-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U6uN1RKdkGQePd5LLfE3dnkn5CnmXzisyHlnlKH74bzUzTi+k3ESh5rmLCk/bxSj anSH9FzQ4bXXn5WIv49DRw== 0000950114-98-000362.txt : 19980821 0000950114-98-000362.hdr.sgml : 19980821 ACCESSION NUMBER: 0000950114-98-000362 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REINSURANCE GROUP OF AMERICA INC CENTRAL INDEX KEY: 0000898174 STANDARD INDUSTRIAL CLASSIFICATION: 6321 IRS NUMBER: 431627032 STATE OF INCORPORATION: MO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11848 FILM NUMBER: 98683946 BUSINESS ADDRESS: STREET 1: 660 MASON RIDGE CENTER DR CITY: ST LOUIS STATE: MO ZIP: 63141 BUSINESS PHONE: 3144537439 MAIL ADDRESS: STREET 1: 660 MASON RIDGE CENTER DR STREET 2: #300 CITY: SAINT LOUIS STATE: MO ZIP: 63141-8557 10-Q 1 REINSURANCE GROUP OF AMERICA, INCORPORATED FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 -------------------- COMMISSION FILE NUMBER 1-11848 REINSURANCE GROUP OF AMERICA, INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MISSOURI 43-1627032 (STATE OR OTHER JURISDICTION (IRS EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 660 MASON RIDGE CENTER DRIVE ST. LOUIS, MISSOURI 63141 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (314) 453-7439 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) -------------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- VOTING COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 31, 1998: 25,240,412 SHARES NON-VOTING COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 31, 1998: 4,945,000 SHARES 2 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES TABLE OF CONTENTS
ITEM PAGE ---- ---- PART I - FINANCIAL INFORMATION ------------------------------ 1 Financial Statements Condensed Consolidated Balance Sheets (Unaudited) June 30, 1998 and December 31, 1997 3 Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) Three and six months ended June 30, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30, 1998 and 1997 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6-11 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12-29 PART II - OTHER INFORMATION --------------------------- 1 Legal Proceedings 29 5 Other Information 30 6 Exhibits and Reports on Form 8-K 30 Signatures 31 Index to Exhibits 32
2 3 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 1998 1997 ---------- ------------ (Dollars in thousands) ASSETS Fixed maturity securities Available for sale-at fair value (amortized cost of $3,092,509 and $2,416,308 at June 30, 1998, and December 31, 1997, respectively) $3,218,245 $2,528,290 Mortgage loans on real estate 214,076 165,452 Policy loans 477,595 480,234 Funds withheld at interest 172,404 165,413 Short-term investments 263,048 277,635 Other invested assets 21,177 16,977 ---------- ---------- Total investments 4,366,545 3,634,001 Cash and cash equivalents 26,714 37,395 Accrued investment income 62,806 34,377 Premiums receivable 149,798 119,554 Funds withheld 86,667 33,957 Reinsurance ceded receivables 323,456 316,156 Deferred policy acquisition costs 326,411 289,842 Other reinsurance balances 133,603 153,134 Other assets 61,108 55,134 ---------- ---------- Total assets $5,537,108 $4,673,550 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Future policy benefits $1,368,972 $1,244,541 Interest sensitive contract liabilities 2,452,584 1,969,270 Other policy claims and benefits 384,350 344,848 Other reinsurance balances 219,095 232,096 Deferred income taxes 132,958 110,763 Other liabilities 103,218 157,616 Long-term debt 108,052 106,830 ---------- ---------- Total liabilities 4,769,229 4,165,964 Minority interest 7,138 8,265 Commitments and contingent liabilities Stockholders' equity: Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no shares issued or outstanding) - - Common stock (par value $.01 per share; 75,000,000 shares authorized, 26,049,375 shares issued) 261 261 Non-voting common stock (par value $.01 per share; 20,000,000 shares authorized; 4,945,000 shares issued; no shares issued at December 31, 1997) 49 - Additional paid in capital 486,915 264,748 Retained earnings 228,784 196,685 Accumulated other comprehensive income 65,596 59,089 ---------- ---------- Total stockholders' equity before treasury stock 781,605 520,783 Less treasury shares held of 808,963 and 844,535 at cost at June 30, 1998, and December 31, 1997, respectively (20,864) (21,462) ---------- ---------- Total stockholders' equity 760,741 499,321 ---------- ---------- Total liabilities and stockholders' equity $5,537,108 $4,673,550 ========== ========== See accompanying notes to condensed consolidated financial statements.
3 4 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
Three months ended Six months ended June 30, June 30, ---------------------- ---------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (Dollars in thousands, except per share data) REVENUES: Net premiums $276,535 $201,568 $546,513 $406,940 Investment income, net of related expenses 72,225 45,995 135,904 87,844 Realized investment gains, net 1,797 532 2,719 919 Other revenue 4,101 4,836 10,655 8,991 -------- -------- -------- -------- Total revenues 354,658 252,931 695,791 504,694 BENEFITS AND EXPENSES: Claims and other policy benefits 212,774 144,579 430,070 303,339 Interest credited 37,845 22,404 72,357 41,526 Accident and health pool charge - - - 18,000 Policy acquisition costs and other insurance expenses 57,428 47,801 104,362 88,268 Other operating expenses 14,089 12,210 29,553 22,729 Interest expense 2,187 1,956 4,212 3,904 -------- -------- -------- -------- Total benefits and expenses 324,323 228,950 640,554 477,766 -------- -------- -------- -------- Income before income taxes and minority interest 30,335 23,981 55,237 26,928 Provision for income taxes 10,957 8,757 19,797 8,756 -------- -------- -------- -------- Income before minority interest 19,378 15,224 35,440 18,172 Minority interest in earnings of consolidated subsidiaries (160) (129) (313) (249) -------- -------- -------- -------- Net income $ 19,218 $ 15,095 $ 35,127 $ 17,923 ======== ======== ======== ======== Other comprehensive income, net of taxes (184) 22,019 6,507 3,264 -------- -------- -------- -------- Comprehensive income $ 19,034 $ 37,114 $ 41,634 $ 21,187 ======== ======== ======== ======== Basic earnings per share $ 0.72 $ 0.59 $ 1.35 $ 0.70 ======== ======== ======== ======== Diluted earnings per share $ 0.71 $ 0.59 $ 1.34 $ 0.70 ======== ======== ======== ======== Weighted average number of diluted shares outstanding (in thousands) 26,933 25,657 26,210 25,643 ======== ======== ======== ======== See accompanying notes to condensed consolidated financial statements.
4 5 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, --------------------------- 1998 1997 --------- --------- (Dollars in thousands) OPERATING ACTIVITIES: Net income $ 35,127 $ 17,923 Adjustments to reconcile net income to net cash provided by operating activities: Change in: Accrued investment income (28,460) (21,460) Premiums receivable (30,846) (20,433) Deferred policy acquisition costs (38,516) (26,732) Funds withheld (52,208) (7,715) Reinsurance ceded balances (10,082) (22,779) Future policy benefits, other policy claims and benefits, and other reinsurance balances 246,929 190,207 Deferred income taxes 18,003 5,316 Other assets and other liabilities (59,696) 22,981 Amortization of goodwill and value of business acquired 839 630 Amortization of net investment discounts (6,617) (5,875) Realized investment gains, net (2,719) (919) Other, net (936) (181) --------- --------- Net cash provided by operating activities 70,818 130,963 INVESTING ACTIVITIES: Sales of investments: Fixed maturity securities 198,109 101,050 Mortgage loans - 25,716 Maturities of fixed maturity securites 33,440 124,463 Purchases of fixed maturity securities (961,386) (498,727) Cash invested in: Mortgage loans (56,157) (41,238) Policy loans (6,155) - Funds withheld at interest (6,989) (28,038) Principal payments on: Mortgage loans 4,076 790 Policy loans 8,794 1,920 Change in short-term and other invested assets 1,492 25,239 --------- --------- Net cash used in investing activities (784,776) (288,825) FINANCING ACTIVITIES: Dividends to stockholders (3,028) (2,717) Proceeds from stock offering 221,837 - Purchase of treasury stock - (3,097) Reissuance of treasury stock 598 450 Minority interest in earnings 313 249 Excess deposits on universal life and other investment type policies and contracts 483,314 162,007 --------- --------- Net cash provided by financing activities 703,034 156,892 Effect of exchange rate changes 243 (284) --------- --------- Change in cash and cash equivalents (10,681) (1,254) Cash and cash equivalents, beginning of period 37,395 13,145 --------- --------- Cash and cash equivalents, end of period $ 26,714 $ 11,891 ========= ========= See accompanying notes to condensed consolidated financial statements.
5 6 REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited, condensed, consolidated financial statements of Reinsurance Group of America, Incorporated and Subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report for the year ended December 31, 1997. The Company has reclassified the presentation of certain prior period information to conform to the 1998 presentation. 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share information):
THREE MONTHS ENDING SIX MONTHS ENDING JUNE 30, JUNE 30, 1998 1997 1998 1997 ---- ---- ---- ---- Numerator: Net income $19,218 $15,095 $35,127 $17,923 Numerator for basic earnings per share-- income available to common stockholders 19,218 15,095 35,127 17,923 Effect of dilutive securities - - - - ------- ------- ------- ------- Numerator for diluted earnings per share-- income available to common stockholders after assumed conversions $19,218 $15,095 $35,127 $17,923 ======= ======= ======= =======
6 7
THREE MONTHS ENDING SIX MONTHS ENDING JUNE 30, JUNE 30, 1998 1997 1998 1997 ---- ---- ---- ---- Denominator: Denominator for basic earnings per share--weighted average shares 26,632 25,459 25,925 25,463 Effect of dilutive securities: Employee stock plan 301 198 285 180 ------ ------ ------ ------ Denominator for diluted earnings per share--adjusted weighted average shares and assumed conversions 26,933 25,657 26,210 25,643 ====== ====== ====== ====== Basic earnings per share $0.72 $0.59 $1.35 $0.70 ----- ----- ----- ----- Diluted earnings per share $0.71 $0.59 $1.34 $0.70 ----- ----- ----- -----
3. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," effective for years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The most significant items of comprehensive income are net income, the change in unrealized gains and losses on securities, and the change in foreign currency translation. Both the change in unrealized gains and losses on securities and the change in foreign currency translation historically have been reported as a component of stockholders' equity. The adoption of SFAS No. 130 does not affect results of operations or financial position, but affects their presentation and disclosure. The Company has adopted SFAS No. 130 as of January 1, 1998, and the following summaries present the components of the Company's comprehensive income, other than net income, for the three and six month periods ending June 30, 1998 and 1997 (dollars in thousands): 7 8
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1998: =============================================================================================== BEFORE-TAX TAX (EXPENSE) NET-OF-TAX AMOUNT BENEFIT AMOUNT - - ----------------------------------------------------------------------------------------------- Foreign currency translation adjustments $(2,287) $ 800 $(1,487) Unrealized gains on securities: Unrealized holding gains arising during period 3,359 (915) 2,444 Less: reclassification adjustment for gains realized in net income 1,797 (656) 1,141 ------- ----- ------- Net unrealized gains 1,562 (259) 1,303 ------- ----- ------- Other comprehensive income $ (725) $ 541 $ (184) =============================================================================================== FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1998: =============================================================================================== BEFORE-TAX TAX (EXPENSE) NET-OF-TAX AMOUNT BENEFIT AMOUNT - - ----------------------------------------------------------------------------------------------- Foreign currency translation adjustments $(2,528) $ 885 $(1,643) Unrealized gains on securities: Unrealized holding gains arising during period 16,540 (6,666) 9,874 Less: reclassification adjustment for gains realized in net income 2,719 (995) 1,724 ------- ------- ------- Net unrealized gains 13,821 (5,671) 8,150 ------- ------- ------- Other comprehensive income $11,293 $(4,786) $ 6,507 ===============================================================================================
8 9
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1997: =============================================================================================== BEFORE-TAX TAX (EXPENSE) NET-OF-TAX AMOUNT BENEFIT AMOUNT - - ----------------------------------------------------------------------------------------------- Foreign currency translation adjustments $(1,647) $ 577 $(1,070) Unrealized gains on securities: Unrealized holding gains arising during period 38,073 (14,646) 23,427 Less: reclassification adjustment for gains realized in net income 532 (194) 338 ------- -------- ------- Net unrealized gains 37,541 (14,452) 23,089 ------- -------- ------- Other comprehensive income $35,894 $(13,875) $22,019 =============================================================================================== FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1997: =============================================================================================== BEFORE-TAX TAX (EXPENSE) NET-OF-TAX AMOUNT BENEFIT AMOUNT - - ----------------------------------------------------------------------------------------------- Foreign currency translation adjustments $(3,394) $ 1,188 $(2,206) Unrealized gains on securities: Unrealized holding gains arising during period 10,734 (4,674) 6,060 Less: reclassification adjustment for gains realized in net income 919 (329) 590 ------- ------- ------- Net unrealized gains 9,815 (4,345) 5,470 ------- ------- ------- Other comprehensive income $ 6,421 $(3,157) $ 3,264 ===============================================================================================
9 10 The following schedule reflects the change in accumulated other comprehensive income for the period ending June 30, 1998 (dollars in thousands):
================================================================================================= ACCUMULATED UNREALIZED OTHER FOREIGN GAINS ON COMPREHENSIVE CURRENCY ITEMS SECURITIES INCOME - - ------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $(8,201) $67,290 $59,089 Current period change (1,643) 8,150 6,507 ------- ------- ------- Balance at June 30, 1998 $(9,844) $75,440 $65,596 =================================================================================================
4. SEGMENT INFORMATION In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," effective for years beginning after December 15, 1997. SFAS No. 131 requires that a public company report financial and descriptive information about its reportable operating segments pursuant to criteria that differ from current accounting practice. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The adoption of SFAS No. 131 will not affect the Company's results of operations or financial position, but will affect the disclosure of segment information. The Company plans to adopt SFAS No. 131 during 1998, however SFAS No. 131 need not be applied to interim financial information in the initial year of its application. 5. STOCK OFFERING In June 1998, the Company completed a public offering in which it sold 4,945,000 shares of non-voting common stock traded on the New York Stock Exchange under the symbol RGA.A. The offering was priced to the public at $47.00 per share and provided net proceeds of approximately $221.8 million. 10 11 6. DIVIDENDS AND OPTIONS The Board of Directors of Reinsurance Group of America, Incorporated (RGA) recently declared a cash dividend of $0.07 per share of common stock. The dividend will be paid on August 28, 1998 to shareholders of record as of August 7, 1998. In July 1998, the Board of Directors of RGA approved an additional grant of 100,000 options to non-executive management. These options are for non-voting common shares and will have similar vesting schedules as the most recent grants under the RGA Flexible Stock Plan. Also in July, the Board of Directors of RGA approved a stock repurchase program to accumulate non-voting shares in anticipation of exercise of these options. 7. NEW ACCOUNTING STANDARDS AND DISCLOSURE REQUIREMENTS In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 15, 1997. SFAS No. 132 does not change the measurement or recognition of pension and other postretirement benefit plans, but standardizes the disclosure requirements. The adoption of this standard has no impact on the financial results of the Company. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999 and is effective for interim periods in the initial year of adoption. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be reported depending on the use of the derivative and whether it qualifies for hedge accounting. The Company has not yet determined the effect, if any, of the implementation of SFAS No. 133 on the results of operation, financial position, or liquidity. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following tables reflect the net income before income taxes and minority interest for the Company's primary operational divisions (dollars in thousands): - - --------------- U.S. OPERATIONS - - ---------------
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1998 ====================================================== TRADITIONAL NON-TRADIITONAL TOTAL ASSET- FINANCIAL U.S. INTENSIVE REINSURANCE ====================================================== REVENUES: Net premiums $174,162 $ 687 $ - $174,849 Investment income, net of related expenses 32,447 29,909 - 62,356 Realized investment gains, net 819 596 - 1,415 Other revenue (522) - 3,751 3,229 ----------------------------------------------------- Total revenues 206,906 31,192 3,751 241,849 BENEFITS AND EXPENSES: Claims and other policy benefits 128,620 2,277 - 130,897 Interest credited 11,974 25,606 - 37,580 Policy acquisition costs and other insurance expenses 34,304 1,567 2,826 38,697 Other operating expenses 5,909 - - 5,909 ----------------------------------------------------- Total benefits and expenses 180,807 29,450 2,826 213,083 Income before income taxes and minority interest $ 26,099 $ 1,742 $ 925 $ 28,766 ===================================================== FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1997 ======================================================= TRADITIONAL NON-TRADIITONAL TOTAL ASSET- FINANCIAL U.S. INTENSIVE REINSURANCE ======================================================= REVENUES: Net premiums $135,086 $ - $ - $135,086 Investment income, net of related expenses 25,671 10,705 - 36,376 Realized investment gains, net 245 213 - 458 Other revenue (24) - 4,416 4,392 ------------------------------------------------------ Total revenues 160,978 10,918 4,416 176,312 BENEFITS AND EXPENSES: Claims and other policy benefits 93,267 194 - 93,461 Interest credited 12,136 9,922 - 22,058 Policy acquisition costs and other insurance expenses 28,124 309 3,590 32,023 Other operating expenses 5,581 - - 5,581 ------------------------------------------------------ Total benefits and expenses 139,108 10,425 3,590 153,123 Income before income taxes and minority interest $ 21,870 $ 493 $ 826 $ 23,189 ======================================================
12 13 - - ------------------- CANADIAN OPERATIONS - - -------------------
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1998 1997 REVENUES: Net premiums $24,328 $17,495 Investment income, net of related expenses 5,386 3,843 Realized investment gains, net 381 110 Other revenue 98 (2) -------------------- Total revenues 30,193 21,446 BENEFITS AND EXPENSES: Claims and other policy benefits 21,216 13,609 Interest credited 216 329 Policy acquisition costs and other insurance expenses 2,639 3,360 Other operating expenses 1,597 1,474 -------------------- Total benefits and expenses 25,668 18,772 Income before income taxes and minority interest $ 4,525 $ 2,674 ====================
- - ------------------- OTHER INTERNATIONAL - - -------------------
FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1998 ============================================================ LATIN AMERICA ASIA OTHER TOTAL PACIFIC MARKETS INTERNATIONAL Direct Reinsurance ============================================================ REVENUES: Net premiums $12,123 $12,057 $12,953 $ 1,638 $38,771 Investment income, net of related expenses 2,264 462 633 24 3,383 Realized investment gains, net - - 1 - 1 Other revenue (121) - 592 150 621 ----------------------------------------------------------- Total revenues 14,266 12,519 14,179 1,812 42,776 BENEFITS AND EXPENSES: Claims and other policy benefits 11,407 11,634 9,603 1,183 33,827 Interest credited 49 - - - 49 Policy acquisition costs and other insurance expenses 1,009 586 2,790 484 4,869 Other operating expenses 1,750 465 1,261 1,172 4,648 Interest expense - - 121 38 159 ----------------------------------------------------------- Total benefits and expenses 14,215 12,685 13,775 2,877 43,552 Income / (loss) before income taxes and minority interest $ 51 $ (166) $ 404 $(1,065) $ (776) =========================================================== 13 14 - - ------------------------------- OTHER INTERNATIONAL (continued) - - ------------------------------- FOR THE THREE MONTH PERIOD ENDING JUNE 30, 1997 =========================================================== LATIN AMERICA ASIA OTHER TOTAL PACIFIC MARKETS INTERNATIONAL Direct Reinsurance =========================================================== REVENUES: Net premiums $13,366 $6,725 $ 8,642 $ 173 $28,906 Investment income, net of related expenses 2,906 417 601 57 3,981 Other revenue 63 - - 9 72 ----------------------------------------------------------- Total revenues 16,335 7,142 9,243 239 32,959 BENEFITS AND EXPENSES: Claims and other policy benefits 12,633 6,260 5,371 165 24,429 Interest credited 17 - - - 17 Policy acquisition costs and other insurance expenses 1,803 154 3,611 15 5,583 Other operating expenses 2,306 (11) 1,469 531 4,295 Interest expense - - 123 - 123 ----------------------------------------------------------- Total benefits and expenses 16,759 6,403 10,574 711 34,447 (Loss) / income before income taxes and minority interest $ (424) $ 739 $(1,331) $(472) $(1,488) ===========================================================
- - ------------------- ACCIDENT AND HEALTH - - -------------------
FOR THE THREE MONTH PERIODS ENDING JUNE 30, 1998 1997 REVENUES: Net premiums $38,587 $20,081 Investment income, net of related expenses 417 317 Other revenue 226 374 ----------------------------- Total revenues 39,230 20,772 BENEFITS AND EXPENSES: Claims and other policy benefits 26,834 13,080 Policy acquisition costs and other insurance expenses 11,223 6,835 Other operating expenses 1,685 551 ----------------------------- Total benefits and expenses 39,742 20,466 (Loss) / income before income taxes and minority interest $ (512) $ 306 =============================
14 15 THREE MONTHS ENDED JUNE 30, 1998 AND 1997 - - ----------------------------------------- RESULTS OF OPERATIONS Consolidated income before income taxes and minority interest increased $6.4 million in the second quarter of 1998, compared to the same period in 1997. Diluted earnings per share were $0.71 for the second quarter of 1998 compared with $0.59 for the same period in 1997. Consolidated net income before realized capital gains and losses increased to $18.1 million in the second quarter of 1998 from $14.8 million in the same period in 1997. The increase in the U.S. operations income before income taxes and minority interest in the second quarter of 1998 compared to the same period in 1997 was due to increased earnings on asset-intensive business and continued growth in the traditional business, where premiums increased 29.0%. The increase in the Canadian operations income before income taxes and minority interest in the second quarter of 1998 compared to the same period in 1997 was a result of growth in premiums of 39.0% primarily for renewal business related to blocks of business added in December 1997 and more favorable mortality experience. The other international operations lost $0.8 million before income taxes and minority interest in the second quarter of 1998 compared to a $1.5 million loss in the same period in 1997. The Latin American and Asia Pacific business showed continued revenue growth. However, reserve strengthening in the Latin American business and costs associated with the development of new business in several other international markets contributed to the overall international loss. The decrease in the accident and health operations income before income taxes and minority interest in the second quarter of 1998 compared to the same period in 1997 was due primarily to the write-off of the excess of purchase price over the fair value of net assets acquired when put options for the minority interest in the accident and health subsidiaries were settled during the period. Net Premiums. Consolidated net premiums increased $74.9 million, or 37.2%, to $276.5 million in the second quarter of 1998, compared to $201.6 million for the same period in 1997. Renewal premiums from the existing block of business, along with new business premiums from facultative and automatic treaties contributed to the premium increase. Business premium levels are significantly influenced by large transactions and reporting practices of ceding companies and therefore fluctuate from period to period. The U.S. operations net premiums in the second quarter of 1998 increased 29.4% to $174.8 million from the same period in prior year. This was attributed to premium growth on the existing block of business and combined with strong new business premium for blocks of business added since the second quarter of 1997. Net premiums in the Canadian operations in the second quarter of 1998 increased 39.1% to $24.3 million in 1998. New business premiums increased $0.2 million, while renewal premiums increased $6.6 million compared to the second quarter of 1997. Several of the treaties produced in December 1997 related to in force blocks of business with large renewal premiums. 15 16 The Company's other international operations reported premiums of $38.8 million for the second quarter of 1998 compared to $28.9 million for the same period in 1997. The 1998 premiums represented approximately $24.2 million from Latin America, of which approximately $12.1 million was direct premium generated in Argentina and Chile. Latin American premiums grew 20.4%, which resulted from growth in reinsurance of privatized pensions in Argentina as well as in direct universal life business in Argentina. Direct premiums from Chilean single premium annuities decreased from prior year due to less favorable market conditions in Chile during 1998. The Asia Pacific operations and other markets generated $14.6 million of premiums, an increase of 49.9% compared to the second quarter in the prior year, predominantly through the Hong Kong contact office and the subsidiary in Australia. Accident and health operations net premiums increased 92.2% to $38.6 million in the second quarter of 1998. The increase resulted from premiums on new contracts initiated and the renewal of existing contracts in the second half of 1997. The Company estimates that 1998 accident and health premiums compared to 1997 premiums will increase as a result of the contracts executed immediately prior to the decision to exit the market. The Company currently estimates reporting approximately $110.0 million of accident and health premiums for the current year, with significantly lower levels in 1999 and beyond. Net Investment Income. Consolidated net investment income increased 57.0% to $72.2 million, in the second quarter of 1998 from the same period in 1997. The cost basis of fixed maturity securities increased $1.3 billion from the second quarter of 1997. The increase in invested assets was a result of an increase in operating cash flows, reinsurance transactions involving deposits for asset-intensive products from ceding companies, primarily stable value product deposits, and the proceeds from the Company's non-voting common stock offering. The Company's stable value reinsurance is assumed from General American Life Insurance Company ("General American"), which indirectly owns approximately 64% of the Company's voting common stock. The amount of future reinsurance of the stable value product is dependent on General American's claims-paying rating. Earnings credited and paid to ceding companies are included in interest credited. Realized Investment Gains, Net. Consolidated net realized investment gains increased $1.3 million to $1.8 million in the second quarter of 1998 from $0.5 million for the same period in the prior year. Net realized investment gains resulted from normal activity within the Company's investment portfolios. Other Revenue. Consolidated other revenue decreased $0.7 million in the second quarter of 1998 to $4.1 million. Other revenue includes items such as profit and risk fees associated with financial reinsurance, treaty recapture fees as well as earnings in unconsolidated subsidiaries, management fee income, and other miscellaneous income. During the second quarter of 1998, financial reinsurance treaties in the U.S. operations resulted in $3.1 million in financial reinsurance fees which were partially offset by $2.8 million of fees paid to retrocessionaires, which is included in policy acquisition costs and other insurance expenses. The Company's strategy involves the assumption and subsequent retrocession of most of these financial 16 17 reinsurance treaties which resulted in amounts of $116.4 million and $120.4 million being included in other reinsurance assets and liabilities, respectively, on the Company's consolidated balance sheets at June 30, 1998. Other revenue also included $0.7 million and $0.4 million in earnings in unconsolidated subsidiaries for the second quarter of 1998 and 1997, respectively. Claims and Other Policy Benefits. Consolidated claims and other policy benefits increased 47.2% to $212.8 million, in the second quarter of 1998. For the second quarter of 1998, total claims and other policy benefits represented 76.9% of total net premiums compared to 71.7% for the same period in 1997. This fluctuation was primarily a result of higher benefits and reserves in the U.S. and Canadian operations in the second quarter of 1998 compared to the same period in 1997. The Company expects mortality to fluctuate somewhat from period to period but believes it is fairly constant over longer periods of time. The Company continues to monitor mortality trends to determine the appropriateness of reserve levels. U.S. operations claims and other policy benefits increased 40.1% in the second quarter of 1998, primarily as a result of increases from new business production and higher claims experience during such period compared to the same period in 1997. Claims and other policy benefits for traditional reinsurance, as a percentage of net premiums, increased to 73.9% in the second quarter of 1998 from 69.0% in the same period in 1997. The current quarter percentage of net premiums was comparable to the 73.6% of net premiums for the entire year ended December 31, 1997. The quarter to quarter fluctuation was primarily due to reserves established for new and renewal blocks of business as well as the timing of claims reported. Also, the percentage is affected by the timing of premium receipts. Canadian operations claims and other policy benefits increased 55.9% in the second quarter of 1998. Claims and other policy benefits as a percentage of net premiums increased to 87.2% in the second quarter of 1998 from 77.8% in the same period in 1997. The current quarter percentage was comparable to the 89.7% for the entire year ended December 31, 1997. This increase as a percent of premiums from the same quarter of prior year was related to the 1997 in force blocks of business as well as new business. The Company will continue to monitor the appropriateness of reserve levels. The claims and other policy benefits of the other international business in the second quarter of 1998 increased 38.5% from the same period in the prior year. Claims and other policy benefits as a percentage of net premiums increased to 87.3% from 84.5%. This increase was primarily the result of reserve and policyholder benefit increases on business from Latin American ventures and blocks of mortality risk reinsurance of $4.1 million. In addition, although direct premiums from Chilean annuities have decreased from prior year, claims and other policy benefits, specifically Chilean annuity payments have continued to increase in the normal course of business. The Asia Pacific operations reflected an increase of $4.2 million resulting primarily from business written in Australia and Japan. Accident and health operations claims and other policy benefits increased $13.8 million in the second quarter of 1998 compared to the same period in 1997. As a percentage of net premiums, 17 18 claims and other policy benefits increased to 69.5% in the second quarter of 1998 from 65.1% in the same period of 1997. The accident and health operations claims and reserves are subject to volatility due to the nature of risk covered, which is primarily accident risk. Reserves are calculated based upon current information including industry estimates for certain aviation accidents. In 1997, the Company made the decision to exit all outside-managed accident and health pools and cease marketing accident and health business and to place the operation into run-off. Interest credited. Consolidated interest credited increased $15.4 million in the second quarter of 1998 to $37.8 million. Interest credited represents amounts credited on the Company's asset-intensive and universal life type products. Asset-intensive products include stable value operations, bank-owned life insurance and annuity products. These products are primarily written in the U.S. operations, while the Canadian operations have a small annuity block of business and the Latin American operations have a direct universal life product in Argentina. The increase in interest credited was primarily a result of an increase of approximately $0.7 billion in deposits related to asset-intensive reinsurance since the second quarter of 1997. Policy Acquisition Costs and Other Insurance Expenses. Consolidated policy acquisition costs and other insurance expenses, consisting primarily of allowances, increased 20.1%, to $57.4 million in the second quarter of 1998. As a percentage of net premiums, consolidated policy acquisition costs and other insurance expenses decreased to 20.8% in the second quarter of 1998 from 23.7% during the same period in 1997. This resulted from a change in business mix from coinsurance to yearly renewable term reinsurance and the addition of larger blocks of business that do not have significant allowances. Generally, policy acquisition costs and other insurance expenses fluctuate with business volume and changes in product mix from period to period. Within the U.S. operations, policy acquisition costs and other insurance expenses as a percentage of net premiums for traditional business decreased to 19.7% in the second quarter of 1998 from 20.8% during the same period in 1997. This was due primarily to new business added during 1998 which was primarily yearly renewable term reinsurance that did not have a high level of commissions associated with the premiums. The financial reinsurance business within the U.S. operations reflects fees of approximately $2.8 million paid to retrocessionaires during 1998, representing a partial offset to the fees collected and reflected as other revenues. In the Canadian operations, policy acquisition costs and other insurance expenses as a percentage of net premiums decreased to 10.8% in the second quarter of 1998, from 19.2% during the same period in 1997. The decrease was primarily due to the large blocks of business added at the end of 1997 that do not have significant commission costs associated with the business. In addition, there was more reinsurance of yearly renewable term products during the second half of 1997 and first six months of 1998 compared to the second quarter of 1997. This shift in reinsurance method resulted in fewer commissions as a percent of net premiums for the second quarter of 1998 compared to the second quarter of 1997. 18 19 Other international operations policy acquisition cost and other insurance expenses as a percentage of net premiums decreased to 12.6% in the second quarter of 1998 from 19.3% during the same period in 1997. These percentages fluctuate due to the timing of client company reporting and variations in the mixture of business being written within the Latin American and Asia Pacific operations. Accident and health operations policy acquisition costs and other insurance expenses as a percentage of net premiums decreased to 29.1% in the second quarter of 1998 from 34.0% during the same period in 1997 resulting from changes in the mixture of business within the accident and health operations. Other Operating Expenses. Consolidated other operating expenses increased $1.9 million in the second quarter of 1998 from the same period in 1997. The overall increase in operating expenses was attributed to planned increases associated with the ongoing growth of the Company. Interest Expense. Consolidated interest expense during the second quarter of 1998 related to the 7 1/4% Senior Notes issued in 1996, the financing of a portion of the Company's Australian reinsurance operations, RGA Australian Holdings Pty Limited ("Australian Holdings") and interest paid on an operating line of credit. Interest cost for the second quarter of 1998 and the second quarter of 1997 was $2.2 million and $2.0 million, respectively. Interest expense related to the 7 1/4% Senior Notes was $1.8 million in the second quarter of 1998 and 1997, respectively. Provision for Income Taxes. Consolidated income tax expense increased $2.2 million in the second quarter of 1998 as a result of higher pre-tax income. Income tax expense from operations before net realized investment gains represented approximately 36.3% and 36.7% of pre-tax income for the second quarters of 1998 and 1997, respectively. 19 20 The following tables reflect the net income before income taxes and minority interest for the Company's primary operational divisions (dollars in thousands): - - --------------- U.S. OPERATIONS - - ---------------
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1998 ================================================== TRADITIONAL NON-TRADITIONAL TOTAL ASSET- FINANCIAL U.S. INTENSIVE REINSURANCE ================================================== REVENUES: Net premiums $354,537 $ 687 $ - $355,224 Investment income, net of related expenses 61,205 56,646 - 117,851 Realized investment gains, net 1,264 837 - 2,101 Other revenue (333) - 7,778 7,445 -------------------------------------------------- Total revenues 416,673 58,170 7,778 482,621 BENEFITS AND EXPENSES: Claims and other policy benefits 273,087 2,300 - 275,387 Interest credited 22,597 49,220 - 71,817 Policy acquisition costs and other insurance expenses 60,514 2,610 5,946 69,070 Other operating expenses 12,291 - - 12,291 -------------------------------------------------- Total benefits and expenses 368,489 54,130 5,946 428,565 Income before income taxes and minority interest $ 48,184 $ 4,040 $1,832 $ 54,056 ================================================== FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1997 ================================================== TRADITIONAL NON-TRADITIONAL TOTAL ASSET- FINANCIAL U.S. INTENSIVE REINSURANCE ================================================== REVENUES: Net premiums $281,049 $ - $ - $281,049 Investment income, net of related expenses 50,333 20,381 - 70,714 Realized investment gains, net 346 456 - 802 Other revenue 376 - 8,056 8,432 -------------------------------------------------- Total revenues 332,104 20,837 8,056 360,997 BENEFITS AND EXPENSES: Claims and other policy benefits 204,276 976 - 205,252 Interest credited 22,634 18,189 - 40,823 Policy acquisition costs and other insurance expenses 52,407 573 7,005 59,985 Other operating expenses 10,171 - - 10,171 -------------------------------------------------- Total benefits and expenses 289,488 19,738 7,005 316,231 Income before income taxes and minority interest $ 42,616 $ 1,099 $1,051 $ 44,766 ==================================================
20 21 - - ------------------- CANADIAN OPERATIONS - - -------------------
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1998 1997 REVENUES: Net premiums $49,354 $36,330 Investment income, net of related expenses 10,544 7,607 Realized investment gains, net 617 110 Other revenue 370 69 ----------------------------- Total revenues 60,885 44,116 BENEFITS AND EXPENSES: Claims and other policy benefits 44,331 28,351 Interest credited 461 671 Policy acquisition costs and other insurance expenses 5,494 6,529 Other operating expenses 3,400 2,897 ----------------------------- Total benefits and expenses 53,686 38,448 Income before income taxes and minority interest $ 7,199 $ 5,668 =============================
- - ------------------- OTHER INTERNATIONAL - - -------------------
FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1998 =========================================================== LATIN AMERICA ASIA OTHER TOTAL PACIFIC MARKETS INTERNATIONAL Direct Reinsurance =========================================================== REVENUES: Net premiums $25,574 $25,423 $23,406 $ 2,044 $76,447 Investment income, net of related expenses 3,847 949 1,053 61 5,910 Realized investment gains, net - - 1 - 1 Other revenue (48) - 2,127 204 2,283 ----------------------------------------------------------- Total revenues 29,373 26,372 26,587 2,309 84,641 BENEFITS AND EXPENSES: Claims and other policy benefits 23,523 23,918 15,156 1,489 64,086 Interest credited 79 - - - 79 Policy acquisition costs and other insurance expenses 1,988 957 7,627 606 11,178 Other operating expenses 3,378 1,431 3,019 2,223 10,051 Interest expense - - 221 83 304 ----------------------------------------------------------- Total benefits and expenses 28,968 26,306 26,023 4,401 85,698 Income / (loss) before income taxes and minority interest $ 405 $ 66 $ 564 $(2,092) $(1,057) =========================================================== 21 22 - - ------------------------------- OTHER INTERNATIONAL (continued) - - ------------------------------- FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1997 =========================================================== LATIN AMERICA ASIA OTHER TOTAL PACIFIC MARKETS INTERNATIONAL Direct Reinsurance =========================================================== Revenues: Net premiums $28,465 $ 9,392 $14,890 $ 236 $52,983 Investment income, net of related expenses 4,046 824 927 61 5,858 Realized investment gains, net - - 15 - 15 Other revenue 77 - - 9 86 ----------------------------------------------------------- Total revenues 32,588 10,216 15,832 306 58,942 BENEFITS AND EXPENSES: Claims and other policy benefits 26,516 8,368 9,287 341 44,512 Interest credited 32 - - - 32 Policy acquisition costs and other insurance expenses 2,903 227 5,971 55 9,156 Other operating expenses 3,531 520 2,949 941 7,941 Interest expense - - 238 - 238 ----------------------------------------------------------- Total benefits and expenses 32,982 9,115 18,445 1,337 61,879 (Loss) / income before income taxes and minority interest $ (394) $ 1,101 $(2,613) $(1,031) $(2,937) ===========================================================
- - ------------------- ACCIDENT AND HEALTH - - -------------------
FOR THE SIX MONTH PERIODS ENDING JUNE 30, 1998 1997 REVENUES: Net premiums $65,488 $ 36,578 Investment income, net of related expenses 850 598 Realized investment gains, net - 3 Other revenue 557 404 ----------------------------- Total revenues 66,895 37,583 BENEFITS AND EXPENSES: Claims and other policy benefits 46,266 25,224 Accident and health pool charge - 18,000 Policy acquisition costs and other insurance expenses 18,620 12,598 Other operating expenses 2,471 1,100 ----------------------------- Total benefits and expenses 67,357 56,922 (Loss) before income taxes and minority interest $ (462) $(19,339) =============================
22 23 SIX MONTHS ENDED JUNE 30, 1998 AND 1997 - - --------------------------------------- RESULTS OF OPERATIONS Consolidated income before income taxes and minority interest increased $28.3 million in the first six months of 1998, compared to the same period in 1997. Diluted earnings per share were $1.34 for the first six months of 1998 compared with $0.70 for the same period in 1997. Consolidated net income before realized capital gains and losses increased to $33.4 million in the first six months of 1998 from $17.3 million in the same period in 1997. The increase in the U.S. operations income before income taxes and minority interest in the first six months of 1998 compared to the same period in 1997 was due to increased earnings from asset-intensive business and financial reinsurance business, combined with continued growth in the traditional reinsurance business, where premiums increased 26.1%. The increase in the Canadian operations income before income taxes and minority interest in the first six months of 1998 compared to the same period in 1997 was a result of growth in premiums of 39.1%, primarily for renewal business related to blocks of business added in December 1997 and more favorable mortality experience. The other international operations lost $1.1 million before income taxes and minority interest in the first six months of 1998 compared to a $2.9 million loss in 1997. Total revenues in the other international operations increased by 43.6% for the first six months of 1998 compared to the same period in 1997. This growth was offset by costs associated with the development of new business in several international markets. The accident and health operations reported a net loss of $0.5 million for the first six months of 1998 compared to a loss of $19.3 million for the same period in 1997. During the first quarter of 1997, the Company recorded an accident and health charge of $18.0 million, $10.4 million after-tax, to increase reserves associated with run-off claims from certain accident and health insurance pools in which it had formerly participated. That action was a result of management's strategic decision to exit all outside-managed accident and health pools. As of December 31, 1997, the Company made a strategic decision to cease marketing accident and health business and established reserves that it believes are sufficient to handle the run-off. Net Premiums. Consolidated net premiums increased $139.6 million, or 34.3%, to $546.5 million in the first six months of 1998, compared to $406.9 million for the same period in 1997. Renewal premiums from the existing block of business, along with new business premiums from facultative and automatic treaties contributed to the premium increase. Business premium levels are significantly influenced by large transactions and reporting practices of ceding companies and therefore fluctuate from period to period. The U.S. operations net premiums in the first six months of 1998 increased 26.4% to $355.2 million from the same period in prior year. This was attributed to premium growth on the existing block of business combined with strong new business premium for blocks of business added since the second quarter of 1997. 23 24 Net premiums in the Canadian operations in the first six months of 1998 increased 35.8% to $49.4 million in 1998. New business premiums decreased $1.2 million, while renewal premiums increased $14.2 million compared to the first six months of 1997. Several of the treaties produced in December 1997 related to in force blocks of business with large renewal premiums. The first year premium decline was primarily the result of unusually strong new business production in December 1996, which increased the first year premiums for the first six months of 1997. The Company's other international operations reported premiums of $76.4 million for the first six months of 1998 compared to $53.0 million for the same period in 1997. The 1998 premiums represented approximately $51.0 million from Latin America, of which approximately $25.6 million was direct premium generated in Argentina and Chile. Latin American premiums grew 34.7%, which resulted from continued growth in direct universal life business in Argentina as well as reinsurance on privatized pensions in Argentina. Direct premiums from Chilean single premium annuities decreased from prior year due to less favorable market conditions in Chile during 1998. The Asia Pacific operations and other markets generated $25.5 million of premiums, an increase of 57.2% compared to the first six months of 1997, predominantly from the Hong Kong contact office and subsidiary in Australia. Accident and health operations net premiums increased 79.0% to $65.5 million in the first six months of 1998. The increase resulted from premiums on new contracts initiated and the renewal of existing contracts in the second half of 1997. The Company estimates that 1998 accident and health premiums compared to 1997 premiums may increase in 1998 as a result of the contracts executed immediately prior to the decision to exit the market. Net Investment Income. Consolidated net investment income increased 54.7% to $135.9 million, in the first six months of 1998 from the same period in 1997. The cost basis of fixed maturity securities increased $1.3 billion from June 30, 1997. The increase in invested assets was a result of an increase in operating cash flows, reinsurance transactions involving deposits for asset-intensive products from ceding companies, primarily stable value product deposits, and the proceeds from the Company's issuance of non-voting common shares. The average earned yield on the consolidated investment portfolio decreased to 7.03% for the six months ending June 30, 1998 compared to 7.26% for the same period in 1997. This decrease in overall yield reflected the increase in assets supporting the stable value reinsurance product that are generally of a shorter duration and carry a lower average yield. This decrease in yield was also impacted by the overall decrease in interest rates. Earnings credited and paid to ceding companies are included in interest credited. Realized Investment Gains, Net. Consolidated net realized investment gains increased $1.8 million to $2.7 million in the first six months of 1998 from $0.9 million for the same period in the prior year. Net realized investment gains resulted from normal activity within the Company's investment portfolios. 24 25 Other Revenue. Consolidated other revenue increased $1.7 million in the first six months of 1998 to $10.7 million. Other revenue includes items such as profit and risk fees associated with financial reinsurance, treaty recapture fees as well as earnings in unconsolidated subsidiaries, management fee income, and other miscellaneous income. During 1998, financial reinsurance treaties in the U.S. operations resulted in $6.5 million in financial reinsurance fees which were partially offset by $5.9 million of fees paid to retrocessionaires, included in policy acquisition costs and other insurance expenses. The Asia Pacific operations completed a financial reinsurance transaction that resulted in $1.8 million in financial reinsurance fee revenue through the first six months of 1998 that was partially offset by fees paid to retrocessionaires. Other revenue also included $1.2 million and $0.7 million in earnings in unconsolidated subsidiaries for the first six months of 1998 and 1997, respectively. Claims and Other Policy Benefits. Consolidated claims and other policy benefits increased 41.8% to $430.1 million, in the first six months of 1998. For the first six months of 1998, total claims and other policy benefits represented 78.7% of total net premiums compared to 74.5% for the same period in 1997. The Company expects mortality to fluctuate somewhat from period to period but believes it is fairly constant over longer periods of time. The Company continues to monitor mortality trends to determine the appropriateness of reserve levels. U.S. operations claims and other policy benefits increased 34.2% in the first six months of 1998, primarily as a result of increases from new business production and higher claims experience compared to the same period in 1997. Claims and other policy benefits as a percentage of net premiums for traditional reinsurance increased to 77.0% in the first six months of 1998 from 72.7% in the same period in 1997. This fluctuation was primarily due to reserves established for new and renewal blocks of business as well as the timing of claims reported. Also, the percentage is affected by the timing of premium receipts. Canadian operations claims and other policy benefits increased 56.4% in the first six months of 1998. Claims and other policy benefits as a percentage of net premiums increased to 89.8%, or $44.3 million, in the first six months of 1998 from 78.0% in the same period in 1997. The increase as a percent of premiums was primarily due to the in force blocks added at the end of 1997. The claims and other policy benefits of the other international business in the first six months of 1998 increased 44.0% from the same period in the prior year. Claims and other policy benefits as a percentage of net premiums was 83.8% for the first six months of 1998 and was comparable to the same period in 1997. Accident and health operations claims and other policy benefits increased 83.4% in the first six months of 1998 from the same period in the prior year. The claims and other policy benefits for the first six months of 1997 do not include the $18.0 million, or $10.4 million after-tax, accident and health pool charge taken during the first quarter of 1997, which is separately disclosed on the income statement. As a percentage of net premiums, claims and other policy benefits increased to 70.6% in the first six months of 1998 from 69.0% in the same period of 1997. The accident 25 26 and health operations reserves are subject to volatility due to the nature of risk covered which is primarily accident risk. Reserves are calculated based upon current information including industry estimates for certain aviation accidents. Interest credited. Consolidated interest credited increased $30.8 million in the first six months of 1998 to $72.4 million. Interest credited represents amounts credited on the Company's asset-intensive and universal life type products, including stable value operations, bank-owned life insurance and annuity products. The increase in interest credited was primarily a result of an increase of approximately $0.7 billion in deposits related to asset-intensive reinsurance since June 30, 1997. Policy Acquisition Costs and Other Insurance Expenses. Consolidated policy acquisition costs and other insurance expenses, consisting primarily of allowances, increased 18.2%, to $104.4 million in the first six months of 1998. As a percentage of net premiums, consolidated policy acquisition costs and other insurance expenses decreased to 19.1% in the first six months of 1998 from 21.7% during the same period in 1997. This resulted from a change in business mix from coinsurance to yearly renewable term reinsurance and the addition of larger blocks of business that do not have significant allowances associated with the business. Generally, policy acquisition costs and other insurance expenses fluctuate with business volume and changes in product mix from period to period. Within the U.S. operations, policy acquisition costs and other insurance expenses as a percentage of net premiums for traditional business decreased to 17.1% in the first six months of 1998 from 18.6% during the same period in 1997. This was due primarily to new business added during 1998 which was primarily yearly renewable term reinsurance that did not have a high level of commissions associated with the premiums. The financial reinsurance business within the U.S. operations reflects fees of approximately $5.9 million paid to retrocessionaires during 1998, which represented a partial offset to the fees collected that were reflected as other revenues. In the Canadian operations, policy acquisition costs and other insurance expenses as a percentage of net premiums decreased to 11.1% in the first six months of 1998, from 18.0% during the same period in 1997. The decrease was primarily due to the decrease in commission costs associated with large blocks of business added at the end of 1997 as well as the shift in reinsurance method to yearly renewable term business. Other international operations policy acquisition cost and other insurance expenses as a percentage of net premiums decreased to 14.6% in the first six months of 1998 from 17.3% during the same period in 1997. These percentages fluctuate due to the timing of client company reporting and variations in the mixture of business being written within the Latin American and Asia Pacific operations. In addition, the financial reinsurance business within the Asia Pacific operations reflects fees of approximately $0.9 million paid to retrocessionaires during the first six months of 1998, which represented a partial offset to the fees collected that were reflected as other revenues. 26 27 Accident and health segment policy acquisition costs and other insurance expenses as a percentage of net premiums decreased to 28.4% in the first six months of 1998 from 34.4% during the same period in 1997, resulting from changes in the mixture of business within the accident and health operations. Other Operating Expenses. Consolidated other operating expenses increased $6.8 million for the first six months of 1998 compared to the same period in 1997. The overall increase in operating expenses was attributed to planned increases associated with the ongoing growth of the Company. Interest Expense. Consolidated interest expense for the first six months of 1998 and 1997 was $4.2 million and $3.9 million, respectively. Interest related to the 7 1/4% Senior Notes was $3.7 million in the first six months of 1998 and 1997, respectively. Provision for Income Taxes. Consolidated income tax expense increased $11.0 million in the first six months of 1998 as a result of higher pre-tax income. Income tax expense from operations before net realized investment gains and accident and health pool charge represented approximately 36.0% and 36.5% of pre-tax income for the first six months of 1998 and 1997, respectively. The Company calculated a tax benefit of $7.6 million on the $18.0 million accident and health reserve adjustment recorded in the first quarter of 1997. LIQUIDITY AND CAPITAL RESOURCES During the first six months of 1998, the Company generated cash of $70.8 million from operating activities, $221.8 million from the non-voting common stock offering in June 1998, and $483.3 million from deposits related to asset-intensive business. These increases were offset by cash used for investing of $784.8 million and dividends to stockholders of $3.0 million. The sources of funds of the operating subsidiaries of Reinsurance Group of America, Incorporated (RGA) consist of premiums received from ceding insurers, investment income, and proceeds from sales and redemption of investments. Premiums are generally received in advance of related claim payments. Funds are primarily applied to policy claims and benefits, operating expenses, income taxes, and investment purchases. As RGA continues its expansion efforts, management continually analyzes capital adequacy issues. At RGA's annual stockholders' meeting on May 27, 1998, a new class of non-voting common stock was authorized. In June, the Company completed a public offering in which it raised approximately $221.8 million. The Company will use the net proceeds for general corporate purposes. In addition, the Company has access to a $25.0 million line of credit. During the first six months of 1998, $15.0 million was drawn upon that line. This liability is included in other liabilities on the balance sheet at June 30, 1998. The ability of RGA and Australian Holdings to make principal and interest payments, and to continue to pay dividends to stockholders, is ultimately dependent on the earnings and surplus of RGA's subsidiaries, the investment earnings on 27 28 the undeployed funds at RGA, and the Company's ability to raise additional capital. The transfer of funds from the subsidiaries to RGA is subject to applicable insurance laws and regulations. Any future increases in liquidity needs due to relatively large policy loans or unanticipated material claim levels would be met first by operating cash flows and then by selling fixed-income securities or short-term investments. INVESTMENTS Invested assets increased 22.2%, to $4.4 billion at June 30, 1998, compared to $3.6 billion at December 31, 1997. The increase resulted from cash deposits for asset-intensive products of $0.5 billion for the first six months of 1998, proceeds from the issuance of non-voting common shares of $221.8 million, and positive operating cash flows. These increases were enhanced by an increase in the fair value adjustment of fixed maturities available for sale of $13.8 million. The Company has historically generated positive cash flows from operations, and expects this to continue in the future. At June 30, 1998, the Company's portfolio of fixed maturity securities available for sale had net unrealized gains before tax of $125.7 million. YEAR 2000 Many of the Company's data processing systems require modifications to enable them to process dates including the year 2000 and beyond. The Company has established a plan to address the Year 2000 issue and that work is progressing on schedule. The Company also relies on information from external parties such as ceding companies and retrocessionaires. The Company could be adversely affected by those companies' compliance efforts, if any, with the Year 2000 issue over which the Company has no direct control. The Company is currently working with its clients to identify their Year 2000 compliance positions and will follow-up with clients on potential interface problems. It is anticipated that testing and resolution will be completed according to the Company's plan. During the years of 1998 and 1999, the Company expects to direct certain internal and external resources to the Year 2000 effort. The Company does not believe the net effect of these efforts will materially affect the Company's consolidated financial statements during the 1998 and 1999 period. 28 29 CAUTIONARY STATEMENT Certain statements contained in this filing are or may be deemed to be "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements relating to the Company's financial position, growth prospects and targets, industry trends, trends in or expectations regarding operations and capital commitments, the sufficiency of claims reserves, estimated premium levels in the accident and health operations, and Year 2000 compliance. Because such statements are based on management's current views and assumptions, they are subject to risks and uncertainties. Numerous factors could cause actual results and events to differ materially from those expressed or implied by forward-looking statements (the "Cautionary Statements"), including, without limitation, (i) general economic conditions affecting the demand for insurance and reinsurance in the Company's current and planned markets, (ii) material changes in mortality and claims experience, (iii) competitive factors and competitors' responses to the Company's initiatives, (iv) successful execution of the Company's entry into new markets, (v) successful development and introduction of new products, (vi) the stability of governments and economies in foreign markets, (vii) fluctuations in U.S. and foreign interest rates and securities and real estate markets, (viii) the success of the Company's clients, including General American and its affiliates, and (ix) changes in laws, regulations, and accounting standards applicable to the Company and its subsidiaries. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. Readers are therefore cautioned not to place undue reliance on such forward-looking statements. PART II - OTHER INFORMATION - - --------------------------- ITEM 1 LEGAL PROCEEDINGS From time to time, the Company is subject to litigation and arbitration related to its reinsurance business and to employment-related matters in the normal course of its business. Management does not believe that the Company is a party to any such pending litigation or arbitration that would have a material adverse effect on its future operations. 29 30 ITEM 5 OTHER INFORMATION The Securities Exchange Act Rule 14a-8 permits shareholders to submit proposals to be included in the Company's proxy statement for the annual meeting of the shareholders. The Company must consider including a proposal in the proxy statement if the Company receives notice of the proposal at least 120 days prior to the corresponding date of the Company's proxy statement for the previous year's annual meeting. Shareholder proposals submitted outside the processes of Rule 14a-8 must be submitted to the Company by March 15, 1999. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) See index to exhibits. (b) No reports on Form 8-K were filed during the three months ended June 30, 1998. 30 31 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Reinsurance Group of America, Incorporated By: /s/ A. Greig Woodring 8/11/98 ------------------------------------ A. Greig Woodring President & Chief Executive Officer (Principal Executive Officer) /s/ Jack B. Lay 8/11/98 ------------------------------------ Jack B. Lay Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) 31 32 INDEX TO EXHIBITS
Exhibit Number Description - - ------- ----------- 3.1 Restated Articles of Incorporation of RGA incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-1 (No. 33-58960) filed on March 2, 1993 3.2 Bylaws of RGA incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-1 (No. 33-58960) filed on March 2, 1993 3.3 Form of Certificate of Designations for Series A Junior Participating Preferred Stock incorporated by reference to Exhibit 3.3 to Amendment No. 1 to Registration Statement on Form S-1 (No. 33-58960) filed on April 14, 1993 27.1 Financial Data Schedule
32 EX-27.1 2
7 This schedule contains summary financial information extracted from the condensed consolidated financial statements of the registrant and is qualified in its entirety by reference to such financial statements 0000898174 REINSURANCE GROUP OF AMERICA 1,000 U.S. DOLLAR 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 3,218,245 0 0 11,541 214,076 1,633 4,366,545 26,714 323,456 326,411 5,537,108 3,821,556 0 384,530 0 108,052 0 0 310 760,431 5,537,108 546,513 135,904 2,719 10,655 502,427 36,065 68,297 55,237 19,797 35,440 0 0 0 35,127 1.35 1.34 0 0 0 0 0 0 0
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