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, 1997
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 24, 1997:
25,405,494 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, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income (Unaudited)
Three months and six months ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months and six months ended June 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-7
2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-17
PART II - OTHER INFORMATION
---------------------------
1 Legal Proceedings 18
6 Exhibits and Reports on Form 8-K 18
Signatures 19
Index to Exhibits 20
2
3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
---------- ------------
(Dollars in thousands)
ASSETS
Fixed maturity securities
Available for sale-at fair value (amortized cost of $1,759,500 and
$1,469,649 at June 30, 1997, and December 31, 1996, respectively) $1,815,933 $1,517,264
Mortgage loans on real estate 112,994 98,262
Policy loans 424,446 426,366
Funds withheld at interest 157,987 129,949
Short-term investments 63,054 93,548
Other invested assets 12,205 6,659
---------- ----------
Total investments 2,586,619 2,272,048
Cash and cash equivalents 11,891 13,145
Accrued investment income 44,758 23,308
Premiums receivable 96,797 76,438
Funds withheld 38,412 30,697
Reinsurance ceded receivables 82,221 59,618
Deferred policy acquisition costs 259,719 233,565
Other reinsurance balances 214,100 157,065
Other assets 26,565 27,770
---------- ----------
Total assets $3,361,082 $2,893,654
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Future policy benefits $ 858,418 $ 755,793
Interest sensitive contract liabilities 1,337,119 1,106,491
Other policy claims and benefits 253,308 206,284
Other reinsurance balances 189,670 149,289
Deferred income taxes 82,765 73,275
Other liabilities 86,177 63,689
Long-term debt 106,145 106,493
---------- ----------
Total liabilities 2,913,602 2,461,314
Minority interest 7,285 6,782
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,
26,049,375 shares issued 261 174
Additional paid in capital 264,314 264,399
Currency translation adjustments (8,929) (5,536)
Unrealized appreciation of securities, net of taxes 33,836 28,365
Retained earnings 163,030 147,824
---------- ----------
Total stockholders' equity before treasury stock 452,512 435,226
Less treasury shares held of 643,881 and 584,031 at cost at
June 30, 1997 and December 31, 1996, respectively (12,317) (9,668)
---------- ----------
Total stockholders' equity 440,195 425,558
---------- ----------
Total liabilities and stockholders' equity $3,361,082 $2,893,654
========== ==========
See accompanying notes to condensed consolidated financial statements.
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4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
(Dollars in thousands, except per share data)
REVENUES:
Net premiums $201,568 $163,423 $406,940 $331,315
Investment income, net of related expenses 45,995 33,050 87,844 60,925
Realized investment gains, net 532 1,233 919 1,795
Other revenue 4,836 3,785 8,991 7,878
-------- -------- -------- --------
Total revenues 252,931 201,491 504,694 401,913
BENEFITS AND EXPENSES:
Claims and other policy benefits 166,983 137,567 344,865 281,252
Accident and health pool charge (see Note 3) - - 18,000 -
Policy acquisition costs and other insurance expenses 47,801 30,621 88,268 61,046
Other operating expenses 12,210 9,747 22,729 18,740
Interest expense 1,956 1,948 3,904 2,239
-------- -------- -------- --------
Total benefits and expenses 228,950 179,883 477,766 363,277
-------- -------- -------- --------
Income before income taxes and minority interest 23,981 21,608 26,928 38,636
Provision for income taxes 8,757 7,998 8,756 14,247
-------- -------- -------- --------
Income before minority interest 15,224 13,610 18,172 24,389
Minority interest in earnings of consolidated subsidiaries (129) (150) (249) (393)
-------- -------- -------- --------
Net income $ 15,095 $ 13,460 $ 17,923 $ 23,996
======== ======== ======== ========
Earnings per common and common equivalent share (see Note 4) $ 0.59 $ 0.53 $ 0.70 $ 0.94
======== ======== ======== ========
Weighted average number of common and common equivalent
shares outstanding (in thousands) 25,779 25,506 25,754 25,491
======== ======== ======== ========
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,
---------------------------
1997 1996
--------- ---------
(Dollars in thousands)
OPERATING ACTIVITIES:
Net income $ 17,923 $ 23,996
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in:
Accrued investment income (21,460) (14,557)
Premiums receivable (20,433) 873
Deferred policy acquisition costs (26,732) (16,646)
Funds withheld (7,715) (1,985)
Reinsurance ceded balances (22,779) (5,485)
Future policy benefits, other policy claims and benefits, and
other reinsurance balances 190,207 95,885
Deferred income taxes 5,316 7,976
Other assets and other liabilities 22,981 32,479
Amortization of goodwill and value of business acquired 630 565
Amortization of net investment discounts (5,875) (5,949)
Realized investment gains, net (919) (1,795)
Other, net (181) 381
--------- ---------
Net cash provided by operating activities 130,963 115,738
INVESTING ACTIVITIES:
Sales of investments:
Fixed maturity securities 101,050 88,005
Mortgage loans 25,716 -
Maturities of fixed maturity securities 124,463 50,786
Purchases of fixed maturity securities (498,727) (589,793)
Cash invested in:
Mortgage loans (41,238) (8,720)
Policy loans - (32,084)
Funds withheld at interest (28,038) (23,653)
Principal payments on:
Mortgage loans 790 447
Policy loans 1,920 -
Change in short-term and other invested assets 25,239 20,211
Investment in joint venture and purchase of subsidiary stock - (3,207)
--------- ---------
Net cash used in investing activities (288,825) (498,008)
FINANCING ACTIVITIES:
Dividends to stockholders (2,717) (2,355)
Purchase of treasury stock (3,097) -
Reissuance of treasury stock 450 205
Minority interest in earnings 249 393
Excess deposits on universal life and other investment type
policies and contracts 162,007 276,012
Proceeds from long-term debt issuance - 104,335
--------- ---------
Net cash provided by financing activities 156,892 378,590
Effect of exchange rate changes (284) 114
--------- ---------
Change in cash and cash equivalents (1,254) (3,566)
Cash and cash equivalents, beginning of period 13,145 18,258
--------- ---------
Cash and cash equivalents, end of period $ 11,891 $ 14,692
========= =========
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, 1997
(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, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997. 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, 1996.
The Company has reclassified the presentation of certain prior period
information to conform with the 1997 presentation.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The statements are effective for
financial statements of fiscal years beginning after December 15, 1997. While
the adoption of these statements will affect the presentation of information,
it will not have an impact on the earnings of the Company.
2. EARNINGS PER SHARE
Earnings per share were 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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share ("EPS")."
SFAS No. 128 supersedes and simplifies the existing computational guidelines
under Accounting Principles Board Opinion No. 15, "Earnings Per Share." It is
effective for financial statements issued for periods ending after December
15, 1997 and the Company plans to retroactively restate all interim amounts
during the fourth quarter. Among other changes, SFAS No. 128 eliminates the
presentation of primary EPS and replaces it with basic EPS for which common
stock equivalents are not considered in the computation. It also revises the
computation of diluted EPS. It is not expected that the adoption of SFAS No.
128 will have a material impact on the earnings per share results reported by
the Company under the Company's current capital structure.
6
7
3. SIGNIFICANT TRANSACTION
During the first quarter of 1997, the Company recorded a non-recurring 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 pools. The charge reflects
management's intent to reserve fully for all anticipated claim payments
attributed to outside-managed accident and health pools.
4. STOCK SPLIT AND DIVIDEND
The Board of Directors of Reinsurance Group of America, Incorporated approved
a three-for-two split of the Company's stock for all shareholders of record as
of August 8, 1997 and will be effective on August 29, 1997. Effective
September 2, 1997, RGA stock will begin trading at a new, post-split price.
All share and per share data is stated to reflect the stock split. RGA
recently declared a cash dividend of $.06 per post-split share of common stock
($.09 per pre-split share). The dividend will be paid on August 29, 1997, to
shareholders of record as of August 8, 1997.
7
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 and 1996
- - -----------------------------------------
RESULTS OF OPERATIONS
Net Premiums. Net premiums increased $38.2 million, or 23.4%, to $201.6
million in the second quarter of 1997 compared to $163.4 million for the same
period in 1996.
Premiums by major segment were as follows (dollars in millions):
Change
------
1997 1996 Dollars Percent
------ ----- ------- -------
U.S. life $135.1 122.9 12.2 9.9
Canadian life 17.5 15.6 1.9 12.2
Accident and health 20.1 11.4 8.7 76.3
Other international 28.9 13.5 15.4 140.7
------ ----- ---- -----
Totals $201.6 163.4 38.2 23.4
====== ===== ==== =====
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. In the U.S. life segment, the increase from
prior year was attributed to premium growth on the existing block of business,
combined with strong new business premium.
The Canadian life segment increase of $1.9 million resulted from several
factors. While new and renewal premium growth remained strong, this increase
was partially offset by processing several large blocks of business on which
the actual results were slightly less than the estimates previously recorded.
Accident and health premiums increased $8.7 million, or 76.3%. The premium
levels continue to grow based on contracts executed during the second half of
1996. The increase represented growth in domestic business of $6.6 million
and growth in business from the Company's contact office in London of $2.1
million. The accident and health segment's premium levels did not show any
decline resulting from the decision to exit outside-managed pools. The premium
reduction will be more noticeable in 1998 as the Company will not renew
existing contracts.
8
9
The Company's other international business reported strong growth from year to
year. Premiums in the Latin America operations increased $10.1 million as the
single premium immediate annuity business from Chile grew $5.6 million and
reported mortality risk reinsurance premiums grew due to timing of statements
received from client companies. In the Asia Pacific operations, premiums
increased $5.3 million resulting from growth in the base of business from the
prior year, which includes $3.5 million in new business generated from the
Company's operating subsidiary in Australia.
Investment Income, Net. Investment income, net of investment expenses,
increased $12.9 million, or 39.0%, to $46.0 million in the second quarter of
1997. The cost basis of invested assets increased $409.4 million from June
30, 1996 to June 30, 1997. The increase in invested assets was a result of
operating cash flows and reinsurance transactions involving stable value
deposits from ceding companies, which totaled $291.9 million since June 30,
1996. The stable value product asset portfolio generated $10.8 million of
investment income in the second quarter of 1997 compared to $5.6 million for
the same period in 1996. The investment income earned on the stable value
product asset portfolio was offset by amounts credited and paid to ceding
companies of $10.3 million and $5.2 million for the second quarter of 1997 and
1996, respectively. These amounts credited are primarily included in
claims and other policy benefits.
Realized Investment Gains, Net. In the second quarter of 1997, net
realized investment gains decreased to $0.5 million from $1.2 million
for the same period in the prior year. Net realized investment gains resulted
from ongoing repositioning within the Company's portfolios.
Other Revenue. Other revenue increased $1.1 million in the second
quarter of 1997 to $4.8 million. Other revenue includes items such as profit
and risk fees associated with financial reinsurance as well as earnings in
unconsolidated investees, management fee income, and miscellaneous income
associated with late premium payments. During 1997, financial reinsurance
treaties resulted in $4.0 million in financial reinsurance fees which were
partially offset by fees paid to retrocessionaires of $3.6 million, included
in other insurance expenses.
Claims and Other Policy Benefits. Claims and other policy benefits
increased $29.4 million, or 21.4%, to $167.0 million in the second quarter of
1997. For the second quarter of 1997, total claims and other policy benefits
represented 82.8% of total net premiums. Net of the interest credited on the
stable value product portfolio to reserves, the total claims and other policy
benefits represented 77.9% of total net premiums. This was comparable to the
81.2% of total net premiums, net of the impact of stable value products,
for the second quarter of 1996 and 80.0% for the entire year ended December
31, 1996. This percentage can fluctuate from quarter to quarter due to
changes in the mix of new business and mortality fluctuations. The Company
expects mortality to fluctuate somewhat from quarter to quarter but believes
it is fairly constant over longer periods of time. The second quarter
percentage is not considered indicative of any longer term trend.
9
10
Claims and other policy benefits by major segment were as follows (dollars in
millions):
Change
------
1997 1996 Dollars Percent
------ ----- ------- -------
U.S. life $115.6 107.2 8.4 7.8
Canadian life 13.9 11.6 2.3 19.8
Accident and health 13.1 8.0 5.1 63.8
Other international 24.4 10.8 13.6 125.9
------ ----- ---- -----
Totals $167.0 137.6 29.4 21.4
====== ===== ==== =====
The increase in claims in the U.S. and Canadian life segments was the result
of an overall increase in the amount at risk, which corresponds with the
overall increase in premiums. In the U.S. and Canadian life segments,
mortality experience was slightly better for the second quarter of 1997 as
compared to the second quarter of 1996, when mortality results were
considerably higher than expected. In addition, reserve levels increased in
relation to the overall increase in the amount at risk and the aging of the
existing blocks of business. The accident and health segment increase
correlated with the increase in premiums discussed above. The increase in
claims in the other international segment correlated with the increase
in premiums from the Latin American and Asia Pacific regions discussed above.
Policy Acquisition Costs and Other Insurance Expenses. Policy
acquisition costs and other insurance expenses totaled $47.8 million, or 23.7%
of net premium for the quarter. This compares to 20.2% of net premiums for
the entire year ended December 31, 1996. Net of the impact of fees paid to
retrocessionnaires in connection with financial reinsurance and allowances on
asset intensive products, those costs represented $43.7 million, or 21.7% of
net premium, for the second quarter of 1997 compared to total costs of
$27.4 million, or 16.8% of net premium, for the second quarter of 1996.
10
11
Policy acquisition costs and other insurance expenses by major segment were as
follows (in millions):
Change
------
1997 1996 Dollars Percent
----- ---- ------- -------
U.S. life $32.0 21.9 10.1 46.1
Canadian life 3.4 2.7 0.7 25.9
Accident and health 6.8 4.2 2.6 61.9
Other international 5.6 1.8 3.8 211.1
----- ---- ---- -----
Totals $47.8 30.6 17.2 56.2
===== ==== ==== =====
In the U.S. life segment, policy acquisition costs and other insurance
expenses as a percent of net premium, net of the effect of financial
reinsurance and allowances on asset intensive products, was 19.5% for the
second quarter of 1997 compared to 15.4% for the second quarter of 1996
and 17.2% for the entire year ended December 31, 1996. The increase in policy
acquisition costs and other insurance expenses for the U.S. life segment is
primarily a result of changes in the mix of business and renewal commissions
on several significant blocks of business on which renewal rates are higher
than historical renewal rates.
In the Canadian life segment, policy acquisition costs and other insurance
expenses as a percent of net premiums increased to 19.2% for the second
quarter of 1997 compared to 17.3% for the second quarter of 1996 and 16.1% of
net premiums for the entire year ended December 31, 1996. The Canadian life
segment increase resulted primarily from new business premiums, which
was partially offset by the processing of significant blocks of renewal business
during the first quarter that carry lower net renewal commissions than the first
year business. The increase as a percent of premiums is primarily a result of
the premium adjustment which resulted from processing several large blocks of
business discussed above.
In the accident and health segment, policy acquisition costs and other
insurance expenses as a percent of net premiums was 34.0% for the second
quarter of 1997 compared to 36.7% for the second quarter of 1996 and 32.2% for
the entire year ended December 31, 1996. This percent fluctuates primarily
due to changes in the mix of business.
In the other international segment, policy acquisition costs and other
insurance expenses as a percent of net premium increased to approximately
19.3% for the second quarter of 1997 compared to 16.7% for the entire year of
1996. The Company's other international segment percentages fluctuate due
primarily to the timing of client company reporting and the diversity in the
mix of business being reported.
11
12
Other Operating Expenses. Other operating expenses increased $2.5
million, or 25.8%, to $12.2 million in the second quarter of 1997 compared to
$9.7 million for the same period in 1996. Expenses of the Canadian and
accident and health operations remained relatively stable compared to the
prior year. U.S. operating expenses increased $1.2 million and other
international business operating expenses increased $1.3 million. The overall
increase in other expenses was the result of planned activities associated
with pursuing new business opportunities and international expansion efforts.
The operating expense increases were consistent with expectations and remain
relatively stable as a percentage of net premiums.
Interest Expense. Interest expense related to the issuance of long-term
debt by Reinsurance Group of America, Incorporated on March 22, 1996 and the
financing of a portion of the Company's Australian reinsurance operations.
Provision for Income Taxes. Income tax expense from operations
represents approximately 36.5% of pre-tax income for the second quarter of
1997 compared to 37.0% of pre-tax income for the second quarter of 1996. The
effective tax rate of 36.5% on income from operations is representative of the
Company's expected annual effective tax rate.
Six Months Ended June 30, 1997 and 1996
- - ---------------------------------------
RESULTS OF OPERATIONS
Net Premiums. Net premiums increased $75.6 million, or 22.8%, to $406.9
million for the first half of 1997 compared to $331.3 million for the same
period in 1996.
Premiums by major segment were as follows (dollars in millions):
Change
------
1997 1996 Dollars Percent
------ ----- ------- -------
U.S. life $281.0 249.3 31.7 12.7
Canadian life 36.3 28.9 7.4 25.6
Accident and health 36.6 25.7 10.9 42.4
Other international 53.0 27.4 25.6 93.4
------ ----- ----
Totals $406.9 331.3 75.6 22.8
====== ===== ==== ====
In the first half of 1997, the U.S. life premiums increased by 12.7% over the
same period in 1996. The increase was attributed to new business production,
renewal premium increases from
12
13
existing blocks of business, revisions of existing treaties, and the continuing
impact of past production. Growth in credit life premiums of $9.5 million over
1996 contributed to the overall increase in premiums.
The Canadian life segment increased $1.0 million in first year premiums and
$6.4 million in renewal premiums. While new and renewal premium growth
remained strong as a result of strong new business production in 1996, this
increase was partially offset by processing several large blocks of business
on which the actual results were slightly less than the estimates previously
recorded.
Accident and health premiums increased $10.9 million, or 42.4%. The increase
represented growth in domestic business of $7.5 million and growth in business
from the Company's contact office in London of $3.4 million. The accident and
health segment's premium levels did not show any decline resulting from the
decision to exit outside-managed pools. The premium reduction will be more
noticeable in 1998 as the Company will not renew existing contracts.
The Company's other international business reported strong growth from year to
year. Premiums in the Latin American operations increased $17.6 million, with
the largest increase from single premium immediate annuity business from
Chile, which grew $10.2 million. In the Asia Pacific operations, premiums
increased $8.0 million, including $3.6 million in new business generated from
the Company's operating subsidiary in Australia.
Investment Income, Net. Investment income, net of investment expenses,
increased $26.9 million, or 44.2%, to $87.8 million in the first half of 1997
from $60.9 million for the same period in 1996. The cost basis of invested
assets increased $409.4 million from June 30, 1996 to June 30, 1997. The
increase in invested assets was a result of operating cash flows and
reinsurance transactions involving stable value deposits from ceding companies
of $291.9 million since June 30, 1996. The stable value product asset
portfolio generated $20.6 million of investment income in 1997 compared to
$8.3 million for the same period in 1996. The investment income earned on the
stable value product asset portfolio was offset by amounts credited and paid
to ceding companies of $19.6 million and $7.7 million for 1997 and 1996,
respectively. These amounts are primarily included in claims and other
policy benefits. The average earned yield on the consolidated investment
portfolio decreased to 7.26% for 1997 compared to 7.31% for the same period in
1996. This resulted primarily from the increase in the stable value
portfolio, which requires a shorter duration to achieve appropriate asset and
liability duration matching, offset by increased yields through the addition
of mortgage loans in other portfolios.
Realized Investment Gains, Net. Realized investment gains decreased
$0.9 million to $0.9 million in the first half of 1997 from $1.8 million for
from ongoing repositioning within the Company's portfolios.
13
14
Other Revenue. Other revenue increased $1.1 million in the first half
of 1997 to $9.0 million compared to $7.9 million for the same period in 1996.
Other revenue includes items such as profit and risk fees associated with
financial reinsurance as well as earnings in unconsolidated investees,
management fee income, and miscellaneous income associated with late premium
payments. During 1997, financial reinsurance treaties resulted in $7.8
million in financial reinsurance fees which were partially offset by fees paid
to retrocessionaires of $7.0 million, included in other insurance expenses.
Claims and Other Policy Benefits. Claims and other policy benefits
increased $63.6 million, or 22.6%, to $344.9 million in the first half of 1997
compared to $281.3 million for the same period in 1996.
For the first half of 1997, total claims and other policy benefits represented
84.7% of total net premiums. Net of the interest credited on the stable value
product portfolio to reserves, the total claims and other policy benefits
represented 83.3% of total net premiums. This was comparable to the 82.8%
of total net premiums, net of the impact of stable value products, for the
first half of 1996 and 80.0% for the entire year ended December 31, 1996. The
Company expects mortality to fluctuate somewhat from period to period but
believes it is fairly constant over longer periods of time.
Claims and other policy benefits by major segment were as follows (dollars in
millions):
Change
------
1997 1996 Dollars Percent
------ ----- ------- -------
U.S. life $246.2 216.3 29.9 13.8
Canadian life 29.0 23.7 5.3 22.4
Accident and health 25.2 19.3 5.9 30.6
Other international 44.5 22.0 22.5 102.3
------ ----- ---- -----
Totals $344.9 281.3 63.6 22.6
====== ===== ==== =====
For the first half of 1997, the increase in claims and other policy benefits
in the U.S. and Canadian life segments was the result of an overall increase
in the amount at risk, which corresponds with the overall increase in
premiums. In the U.S. and Canadian life segments, mortality was slightly more
favorable for 1997 as compared to the same period in 1996, while reserve
levels increased in relation to the overall increase in the amount at risk and
the aging of the existing blocks of business. In addition, the stable value
product interest credited and paid to ceding companies increased $11.9 million
over the same period in 1996 in the U.S. life segment. The accident and
health segment increase correlated with the increase in premiums discussed
above. The increase in claims and other policy benefits in the other
international segment
14
15
correlated with the increase in premiums from the Latin American and Asia
Pacific regions discussed above.
Accident and Health Pool Charge. The Company reported a non-recurring
charge totaling $18.0 million during the first quarter of 1997 associated with
the decision to exit all outside-managed accident and health pools, along with
the run-off claims from certain accident and health reinsurance pools in which
the Company had formerly participated. The adjustment in this segment
represented management's current estimate to reserve fully for claim payments
attributable to outside-managed accident and health pools. The reserve
increase of $18.0 million was developed from information received from the
accident and health reinsurance pool managers, along with the Company
management's judgment of the completeness of the amounts reported.
Policy Acquisition Costs and Other Insurance Expenses. Policy
acquisition costs and other insurance expenses totaled $88.3 million, or 21.7%
of net premium for the first half of 1997. This compares to 20.2% of net
premiums for the entire year ended December 31, 1996. Net of the impact of
fees paid to retrocessionnaires in connection with financial reinsurance and
allowances on asset intensive products, those costs represented $79.8 million,
or 19.6% of net premium, for the first half of 1997 compared to total costs of
54.4 million, or 16.4% of net premium, for the same period of 1996.
Policy acquisition costs and other insurance expenses by major segment
were as follows (dollars in millions):
Change
------
1997 1996 Dollars Percent
----- ---- ------- -------
U.S. life $60.0 44.6 15.4 34.5
Canadian life 6.5 4.6 1.9 41.3
Accident and health 12.6 7.9 4.7 59.5
Other international 9.2 3.9 5.3 135.9
----- ---- ---- -----
Totals $88.3 61.0 27.3 44.8
===== ==== ==== =====
In the U.S. life segment, policy acquisition costs and other insurance
expenses as a percent of net premium, net of the effect of financial
reinsurance and allowances on asset intensive products, represented 18.4% for
the first half of 1997 compared to 16.9% for the same period of 1996 and
17.2% for the entire year ended December 31, 1996. The increase in policy
acquisition costs and other insurance expenses for the U.S. life is primarily
a result of changes in the mix of business and renewal commissions on several
significant blocks of business on which renewal rates are higher than our
historical renewal rates.
15
16
In the Canadian life segment, policy acquisition costs and other insurance
expenses as a percentage of net premiums increased to 18.0% for the first half
of 1997 compared to 15.8% for the same period of 1996 and 16.1% of net
premiums for the entire year ended December 31, 1996. The increase as a
percent of premiums is primarily a result of the premium adjustment which
resulted from processing several large blocks of business discussed above.
In the accident and health segment, policy acquisition costs and other
insurance expenses as a percentage of net premiums increased to 34.4% for the
first half of 1997 compared to 30.7% for the same period of 1996. This
increase was attributed to the new business growth primarily with the new
business processed during the first two quarters of 1997.
In the other international segment, policy acquisition costs and other
insurance expenses as a percent of net premium increased to approximately
17.3% for the first half of 1997 compared to 16.7% for the entire year of
1996. The Company's other international segment percentages fluctuate due
primarily to the timing of client company reporting and the diversity in the
mix of business being reported.
Other Operating Expenses. Other operating expenses increased $4.0
million, or 21.4%, to $22.7 million in the first half of 1997 compared to
$18.7 million for the same period in 1996. Expenses of the Canadian, and
accident and health operations remained relatively stable compared to the
prior year. U.S. operating expenses increased $1.2 million and other
international business operating expenses increased $2.7 million. The
overall increase in other expenses was the result of planned activities
associated with pursuing new business opportunities and international
expansion efforts. The operating expense increases were consistent with
expectations and remain relatively stable as a percent of net premiums.
Interest Expense. Interest expense related to the issuance of long-term
debt by Reinsurance Group of America, Incorporated on March 22, 1996, and the
financing of a portion of the Company's Australian reinsurance operations
during 1996.
Provision for Income Taxes. Income tax expense from operations
represented approximately 32.5% of pre-tax income for the first half of 1997
and 36.9% of pre-tax income for the first half of 1996. 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. The
effective tax rate of 36.4% on income from operations is representative of the
Company's expected annual effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1997, the Company generated $131.0 million in
cash from operating activities and $141.9 million from deposits related to the
stable value business. These increases were offset by cash used for
investing of $288.8 million, dividends to stockholders of $2.7 million and the
repurchase of the Company's stock of $3.1 million. The sources of funds of
RGA's operating subsidiaries consist of premiums received from ceding
insurers, investment income, and
16
17
proceeds from sales and redemption of investments. Premiums are generally
received in advance of related claim payments. The funds are primarily
applied to policy claims and benefits, operating expenses, income taxes, and
investment purchases.
In addition, RGA's liquidity position was supported by the $100.0 million
offering of Senior Notes in March 1996. The ability of the Company to make
principal and interest payments, as well as and to continue to pay dividends to
stockholders, is ultimately dependent on the earnings and surplus of RGA's
subsidiaries, as well as the investment earnings on the undeployed debt
proceeds. 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.
RGA recently declared a cash dividend of $.06 per post-split share of common
stock. On a post-split basis, this dividend will be paid on August 29, 1997
to shareholders of record as of August 8, 1997. The cash dividend reflects a
13% increase over the previous dividend rate. 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 subsidiaries.
During the second quarter of 1997, RGA repurchased shares of RGA common stock.
The repurchased shares are intended to enable RGA to satisfy obligations under
its stock option program. Purchases were made in the open market, at the then
prevailing market price. As of June 30, 1997, 85,800 shares (on a post-split
basis) have been repurchased.
INVESTMENTS
Invested assets increased by $314.6 million, or 13.8%, to $2,586.6 million at
June 30, 1997, compared to $2,272.0 million at December 31, 1996. The
increase resulted from cash deposits for stable value products of $141.9
million and positive operating cash flows. The increase was also attributed
to an increase in the fair value adjustment of fixed maturities available for
sale of $8.8 million. The Company has historically generated positive cash
flows from operations, and expects to do so in the future.
At June 30, 1997, the Company's portfolio of fixed maturity securities
available for sale had net unrealized gains before tax of $56.4 million.
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 of Reinsurance Group of America,
Incorporated ("RGA") was held in St. Louis, Missouri on May 15, 1997. At the
meeting, the election of two incumbent directors and one new nominee for
director was submitted to the stockholders. Each nominee had been nominated
for a three-year term to expire at the annual meeting in 2000. Management
solicited proxies from stockholders and a total of 16,076,137 shares were
voted as follows:
Nominee For Withheld Broker Non-Votes
------- --- -------- ----------------
Bernard A. Edison 16,067,616 8,521 0
Stuart I. Greenbaum 16,067,691 8,446 0
Richard A. Liddy 16,069,891 6,246 0
There were no other nominees for director. All three nominees were elected.
Mr. Greenbaum was nominated to succeed Dennis F. Hardcastle, who resigned
effective upon Mr. Greenbaum's election. Continuing in office as directors of
RGA are: J. Cliff Eason, William A. Peck, M.D., Leonard M. Rubenstein,
William P. Stiritz, H. Edwin Trusheim, and A. Greig Woodring.
No other matters were presented at the meeting.
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, 1997.
18
19
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 8/12/97
----------------------------------------
A. Greig Woodring
President & Chief Executive Officer
/s/ Jack B. Lay 8/12/97
--------------------------------------------
Jack B. Lay
Executive Vice President & Chief Financial Officer
19
20
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 Certificate of Designations for Series A Junior
Participating Preferred Stock incorporated by
reference to Exhibit 3.3 to Amendment No. 1 to Form
10-Q for the quarter ended March 31, 1997 (No.
1-11848)
27.1 Financial Data Schedule
20
7
1,000
U.S. DOLLAR
6-MOS
DEC-31-1996
JAN-01-1997
JUN-30-1997
1
1,815,933
0
0
6,992
112,994
0
2,586,619
11,891
82,221
259,719
3,361,082
2,195,537
0
253,308
0
106,145
0
0
261
439,934
3,361,082
406,940
87,844
919
8,991
362,865
29,597
58,671
26,928
8,756
18,172
0
0
0
17,923
0.70
0.70
0
0
0
0
0
0
0
