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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, 2004
[ ] 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
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,
2004, as reported on the New York Stock Exchange was approximately $1.2 billion.
As of January 31, 2005, Registrant had outstanding 62,497,915 shares of common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2005
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, 2004, 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, 2004
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....................... 18
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES...................... 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................ 51
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 51
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................................. 87
9A. CONTROLS AND PROCEDURES................................................... 87
9B. OTHER INFORMATION......................................................... 89
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................ 89
11. EXECUTIVE COMPENSATION.................................................... 92
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............................. 93
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 97
14. PRINCIPAL ACCOUNTING FEES AND SERVICES.................................... 98
PART IV
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES................................ 99
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Item 1. BUSINESS
A. OVERVIEW
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding
company that was formed on December 31, 1992. As of December 31, 2004, General
American Life Insurance Company ("General American"), a Missouri life insurance
company, directly owned approximately 51.6% of the outstanding shares of common
stock of RGA. General American is a wholly-owned subsidiary of MetLife, Inc., a
New York-based insurance and financial services holding company. See Note 21 to
the Consolidated Financial Statements, "Subsequent Event" for more information
regarding MetLife's ownership of RGA common stock.
The consolidated financial statements herein include the assets,
liabilities, and results of operations of RGA, RGA Reinsurance Company ("RGA
Reinsurance"), RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA
Life Reinsurance Company of Canada ("RGA Canada"), RGA Americas Reinsurance
Company, Ltd. ("RGA Americas"), RGA Reinsurance Company of Australia, Limited
("RGA Australia") and RGA Reinsurance UK Limited ("RGA UK") as well as several
other subsidiaries subject to an ownership position of greater than fifty
percent (collectively, the "Company").
The Company is primarily engaged in traditional life, asset-intensive,
critical illness and financial reinsurance. RGA and its predecessor, the
Reinsurance Division of General American, have been engaged in the business of
life reinsurance since 1973. The Company's more established operations in the
U.S. and Canada contributed approximately 74% of its consolidated net premiums
during 2004. In 1994, the Company began expanding into international markets and
now has subsidiaries, branch operations, or representative offices in Australia,
Barbados, Hong Kong, India, Ireland, Japan, Mexico, South Africa, South Korea,
Spain, Taiwan and the United Kingdom. RGA is considered one of the leading life
reinsurers in the North American market based on amounts of life reinsurance in
force. As of December 31, 2004, the Company had approximately $1.5 trillion of
life reinsurance in force and $14.0 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 last survivor insurance policies. Asset-intensive
reinsurance primarily refers to reinsurance of annuities and corporate-owned
life insurance. Critical illness reinsurance pays on the earlier of death or
diagnosis of a pre-defined critical illness. Financial reinsurance primarily
involves assisting ceding companies in meeting applicable regulatory
requirements while enhancing the ceding companies' financial strength and
regulatory surplus position. Financial reinsurance transactions do not qualify
as reinsurance for U.S. Generally Accepted Accounting Principles ("GAAP")
accounting. Ceding companies typically contract with more than one reinsurance
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 directly to the reinsurer. Reinsurers also may purchase reinsurance,
known as retrocession reinsurance, to cover their risk exposure. Reinsurance
companies enter into retrocession agreements for reasons similar to those that
drive primary insurers to purchase reinsurance.
Reinsurance generally is written on a facultative or 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 reinsurer will be
liable for a portion of the risk associated with the specified policies written
by the ceding company.
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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. 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 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 may 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. 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.
Reinsurers, at their discretion, may place assets in trust to satisfy
collateral requirements for certain treaties. As of December 31, 2004, the
Company held securities in trust for this purpose with amortized costs of $808.2
million and $1,608.1 million for the benefit of certain subsidiaries and
third-party reinsurance treaties, respectively. Under certain conditions, RGA
may be obligated to move reinsurance from one RGA subsidiary company to another
RGA subsidiary or make payments under a given treaty. These conditions include
change in control of the subsidiary, insolvency, nonperformance under a treaty,
or loss of the reinsurance license of such subsidiary. If RGA were ever required
to perform under these obligations, the risk to the consolidated company under
the reinsurance treaties would not change; however, additional capital may be
required due to the change in jurisdiction of the subsidiary reinsuring the
business and may create a strain on liquidity.
Some treaties give the ceding company the right to force the reinsurer to
place assets in trust for the ceding company's benefit to support reserve
credits, in the event of a downgrade of the reinsurer's ratings to specified
levels, generally non-investment grade levels. As of December 31, 2004, the
Company had approximately $326.8 million in reserves associated with these types
of treaties. Assets placed in trust continue to be owned by the Company, but
their use is restricted based on the terms of the trust agreement.
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
Barbados, RGA Canada and RGA Americas Reinsurance Company, Ltd. ("RGA
Americas"), as well as investments in several other wholly-owned subsidiaries.
Potential sources of funds for RGA to make stockholder 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, 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. RGA Barbados and RGA
Americas were formed and capitalized in 1995 and 1998, respectively, to provide
reinsurance for a portion of certain business assumed by various RGA operating
subsidiaries and to assume reinsurance directly from clients.
5
The Company has five main operational segments: U.S., Canada, Europe &
South Africa, Asia Pacific and Corporate and Other. These operating segments
write reinsurance business that is wholly or partially retained in one or more
of the Company's reinsurance subsidiaries. See "Segments" for more information
concerning the Company's operating segments.
Intercorporate Relationships
The Company has arms-length direct policies and reinsurance agreements
with MetLife and certain of its subsidiaries. As of December 31, 2004, the
Company had reinsurance-related assets and liabilities from these agreements
totaling $143.2 million and $173.3 million, respectively. Prior-year comparable
assets and liabilities were $175.0 million and $169.6 million, respectively.
Additionally, the Company reflected net premiums from these agreements of
approximately $164.4 million, $157.9 million, and $172.8 million in 2004, 2003,
and 2002, respectively. The premiums reflect the net of business assumed from
and ceded to MetLife and its subsidiaries. The pre-tax gain on this business was
approximately $36.5 million, $19.4 million, and $23.3 million in 2004, 2003, and
2002, respectively.
Ratings
Insurer financial strength ratings represent the opinions of rating
agencies regarding the financial ability of an insurance company to meet its
obligations under an insurance policy. Credit ratings represent the opinions of
rating agencies regarding an entity's ability to repay its indebtedness. The
Company's insurer financial strength ratings and credit ratings as of the date
of this filing are listed in the table below for each rating agency that meets
with the Company's management on a regular basis:
A.M. Best Moody's Investors Standard &
Insurer Financial Strength Ratings Company (1) Service (2) Poor's (3)
- ----------------------------------------------- ----------- ------------------ ----------
RGA Reinsurance Company A+ A1 AA-
RGA Life Reinsurance Company of Canada A+ n/a AA-
RGA International Reinsurance Company n/a n/a AA-
Credit Ratings
Reinsurance Group of America, Incorporated
(Senior Unsecured) a- Baa1 A-
RGA Capital Trust I (Preferred Securities) bbb+ Baa2 BBB
(1) An A.M. Best Company ("A.M. Best") insurer financial strength rating of
"A+ (superior)" is the second highest out of fifteen possible ratings and
is assigned to companies that have, in A.M. Best's opinion, a superior
ability to meet their ongoing obligations to policyholders. Financial
strength ratings range from "A++ (superior)" to "F (in liquidation)."
A credit rating of "a-" is in the "strong" category and is the seventh
highest rating out of twenty-two possible ratings. A rating of "bbb+" is
in the "adequate" category and is the eighth highest rating.
(2) A Moody's Investors Service ("Moody's") insurer financial strength rating
of "A1 (good)" is the fifth highest rating out of twenty-one possible
ratings and indicates that Moody's believes the insurance company offers
good financial security; however, elements may be present which suggest a
susceptibility to impairment sometime in the future.
Moody's credit ratings of "Baa1" and "Baa2" are in the "medium-grade"
category and represent the eighth and ninth highest ratings, respectively,
out of twenty-two possible ratings. According to Moody's, these ratings
are subject to moderate credit risk.
(3) A Standard & Poor's ("S&P") insurer financial strength rating of "AA-
(very strong)" is the fourth highest rating out of twenty-one possible
ratings. According to S&P's rating scale, a rating of "AA-" means that, in
S&P's opinion, the insurer has very strong financial security
characteristics.
S&P credit ratings of "A-" and "BBB" are in the "strong" and "good"
categories, respectively, and represent the seventh and ninth highest
ratings, respectively, out of twenty-two possible ratings. According to
S&P, a rating of "A-" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its
financial commitment of the obligation is still strong.
The ability of RGA Reinsurance to write reinsurance partially depends on
its financial condition and its insurer financial strength ratings. These
ratings are based on an insurance company's ability to pay policyholder
obligations and are
6
not directed toward the protection of investors. Each of the Company's credit
ratings is considered investment grade. RGA's ability to raise capital for its
business and the cost of this capital is influenced by its credit ratings. 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.
On January 31, 2005, MetLife announced an agreement to purchase Travelers
Life & Annuity and substantially all of Citigroup's international insurance
business. To help finance that transaction, MetLife indicated that it would
consider select asset sales, including its holdings of RGA's common stock. In
response to MetLife's announcement, Moody's placed the Company's ratings on
review with direction uncertain and S&P placed the Company's ratings on credit
watch with negative implications.
Regulation
RGA Reinsurance and RCM; RGA Canada; General American Argentina Seguros de
Vida, S.A. ("GA Argentina"); RGA Barbados and RGA Americas; RGA Australia; RGA
International; RGA South Africa; and RGA UK are regulated by authorities in
Missouri, Canada, Argentina, Barbados, Australia, Ireland, South Africa, and the
United Kingdom, respectively. RGA Reinsurance is also 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. Additionally,
Missouri law imposes restrictions on the amounts and type of investments that
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.
The Company's insurance subsidiaries are required to file statutory
financial statements in each jurisdiction in which they are licensed and may be
subject to periodic examinations by the insurance regulators of the
jurisdictions in which each is licensed, authorized, or accredited. To date,
none of the regulator's reports related to the Company's periodic examinations
have contained material adverse findings.
Although some of the rates and policy terms of U.S. direct insurance
agreements are regulated by state insurance departments, the rates, policy
terms, and conditions of reinsurance agreements generally are not subject to
regulation by any regulatory authority. However, the 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.
The Valuation of Life Insurance Policies Model Regulation, commonly
referred to as Regulation XXX, was implemented in the U.S. for various types of
life insurance business beginning January 1, 2000. Regulation XXX significantly
increased the level of reserves that U.S. life insurance and life reinsurance
companies must hold on their statutory financial statements for various types of
life insurance business, primarily certain level term life products. The reserve
levels required under Regulation XXX increase over time and are normally in
excess of reserves required under generally accepted accounting principles. In
situations where primary insurers have reinsured business to reinsurers that are
unlicensed and unaccredited in the U.S., the reinsurer must provide collateral
equal to its reinsurance reserves in order for the ceding company to receive
statutory financial statement credit. Reinsurers have historically utilized
letters of credit for the benefit of the ceding company, or have placed assets
in trust for the benefit of the ceding company as the primary forms of
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collateral. The increasing nature of the statutory reserves under Regulation XXX
will likely require increased levels of collateral from reinsurers in the future
to the extent the reinsurer remains unlicensed and unaccredited in the U.S.
In order to reduce the impact of Regulation XXX, RGA Re has retroceded
Regulation XXX reserves to unaffiliated and affiliated unlicensed reinsurers.
RGA Re's statutory capital may be significantly reduced if the unaffiliated or
affiliated reinsurer is unable to provide the required collateral to support RGA
Re's statutory reserve credits and RGA Re cannot find an alternative source for
collateral.
RGA Reinsurance and RCM prepare statutory financial statements in
conformity with accounting practices prescribed or permitted by the State of
Missouri. The State of Missouri requires 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 subject to
any deviations prescribed or permitted by the State of Missouri insurance
commissioner.
Capital Requirements
Risk-Based Capital ("RBC") guidelines promulgated by the NAIC became
effective for U.S. insurance companies in 1993. These guidelines, applicable to
RGA Reinsurance and RCM, identify minimum capital requirements based upon
business levels and asset mix. RCM and RGA Reinsurance maintain capital levels
in excess of the amounts required by the applicable guidelines. Regulations in
international jurisdictions also require certain minimum capital levels, and
subject the companies operating there to oversight by the applicable regulatory
bodies. The Company's operations meet the minimum capital requirements in their
respective jurisdictions. The Company cannot predict the effect that any
proposed or future legislation or rule making in the countries in which it
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.
In addition to RGA, the Company owns several international holding
companies. 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 its wholly-owned subsidiary,
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. Additionally, dividends may
be paid only to the extent the insurer has unassigned surplus (as opposed to
contributed surplus). Pursuant to these restrictions, RCM's and RGA
Reinsurance's allowable dividends without prior approval for 2005 are
approximately $43.7 million and $88.6 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.
8
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. Dividend payments from other subsidiaries are subject to
the regulations in the country of domicile.
Default or Liquidation
In the event of a default on any debt that may be incurred by RGA or the
bankruptcy, liquidation, or other reorganization of RGA, the creditors and
stockholders of RGA will have no right to proceed against the assets of RCM, RGA
Reinsurance, RGA Canada, or other insurance or reinsurance company subsidiaries
of RGA. If RCM or RGA Reinsurance were to be liquidated, such liquidation would
be conducted by the Missouri Director of Insurance as the receiver with respect
to such insurance company's property and business. If RGA Canada were to be
liquidated, such liquidation would be conducted pursuant to the general laws
relating to the winding-up of Canadian federal companies. In both cases, all
creditors of such insurance company, including, without limitation, holders of
its reinsurance agreements and, if applicable, the various state guaranty
associations, would be entitled to payment in full from such assets before RGA,
as a direct or indirect stockholder, would be entitled to receive any
distributions made to it prior to commencement of the liquidation proceedings,
and, if the subsidiary was insolvent at the time of the distribution,
shareholders of RGA might likewise be required to refund dividends subsequently
paid to them.
In addition to RCM and RGA Reinsurance, RGA has an interest in licensed
insurance subsidiaries in Canada, Australia, Argentina, Barbados, Ireland,
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
Corporate Risk Management
RGA has a Corporate Risk Management framework, directed by the Corporate
Actuarial Department, which reports to the chief operating officer. A primary
responsibility of this department is managing, measuring and monitoring risks,
including establishing appropriate corporate risk tolerance levels. In addition,
the Corporate Actuary provides quarterly updates to the board of directors on
significant risks.
Mortality Risk Management
The Company's reinsurance contracts expose it to mortality risk, which is
the risk that the level of death claims may differ from that which is assumed in
the pricing of life, critical illness and annuity reinsurance contracts. Some of
the reinsurance contracts expose the Company to morbidity risk, which is the
risk that an insured person will become critically ill. The Company's risk
analysis and underwriting processes are designed with the objective of
controlling the quality of the business and establishing appropriate pricing for
the risks assumed. Among other things, these processes rely heavily on
underwriting, analysis of mortality and morbidity trends and lapse rates, and
understanding of medical impairments and their impact on mortality or morbidity.
The Company also relies on original underwriting decisions made by, and
information provided to it from, insurance company customers.
The Company expects mortality and morbidity experience to fluctuate
somewhat from period to period, but believes experience should remain fairly
constant over the long term. Mortality or morbidity experience that is less
favorable than the mortality or morbidity rates used in pricing a reinsurance
agreement will negatively affect net income because the premiums
9
received for the risks assumed may not be sufficient to cover claims.
Furthermore, even if the total benefits paid over the life of the contract do
not exceed the expected amount, unexpected increases in the incidence of deaths
or illness can result in more benefits in a given reporting period than
expected, adversely affecting net income in any particular quarter or year.
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. In the U.S., the Company retains a maximum
of $6.0 million of coverage per individual life. For other countries,
particularly those with higher risk factors or smaller books of business, 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, 2004, all retrocession pool members in this
excess retention pool reviewed by the A.M. Best Company were rated "B++", the
fifth highest rating out of fifteen possible ratings, 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, letters of credit
or trust assets have 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 material 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 two catastrophe insurance programs that renew on
August 13th of each year. The current programs began August 13, 2004. The
primary program covers all of its business worldwide and provides protection for
losses incurred during any event involving 10 or more insured deaths. Under this
program, the Company retains the first $50 million in claims, the catastrophe
program covers the next $30 million in claims, and the Company retains all
claims in excess of $80 million. This program covers catastrophic losses from
covered events, including natural disasters and terrorism-related losses due to
nuclear, chemical or biological events. Under the second program, which covers
events involving 5 or more insured deaths, the Company retains the first $25
million in claims, the catastrophe program covers the next $25 million in
claims, and the Company retains all claims in excess of $50 million. It covers
only losses under U.S. guaranteed issue (e.g. company- and bank-owned life
insurance) reinsurance and includes losses due to acts of terrorism but excludes
terrorism losses due to nuclear, chemical and/or biological events. Both
programs are insured by several insurance companies and Lloyds Syndicates with
no single entity providing more than $13 million of coverage.
Investment Risk Management
The Company structures its investment portfolio to match its anticipated
liabilities under reinsurance treaties to the extent necessary. The majority of
the Company's investments are investment-grade fixed maturity securities which
are subject to various risks including interest rate, credit and liquidity. The
Company maintains investment guidelines intended to balance quality,
diversification, asset liability matching, liquidity and investment return. The
Company provides for the various investment risks when analyzing and pricing
treaties.
Foreign Currency Risk
The Company has foreign currency risk on business denominated and
investments in foreign currencies to the extent that the exchange rates of the
foreign currencies are subject to adverse change over time. Approximately 35% of
revenues and 27% of fixed maturity securities available for sale were
denominated in currencies other than the U.S. dollar as of and for the year
ended December 31, 2004. Fluctuations in exchange rates can negatively or
positively impact premiums and earnings. We hold fixed-maturity investments
denominated in foreign currencies as a natural hedge against liabilities based
in those currencies. We generally do not hedge the foreign currency exposure
associated with our net investments in foreign subsidiaries due to the long-term
nature of these investments. We cannot predict whether exchange rate
fluctuations will significantly harm our operations or financial results in the
future.
10
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. Many 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 in the
U.S., and the Company employs six medical directors in various international
locations, as well as a medical consultant.
Automatic. The Company's management determines whether to write automatic
reinsurance business by considering many factors, including the types of risks
to be covered; the ceding company's retention limit and binding authority,
product, and pricing assumptions; and the ceding company's underwriting
standards, financial strength and distribution systems. For automatic business,
the Company ensures that the underwriting standards and procedures of its ceding
companies are compatible with those of RGA. To this end, the Company conducts
periodic reviews of the ceding companies' underwriting and claims personnel and
procedures.
Operations
Generally, the Company's life business has been obtained directly, rather
than through brokers. The Company has an experienced marketing staff that works
to provide responsive service and maintain existing relationships.
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 departments review and verify reinsurance claims,
obtain the information necessary to evaluate claims, and arrange 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. The claims departments also investigate claims
generally for evidence of misrepresentation in the policy application and
approval process. In addition, the claims departments monitor both specific
claims and the overall claims handling procedures 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 in detail to find
potential mistakes such as claims ceded to the wrong reinsurer and claims
submitted for improper amounts.
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, Munich American Reinsurance Company, and Scottish Re Group Ltd.
However, within the reinsurance industry, this can change from year to year. The
Company believes that its major competitors in the international life
reinsurance markets are Swiss Re Life and Health Ltd., General Re, Munich
Reinsurance Company, and Hannover Reinsurance.
11
Employees
As of December 31, 2004, the Company had 778 employees located in the
United States, Canada, Argentina, Mexico, Hong Kong, South 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 RGA and 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, joint and last survivor
insurance, critical illness, as well as annuities, financial reinsurance, and
direct premiums which include single premium pension annuities, universal life,
and group life. Generally, the Company, through various subsidiaries, has
provided reinsurance and, to a lesser extent, direct 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,
------------------------------------------------------------------------
2004 2003 2002
---- ---- ----
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
GROSS PREMIUMS:
U.S. $2,421.8 66.3 $2,013.4 68.9 $1,671.7 71.7
Canada 284.3 7.8 238.8 8.2 210.2 9.0
Europe & South Africa 506.0 13.9 385.7 13.2 272.0 11.7
Asia Pacific 434.2 11.9 281.0 9.6 175.4 7.5
Corporate and Other 3.1 0.1 3.5 0.1 1.1 0.1
-------- ----- -------- ----- -------- -----
Total $3,649.4 100.0 $2,922.4 100.0 $2,330.4 100.0
======== ===== ======== ===== ======== =====
NET PREMIUMS:
U.S. $2,212.6 66.1 $1,801.8 68.2 $1,411.5 71.3
Canada 253.9 7.6 214.7 8.1 181.2 9.1
Europe & South Africa 478.6 14.3 364.2 13.8 226.9 11.5
Asia Pacific 399.1 11.9 259.0 9.8 160.2 8.1
Corporate and Other 3.2 0.1 3.5 0.1 0.9 -
-------- ----- -------- ----- -------- -----
Total $3,347.4 100.0 $2,643.2 100.0 $1,980.7 100.0
======== ===== ======== ===== ======== =====
The Company executed a coinsurance agreement with Allianz Life Insurance
Company of North America ("Allianz Life") during 2003. This agreement
contributed $246.1 million in gross and net premiums to the U.S. segment in
2003.
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,
-----------------------------------------------------------
2004 2003 2002
---- ---- ----
Amount % Amount % Amount %
-------- ----- -------- ----- ------ -----
U.S. $ 996.7 68.3 $ 896.8 71.6 $544.7 71.8
Canada 105.2 7.2 84.0 6.7 64.5 8.5
Europe & South Africa 247.3 17.0 153.4 12.3 92.7 12.2
Asia Pacific 109.7 7.5 118.0 9.4 57.0 7.5
-------- ----- -------- ----- ------ -----
Total $1,458.9 100.0 $1,252.2 100.0 $758.9 100.0
======== ===== ======== ===== ====== =====
12
The coinsurance agreement with Allianz Life provided $278.0 billion in
reinsurance in force to the U.S. segment at December 31, 2003.
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 $112.3 billion, $89.9 billion,
and $91.3 billion were released in 2004, 2003, and 2002, 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,
-----------------------------------------------------
2004 2003 2002
--------------- -------------- ---------------
Amount % Amount % Amount %
------- ----- ------- ----- -------- -----
U.S. $ 168.8 60.5 $ 423.4 77.8 $ 150.3 65.3
Canada 19.6 7.0 11.0 2.0 11.3 4.9
Europe & South Africa 68.9 24.7 65.3 12.0 56.3 24.5
Asia Pacific 21.8 7.8 44.7 8.2 12.1 5.3
------- ----- ------- ----- ------- -----
Total $ 279.1 100.0 $ 544.4 100.0 $ 230.0 100.0
======= ===== ======= ===== ======= =====
The U.S. agreement with Allianz Life increased new business volume by
$287.2 billion during 2003.
Additional information regarding the operations of the Company's segments
and geographic operations is contained in Note 16 to the Consolidated Financial
Statements.
U.S. OPERATIONS
The U.S. operations represented 66.1%, 68.2% and 71.3% of the Company's
net premiums in 2004, 2003 and 2002, respectively. The U.S. operations market
traditional life reinsurance, reinsurance of asset-intensive products and
financial reinsurance primarily to the largest U.S. life insurance companies.
Traditional Reinsurance
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. 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.
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 each risk 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.
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 2004,
13
2003, and 2002, approximately 20.9%, 21.1%, and 21.6%, 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.
Only a portion of approved facultative applications ultimately result in
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. 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.
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, 2004, reinsurance of such
policies was reflected in interest-sensitive contract reserves of approximately
$1.0 billion and policy loans of $957.6 million.
Asset-Intensive Reinsurance
Asset-intensive reinsurance primarily concentrates on the investment risk
within underlying annuities and corporate-owned life insurance policies. Most of
these agreements are coinsurance, coinsurance funds withheld, or modified
coinsurance of primarily investment risk 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,
2004, reinsurance of such business was reflected in interest-sensitive contract
liabilities of approximately $3.8 billion.
Annuities are normally limited by size of the deposit from any single
depositor. Corporate-owned life insurance normally involves a large number of
insureds associated with each deposit, and the Company's underwriting guidelines
limit the size of any single deposit. The individual policies associated with
any single 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" and Note 5 to the Consolidated Financial Statements for
additional information.
The Company targets highly rated, financially secure companies as clients
for asset-intensive business. These companies may wish to limit their own
exposure to certain products. Ongoing asset/liability analysis is required for
the management of asset-intensive business. The Company performs this analysis
internally, 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 regulatory 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 regulatory 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 regulatory surplus created by this business.
Customer Base
The U.S. reinsurance operation markets life reinsurance primarily to the
largest U.S. life insurance companies. The Company estimates that over 75% of
the top 100 U.S. life insurance companies, based on premiums, are clients. These
14
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 2004,
48 non-affiliated clients generated annual gross premiums of $5.0 million or
more and the aggregate gross premiums from these clients represented
approximately 86.1% of U.S. life gross premiums. For the purpose of this
disclosure, companies that are within the same holding company structure are
combined.
MetLife and its affiliates (excluding the Company) generated approximately
$241.0 million or 10.0% of U.S. operations gross premiums in 2004.
CANADA OPERATIONS
The Canada operations represented 7.6%, 8.1%, and 9.1% of the Company's
net premiums in 2004, 2003, and 2002, respectively. In 2004, the Canadian life
operations assumed $19.6 billion in new business, all of which resulted from
recurring new business. Approximately 89% of the 2004 recurring new business was
written on an automatic basis.
The Company operates in Canada primarily through RGA Canada, a
wholly-owned subsidiary. 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, as well as
group reinsurance and non-guaranteed critical illness products. Approximately
92% of RGA Canada's premium income is derived from life reinsurance products.
Clients include most of the life insurers in Canada, although the number
of life insurers is much smaller compared to the U.S. During 2004, the two
largest clients represented $130.3 million, or 45.8%, of gross premiums. Three
other clients individually represented more than 5% of Canada's gross premiums.
Together, these three clients represented 20.3% 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.
As of December 31, 2004, RGA Canada had two offices and maintained a staff
of eighty-three people at the Montreal office and fifteen 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 14.3%, 13.8%, and 11.5%
of the Company's net premiums in 2004, 2003, and 2002, respectively. This
segment provides primarily life reinsurance to clients located in Europe
(primarily in the United Kingdom and Spain), South Africa, and more recently,
India. The principal types of business have been reinsurance of a variety of
life products through yearly renewable term and coinsurance agreements and the
reinsurance of accelerated critical illness coverage, which pays on the earlier
of death or diagnosis of a pre-defined critical illness. These agreements may be
either facultative or automatic agreements. Premiums earned from accelerated
critical illness coverage represented 35.1% of the total gross premiums for this
segment in 2004. The segment's three largest clients, all part of the Company's
U.K. operations, generated approximately $349.5 million, or 69.1%, of the
segment gross premiums in 2004.
During 2000, RGA UK began operating in the United Kingdom, where an
increasing number of insurers are ceding the mortality and accelerated critical
illness risks of individual life products on a quota share basis, creating what
we believe are reinsurance opportunities. The reinsurers present in the market
include the large global companies with which RGA also competes in other
markets.
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, and has gained an increasing share in the automatic market. Life
reinsurance is also provided on group cases. 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 thirty
companies covering both individual and group life business. In 2002, RGA opened
a representative office in India marketing life reinsurance support on
individual and group business.
RGA'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 U.S.
operations. Divisional management through RGA International Corporation (Nova
Scotia ULC) ("RGA International"), based in Toronto, provides additional
services for these markets. In total as of December 31, 2004, this segment
employed twenty-
15
seven people in Toronto, thirty-seven people in the United Kingdom, forty-three
people in South Africa, seven people in Spain and five people in India.
ASIA PACIFIC OPERATIONS
The Asia Pacific operations represented 11.9%, 9.8%, and 8.1% of the
Company's net premiums in 2004, 2003, and 2002, respectively. The Company has a
presence in the Asia Pacific region with licensed branch offices in Hong Kong,
Japan, and New Zealand, representative offices in China, Taiwan and South Korea,
and a regional office in Sydney. In January 2005, the Company received approval
to open a representative office in China. The Company also established a
reinsurance subsidiary in Australia in January 1996. During 2004, the two
largest clients, both in Australia, generated approximately $65.9 million, or
15.2% of the total gross premiums for the Asia Pacific operations.
Within the Asia Pacific segment as of December 31, 2004, eight people were
on staff in the Hong Kong office, twenty-one people were on staff in the Japan
office, six people were on staff in the Taiwan office, eight people were on
staff in the South Korean Office, eight people were on staff in the Sydney
regional office, ten were on staff at the St. Louis office, and RGA Australian
Holdings maintained a staff of thirty-eight people. The Hong Kong, Japan,
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 U.S. 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 U.S. and Sydney regional operations.
The principal types of reinsurance for this segment include life, critical
care and illness, disability income, superannuation, and financial reinsurance.
Superannuation is the Australian government mandated compulsory retirement
savings program. Superannuation funds accumulate retirement funds for employees,
and in addition, offer life and disability insurance coverage. Reinsurance
agreements may be either facultative or automatic agreements covering primarily
individual risks and in some markets, group risks.
CORPORATE AND OTHER
Corporate and Other operations include investment income from invested
assets not allocated to support segment operations and undeployed proceeds from
the Company's capital raising efforts, in addition to unallocated realized
investment gains or losses. General corporate expenses consist of unallocated
overhead and executive costs and interest expense related to debt and the $225.0
million, 5.75% mandatorily redeemable trust preferred securities. Additionally,
the Corporate and Other operations segment includes results from RGA Technology
Partners, Inc. ("RTP"), a wholly-owned subsidiary that develops and markets
technology solutions for the insurance industry, the Company's Argentine
privatized pension business ("AFJP"), which is currently in run-off, and an
insignificant amount of direct insurance operations in Argentina. The Company
ceased renewal of reinsurance treaties associated with privatized pension
contracts in Argentina in 2001 because of adverse claims experience on the
business. See Item 3, "Legal Proceedings." for additional AFJP information.
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 division may be found in Note 20 to
the Consolidated Financial Statements.
D. FINANCIAL INFORMATION ABOUT FOREIGN OPERATIONS
The Company's foreign operations are primarily in Canada, the Asia Pacific
region, Europe and 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 16 to the Consolidated Financial Statements. Although
there are risks inherent to foreign operations, such as currency fluctuations
and restrictions on the movement of funds, the Company's financial position and
results of operations have not been materially adversely affected thereby to
date.
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. operations and Corporate and Other operations
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 $2,600,000 to $2,800,000. RGA
Reinsurance also conducts business from a total of approximately 1,400 square
feet of office space in Norwalk, Connecticut and North Palm Beach, Florida.
These premises are leased through December 2005, at an annual rent of
approximately $39,000. RGA Reinsurance also leases approximately 2,000 square
feet of office space in Mexico at an annual rent of approximately $62,000. GA
Argentina, part of the Corporate and Other operations, conducts business from
approximately 6,600 square feet of office space in Buenos Aires. These premises
are leased through July 2007, at annual rents of approximately $30,000.
Canada operations
RGA Canada conducts business from approximately 26,000 square feet of
office space in Montreal and Toronto, Canada. These premises are leased through
November 2016, at annual rents ranging from approximately $474,000 to $545,000.
These rents are net of expected sublease income ranging from approximately
$390,000 to $411,000 annually through 2010.
Europe & South Africa operations
RGA Reinsurance also conducts business from a total of approximately 4,100
square feet of office space in Madrid and Mumbai. These premises are leased
through November 2007, at annual rents of approximately $79,000. RGA
International, which also provides support functions for the Asia Pacific
operations, conducts business from approximately 9,300 square feet of office
space in Toronto. These premises are leased through August 2007, at annual rents
of approximately $416,000. These rents are net of approximately $31,000 received
from a sublease through 2005. RGA UK conducts business from approximately 6,400
square feet of office space in London. These premises are leased through April
2010, at annual rents of approximately $807,000. RGA South Africa conducts
business from approximately 12,800 square feet of office space in Cape Town and
Johannesburg. These premises are leased through June 2009, at annual rents of
approximately $185,000.
Asia Pacific operations
RGA Reinsurance also conducts business from a total of approximately
23,000 square feet of office space in Hong Kong, Tokyo, Taipei and Seoul. These
premises are leased through April 2008, at annual rents of approximately
$1,239,000. RGA Australia conducts business from approximately 8,400 square feet
of office space in Sydney. These premises are leased through January 2010, at
annual rents of approximately $229,000.
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 an arbitration that involves personal
accident business (including London market excess of loss business) written
through its discontinued accident and health business. In addition, the Company
is currently a party to litigation that involves the claim of a broker to
commissions on a medical reinsurance arrangement. As of January 31, 2005, the
companies involved in these disputes have raised claims, or established reserves
that may result in claims, in the amount of $4.4 million, which is $3.7 million
in excess of the amounts held in reserve by the Company. In these disputes, the
Company generally has little information regarding any reserves established by
ceding companies, and must rely on management estimates to establish policy
claim liabilities. It is possible that any such reserves could be increased in
the future. 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 in the amount of $24.9 million, which is $24.5 million in excess of
the amounts held in reserve by the Company. These claims appear to relate to
personal accident business (including London market excess of loss business) and
workers' compensation carve out business. Depending upon the audit findings in
these
17
cases, they could result in litigation or arbitrations in the future. See Note
20 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. However,
it is possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in
particular quarterly or annual periods.
In addition, as explained in greater detail in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," AFJP
claims payments are linked to AFJP fund unit values, which we believe are
artificially inflated because of the regulatory intervention of the Argentine
government. In view of this fact, coupled with the acceleration of permanent
disability payments, during the third quarter of 2004, the Company formally
notified the AFJP ceding companies that it will no longer make artificially
inflated claim payments, as it has been doing for some time under a reservation
of rights, but rather will pay claims only on the basis of the market value of
the AFJP fund units. This formal notification could result in litigation or
arbitrations in the future. While it is not feasible to predict or determine the
ultimate outcome of any such future litigations 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. However,
it is possible that an adverse outcome could, from time to time, have a material
adverse effect on the Company's consolidated net income or cash flows in
particular quarterly or annual periods.
In addition, the Company is currently in negotiations with some of the
AFJP ceding companies regarding commutation of their contracts. In the fourth
quarter of 2004, the Company increased the amount of liabilities associated with
the AFJP business by $10.0 million, so that the overall amount of the
liabilities reflects the Company's current estimate of the value of its
obligations, and reflects the uncertainty regarding the amount and timing of
claims payments and the outcome of any negotiated settlements.
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 2004.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
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 1 under the caption "Restrictions on Dividends and Distributions."
See Item 12 for information regarding securities authorized for issuance
under equity compensation plans.
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, 2004, have been prepared in
accordance with accounting principles generally accepted in the United States of
America. 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 ENDED DECEMBER 31, 2004 2003 2002 2001 2000
INCOME STATEMENT DATA
Revenues:
Net premiums $ 3,347.4 $ 2,643.2 $ 1,980.7 $ 1,661.8 $ 1,404.1
Investment income, net of related expenses 580.5 465.6 374.5 340.6 326.5
Realized investment gains (losses), net 29.5 5.3 (14.6) (68.4) (28.7)
Change in value of embedded derivatives 26.1 43.6 - - -
Other revenues 55.4 47.3 41.4 34.3 23.8
--------- --------- --------- --------- ---------
Total revenues 4,038.9 3,205.0 2,382.0 1,968.3 1,725.7
Benefits and expenses:
Claims and other policy benefits 2,678.5 2,108.4 1,539.5 1,376.8 1,103.6
Interest credited 198.9 179.7 126.7 111.7 104.8
Policy acquisition costs and other insurance expenses 591.0 458.2 391.5 304.2 243.5
Change in deferred acquisition costs associated with
change in value of embedded derivatives 22.9 30.7 - - -
Other operating expenses 140.0 119.6 94.8 91.3 81.2
Interest expense 38.4 36.8 35.5 18.1 17.6
--------- --------- --------- --------- ---------
Total benefits and expenses 3,669.7 2,933.4 2,188.0 1,902.1 1,550.7
--------- --------- --------- --------- ---------
Income from continuing operations before income taxes 369.2 271.6 194.0 66.2 175.0
Provision for income taxes 123.9 93.3 65.5 26.3 69.2
--------- --------- --------- --------- ---------
Income from continuing operations 245.3 178.3 128.5 39.9 105.8
Discontinued operations:
Loss from discontinued accident and health operations,
net of income taxes (23.0) (5.7) (5.7) (6.9) (28.1)
Cumulative effect of change in accounting principle,
net of income taxes (0.4) 0.5 - - -
--------- --------- --------- --------- ---------
Net income $ 221.9 $ 173.1 $ 122.8 $ 33.0 $ 77.7
========= ========= ========= ========= =========
BASIC EARNINGS PER SHARE
Continuing operations $ 3.94 $ 3.47 $ 2.60 $ 0.81 $ 2.14
Discontinued operations (0.37) (0.11) (0.11) (0.14) (0.57)
Accounting change (0.01) 0.01 - - -
--------- --------- --------- --------- ---------
Net income $ 3.56 $ 3.37 $ 2.49 $ 0.67 $ 1.57
DILUTED EARNINGS PER SHARE
Continuing operations $ 3.90 $ 3.46 $ 2.59 $ 0.80 $ 2.12
Discontinued operations (0.37) (0.11) (0.12) (0.14) (0.56)
Accounting change (0.01) 0.01 - - -
--------- --------- --------- --------- ---------
Net income $ 3.52 $ 3.36 $ 2.47 $ 0.66 $ 1.56
Weighted average diluted shares, in thousands 62,964 51,598 49,648 49,905 49,920
Dividends per share on common stock $ 0.27 $ 0.24 $ 0.24 $ 0.24 $ 0.24
BALANCE SHEET DATA
Total investments $10,564.2 $ 8,883.4 $ 6,650.2 $ 5,088.4 $ 4,560.2
Total assets 14,048.1 12,113.4 8,892.6 7,016.1 6,090.0
Policy liabilities 10,314.5 8,811.8 6,603.7 5,077.1 4,617.7
Long-term debt 349.7 398.1 327.8 323.4 272.3
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely junior
subordinated debentures of the Company 158.4 158.3 158.2 158.1 -
Total stockholders' equity 2,279.0 1,947.7 1,222.5 1,005.6 862.9
Total stockholders' equity per share $ 36.50 $ 31.33 $ 24.72 $ 20.30 $ 17.51
OPERATING DATA (IN BILLIONS)
Assumed ordinary life reinsurance in force $ 1,458.9 $ 1,252.2 $ 758.9 $ 616.0 $ 545.9
Assumed new business production 279.1 544.4 230.0 171.1 161.1
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This report 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 strategies, earnings, revenues, income
or loss, ratios, future financial performance, and growth potential of
Reinsurance Group of America, Incorporated and its subsidiaries (referred 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) adverse changes in mortality, morbidity or
claims experience, (2) changes in our financial strength and credit ratings or
those of MetLife, Inc. ("MetLife"), the beneficial owner of a majority of our
common shares, or its subsidiaries, and the effect of such changes on our future
results of operations and financial condition, (3) general economic conditions
affecting the demand for insurance and reinsurance in our current and planned
markets, (4) market or economic conditions that adversely affect our ability to
make timely sales of investment securities, (5) risks inherent in our risk
management and investment strategy, including changes in investment portfolio
yields due to interest rate or credit quality changes, (6) fluctuations in U.S.
or foreign currency exchange rates, interest rates, or securities and real
estate markets, (7) adverse litigation or arbitration results, (8) the adequacy
of reserves relating to settlements, awards and terminated and discontinued
lines of business, (9) the stability of governments and economies in the markets
in which we operate, (10) competitive factors and competitors' responses to our
initiatives, (11) the success of our clients, (12) successful execution of our
entry into new markets, (13) successful development and introduction of new
products, (14) our ability to successfully integrate and operate reinsurance
business that we acquire, (15) regulatory action that may be taken by state
Departments of Insurance with respect to us, MetLife, or its subsidiaries, (16)
our dependence on third parties, including those insurance companies and
reinsurers to which we cede some reinsurance, third-party investment managers
and others, (17) changes in laws, regulations, and accounting standards
applicable to us, our subsidiaries, or our business, and (18) other risks and
uncertainties described in this document 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. These forward-looking statements 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."
SUBSEQUENT EVENT
On January 31, 2005, MetLife announced an agreement to purchase Travelers Life &
Annuity and substantially all of Citigroup's international insurance business.
To help finance that transaction, MetLife indicated that it would consider
select asset sales, including its holdings of RGA's common stock.
OVERVIEW
RGA is an insurance holding company that was formed on December 31, 1992.
As of December 31, 2004, General American, a Missouri life insurance company,
directly owned approximately 51.6% of the outstanding shares of common stock of
RGA. General American is a wholly-owned subsidiary of MetLife, Inc., a New
York-based insurance and financial services holding company.
20
The consolidated financial statements include the assets, liabilities, and
results of operations of RGA, RGA Reinsurance, RGA Barbados, RGA Canada, RGA
Americas, RGA Australia and RGA UK as well as several other subsidiaries subject
to an ownership position of greater than fifty percent (collectively, the
"Company").
We are primarily engaged in traditional individual life, asset-intensive,
critical illness 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 73.7% of our 2004 net premiums were
from our more established operations in North America, which include our U.S.
and Canada segments.
We believe we are one of the leading life reinsurers in North America
based on premiums and the amount of life insurance in force. We believe, based
on an industry survey prepared by Munich American at the request of the Society
of Actuaries Reinsurance Section ("SOA survey"), that we have the second largest
market share in North America as measured by life insurance in force. Our
approach to the North American market has been to:
- focus on large, high quality life insurers as clients;
- provide quality facultative underwriting and automatic reinsurance
capacity; and
- deliver responsive and flexible service to our clients.
In 1994, we began using our North American underwriting expertise and
industry knowledge to expand into international markets and now have
subsidiaries, branches or offices in Australia, Barbados, Hong Kong, India,
Ireland, Japan, Mexico, South Africa, South Korea, Spain, Taiwan and the United
Kingdom. These operations are included in either our Asia Pacific segment or our
Europe & South Africa segment. We generally start new operations from the ground
up in these markets as opposed to acquiring existing operations, and we often
enter these markets to support our North American clients as they expand
internationally. Based on Standard & Poor's Global Reinsurance Highlights, 2004
Edition, we believe we are the fourth largest life reinsurer in the world based
on 2003 gross premiums. While RGA believes information published by Standard &
Poor's is generally reliable, RGA has not independently verified the data.
Standard & Poor's does not guarantee the accuracy and completeness of the
information. We conduct business with the majority of the largest U.S. and
international life insurance companies, with no single non-affiliated client
representing more than 10% of 2004 consolidated gross premiums. We have also
developed our capacity and expertise in the reinsurance of asset-intensive
products (primarily annuities and corporate-owned life insurance) and financial
reinsurance.
INDUSTRY TRENDS
We believe that the following trends in the life insurance industry will
continue to create demand for life reinsurance.
Outsourcing of Mortality. The SOA survey indicates that U.S. life
reinsurance in force has grown from $2.6 trillion in 1998 to $5.8 trillion
at year-end 2003. We believe this trend reflects increased utilization by
life insurance companies of reinsurance to manage capital and mortality
risk and to develop competitive products. Reinsurers are able to
efficiently aggregate a significant volume of life insurance in force,
creating economies of scale and greater diversification of risk. As a
result of having larger amounts of data at their disposal compared to
primary life insurance companies, reinsurers tend to have better insights
into mortality trends, creating more efficient pricing for mortality risk.
Increased Capital Sensitivity. Regulatory environments, rating agencies
and competitive business pressures are causing life insurers to reinsure
as a means to:
- manage risk-based capital by shifting mortality and other risks to
reinsurers, thereby reducing amounts of reserves and capital they
need to maintain;
- release capital to pursue new business initiatives; and
- unlock the capital supporting, and value embedded in, non-core
product lines.
Consolidation and Reorganization Within the Life Reinsurance and Life
Insurance Industry. As a result of consolidations in recent years within
the life reinsurance industry, there are fewer competitors. According to
the SOA survey, as of December 31, 2003, the top five companies held over
70% of the market share in North America based on life reinsurance in
force, whereas in 1995, the top five companies held less than 50% of the
market share. As a consequence, we believe the life reinsurance pricing
environment may reflect higher prices in the future.
The SOA surveys indicate that the authors obtained information from
participating or responding companies and do not guarantee the accuracy
and completeness of their information. Additionally, the surveys do not
survey all
21
reinsurance companies, but RGA believes most of its principal competitors
are included. While RGA believes these surveys to be generally reliable,
RGA has not independently verified their data.
Additionally, the number of merger and acquisition transactions within the
life insurance industry has increased in recent years. We believe that
reorganizations and consolidations of life insurers will continue. As
reinsurance products are increasingly used to facilitate these
transactions and manage risk, we expect demand for our products to
continue.
Changing Demographics of Insured Populations. The aging of the population
in North America is increasing demand for financial products among "baby
boomers" who are concerned about protecting their peak income stream and
are considering retirement and estate planning. We believe that this trend
is likely to result in continuing demand for annuity products and life
insurance policies, larger face amounts of life insurance policies and
higher mortality risk taken by life insurers, all of which should fuel the
need for insurers to seek reinsurance coverage.
We continue to follow a two-part business strategy to capitalize on industry
trends.
Continue Growth of Core North American Business. Our strategy includes
continuing to grow each of the following components of our North American
operations:
- Facultative Reinsurance. Based on discussions with our clients and
informal knowledge about the industry, we believe we are a leader in
facultative underwriting in North America. We intend to maintain
that status by emphasizing our underwriting standards, prompt
response on quotes, competitive pricing, capacity and flexibility in
meeting customer needs. We believe our facultative business has
allowed us to develop close, long-standing client relationships and
generate additional business opportunities with our facultative
clients.
- Automatic Reinsurance. We intend to expand our presence in the North
American automatic reinsurance market by using our mortality
expertise and breadth of products and services to gain additional
market share.
- In Force Block Reinsurance. We anticipate additional opportunities
to grow our business by reinsuring "in force block" insurance, as
insurers and reinsurers seek to exit various non-core businesses and
increase financial flexibility in order to, among other things,
redeploy capital and pursue merger and acquisition activity. We took
advantage of one such opportunity in 2003 when we assumed the
traditional life reinsurance business of Allianz Life.
Continue Expansion Into Selected Markets. Our strategy includes building
upon the expertise and relationships developed in our core North American
business platform to continue our expansion into selected products and
markets, including:
- International Markets. Management believes that international
markets offer opportunities for growth, and we intend to capitalize
on these opportunities by establishing a presence in selected
markets. Since 1994, we have entered twelve markets internationally,
including, in the mid-to-late 1990's, Australia, Hong Kong, Japan,
Malaysia, New Zealand, South Africa, Spain, Taiwan and the U.K., and
in the last three years, China, India and South Korea. During
January 2005, we received approval to open a representative office
in China. Before entering new markets, we evaluate several factors
including:
- the size of the insured population,
- competition,
- the level of reinsurance penetration,
- regulation,
- existing clients with a presence in the market, and
- the economic, social and political environment.
We generally start new operations in these markets from the ground
up as opposed to acquiring existing operations, and we often enter
these markets to support our North American clients as they expand
internationally. Many of the markets that we have entered since
1994, or may enter in the future, are not utilizing life
reinsurance, including facultative life reinsurance, at the same
levels as the North American market, and therefore, we believe
represent opportunities for increasing reinsurance penetration.
22
Additionally, we believe that in certain markets, ceding companies
may want to reduce counterparty exposure to their existing life
reinsurers, creating opportunities for us.
- Asset-intensive and Other Products. We intend to continue leveraging
our existing client relationships and reinsurance expertise to
create customized reinsurance products and solutions. Industry
trends, particularly the increased pace of consolidation and
reorganization among life insurance companies and changes in
products and product distribution, are expected to enhance existing
opportunities for asset-intensive and other products.
Financial Objectives
We set various consolidated financial and operating goals for the
intermediate period (next three to five years) including:
- Achieving a return on stockholders' equity of 12% to 14%;
- Achieving annual earnings per share growth of 12% to 13%; and
- Maintaining a debt to capital ratio of 20% to 25%.
Additionally, we establish various financial growth objectives for our
operational segments for the intermediate period (next three to five years). For
our U.S. and Canada operations, we are targeting premium and income before
income taxes growth of 10% to 12%. Our newer international operations, which
include Europe & South Africa, and Asia Pacific, are smaller and their annual
financial results are subject to more volatility. However, over the intermediate
term (next three to five years), we are targeting premium and income before
income taxes growth of 20% to 25%.
These targets are aspirational and you should not rely on them. We can give
no assurance that we will be able to approach or meet any of these objectives,
and we may fall short of any or all of them. See "Forward-Looking and Cautionary
Statements."
RESULTS OF OPERATIONS
We derive 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 from financial
reinsurance transactions.
Our 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 ceding companies.
During December 2003, we completed a large coinsurance agreement with
Allianz Life. Under this agreement, RGA Reinsurance assumed the traditional life
reinsurance business of Allianz Life, including yearly renewable term
reinsurance and coinsurance of term policies. The business did not include any
accident and health risk, annuities or related guaranteed minimum death benefits
or guaranteed minimum income benefits. This transaction added additional scale
to our U.S. traditional business, but did not significantly add to our client
base because most of the underlying ceding companies were already our clients.
As of December 31, 2004, approximately 96.2% of the underlying ceding companies,
representing approximately 95.7% of the business in force, had novated their
treaties from Allianz Life to RGA Reinsurance during 2004. Novation results in
the underlying client companies reinsuring the business directly to RGA
Reinsurance versus passing through Allianz Life. The profitability of the
business is not dependent on novation.
The transaction was effective retroactive to July 1, 2003. Under the
agreement, Allianz Life transferred to RGA Reinsurance $425.7 million in cash
and statutory reserves. RGA Reinsurance paid Allianz Life a ceding commission of
$310.0 million. As a result of this transaction, during the fourth quarter of
2003, our U.S. traditional sub-segment reflected $246.1 million in net premiums
and approximately $6.8 million of net income, after tax. Additionally, as of
December 31, 2003, we reflected $217.6 million in invested assets and cash,
$264.0 million in deferred policy acquisition costs and $455.5 million in future
policy benefits on our consolidated balance sheet.
Consolidated assumed insurance in force increased from $1.3 trillion to
$1.5 trillion for the year ended December 31, 2004. Assumed new business
production for 2004 totaled $279.1 billion compared to $544.4 billion in 2003
and $230.0 billion in 2002. The transaction with Allianz Life contributed $287.2
billion of the 2003 increase in new business production.
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 preparation of its
financial statements and the financial effects resulting from the incorporation
of revised data are reflected currently.
23
Our profitability primarily depends on the volume and amount of death
claims incurred and our ability to adequately price the risks we assume. 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. Effective July 1, 2003, we
increased the maximum amount of coverage that we retain per life from $4 million
to $6 million. This increase does not affect business written prior to July 1,
2003. Claims in excess of this retention amount are retroceded to
retrocessionaires; however, we remain fully liable to the ceding company, our
customer, for the entire amount of risk we assume. The increase in our retention
limit from $4 million to $6 million reduces the amount of premiums we pay to our
retrocessionaires, but increases the maximum impact a single death claim can
have on our results and therefore may result in additional volatility to our
results.
We maintain two catastrophe insurance programs that renew on August 13th
of each year. The current programs began August 13, 2004. The primary program
covers all of our business worldwide and provides protection for losses incurred
during any event involving 10 or more insured deaths. Under this program, we
retain the first $50 million in claims, the catastrophe program covers the next
$30 million in claims, and we retain all claims in excess of $80 million. This
program covers catastrophic losses from covered events, including natural
disasters and terrorism-related losses due to nuclear, chemical or biological
events. Under the second program, which covers events involving 5 or more
insured deaths, we retain the first $25 million in claims, the catastrophe
program covers the next $25 million in claims, and we retain all claims in
excess of $50 million. It covers only losses under U.S. guaranteed issue (e.g.
company- and bank-owned life insurance) reinsurance and includes losses due to
acts of terrorism but excludes terrorism losses due to nuclear, chemical and/or
biological events. Both programs are insured by several insurance companies and
Lloyds Syndicates, with no single entity providing more than $13 million of
coverage.
Since December 31, 1998, we have formally reported our 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, we expect to pay claims over a number of years as the
level of business diminishes. We will report a loss to the extent claims and
related expenses exceed established reserves. During 2004, the accident and
health division reported a net loss of $23.0 million due to claim payments in
excess of established reserves, an arbitration settlement and legal fees. See
Note 20 to the Consolidated Financial Statements. The increase in 2004 is due
primarily to a negotiated settlement of all disputed claims associated with the
Company's largest identified accident and health exposure.
The Company has five main operational segments, each of which is a
distinct reportable segment: U.S., Canada, Europe & South Africa, Asia Pacific
and Corporate and Other. The U.S. operations provide traditional life,
asset-intensive, and financial reinsurance primarily to domestic clients. The
Canada operations provide insurers with reinsurance of traditional life products
as well as reinsurance of critical illness products. Asia Pacific operations
provide primarily traditional life reinsurance, critical illness and, to a
lesser extent, financial reinsurance. Europe & South Africa operations include
traditional life reinsurance and critical illness business from Europe & South
Africa, in addition to other markets we are developing. Our discontinued
accident and health business is excluded from continuing operations. We measure
segment performance based on profit or loss from operations before income taxes.
Consolidated income from continuing operations increased 37.6% in 2004 to
$245.3 million and increased 38.8% in 2003 to $178.3 million. Diluted earnings
per share from continuing operations were $3.90 for 2004 compared to $3.46 for
2003 and $2.59 for 2002. A majority of our earnings during these years were
attributed primarily to traditional reinsurance results in the U.S. Claims and
other policy benefits as a percentage of net premiums during 2004 and 2003 were
80.0% and 79.8%, respectively, and within our range of expectations.
Additionally, 2004 and 2003 income from continuing operations for our U.S.
Traditional operations benefited from the Allianz Life transaction as twelve
months and six months of financial results were included, respectively.
Our results in 2004 were adversely affected by the Indian Ocean tsunami on
December 26, 2004. At December 31, 2004, we recorded $7.5 million in policy
claims and benefits, including an estimate for incurred but not reported claims.
As of February 17, 2005, we had received 14 death claims totaling approximately
$2.2 million due to this tragedy. Our estimate is based on the limited
information received to date and is subject to change.
Consolidated investment income increased 24.7% and 24.3% during 2004 and
2003, respectively. These increases related to a growing invested asset base due
to positive cash flows from our mortality operations and deposits from several
annuity reinsurance treaties, offset, in part, by declining invested asset
yields primarily due to a decline in prevailing interest rates. The cost basis
of invested assets increased by $1.5 billion, or 17.7%, in 2004 and increased
$2.1 billion, or 32.3%, in 2003. In excess of $400 million of the increase in
the cost basis of invested assets during 2003 was due to the Company's
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common equity offering in which 12,075,000 new shares were issued. The average
yield earned on investments, excluding funds withheld, was 5.91% in 2004,
compared with 6.39% in 2003 and 6.51% in 2002. We expect the average yield to
vary from year to year depending on a number of variables, including the
prevailing interest rate environment, and changes in the mix of our underlying
investments. Funds withheld assets are associated with annuity contracts on
which we earn a spread. Fluctuations in the yield on funds withheld assets are
generally offset by a corresponding adjustment to the interest credited on the
liabilities. Investment income and realized investment gains and losses are
allocated to the operating 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 33.6%, 34.3%, and 33.8% of pre-tax income for 2004,
2003, and 2002, respectively. Absent unusual items, we expect the consolidated
effective tax rate to be between 34% and 35%. The effective tax rates for 2004
and 2002 include the effect of $1.9 million and $2.0 million reductions in tax
liabilities, respectively, resulting from the favorable resolution of a tax
position and the settlements of Internal Revenue Service ("IRS") audit issues.
The Company calculated tax benefits related to its discontinued operations of
$12.4 million for 2004, and $3.1 million for 2003 and 2002. The effective tax
rate on the discontinued operations was approximately 35% for each of the three
years.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are described in Note 2 to the
Consolidated Financial Statements. The Company believes its most critical
accounting policies include the capitalization and amortization of deferred
acquisition costs ("DAC"), 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
the possibility of a significant loss from insurance risk will occur only under
remote circumstances, it records the contract under a deposit method of
accounting with the net amount payable/receivable reflected in other reinsurance
assets or liabilities on the consolidated balance sheets. 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. DAC amounts
reflect our expectations about the future experience of the business in force
and include commissions and allowances as well as certain costs of polic