlying risks is such that the claims may take several years to
reach the reinsurers involved. Thus, the Company expects to pay claims over a
number of years as the level of business diminishes. The Company will report a
loss to the extent claims exceed established reserves. During 2002, the accident
and health division reported a net loss of $5.7 million due to claim payments in
excess of established reserves and legal fees. See Note 21 to the Consolidated
Financial Statements in Item 8 of Part II.
The Company has five main operational segments segregated primarily by
geographic region: U.S., Canada, Europe & South Africa, Asia Pacific and Latin
America operations. The Europe & South Africa, Asia Pacific and Latin America
operational segments are presented herein as one reportable segment, Other
International. The U.S. operations provide traditional life, asset-intensive,
and financial reinsurance to domestic clients. Asset-intensive products
primarily include reinsurance of corporate-owned life insurance and annuities.
The Canada operations provide insurers with reinsurance of traditional life
products as well as reinsurance of creditor and critical illness products. The
Latin America operations include traditional reinsurance, reinsurance of
privatized pension products primarily in Argentina, which the Company ceased
writing during 2001, and direct life insurance through a subsidiary in
Argentina. Asia Pacific operations provide primarily traditional life
reinsurance and, to a lesser extent, financial reinsurance through RGA
Reinsurance Company of Australia, Limited ("RGA Australia") and RGA Reinsurance
Company ("RGA Reinsurance"). Europe & South Africa operations include
traditional life reinsurance and critical illness business from Europe & South
Africa, in addition to other markets being developed by the Company. The
operational segment results do not include the corporate investment activity,
general
22
corporate expenses, interest expense of RGA, or 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.
Consolidated income from continuing operations increased 222.1% in 2002
to $128.5 million and decreased 62.3% in 2001 to $39.9 million. Diluted earnings
per share from continuing operations were $2.59 for 2002 compared to $0.80 for
2001 and $2.12 for 2000. Earnings during these years were attributed primarily
to the traditional reinsurance in the U.S. and Canada. Earnings during 2001 were
adversely affected by the terrorist attacks of September 11, 2001, investment
losses on sales and impairments of investment securities, the accrual of
additional reserves to support the Company's reinsurance of Argentine pension
business, and higher than expected mortality results in the U.S. operations.
Consolidated investment income increased 10.0% during 2002 and
increased 4.3% during 2001. The increase in 2002 and 2001 was related to an
increase in the invested asset base due to positive cash flows from operations
and deposits from several new annuity reinsurance treaties, offset, in part, by
a drop in the invested asset yield primarily due to a decline in prevailing
interest rates. Investment income during 2001 was affected by the write-off of
accrued investment income associated with the write-down of impaired securities
as well as the general decline in interest rates. The cost basis of invested
assets increased by $1.4 billion, or 27.5% in 2002 and increased $0.6 billion,
or 13.0% in 2001. The increase in the cost basis of invested assets during 2001
was primarily a result of proceeds from the Company's capital raising efforts in
December 2001, in addition to the factors previously discussed. The average
yield earned on investments was 6.51% in 2002, compared with 6.79% in 2001, and
7.30% in 2000. The average yield will vary from year to year depending on a
number of variables, including prevailing interest rate fluctuations, changes in
the mix of asset-intensive products, and yields related to funds withheld at
interest. Investment income is allocated to the segments based upon average
assets and related capital levels deemed appropriate to support the segment
business volumes.
The consolidated provision for income taxes for continuing operations
represented approximately 33.8%, 39.7%, and 39.6% of pre-tax income for 2002,
2001, and 2000, respectively. The effective tax rate for 2002 includes the
effect of a $2.0 million reduction in tax liabilities subsequent to a settlement
of an IRS audit. The effective tax rate for 2001 and 2000 was affected by
realized capital losses domestically and operating losses from foreign
subsidiaries for which deferred tax assets cannot be fully established. The
Company calculated a tax benefit of $3.1 million, $3.7 million, and $15.1
million related to the discontinued operations in 2002, 2001, and 2000,
respectively. The effective tax rate on the discontinued operations was 35.1% in
2002 and 35.0% in 2001 and 2000.
Further discussion and analysis of the results for 2002 compared to
2001 and 2000 are presented by segment. Certain prior year amounts have been
reclassified to conform to the current year presentation.
U.S. OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(in thousands)
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------------------------------------------------------------
REVENUES:
Net premiums $ 1,396,005 $ 3,786 $ - $ 1,399,791
Investment income, net of related expenses 160,945 110,019 191 271,155
Realized investment losses, net (6,129) (4,135) - (10,264)
Other revenues 2,713 7,277 26,586 36,576
----------------------------------------------------------------
Total revenues 1,553,534 116,947 26,777 1,697,258
BENEFITS AND EXPENSES:
Claims and other policy benefits 1,091,630 17,376 - 1,109,006
Interest credited 56,480 65,504 - 121,984
Policy acquisition costs and other insurance expenses 224,707 18,560 8,196 251,463
Other operating expenses 27,216 1,242 9,295 37,753
----------------------------------------------------------------
Total benefits and expenses 1,400,033 102,682 17,491 1,520,206
Income before income taxes $ 153,501 $ 14,265 $ 9,286 $ 177,052
----------------------------------------------------------------
23
FOR THE YEAR ENDED DECEMBER 31, 2001
(in thousands)
ASSET- FINANCIAL TOTAL
TRADITIONAL INTENSIVE REINSURANCE U.S.
----------------------------------------------------------------
REVENUES:
Net premiums $ 1,219,674 $ 3,248 $ - $ 1,222,922
Investment income, net of related expenses 150,262 93,252 474 243,988
Realized investment gains (losses), net (29,933) 1,193 - (28,740)
Other revenues 2,232 2,379 25,958 30,569
----------------------------------------------------------------
Total revenues 1,342,235 100,072 26,432 1,468,739
BENEFITS AND EXPENSES:
Claims and other policy benefits 976,740 4,658 - 981,398
Interest credited 51,596 58,087 - 109,683
Policy acquisition costs and other insurance expenses 181,307 21,632 9,925 212,864
Other operating expenses 30,363 740 7,980 39,083
----------------------------------------------------------------
Total benefits and expenses 1,240,006 85,117 17,905 1,343,028
Income before income taxes $ 102,229 $ 14,955 $ 8,527 $ 125,711
----------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
(in thousands)
ASSET- FINANCIAL TOTAL
TRADITIONAL 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 revenues 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 $ 147,929 $ 11,678 $ 7,602 $ 167,209
----------------------------------------------------------------
Income before taxes for the U. S. operations segment totaled $177.1
million for 2002 compared to $125.7 million in 2001 and $167.2 million in 2000.
Strong growth in revenue in the traditional subsegment contributed to the
increase in income for 2002. Income was down in 2001 due primarily to
unfavorable claims experience, higher realized net investment losses, and claims
arising from the terrorist attacks of September 11, 2001.
Traditional Reinsurance
The U.S. traditional sub-segment is the oldest and largest sub-segment
of the Company. This sub-segment provides life reinsurance to domestic clients
for a variety of life products through yearly renewable term agreements,
coinsurance and modified coinsurance agreements. These reinsurance arrangements
may be either facultative or automatic agreements. During 2002 production
totaled $146.9 billion face amount of new business, compared to $99.5 billion in
2001 and $115.7 billion in 2000. The strong growth in production was realized on
both new and existing treaties. Management believes industry consolidation,
demutualizations, and the trend toward reinsuring mortality risks should
continue to provide opportunities for growth.
Income before income taxes for U.S. traditional reinsurance increased
50.2% and decreased 30.9% in 2002 and 2001, respectively. The variances in
income for the comparable periods are primarily due to $16.1 million in net
claims
24
associated with the terrorist attacks on September 11, 2001, higher realized
losses on investment securities in 2001, and generally higher mortality. Also
contributing to the increase in 2002 was the continued growth in premiums.
Net premiums for U.S. traditional reinsurance increased 14.5% in 2002
and 17.7% in 2001. New premiums from facultative and automatic treaties and
renewal premiums on existing blocks of business all contributed to the growth.
The increased premium reflects the growth of total U.S. business in force, which
grew to $540.0 billion in 2002, a 15.4% increase over the prior year. Premium
levels are significantly influenced by large transactions and reporting
practices of ceding companies and therefore can fluctuate from period to period.
Net investment income increased 7.1% and 7.6% in 2002 and 2001,
respectively. The increase in both years is due to growth in the invested asset
base, primarily due to increased operating cash flows on traditional
reinsurance, which was partially offset by lower yields, primarily as a result
of a general decline in interest rates.
Realized investment losses of $6.1 million were reported in 2002
compared to $29.9 million and $12.2 million in 2001 and 2000, respectively.
Claims and other policy benefits, as a percentage of net premiums, were
78.2%, 80.1%, and 76.5% in 2002, 2001, and 2000, respectively. The 2001 loss
ratio, when adjusted for claims of $16.1 million related to the events of
September 11, 2001, is reduced to 78.8%. The lower percentage in 2000 is the
result of favorable mortality experience. In 2002, liabilities established in
2001 for claims related to the terrorists attacks of September 11, 2001 were
adjusted down $1.9 million as reported claims from this event are lower than
originally projected. The Company's catastrophe coverage program has limited its
net losses related to the terrorist attack. As of December 31, 2002, the amount
recoverable from catastrophe coverage was approximately $2.9 million. Death
claims are reasonably predictable over a period of many years, but are less
predictable over shorter periods and are subject to significant fluctuation.
Interest credited relates to amounts credited on the Company's cash
value products in this segment, which have a significant mortality component.
This amount fluctuates with the changes in deposit levels, cash surrender
values, and investment performance.
The amount of policy acquisition costs and other insurance expenses, as
a percentage of net premiums, was 16.1%, 14.9%, and 14.5% in 2002, 2001, and
2000, respectively. The increase in this ratio for the comparable periods can be
attributed to the proportional increase in the volume of coinsurance business
written versus yearly renewable term business. These percentages will fluctuate
due to variations in the mixture of business being written.
Other operating expenses, as a percentage of net premiums, were 1.9%,
2.5%, and 2.4% in 2002, 2001, and 2000, respectively. The improvement in this
ratio can be attributed to continued growth in premiums and a decline in
operating expenses for 2002. The decrease in operating expenses for 2002 is the
result of lower overhead costs being allocated to this sub-segment as the
international operations have grown. This percentage will fluctuate based on
premium levels and the mix of fixed versus variable operating expenses.
Asset-Intensive Reinsurance
The U.S. asset-intensive reinsurance subsegment includes the
reinsurance of annuities and corporate-owned life insu