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, 1996
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
------- -------
COMMON STOCK OUTSTANDING ($.01 PAR VALUE) AS OF JULY 31, 1996:
16,829,796 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, 1996 and December 31, 1995 3
Condensed Consolidated Statements
of Income (Unaudited)
Three months and six months ended June 30, 1996 and 1995 4
Condensed Consolidated Statements
of Cash Flows (Unaudited)
Six months ended June 30, 1996 and 1995 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-17
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 18
4 Submission of Matters to a Vote of Security Holders 18-19
6 Exhibits and Reports on Form 8-K 19
Signatures 20
Index to Exhibits 21
2
3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1996 1995
------------- -------------
(Dollars in thousands)
Assets
Fixed maturity securities
Available for sale-at fair value (amortized cost of $1,350,188 and
$834,314 at June 30, 1996 and December 31, 1995, respectively) $ 1,361,925 $ 887,457
Policy loans 379,026 346,942
Funds withheld at interest 125,494 101,841
Short-term investments 47,286 66,161
Other invested assets 3,913 3,112
------------- -------------
Total investments 1,917,644 1,405,513
Cash and cash equivalents 14,692 18,258
Accrued investment income 32,212 17,657
Premiums receivable 83,848 84,731
Funds withheld 30,629 28,644
Reinsurance ceded receivables 69,522 64,076
Deferred policy acquisition costs 203,335 186,813
Other reinsurance balances 118,835 158,967
Other assets 27,768 25,275
------------- -------------
Total assets $ 2,498,485 $ 1,989,934
============= =============
Liabilities and Stockholders' Equity
Future policy benefits $ 676,723 $ 601,674
Interest sensitive contract liabilities 894,964 598,935
Other policy claims and benefits 208,749 207,673
Other reinsurance balances 115,979 105,178
Deferred income taxes 53,908 61,169
Other liabilities 64,127 30,495
Long-term debt 104,496 -
------------- -------------
Total liabilities 2,118,946 1,605,124
Minority interest 6,977 7,881
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; 50,000,000 shares authorized,
17,366,250 shares issued) 174 174
Additional paid in capital 263,169 263,169
Currency translation adjustments (3,760) (3,736)
Unrealized appreciation of securities, net of taxes 6,821 33,010
Retained earnings 119,443 97,802
------------- -------------
Total stockholders' equity before treasury stock 385,847 390,419
Less treasury shares held of 536,454 and 544,354 at cost at June 30,
1996 and December 31, 1995, respectively (13,285) (13,490)
------------- -------------
Total stockholders' equity 372,562 376,929
------------- -------------
Total liabilities and stockholders' equity $ 2,498,485 $ 1,989,934
============= =============
See accompanying notes to condensed consolidated financial statements.
3
4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------- ----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(Dollars in thousands, except per share data)
Revenues:
Net premiums $163,423 $128,702 $331,315 $268,291
Investment income, net of related expenses 33,050 22,200 60,925 42,924
Realized investment gains, net 1,233 96 1,795 229
Other revenue 3,785 201 7,878 264
---------- ---------- ---------- ----------
Total revenues 201,491 151,199 401,913 311,708
Benefits and expenses:
Claims and other policy benefits 137,567 104,716 281,252 225,296
Policy acquisition costs and other insurance expenses 30,621 21,030 61,046 39,859
Other operating expenses 9,747 7,296 18,740 13,849
Interest expense 1,948 - 2,239 -
---------- ---------- ---------- ----------
Total benefits and expenses 179,883 133,042 363,277 279,004
---------- ---------- ---------- ----------
Income before income taxes and minority interest 21,608 18,157 38,636 32,704
Provision for income taxes 7,998 6,695 14,247 12,082
---------- ---------- ---------- ----------
Income before minority interest 13,610 11,462 24,389 20,622
Minority interest in earnings of consolidated subsidiaries (150) 88 (393) (184)
---------- ---------- ---------- ----------
Net income $ 13,460 $ 11,550 $ 23,996 $ 20,438
========== ========== ========== ==========
Earnings per common and common equivalent share $ 0.79 $ 0.69 $ 1.41 $ 1.21
========== ========== ========== ==========
Weighted average number of common and common equivalent
shares outstanding (in thousands) 17,004 16,828 16,994 16,848
========== ========== ========== ==========
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,
-----------------------------------
1996 1995
----------- -----------
(Dollars in thousands)
Operating Activities:
Net income $ 23,996 $ 20,438
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (14,557) (10,771)
Premiums receivable 873 (1,912)
Deferred policy acquisition costs (16,646) (14,130)
Funds withheld (1,985) (807)
Reinsurance ceded balances (5,485) (8,373)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 148,625 137,380
Deferred income taxes 7,976 3,069
Other assets and other liabilities 32,479 (14,026)
Amortization of goodwill and value of business acquired 565 230
Amortization of net investment discounts (5,923) (2,961)
Realized investment gains, net (1,795) (229)
Other, net 381 255
----------- -----------
Net cash provided by operating activities 168,504 108,163
Investing Activities:
Sales of fixed maturity securities:
Available for sale 93,514 60,657
Maturities of fixed maturity securites:
Held to maturity - 4,427
Available for sale 50,786 13,801
Purchases of fixed maturity securities:
Held to maturity - (3,068)
Available for sale (654,063) (148,124)
Cash invested in:
Policy loans (32,084) (5,122)
Funds withheld at interest (23,653) (18,787)
Principal payments on:
Policy loans - 1,087
Change in short-term and other invested assets 17,933 (14,164)
Investment in joint venture and purchase of subsidiary stock (3,207) (3,366)
----------- -----------
Net cash used in investing activities (550,774) (112,659)
Financing activities:
Dividends to stockholders (2,355) (2,021)
Purchase of treasury stock - (2,422)
Reissuance of treasury stock 205 156
Minority interest in earnings 393 184
Excess deposits on universal life and other investment type
policies and contracts 276,012 222
Proceeds from long-term debt issuance 104,335 -
----------- -----------
Net cash provided by financing activities 378,590 (3,881)
Effect of exchange rate changes 114 175
----------- -----------
Change in cash and cash equivalents (3,566) (8,202)
Cash and cash equivalents, beginning of period 18,258 11,496
----------- -----------
Cash and cash equivalents, end of period $ 14,692 $ 3,294
----------- -----------
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, 1996
(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, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. 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, 1995.
2. EARNINGS PER SHARE
Earnings per share was computed by dividing net income by the weighted
average number of common shares and common stock equivalents outstanding
during the period. Outstanding employee stock options, which are
reflected as common stock equivalents using the treasury stock method,
have been considered in net earnings per share calculations.
3. SIGNIFICANT TRANSACTIONS
On March 22, 1996, Reinsurance Group of America, Incorporated completed
the sale of $100,000,000 of 7-1/4 % Senior Notes in accordance with Rule
144A of the Securities Act of 1933, as amended. Interest is payable
semiannually on April 1 and October 1 with the principal amount due
April 1, 2006.
In June 1996, Reinsurance Group of America, Incorporated (RGA) purchased
the remaining 275,000 shares of Manantial Seguros de Vida S.A.
(Manantial) for $4.5 million.
6
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995
- - -----------------------------------------
RESULTS OF OPERATIONS
Net Premiums. Net premiums increased $34.7 million, or 27.0%, to
$163.4 million in the second quarter of 1996 compared to $128.7 million for
the same period in 1995.
Premiums by major segment were as follows (in millions):
Change
----------------
1996 1995 Dollars Percent
---- ---- ------- -------
U.S. ordinary life $122.9 90.9 32 35.2
Canadian ordinary life 15.6 12.2 3.4 27.9
Accident and health 11.4 13.5 (2.1) (15.6)
Other international 13.5 12.1 1.4 11.6
------ ----- ----
Totals $163.4 128.7 34.7 27
====== ===== ==== ====
In the U.S. ordinary life segment, $16.2 million of the premium increase
related to new business which fluctuates from quarter to quarter due to the
timing of production and normal reporting lags experienced from client
companies. A significant portion of the increase in new business premium is
attributed to business obtained in 1995 from the reinsurance transaction with
ITT Lyndon Life, which was effective July 1, 1995. The impact of the
original business reinsured by this transaction on quarter to quarter trends
will diminish going forward. Renewal premiums in the U.S. ordinary life
segment increased $15.7 million, or 19.0%, to $98.5 million in the second
quarter of 1996 compared to the same period in 1995. Growth in the core
traditional reinsurance blocks of $13.6 million, or 15.8%, contributed to
this increase.
On an original currency basis, Canadian ordinary life premiums increased $4.5
million, or 26.8%. The overall increase consisted of $5.5 million in renewal
premiums which was offset by a decline in new business premium of $1.0
million. The increase in renewal premiums was a result of incremental
increases in renewal premium rates, while new business premium continued to
fluctuate due to normal reporting lags experienced by client companies and
the timing of production. The effect of the changes in foreign exchange
rates during the second quarter of 1996 compared to the same period of 1995
was not material.
7
8
Accident and health premiums decreased $2.1 million, or 15.6%. The decrease
was primarily due to the timing of statements received from client companies
and the Company's decision to remain selective in the opportunities that it
pursues. Overall, the accident and health segment provides the Company the
ability to offer a more complete core of services to domestic and
international clients.
The Company's other international business premiums increased $1.4 million,
or 11.6%. Premiums from the South American operations increased $0.9
million. Premium in the current year was largely derived from the Company's
Chilean venture, where the single premium immediate annuity business
continues to grow. The growth was partially offset by a change in the terms
for the mortality risk reinsurance assumed from Argentina. In the Asia
Pacific operations, premiums increased $0.5 million resulting from the growth
in the base of business from the prior year.
Investment Income, Net. Investment income, net of investment expenses,
increased $10.9 million, or 49.1%, to $33.1 million in the second quarter of
1996 from $22.2 million for the same period in 1995. The cost basis of
invested assets increased $649.3 million from June 30, 1995, to June 30,
1996. The increase in invested assets was a result of an increase in
operating cash flows, net proceeds of $99.0 million from the 7-1/4% Senior
Notes issued by Reinsurance Group of America, Incorporated, and reinsurance
transactions involving variable guaranteed interest contracts (VGIC) deposits
from ceding companies of $279.3 million and $112.5 million during 1996 and
the second half of 1995, respectively. The average yield earned on the
consolidated investment portfolio was 7.12% for the second quarter of 1996
compared to 7.71% for the same period in 1995. The decrease in overall yield
was a result of the assets in the VGIC portfolio that carry a lower average
yield which are of a shorter duration and are matched with the shorter
duration VGIC liabilities. The VGIC asset portfolio generated $5.6 million
of investment income for the second quarter of 1996, which was largely offset
by earnings credited to ceding companies included in claims and other policy
benefits.
Realized Investment Gains, Net. In the second quarter of 1996, the
Company reported net realized investment gains of $1.2 million compared to
$0.1 million for the prior year's period. This was primarily the result of
repositioning the Company's Canadian operation portfolio to achieve a better
duration match for the assets and liabilities.
Other Revenue. Other revenue increased $3.6 million in the second
quarter of 1996 compared to the same period in 1995. Other revenue included
items such as fees associated with financial reinsurance, as well as
management fee income and miscellaneous income related to late premium
payments. The increase was primarily attributed to the assumption of certain
financial reinsurance treaties that resulted in $3.3 million in financial
reinsurance fees. This increase was partially offset by fees paid to
retrocessionaires of $2.8 million included in other insurance expenses.
Claims and Other Policy Benefits. Claims and other policy benefits
increased $32.9 million, or 31.4%, to $137.6 million in the second quarter of
1996 compared to $104.7 million for the same period in 1995.
8
9
Claims and other policy benefits by major segment were as follows (in
millions):
Change
------------------
1996 1995 Dollars Percent
---- ---- ------- -------
U.S. ordinary life $ 107.2 75.2 32 42.6
Canadian ordinary life 11.6 10.1 1.5 14.9
Accident and health 8 8.9 (0.9) (10.1)
Other international 10.8 10.5 0.3 0.3
------- ----- ----
Totals $ 137.6 104.7 32.9 31.4
======= ===== ==== ====
The increase in claims and other policy benefits in the U.S. ordinary life
segment was partially a result of the growth in the overall volume of
business and amount of insurance at risk. Also, interest paid on the VGIC
liabilities increased claims and other policy benefits by $5.2 million in the
second quarter of 1996. The U.S. ordinary life segment experienced mortality
results which were slightly higher than expected during the second quarter of
1996. The Company expects actual mortality experience to fluctuate from
period to period, but believes it is fairly constant over longer periods of
time. The Company believes that the slightly higher than expected mortality
is not attributable to any specific block of business, with the average size
claim remaining comparable to the prior period.
On an original currency basis, Canadian claims and other policy benefits
increased $1.8 million when compared to the same period in 1995. For the
Canadian segment, the increase over the prior year was affected by an
increase in the reserve levels due to the overall increase in the amount at
risk and the aging of the existing blocks of business. The effect of the
changes in foreign exchange rates during the second quarter of 1996 compared
to the same period of 1995 was not material.
Policy Acquisition Costs and Other Insurance Expenses. Policy
acquisition costs and other insurance expenses totaled $30.6 million, or
18.7% of net premiums for the quarter. This compared to insurance expenses
of $21.0 million, or 16.3% of net premiums for the second quarter 1995.
9
10
Policy acquisition costs and other insurance expenses by major segment were
as follows (in millions):
Change
----------------
1996 1995 Dollars Percent
---- ---- ------- -------
U.S. ordinary life $ 21.9 14 7.9 56.4
Canadian ordinary life 2.7 2.6 0.1 3.8
Accident and health 4.2 4.1 0.1 2.4
Other international 1.8 0.3 1.5 500.0
------ ---- ---
Totals $ 30.6 21.0 9.6 45.7
====== ==== === =====
In the U.S. ordinary life segment, policy acquisition costs and other
insurance expenses increased as a percent of net premium to approximately
17.8% for the second quarter of 1996 compared to 17.2% for the entire year of
1995. The increase in the U.S. ordinary life segment resulted primarily from
the financial reinsurance business which the Company obtained effective July
1, 1995, coupled with an overall increase in the amount at risk. Most of the
financial reinsurance business assumed by the Company was retroceded to other
reinsurers. The cost of these retrocessions is included in policy
acquisition costs and other insurance expenses and represents an offset to
surplus relief fees included in other income.
The increase in the other international segment was attributed to a shift in
the mix of business compared with the prior year. This business was
primarily mortality risk reinsurance in the second quarter of 1995 versus
single premium immediate annuity business in 1996. Single premium immediate
annuity business includes a more traditional acquisition and insurance
expense margin.
Overall, policy acquisition costs and other insurance expenses continue to
fluctuate with business volume and changes in product mix from period to
period.
Other Operating Expenses. Other operating expenses increased $2.4
million, or 32.9%, to $9.7 million for the second quarter in 1996 compared to
$7.3 million for the same period in 1995. Expenses of the U.S. operations
increased $1.0 million while expenses of the Canadian operations increased
$0.2 million. In addition, the other international business operating
expenses increased $1.2 million which represented operating costs in South
America and Asia Pacific, as well as additional home office support staff for
these operations. The increase in other expenses was primarily the result of
planned activities associated with pursuing new business opportunities
domestically and expansion efforts internationally.
10
11
Interest Expense. Interest expense during the second quarter of 1996
related to the issuance of $100.0 million (principal amount) of 7-1/4% Senior
Notes by Reinsurance Group of America, Incorporated on March 22, 1996, and
the financing of a portion of the Company's investment in RGA Australian
Holdings PTY, Limited, the Company's Australian reinsurance operations.
Interest cost was $1.9 million for the second quarter of 1996 with $1.8
million related to the Senior Notes.
Provision for Income Taxes. Income tax expense represented
approximately 37.0% of pre-tax income, compared to 36.9% for the second
quarter of 1995. The effective tax rate of 37.0% represents the Company's
expected annual effective tax rate.
Net Income. Net income increased $1.9 million, or 16.5%, to $13.5
million in the second quarter of 1996, from $11.6 million in the same period
of 1995. Earnings before realized capital gains and losses increased $1.3
million, or 11.6%, to $12.8 million for the second quarter of 1996 from $11.5
million for the same period of 1995.
The U.S. ordinary life segment's net income increased $1.2 million, or 12.2%
for the second quarter of 1996 compared to the same period in 1995. Strong
premium growth was offset by mortality experience that was slightly higher
than expected. The Canadian ordinary life segment's net income increased
$2.5 million, to $3.1 million for the second quarter of 1996 from $0.6
million for the same period of 1995. During the second quarter of 1996, the
Canadian segment realized $1.3 million of investment gains, after provision
for income taxes, from repositioning the portfolio in order to retain
appropriate duration matching on assets and liabilities. For the second
quarter of 1996, the Canadian segment results are attributed to strong
premium growth and lower than expected mortality levels.
The accident and health segment reported a net loss of $0.6 million for the
second quarter of 1996 compared to net income of $0.2 million for the same
period of 1995. The loss in the second quarter of 1996 was from several
closed blocks of business on which additional reserves were established to
match current estimates of potential exposure.
The other international segment reported a net loss of $0.5 million for the
second quarter of 1996 compared to a gain of $0.5 million for the same period
of 1995. The loss in the second quarter of 1996 resulted from continuing
investments associated with expansion opportunities and changes in product
mix within the South American markets.
Six Months Ended June 30, 1996 and 1995
- - ---------------------------------------
RESULTS OF OPERATIONS
Net Premiums. Net premiums increased $63.0 million, or 23.5%, to
$331.3 million for the first half of 1996 compared to $268.3 million for the
same period of 1995.
11
12
Premiums by major segment were as follows (in millions):
Change
-----------------
1996 1995 Dollars Percent
---- ---- ------- -------
U.S. ordinary life $ 249.3 194.2 55.1 28.4
Canadian ordinary life 28.9 22.9 6.0 26.2
Accident and health 25.7 25.1 0.6 2.4
Other international 27.4 26.1 1.3 5.0
------- ----- ----
Totals $ 331.3 268.3 63.0 23.5
======= ===== ==== ====
In the first half of 1996, U.S. ordinary life premiums increased by 28.4%
over the same period in 1995. The increase was attributed to new business
production, renewal premium increases from existing blocks of business,
revisions of existing treaties, and the continuing impact of past production.
A significant portion of the increase was attributed to new business
production, which includes the business obtained in the ITT Lyndon
transaction that was effective July 1, 1995. The impact of the original
business reinsured by this transaction on period to period trends will
diminish going forward. In addition, growth in credit life premiums of $4.2
million over 1995 contributed to the overall increase in premiums.
On an original currency basis, Canadian ordinary life premiums increased $7.7
million, or 24.3%. Renewal premiums increased $8.9 million, or 36.6%, over
the comparable prior year period, while first year premiums decreased $1.2
million, or 15.4%. The increase in renewal premium was a result of the
incremental increases in renewal premium rates, while new business premium
continued to fluctuate due to normal reporting lags experienced by client
companies and the timing of production. The effect of the changes in foreign
exchange rates during the first half of 1996 compared to the same period of
1995 was not material.
The accident and health premium level was consistent with the premium level
in the comparable 1995 period. This reflected the Company's decision to
remain selective in the opportunities it pursues. Overall, the accident and
health segment provides the Company the ability to offer a more complete core
of services to domestic and international clients.
12
13
The Company's other international business contributed to the increase in
premiums with $20.2 million in premiums from South America and $7.2 million
from Asia Pacific. The premiums from South America generally represent
results from the Company's joint ventures. The premiums from Asia Pacific
increased as a result of the growth in the base of business from the prior
year.
Investment Income, Net. Investment income, net of investment expenses,
increased $18.0 million, or 42.0%, to $60.9 million in the first half of 1996
compared to $42.9 million for the same period in 1995. The cost basis of
invested assets increased $649.3 million from June 30, 1995, to June 30,
1996. The increase in invested assets was a result of an increase in
operating cash flows, net proceeds of $99.0 million from the 7-1/4% Senior
Notes issued by the Company, and reinsurance transactions involving VGIC
deposits from ceding companies of $279.3 million and $112.5 million during
1996 and the second half of 1995, respectively. The average yield earned was
7.31% for 1996 compared with 7.64% earned in the same period of 1995. The
decrease in overall yield was a result of the assets in the VGIC portfolio
that carry a lower average yield which are of a shorter duration and are
matched with the shorter duration VGIC liabilities. The VGIC asset portfolio
generated $8.2 million of investment income during the first half of 1996,
which was largely offset by earnings credited to ceding companies included in
claims and other policy benefits.
Realized Investment Gains, Net. Realized investment gains increased
$1.6 million to $1.8 million in the first half of 1996 compared to $0.2
million in the same period of 1995. This was primarily the result of
repositioning the Company's Canadian operation portfolio to achieve a better
duration match for the assets and liabilities.
Other Revenue. Other revenue increased $7.6 million to $7.9 million in
the first half of 1996 compared to $0.3 million for the same period in 1995.
This increase was primarily attributed to fee income for the assumption of
certain financial reinsurance treaties resulting in an additional $6.8
million in financial reinsurance fees. This increase was partially offset by
fees paid to retrocessionaires of $5.8 million included in other insurance
expenses.
Claims and Other Policy Benefits. Claims and other policy benefits
increased $56.0 million, or 24.9%, to $281.3 million in the first half of
1996 compared to $225.3 million for the same period in 1995.
13
14
Claims and other policy benefits by major segment were as follows (in
millions):
Change
-----------------
1996 1995 Dollars Percent
---- ---- ------- -------
U.S. ordinary life $ 216.3 169.6 46.7 27.5
Canadian ordinary life 23.7 17.4 6.3 36.2
Accident and health 19.3 17.4 1.9 10.9
Other international 22.0 20.9 1.1 5.3
------- ----- ----
Totals $ 281.3 225.3 56.0 24.9
======= ===== ==== ====
For the first half of 1996, the increase in claims and other policy benefits
in the U.S. ordinary life segment was the result of increased business levels
over the comparable prior year period, interest paid for the VGIC product of
$7.6 million, and less favorable mortality than that experienced in the same
period in 1995. The Company expects mortality to fluctuate from period to
period, but believes it is fairly constant over longer periods of time. The
Company believes that the slightly higher than expected mortality is not
attributable to any specific block of business, with the average size claim
remaining comparable to the prior period.
On an original currency basis, Canadian claims and other policy benefits
increased $8.3 million when compared to the same period in 1996. In Canada,
the mortality results were slightly above the expected level for the first
half of 1996, while mortality was favorable during the first half of 1995.
The Company continues to monitor mortality trends to determine the
appropriateness of reserve and IBNR levels. Overall, the effect of the
changes in foreign exchange rates during the first half of 1996 compared to
the same period of 1995 was not material.
The accident and health segment increase related to the strengthening of
claim liabilities on several closed blocks of business. The other
international operations reported reserve increases related to the new
business being written and as a result of the change in product mix in the
South American operations.
Policy Acquisition Costs and Other Insurance Expenses. Policy
acquisition costs and other insurance expenses totalled $61.0 million, or
18.4% of net premium for the first half of 1996. This compared to 14.9% of
net premiums for the first half of 1995.
14
15
Policy acquisition costs and other insurance expenses by major segment were
as follows (in millions):
Change
-----------------
1996 1995 Dollars Percent
---- ---- ------- -------
U.S. ordinary life $ 44.6 27.2 17.4 64.0
Canadian ordinary life 4.6 4.5 0.1 2.2
Accident and health 7.9 7.1 0.8 11.3
Other International 3.9 1.1 2.8 254.5
------ ---- ----
Totals $ 61.0 39.9 21.1 52.9
====== ==== ==== =====
In the U.S. ordinary life segment, the increase as a percent of premium to
17.9% for the first half of 1996, from 14.0% for the first half of 1995, was
primarily a result of financial reinsurance transactions which were effective
July 1, 1995. Most of the financial reinsurance business assumed by the
Company was retroceded to other reinsurers. The cost of these retrocessions
is included in policy acquisition costs and other insurance expenses. The
Company's international activities have experienced a shift in the mix of
business compared with the prior year. This business was primarily mortality
risk reinsurance in the first half of 1995 versus the single premium
immediate annuity business received in 1996. Single premium immediate
annuity business includes a more traditional acquisition and insurance
expense margin.
Overall, policy acquisition costs and other insurance expenses continue to
fluctuate with business volume and changes in product mix from period to
period.
Other Operating Expenses. Other operating expenses increased $4.9
million, or 35.5%, to $18.7 million in 1996 compared to $13.8 million for the
same period in 1995. The 1996 and 1995 amounts represented approximately
4.4% and 4.1% of gross premium, respectively. The increase in other expenses
was primarily the result of costs associated with pursuing new business
opportunities domestically and expansion efforts internationally.
Interest Expense. Interest expense during 1996 related to the issuance
of $100.0 million (principal amount) of 7-1/4% Senior Notes by Reinsurance
Group of America, Incorporated on March 22, 1996, and the financing of a
portion of the Company's investment in RGA Australian Holdings PTY, Limited,
the Company's Australian reinsurance operations. Interest cost for the first
half of 1996 was $2.2 million with $2.0 million related to the Senior Notes.
15
16
Provision for Income Taxes. Income tax expense represented
approximately 36.9% of pre-tax income for the first half of 1996 and 1995.
The effective tax rate of 36.9% represents the Company's expected annual
effective tax rate.
Net Income. Net income increased $3.6 million, or 17.4%, to $24.0
million for the first half of 1996, from $20.4 million for the same period of
1995. Earnings before realized capital gains and losses increased $2.7
million, or 13.4%, to $23.0 million for the first half of 1995, from $20.3
million for the same period of 1995.
The U.S. ordinary life segment's net income increased $5.5. million, or
32.4%, for the first half of 1996 compared to the same period of 1995. This
increase is generally attributable to premium growth discussed above and the
impact of the reinsurance business obtained from the ITT Lyndon Life
transaction which was effective July 1, 1995. The Canadian ordinary life
segment's net income increased $1.5 million to $3.7 million for the first
half of 1996 from $2.2 million for the same period of 1995. The Canadian
segment realized $1.4 million and $(0.1) million of investment
gains/(losses), after provision for income taxes, for the first half of 1996
and 1995 respectively. The Canadian segment increase is a result of strong
growth in production and premiums, while mortality results were slightly
above the expected level for the first half of 1996.
The accident and health segment reported a net loss of $1.3 million for the
first half of 1996 compared to a net loss of $0.2 million for the first half
of 1995. The loss related to strengthening reserves on several closed
blocks of business, while premium levels were consistent between the two
periods.
The other international segment reported a net loss of $0.9 million for the
first half of 1996 compared to net income of $1.4 million for the same period
of 1995. The fluctuation between the periods is primarily attributable to
changes in product mix within the South American markets and continuing
investments associated with expansion opportunities.
LIQUIDITY AND CAPITAL RESOURCES
Invested assets increased by $512.1 million, or 36.4%, to $1,917.6
million at June 30, 1996, compared to $1,405.5 million at December 31, 1995.
The increase resulted from cash deposits on certain reinsurance transactions
of $278.8 million, net proceeds from a Senior Note offering of $99.0 million,
and positive operating cash flows. These increases were partially offset by
a decrease in the fair value adjustment of fixed maturities available for
sale of $41.4 million. The Company has historically generated positive cash
flows from operations, and expects to do so in the future.
At June 30, 1996, the Company's portfolio of fixed maturity securities
available for sale had net unrealized gains before tax of $11.7 million.
16
17
In addition, dividends to stockholders increased from $0.07 to $0.08
for stockholders of record on August 9, 1996, and payable August 30, 1996.
All future payments of dividends are at the discretion of the Company's Board
of Directors and will depend on the Company's earnings, capital requirements,
insurance regulatory conditions, operating conditions, and such other factors
as the Board of Directors may deem relevant. The amount of dividends that
the Company can pay will depend in part on the operations of its reinsurance
subsidiaries.
A program of repurchasing shares of stock in Reinsurance Group of
America, Incorporated was approved at a meeting of that company's Board of
Directors held on July 24, 1996. The program is intended to enable
Reinsurance Group of America, Incorporated to satisfy obligations under its
stock option program and to acquire larger blocks of stock. Purchases will
be made in the open market from time to time, at the then prevailing market
price, or through negotiated transactions.
The ability of the Company to make debt principal and interest payments
as well as dividend payments to shareholders is ultimately dependent on the
earnings and surplus of subsidiaries and the undeployed debt proceeds. The
transfer of funds from the insurance subsidiaries to Reinsurance Group of
America, Incorporated is subject to applicable insurance laws and
regulations.
17
18
PART II - OTHER INFORMATION
- - ---------------------------
ITEM 1
- - ------
Legal Proceedings
- - -----------------
From time to time, subsidiaries of Reinsurance Group of America, Incorporated
are subject to reinsurance-related litigation and arbitration in the normal
course of business. Management does not believe that any such pending
litigation or arbitration would have a material adverse effect on the
Company's future operations.
ITEM 4
- - ------
Submission of Matters to a Vote of Security Holders
- - ---------------------------------------------------
The annual meeting of stockholders was held in St. Louis, Missouri, on May
15, 1996. At the meeting the election of three incumbent directors was
submitted to the stockholders. Each director had been nominated for a three
year term. Proxies were solicited from stockholders, and the outcome of the
voting was as follows:
Broker
For Withheld Non-Votes
--- -------- ---------
J. Cliff Eason ............... 10,778,220 ............. 100 ................ 6,046,076
Leonard M. Rubenstein ........ 10,778,220 ............. 100 ................ 6,046,076
H. Edwin Trusheim ............ 10,778,220 ............. 100 ................ 6,046,076
There were no other nominees and all three incumbents were re-elected.
Continuing in office as directors of the Company are: Bernard A. Edison,
Dennis F. Hardcastle, Richard A. Liddy, William A. Peck, M.D., William P.
Stiritz, and A. Greig Woodring.
Proxies were solicited from the stockholders for approval of amendments to
the Flexible Stock Plan, the Executive Performance Share Plan, and the
Management Incentive Plan. The Flexible Stock Plan provides for the award of
benefits such as stock options to retain and reward employees and others.
Amendments to the Plan were proposed which would establish limits to the
number of stock options and stock appreciation rights which may be granted to
one individual in any one year and specify that the members of the committee
administering the Plan are outside directors as defined in the Internal
Revenue Code. The stockholders approved the amendments with 10,765,920
shares voting in favor, 12,300 shares opposed, 100 shares abstaining, and
6,046,076 broker non-votes.
18
19
The Executive Performance Share Plan provides for grants in the form of
performance shares to be credited to the accounts of certain officers and key
employees of the Company. An amendment was proposed specifying that the
members of the committee that selects participants in this plan be outside
directors as defined in the Internal Revenue Code. The stockholders approved
this amendment by a vote of 10,765,720 in favor, 12,300 shares opposed, 300
shares abstaining, and 6,046,076 broker non-votes.
The Management Incentive Plan provides for awards in the form of cash plus
performance shares or other stock-based compensation to key employees.
Amendments to this plan were proposed that would require that awards be based
on performance goals established in advance and set an annual maximum of
$750,000 in compensation payable to any participant. The amendments were
passed by the shareholders by a vote of 10,763,720 in favor, 14,300 shares
opposed, 300 shares abstaining, and 6,046,076 broker non-votes.
ITEM 6
- - ------
Exhibits and Reports on Form 8-K
- - --------------------------------
(a) See index to exhibits.
(b) A report on Form 8-K was filed with the Securities and Exchange
Commission on April 5, 1996, regarding the sale of $100,000,000 of
Reinsurance Group of America, Incorporated 7-1/4% Senior Notes due
2006. No other reports on Form 8-K were filed during the three months
ended June 30, 1996.
19
20
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
August 12, 1996 By: /s/ A. Greig Woodring
-------------------------------------
A. Greig Woodring
President & Chief Executive Officer
August 12, 1996 /s/ Jack B. Lay
----------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
20
21
INDEX TO EXHIBITS
Exhibit
Number Description
- - ------ -----------
3.1 Restated Articles of Incorporation of
Reinsurance Group of America, Incorporated
("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
21
7
1,000
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
1,361,925
0
0
0
0
0
1,917,644
14,692
69,522
203,335
2,498,485
1,571,687
0
208,749
0
104,496
0
0
174
372,388
2,498,485
331,315
60,925
1,795
7,878
281,252
23,409
37,637
38,636
14,247
24,389
0
0
0
23,996
1.41
1.41
0
0
0
0
0
0
0
