e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2009 |
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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)
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Missouri
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43-1627032 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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1370 Timberlake Manor Parkway, Chesterfield, Missouri
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63017 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (636) 736-7000
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange |
Title of each class |
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on which registered |
Common Stock, par value $0.01
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New York Stock Exchange |
Trust Preferred Income Equity Redeemable |
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Securities (PIERS sm) Units
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company. Yes o No þ
The aggregate market value of the stock held by non-affiliates of the registrant, based upon the
closing sale price of the common stock on June 30, 2009, as reported on the New York Stock Exchange
was approximately $2.5 billion.
As of January 29, 2010, 72,995,993 shares of the registrants common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2010 Annual Meeting
of Shareholders (the Proxy Statement) which will be filed with the Securities and Exchange
Commission not later than 120 days after the Registrants fiscal year ended December 31, 2009, are
incorporated by reference in Part III of this Form 10-K.
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REINSURANCE GROUP OF AMERICA, INCORPORATED
Form 10-K
YEAR ENDED DECEMBER 31, 2009
INDEX
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Item 1. BUSINESS
A. Overview
Reinsurance Group of America, Incorporated (RGA) is an insurance holding company that was
formed on December 31, 1992. The consolidated financial statements herein include the assets,
liabilities, and results of operations of RGA, RGA Reinsurance Company (RGA Reinsurance),
Reinsurance Company of Missouri, Incorporated (RCM), RGA Reinsurance Company (Barbados) Ltd.
(RGA Barbados), RGA Americas Reinsurance Company, Ltd. (RGA Americas), RGA Life Reinsurance
Company of Canada (RGA Canada), RGA Reinsurance Company of Australia, Limited (RGA Australia),
RGA Reinsurance UK Limited (RGA UK) and RGA Atlantic Reinsurance Company, Ltd. (RGA Atlantic)
as well as several other subsidiaries subject to an ownership position of greater than fifty
percent (collectively, the Company).
The Company is primarily engaged in traditional individual and group life, annuity, critical
illness and financial reinsurance. RGA and its predecessor, the Reinsurance Division of General
American, a Missouri life insurance company, have been engaged in the business of life reinsurance
since 1973. The Companys more established operations in the U.S. and Canada contributed
approximately 68.7% of its consolidated net premiums during 2009. In 1994, the Company began
expanding into international markets and now has subsidiaries, branch operations, or representative
offices in Australia, Barbados, Bermuda, China, France, Germany, Hong Kong, India, Ireland, Italy,
Japan, Mexico, the Netherlands, Poland, South Africa, South Korea, Spain, Taiwan and the United
Kingdom (UK). RGA is considered to be one of the leading life reinsurers in the North American
market based on premiums and the amount of life reinsurance in force. As of December 31, 2009, the
Company had approximately $2.3 trillion of life reinsurance in force and $25.2 billion in
consolidated assets.
Reinsurance is an arrangement under which an insurance company, the reinsurer, agrees to
indemnify another insurance company, the ceding company, for all or a portion of the insurance
risks underwritten by the ceding company. Reinsurance is designed to (i) reduce the net liability
on individual risks, thereby enabling the ceding company to increase the volume of business it can
underwrite, as well as increase the maximum risk it can underwrite on a single life or risk; (ii)
stabilize operating results by leveling fluctuations in the ceding companys loss experience; (iii)
assist the ceding company in meeting applicable regulatory requirements; and (iv) enhance the
ceding companys financial strength and surplus position.
Life reinsurance primarily refers to reinsurance of individual or group-issued term life
insurance policies, whole life insurance policies, universal life insurance policies, and joint and
last survivor insurance policies. Asset-intensive reinsurance primarily refers to reinsurance of
annuities and corporate-owned life insurance. Critical illness reinsurance provides a benefit in
the event of the diagnosis of a pre-defined critical illness. Financial reinsurance primarily
involves assisting ceding companies in meeting applicable regulatory requirements while enhancing
the ceding companies financial strength and regulatory surplus position. Financial reinsurance
transactions do not qualify as reinsurance under accounting principles generally accepted in the
United States of America (GAAP). Due to the low risk nature of financial reinsurance
transactions they are reported based on deposit accounting guidelines. Ceding companies typically
contract with more than one reinsurance company to reinsure their business.
Reinsurance may be written on an indemnity or an assumption basis; however, the Company has
not entered into any assumption reinsurance contracts. Indemnity reinsurance does not discharge a
ceding company from liability to the policyholder. A ceding company is required to pay the full
amount of its insurance obligations regardless of whether it is entitled or able to receive
payments from its reinsurers. In the case of assumption reinsurance, the ceding company is
discharged from liability to the policyholder, with such liability passed directly to the
reinsurer. Reinsurers also may purchase reinsurance, known as retrocession reinsurance, to cover
their risk exposure. Reinsurance companies enter into retrocession agreements for reasons similar
to those that drive primary insurers to purchase reinsurance.
Reinsurance generally is written on a facultative or automatic treaty basis. Facultative
reinsurance is individually underwritten by the reinsurer for each policy to be reinsured, with the
pricing and other terms established at the time the policy is underwritten based upon rates
negotiated in advance. Facultative reinsurance normally is purchased by insurance companies for
medically impaired lives, unusual risks, or liabilities in excess of the binding limits specified
in their automatic reinsurance treaties.
An automatic reinsurance treaty provides that the ceding company will cede risks to a
reinsurer on specified blocks of policies where the underlying policies meet the ceding companys
underwriting criteria. In contrast to facultative reinsurance, the reinsurer does not approve each
individual policy being reinsured. Automatic reinsurance treaties generally provide that the
reinsurer will be liable for a portion of the risk associated with the specified policies written
by the ceding company. Automatic reinsurance treaties specify the ceding companys binding limit,
which is the maximum amount of risk
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on a given life that can be ceded automatically and that the reinsurer must accept. The binding
limit may be stated either as a multiple of the ceding companys retention or as a stated dollar
amount.
Facultative and automatic reinsurance may be written as yearly renewable term, coinsurance, or
modified coinsurance. Under a yearly renewable term treaty, the reinsurer assumes only the
mortality or morbidity risk. Under a coinsurance arrangement, depending upon the terms of the
contract, the reinsurer may share in the risk of loss due to mortality or morbidity, lapses, and
the investment risk, if any, inherent in the underlying policy. Modified coinsurance and
coinsurance with funds withheld differs from coinsurance in that the assets supporting the reserves
are retained by the ceding company while the risk is transferred to the reinsurer.
Generally, the amount of life reinsurance ceded under facultative and automatic reinsurance
agreements is stated on an excess or a quota share basis. Reinsurance on an excess basis covers
amounts in excess of an agreed-upon retention limit. Retention limits vary by ceding company and
also may vary by age and underwriting classification of the insured, product, and other factors.
Under quota share reinsurance, the ceding company states its retention in terms of a fixed
percentage of the risk that will be retained, with the remainder up to the maximum binding limit to
be ceded to one or more reinsurers.
Reinsurance agreements, whether facultative or automatic, may provide for recapture rights,
which permit the ceding company to reassume all or a portion of the risk formerly ceded to the
reinsurer after an agreed-upon period of time (generally 10 years) or in some cases due to changes
in the financial condition or ratings of the reinsurer. Recapture of business previously ceded
does not affect premiums ceded prior to the recapture of such business, but would reduce premiums
in subsequent periods. The potential adverse effects of recapture rights are mitigated by the
following factors: (i) recapture rights vary by treaty and the risk of recapture is a factor that
is considered when pricing a reinsurance agreement; (ii) ceding companies generally may exercise
their recapture rights only to the extent they have increased their retention limits for the
reinsured policies; and (iii) ceding companies generally must recapture all of the policies
eligible for recapture under the agreement in a particular year if any are recaptured, which
prevents a ceding company from recapturing only the most profitable policies. In addition, when a
ceding company increases its retention and recaptures reinsured policies, the reinsurer releases
the reserves it maintained to support the recaptured portion of the policies.
Reinsurers may place assets in trust to satisfy collateral requirements for certain treaties.
As of December 31, 2009, the Company held securities in trust for this purpose with amortized costs
of $1,022.4 million and $1,755.6 million for the benefit of certain subsidiaries and third-party
reinsurance treaties, respectively. Under certain conditions, RGA may be obligated to move
reinsurance from one RGA subsidiary to another RGA subsidiary or make payments under a given
treaty. These conditions include change in control or ratings of the subsidiary, insolvency,
nonperformance under a treaty, or loss of the reinsurance license of such subsidiary. If RGA is
ever required to perform under these obligations, the risk to the consolidated company under the
reinsurance treaties would not change; however, additional capital may be required due to the
change in jurisdiction of the subsidiary reinsuring the business and may create a strain on
liquidity.
During 2006, RGAs subsidiary, Timberlake Financial, L.L.C. (Timberlake Financial), issued
$850.0 million of Series A Floating Rate Insured Notes due June 2036 in a private placement. The
notes were issued to fund the collateral requirements for statutory reserves required by the U.S.
Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX) on specified
term life insurance policies reinsured by RGA Reinsurance. Proceeds from the notes and the
Companys direct investment in Timberlake Financial were deposited into a series of trust accounts
as collateral and are not available to satisfy the general obligations of the Company. As of
December 31, 2009, the Company held assets in trust and in custody of $876.7 million for this
purpose, which is not included above. See Note 16 Collateral Finance Facility in the Notes to
Consolidated Financial Statements for additional information on the Timberlake Financial notes.
Some treaties give the ceding company the right to force the reinsurer to place assets in
trust for the ceding companys benefit to provide collateral for statutory reserve credits taken by
the ceding company, in the event of a downgrade of the reinsurers ratings to specified levels,
generally non-investment grade levels, or if minimum levels of financial condition are not
maintained. As of December 31, 2009, the Company had approximately $1,059.3 million in statutory
reserves associated with these types of treaties. Assets placed in trust continue to be owned by
the Company, but their use is restricted based on the terms of the trust agreement.
B. Corporate Structure
RGA is an insurance holding company, the principal assets of which consist of the common stock
of RCM, RGA Barbados, RGA Americas, RGA Canada, RGA UK and RGA Atlantic as well as investments in
several other wholly-owned subsidiaries. Potential sources of funds for RGA to make stockholder
dividend distributions and to fund debt service obligations are dividends paid to RGA by its
operating subsidiaries, securities maintained in its investment portfolio, and proceeds from
securities offerings and borrowings. RCMs primary sources of funds are dividend distributions
paid by RGA
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Reinsurance Company, whose principal source of funds is derived from current operations.
Dividends paid by the Companys reinsurance subsidiaries are subject to regulatory restrictions of
the respective governing bodies where each reinsurance subsidiary is domiciled.
The Company has five main geographic-based operational segments: U.S., Canada, Europe & South
Africa, Asia Pacific and Corporate and Other. These operating segments write reinsurance business
that is wholly or partially retained in one or more of the Companys reinsurance subsidiaries. See
Segments for more information concerning the Companys operating segments.
Intercorporate Relationships
On September 12, 2008 (the Divestiture Date), the Companys majority shareholder, General
American Life Insurance Company (General American), disposed of its majority ownership in the
Company. General American is a wholly-owned subsidiary of MetLife, Inc. (MetLife), a New
York-based insurance and financial services holding company. Prior to the Divestiture Date,
General American and MetLife provided certain administrative services to RGA and RGA Reinsurance.
Such services included risk management and corporate travel. The cost of these services for the
years ended December 31, 2008 and 2007 was approximately $1.8 million (through the Divestiture
Date) and $2.8 million, respectively, included in other expenses. Management does not believe that
the various amounts charged for these services would have been materially different if they had
been incurred from an unrelated third party.
RGA Reinsurance also has a product license and service agreement with MetLife. Under this
agreement, RGA has licensed the use of its electronic underwriting product to MetLife and provides
internet hosting services, installation and modification services for the product. The Company
recorded revenue under the agreement for the years ended December 31, 2008 and 2007 of
approximately $0.6 million (through the Divestiture Date) and $0.6 million, respectively.
The Company also had arms-length direct policies and reinsurance agreements with MetLife and
certain of its subsidiaries. These direct policies and reinsurance agreements with MetLife and
certain of its subsidiaries continue to be in place after the Divestiture Date. The Company
reflected net premiums from these agreements of approximately $163.5 million (through the
Divestiture Date) and $250.9 million in 2008 and 2007, respectively. The premiums reflect the net
of business assumed from and ceded to MetLife and its subsidiaries. The pre-tax income, excluding
investment income allocated to support the business, was approximately $15.8 million (through the
Divestiture Date) and $16.0 million in 2008 and 2007, respectively.
Ratings
Insurer financial strength ratings, sometimes referred to as claims paying ratings, represent
the opinions of rating agencies regarding the financial ability of an insurance company to meet its
obligations under an insurance policy. Credit ratings represent the opinions of rating agencies
regarding an entitys ability to repay its indebtedness. The Companys insurer financial strength
ratings and credit ratings as of the date of this filing are listed in the table below for each
rating agency that meets with the Companys management on a regular basis:
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Moodys |
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A.M. Best |
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Investors |
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Standard & |
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Company (1) |
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Service (2) |
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Poors (3) |
Insurer Financial Strength Ratings |
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RGA Reinsurance Company |
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A+ |
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A1 |
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AA- |
RGA Life Reinsurance Company of Canada |
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A+ |
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Not Rated |
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AA- |
RGA International Reinsurance Company |
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Not Rated |
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Not Rated |
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AA- |
RGA Global Reinsurance Company |
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Not Rated |
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Not Rated |
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AA- |
Credit Ratings |
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Reinsurance Group of America, Incorporated: |
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Senior Unsecured |
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a- |
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Baa1 |
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A- |
Junior Subordinated Debentures |
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bbb |
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Baa3 |
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BBB- |
RGA Capital Trust I (Preferred Securities) |
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bbb |
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Baa2 |
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BBB |
Timberlake Financial Floating Rate Insured Notes |
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Not Rated |
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Not Rated |
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BBB |
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(1) |
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An A.M. Best Company (A.M. Best) insurer financial strength rating of A+ (superior) is
the second highest out of fifteen possible ratings and is assigned to companies that have, in
A.M. Bests opinion, a superior ability to meet their ongoing obligations to policyholders.
Financial strength ratings range from A++ (superior) to F (in liquidation). |
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A credit rating of a- is in the strong category and is the seventh highest rating out of
twenty-two possible ratings. A credit rating of bbb is in the adequate category and is the
ninth highest rating. |
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A Moodys Investors Service (Moodys) insurer financial strength rating of A1 (good) is
the fifth highest rating out of twenty-one possible ratings and indicates that Moodys
believes the insurance company offers good financial security; however, elements may be
present which suggest a susceptibility to impairment sometime in the future. |
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Moodys credit ratings of Baa1, Baa2 and Baa3 are in the medium-grade category and
represent the eighth, ninth and tenth highest ratings, respectively, out of twenty-two possible
ratings. According to Moodys, obligations with these ratings are subject to moderate credit
risk. |
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A Standard & Poors (S&P) insurer financial strength rating of AA- (very strong) is the
fourth highest rating out of twenty-one possible ratings. According to S&Ps rating scale, a
rating of AA- means that, in S&Ps opinion, the insurer has very strong financial security
characteristics. |
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S&P credit ratings of A- (strong), BBB (good) and BBB- (good) represent the seventh,
ninth, and tenth highest ratings, respectively, out of twenty-two possible ratings. According
to S&P, an obligation rated A- is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher-rated categories. However,
the obligors capacity to meet its financial commitment of the obligation is still strong.
According to S&P, an obligation rated BBB or BBB- exhibit adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the obligation. |
The ability to write reinsurance partially depends on an insurers financial condition and its
financial strength ratings. These ratings are based on an insurance companys ability to pay
policyholder obligations and are not directed toward the protection of investors. Each of the
Companys credit ratings is considered investment grade. RGAs ability to raise capital and the
cost of that capital is influenced by, among other things, its credit ratings. A security rating
is not a recommendation to buy, sell or hold securities. It is subject to revision or withdrawal
at any time by the assigning rating organization, and each rating should be evaluated independently
of any other rating.
A ratings downgrade of RGA or one of its reinsurance subsidiaries could adversely affect the
Companys ability to compete. See Item 1A Risk Factors for more on the potential
effects of a ratings downgrade.
Regulation
RGA Reinsurance, Parkway Reinsurance Company (Parkway Re) and RCM; Timberlake Reinsurance
Company II (Timberlake Re); RGA Canada; General American Argentina Seguros de Vida, S.A. (GA
Argentina); RGA Barbados, RGA Americas, RGA Atlantic and RGA Worldwide Reinsurance Company, Ltd.
(RGA Worldwide); RGA Global Reinsurance Company, Ltd. (RGA Global); RGA Australia; RGA
International Reinsurance Company (RGA International); RGA Reinsurance Company of South Africa,
Limited (RGA South Africa); and RGA UK are regulated by authorities in Missouri, South Carolina,
Canada, Argentina, Barbados, Bermuda, Australia, Ireland, South Africa, and the United Kingdom,
respectively. RGA Reinsurance, RGA Global and RGA International are also subject to regulations in
the other jurisdictions in which it is licensed or authorized to do business. Insurance laws and
regulations, among other things, establish minimum capital requirements and limit the amount of
dividends, distributions, and intercompany payments affiliates can make without prior regulatory
approval. Additionally, insurance laws and regulations impose restrictions on the amounts and type
of investments that insurance companies may hold.
General
The insurance laws and regulations, as well as the level of supervisory authority that may be
exercised by the various insurance departments, vary by jurisdiction, but generally grant broad
powers to supervisory agencies or regulators to examine and supervise insurance companies and
insurance holding companies with respect to every significant aspect of the conduct of the
insurance business, including approval or modification of contractual arrangements. These laws and
regulations generally require insurance companies to meet certain solvency standards and asset
tests, to maintain minimum standards of business conduct, and to file certain reports with
regulatory authorities, including information concerning their capital structure, ownership, and
financial condition, and subject insurers to potential assessments for amounts paid by guarantee
funds.
The Companys reinsurance subsidiaries are required to file statutory financial statements in
each jurisdiction in which they are licensed and may be subject to periodic examinations by the
insurance regulators of the jurisdictions in which
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each is licensed, authorized, or accredited. To date, none of the regulators reports related to
the Companys periodic examinations have contained material adverse findings.
Although some of the rates and policy terms of U.S. direct insurance agreements are regulated
by state insurance departments, the rates, policy terms, and conditions of reinsurance agreements
generally are not subject to regulation by any regulatory authority. However, the National
Association of Insurance Commissioners (NAIC) Model Law on Credit for Reinsurance, which has been
adopted in most states, imposes certain requirements for an insurer to take reserve credit for risk
ceded to a reinsurer. Generally, the reinsurer is required to be licensed or accredited in the
insurers state of domicile, or security must be posted for reserves transferred to the reinsurer
in the form of letters of credit or assets placed in trust. The NAIC Life and Health Reinsurance
Agreements Model Regulation, which has been passed in most states, imposes additional requirements
for insurers to claim reserve credit for reinsurance ceded (excluding yearly renewable term
reinsurance and non-proportional reinsurance). These requirements include bona fide risk transfer,
an insolvency clause, written agreements, and filing of reinsurance agreements involving in force
business, among other things.
The Valuation of Life Insurance Policies Model Regulation, commonly referred to as Regulation
XXX, was implemented in the U.S. for various types of life insurance business beginning January 1,
2000. Regulation XXX significantly increased the level of reserves that U.S. life insurance and
life reinsurance companies must hold on their statutory financial statements for various types of
life insurance business, primarily certain level premium term life products. The reserve levels
required under Regulation XXX increase over time and are normally in excess of reserves required
under GAAP. In situations where primary insurers have reinsured business to reinsurers that are
unlicensed and unaccredited in the U.S., the reinsurer must provide collateral equal to its
reinsurance reserves in order for the ceding company to receive statutory financial statement
credit. Reinsurers have historically utilized letters of credit for the benefit of the ceding
company, or have placed assets in trust for the benefit of the ceding company, or have used other
structures as the primary forms of collateral. The increasing nature of the statutory reserves
under Regulation XXX will likely require increased levels of collateral from reinsurers in the
future to the extent the reinsurer remains unlicensed and unaccredited in the U.S.
In order to manage the effect of Regulation XXX on its statutory financial statements, RGA
Reinsurance has retroceded a majority of Regulation XXX reserves to unaffiliated and affiliated
unlicensed reinsurers. RGA Reinsurances statutory capital may be significantly reduced if the
unaffiliated or affiliated reinsurer is unable to provide the required collateral to support RGA
Reinsurances statutory reserve credits and RGA Reinsurance cannot find an alternative source for
the collateral.
RGA Reinsurance, Parkway Re and RCM prepare statutory financial statements in conformity with
accounting practices prescribed or permitted by the State of Missouri. Timberlake Re prepares
statutory financial statements in conformity with accounting practices prescribed or permitted by
the State of South Carolina. Both states require domestic insurance companies to prepare their
statutory financial statements in accordance with the NAIC Accounting Practices and Procedures
manual subject to any deviations prescribed or permitted by each states insurance commissioner.
The Companys non-U.S. subsidiaries are subject to the regulations and reporting requirements of
their respective countries of domicile.
Capital Requirements
Risk-Based Capital (RBC) guidelines promulgated by the NAIC are applicable to RGA
Reinsurance and RCM, and identify minimum capital requirements based upon business levels and asset
mix. RGA Reinsurance and RCM maintain capital levels in excess of the amounts required by the
applicable guidelines. Regulations in international jurisdictions also require certain minimum
capital levels, and subject the companies operating there to oversight by the applicable regulatory
bodies. The Companys operations meet the minimum capital requirements in their respective
jurisdictions. The Company cannot predict the effect that any proposed or future legislation or
rule making in the countries in which it operates may have on the financial condition or operations
of the Company or its subsidiaries.
Insurance Holding Company Regulations
RGA Reinsurance, RCM and Parkway Re are subject to regulation under the insurance and
insurance holding company statutes of Missouri. The Missouri insurance holding company laws and
regulations generally require insurance and reinsurance subsidiaries of insurance holding companies
to register and file with the Missouri Department of Insurance, Financial Institutions and
Professional Registration (MDI), certain reports describing, among other information, their
capital structure, ownership, financial condition, certain intercompany transactions, and general
business operations. The Missouri insurance holding company statutes and regulations also require
prior approval of, or in certain circumstances, prior notice to the MDI of certain material
intercompany transfers of assets, as well as certain transactions between insurance companies,
their parent companies and affiliates.
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Under Missouri insurance laws and regulations, unless (i) certain filings are made with the
MDI, (ii) certain requirements are met, including a public hearing, and (iii) approval or exemption
is granted by the Director of the MDI, no person may acquire any voting security or security
convertible into a voting security of an insurance holding company, such as RGA, which controls a
Missouri insurance company, or merge with such an insurance holding company, if as a result of such
transaction such person would control the insurance holding company. Control is presumed to
exist under Missouri law if a person directly or indirectly owns or controls 10% or more of the
voting securities of another person.
In addition to RGA Reinsurance, RCM and Parkway Re, other insurance subsidiaries of RGA are
subject to various regulations in their respective jurisdictions.
Restrictions on Dividends and Distributions
Current Missouri law, applicable to RCM, and its wholly-owned subsidiary, RGA Reinsurance,
permits the payment of dividends or distributions which, together with dividends or distributions
paid during the preceding twelve months, do not exceed the greater of (i) 10% of statutory capital
and surplus as of the preceding December 31, or (ii) statutory net gain from operations for the
preceding calendar year. Any proposed dividend in excess of this amount is considered an
extraordinary dividend and may not be paid until it has been approved, or a 30-day waiting period
has passed during which it has not been disapproved, by the Director of the MDI. Additionally,
dividends may be paid only to the extent the insurer has unassigned surplus (as opposed to
contributed surplus). Pursuant to these restrictions, RCMs and RGA Reinsurances allowable
dividends without prior approval for 2010 are approximately $141.3 million and $146.6 million,
respectively. Any dividends paid by RGA Reinsurance would be paid to RCM, which in turn has the
ability to pay dividends to RGA. The MDI allows RCM to pay a dividend to RGA to the extent RCM
received the dividend from RGA Reinsurance, without limitation related to the level of unassigned
surplus. Historically, RGA has not relied upon dividends from its subsidiaries to fund its
obligations. However, the regulatory limitations described here could limit the Companys
financial flexibility in the future should it choose to or need to use subsidiary dividends as a
funding source for its obligations.
In contrast to current Missouri law, the NAIC Model Insurance Holding Company Act (the Model
Act) defines an extraordinary dividend as a dividend or distribution which, together with
dividends or distributions paid during the preceding twelve months, exceeds the lesser of (i) 10%
of statutory capital and surplus as of the preceding December 31, or (ii) statutory net gain from
operations for the preceding calendar year. The Company is unable to predict whether, when, or in
what form Missouri will enact a new measure for extraordinary dividends.
Missouri insurance laws and regulations also require that the statutory surplus of RCM and RGA
Reinsurance following any dividend or distribution be reasonable in relation to its outstanding
liabilities and adequate to meet its financial needs. The Director of the MDI may call for a
rescission of the payment of a dividend or distribution by RGA Reinsurance or RCM that would cause
its statutory surplus to be inadequate under the standards of the Missouri insurance regulations.
Pursuant to the South Carolina Director of Insurance, Timberlake Re may declare dividends
after June 15, 2012 subject to a minimum Total Adjusted Capital threshold, as defined by the NAICs
RBC regulation. Timberlake Re may pay dividends in accordance with any filed request to make such
payments if the South Carolina Director of Insurance has approved such request. Dividend payments
from other subsidiaries are subject to the regulations in the country of domicile.
Default or Liquidation
In the event that RGA defaults on any of its debt or other obligations, or becomes the subject
of bankruptcy, liquidation, or reorganization proceedings, the creditors and stockholders of RGA
will have no right to proceed against the assets of any of the subsidiaries of RGA. If any of
RGAs reinsurance subsidiaries were to be liquidated or dissolved, the liquidation or dissolution
would be conducted in accordance with the rules and regulations of the appropriate governing body
in the state or country of the subsidiarys formation. The creditors of any such reinsurance
company, including, without limitation, holders of its reinsurance agreements and state guaranty
associations (if applicable), would be entitled to payment in full from such assets before RGA, as
a direct or indirect stockholder, would be entitled to receive any distributions or other payments
from the remaining assets of the liquidated or dissolved subsidiary.
Federal Regulation
Discussions continue in the Congress of the United States concerning the future of the
McCarran-Ferguson Act, which exempts the business of insurance from most federal laws, including
anti-trust laws, to the extent such business is subject to state regulation. Judicial decisions
narrowing the definition of what constitutes the business of insurance and repeal or modification
of the McCarran-Ferguson Act may limit the ability of the Company, and RGA Reinsurance in
particular, to share information with respect to matters such as rate setting, underwriting, and
claims management. Likewise, discussions continue in the Congress of the United States concerning
potential future regulation of insurance and reinsurance
9
at the Federal level. It is not possible to predict the effect of such decisions or changes in the
law on the operation of the Company.
Environmental Considerations
Federal, state and local environmental laws and regulations apply to the Companys ownership
and operation of real property. Inherent in owning and operating real property are the risk of
hidden environmental liabilities and the costs of any required clean-up. Under the laws of certain
states, contamination of a property may give rise to a lien on the property to secure recovery of
the costs of clean-up. In several states, this lien has priority over the lien of an existing
mortgage against such property. In addition, in some states and under the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the Company may be
liable, in certain circumstances, as an owner or operator, for costs of cleaning-up releases or
threatened releases of hazardous substances at a property mortgaged to it. The Company also risks
environmental liability when it forecloses on a property mortgaged to it, although Federal
legislation provides for a safe harbor from CERCLA liability for secured lenders that foreclose and
sell the mortgaged real estate, provided that certain requirements are met. However, there are
circumstances in which actions taken could still expose the Company to CERCLA liability.
Application of various other federal and state environmental laws could also result in the
imposition of liability on the Company for costs associated with environmental hazards.
The Company routinely conducts environmental assessments prior to taking title to real estate
through foreclosure on real estate collateralizing mortgages that it holds. Although unexpected
environmental liabilities can always arise, the Company seeks to minimize this risk by undertaking
these environmental assessments and complying with its internal procedures, and as a result, the
Company believes that any costs associated with compliance with environmental laws and regulations
or any clean-up of properties would not have a material adverse effect on the Companys results of
operations.
Underwriting
Facultative. The Company has developed underwriting policies, procedures and standards with
the objective of controlling the quality of business written as well as its pricing. The Companys
underwriting process emphasizes close collaboration between its underwriting, actuarial, and
operations departments. Management periodically updates these underwriting policies, procedures,
and standards to account for changing industry conditions, market developments, and changes
occurring in the field of medical technology. These policies, procedures, and standards are
documented in electronic underwriting manuals made available to all the Companys underwriters.
The Company regularly performs both internal and external reviews of its underwriters and
underwriting process.
The Companys management determines whether to accept facultative reinsurance business on a
prospective insured by reviewing the application, medical information and all underwriting
requirements based on age and the face amount of the application. An assessment of medical and
financial history follows with decisions based on underwriting knowledge, manual review and
consultation with the Companys medical directors as necessary. Many facultative applications
involve individuals with multiple medical impairments, such as heart disease, high blood pressure,
and diabetes, which require a complex underwriting/mortality assessment. To assist its
underwriters in making these assessments, the Company employs 13 full-time medical directors as
well as 17 medical consultants.
Automatic. The Companys management determines whether to write automatic reinsurance
business by considering many factors, including the types of risks to be covered; the ceding
companys retention limit and binding authority, product, and pricing assumptions; and the ceding
companys underwriting standards, financial strength and distribution systems. For automatic
business, the Company ensures that the underwriting standards, procedures and guidelines of its
ceding companies are priced appropriately and consistent with the Companys expectations. To this
end, the Company conducts periodic reviews of the ceding companies underwriting and claims
personnel and procedures.
Operations
Generally, the Companys life business has been obtained directly, rather than through
brokers. The Company has an experienced sales and marketing staff that works to provide responsive
service and maintain existing relationships.
The Companys administration, auditing, valuation and accounting departments are responsible
for treaty compliance auditing, financial analysis of results, generation of internal management
reports, and periodic audits of administrative practices and records. A significant effort is
focused on periodic audits of administrative and underwriting practices, records, and treaty
compliance of reinsurance clients.
The Companys claims departments review and verify reinsurance claims, obtain the information
necessary to evaluate claims, and arrange for timely claims payments. Claims are subjected to a
detailed review process to ensure that the
10
risk was properly ceded, the claim complies with the contract provisions, and the ceding company is
current in the payment of reinsurance premiums to the Company. In addition, the claims departments
monitor both specific claims and the overall claims handling procedures of ceding companies.
Competition
Reinsurers compete on the basis of many factors, including financial strength, pricing and
other terms and conditions of reinsurance agreements, reputation, service, and experience in the
types of business underwritten. The U.S. and Canadian life reinsurance markets are served by
numerous international and domestic reinsurance companies. The Company believes that its primary
competitors in the North American life reinsurance market are currently the following, or their
affiliates: Transamerica Occidental Life Insurance Company, a subsidiary of Aegon N.V., Swiss Re
Life, Munich Reinsurance Company and Generali Re. However, within the reinsurance industry, this
can change from year to year. The Company believes that its major competitors in the international
life reinsurance markets are Swiss Re Life and Health Ltd., General Re, Munich Reinsurance Company,
Hannover Reinsurance, and SCOR Global Reinsurance.
Employees
As of December 31, 2009, the Company had 1,367 employees located throughout the world. None
of these employees are represented by a labor union.
C. Segments
The Company obtains substantially all of its revenues through reinsurance agreements that
cover a portfolio of life insurance products, including term life, credit life, universal life,
whole life, group life, joint and last survivor insurance, critical illness, as well as annuities
and financial reinsurance. Generally, the Company, through various subsidiaries, has provided
reinsurance for mortality, morbidity, and lapse risks associated with such products. With respect
to asset-intensive products, the Company has also provided reinsurance for investment-related
risks.
The following table sets forth the Companys premiums attributable to each of its segments for
the periods indicated on both a gross assumed basis and net of premiums ceded to third parties:
Gross and Net Premiums by Segment
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
Gross Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
3,513.9 |
|
|
|
56.3 |
|
|
$ |
3,305.2 |
|
|
|
56.6 |
|
|
$ |
3,073.8 |
|
|
|
57.2 |
|
Canada |
|
|
882.9 |
|
|
|
14.1 |
|
|
|
751.2 |
|
|
|
12.9 |
|
|
|
675.7 |
|
|
|
12.6 |
|
Europe & South Africa |
|
|
810.9 |
|
|
|
13.0 |
|
|
|
747.9 |
|
|
|
12.8 |
|
|
|
719.6 |
|
|
|
13.4 |
|
Asia Pacific |
|
|
1,027.8 |
|
|
|
16.5 |
|
|
|
1,027.9 |
|
|
|
17.6 |
|
|
|
898.2 |
|
|
|
16.7 |
|
Corporate and Other |
|
|
8.7 |
|
|
|
0.1 |
|
|
|
6.8 |
|
|
|
0.1 |
|
|
|
3.7 |
|
|
|
0.1 |
|
|
|
|
Total |
|
$ |
6,244.2 |
|
|
|
100.0 |
|
|
$ |
5,839.0 |
|
|
|
100.0 |
|
|
$ |
5,371.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
3,320.7 |
|
|
|
58.0 |
|
|
$ |
3,099.6 |
|
|
|
58.0 |
|
|
$ |
2,874.8 |
|
|
|
58.6 |
|
Canada |
|
|
614.9 |
|
|
|
10.7 |
|
|
|
534.3 |
|
|
|
10.0 |
|
|
|
487.1 |
|
|
|
9.9 |
|
Europe & South Africa |
|
|
782.0 |
|
|
|
13.7 |
|
|
|
707.8 |
|
|
|
13.2 |
|
|
|
678.6 |
|
|
|
13.8 |
|
Asia Pacific |
|
|
998.9 |
|
|
|
17.4 |
|
|
|
1,000.8 |
|
|
|
18.7 |
|
|
|
864.5 |
|
|
|
17.6 |
|
Corporate and Other |
|
|
8.7 |
|
|
|
0.2 |
|
|
|
6.8 |
|
|
|
0.1 |
|
|
|
4.0 |
|
|
|
0.1 |
|
|
|
|
Total |
|
$ |
5,725.2 |
|
|
|
100.0 |
|
|
$ |
5,349.3 |
|
|
|
100.0 |
|
|
$ |
4,909.0 |
|
|
|
100.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
The following table sets forth selected information concerning assumed life reinsurance
business in force by segment for the indicated periods. (The term in force refers to insurance
policy face amounts or net amounts at risk.)
Reinsurance Business In Force by Segment
(in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
U.S. |
|
$ |
1,290.5 |
|
|
|
55.5 |
|
|
$ |
1,274.5 |
|
|
|
60.5 |
|
|
$ |
1,232.3 |
|
|
|
58.1 |
|
Canada |
|
|
276.8 |
|
|
|
11.9 |
|
|
|
209.5 |
|
|
|
9.9 |
|
|
|
217.7 |
|
|
|
10.3 |
|
Europe & South Africa |
|
|
408.9 |
|
|
|
17.6 |
|
|
|
325.2 |
|
|
|
15.4 |
|
|
|
380.4 |
|
|
|
17.9 |
|
Asia Pacific |
|
|
348.9 |
|
|
|
15.0 |
|
|
|
298.9 |
|
|
|
14.2 |
|
|
|
289.5 |
|
|
|
13.7 |
|
|
|
|
Total |
|
$ |
2,325.1 |
|
|
|
100.0 |
|
|
$ |
2,108.1 |
|
|
|
100.0 |
|
|
$ |
2,119.9 |
|
|
|
100.0 |
|
|
|
|
Reinsurance business in force reflects the addition or acquisition of new life
reinsurance business, offset by terminations (e.g., voluntary surrenders of underlying life
insurance policies, lapses of underlying policies, deaths of insureds, and the exercise of
recapture options), changes in foreign exchange, and any other changes in the amount of insurance
in force. As a result of terminations and other changes, assumed in force amounts at risk of
$104.0 billion, $316.8 billion, and $123.9 billion were released in 2009, 2008 and 2007,
respectively.
The following table sets forth selected information concerning assumed new business volume by
segment for the indicated periods. (The term volume refers to insurance policy face amounts or
net amounts at risk.)
New Business Volume by Segment
(in billions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
|
Amount |
|
% |
|
Amount |
|
% |
|
Amount |
|
% |
U.S. |
|
$ |
135.0 |
|
|
|
42.1 |
|
|
$ |
134.4 |
|
|
|
44.1 |
|
|
$ |
164.2 |
|
|
|
54.3 |
|
Canada |
|
|
43.9 |
|
|
|
13.7 |
|
|
|
51.2 |
|
|
|
16.8 |
|
|
|
46.8 |
|
|
|
15.5 |
|
Europe & South Africa |
|
|
121.1 |
|
|
|
37.7 |
|
|
|
87.5 |
|
|
|
28.7 |
|
|
|
61.3 |
|
|
|
20.3 |
|
Asia Pacific |
|
|
21.0 |
|
|
|
6.5 |
|
|
|
31.9 |
|
|
|
10.4 |
|
|
|
30.1 |
|
|
|
9.9 |
|
|
|
|
Total |
|
$ |
321.0 |
|
|
|
100.0 |
|
|
$ |
305.0 |
|
|
|
100.0 |
|
|
$ |
302.4 |
|
|
|
100.0 |
|
|
|
|
Additional information regarding the operations of the Companys segments and geographic
operations is contained in Note 17 Segment Information in the Notes to Consolidated Financial
Statements.
U.S. Operations
The U.S. operations represented 58.0%, 58.0% and 58.6% of the Companys net premiums in 2009,
2008 and 2007, respectively. The U.S. operations market traditional life reinsurance, reinsurance
of asset-intensive products and financial reinsurance, primarily to large U.S. life insurance
companies.
Traditional Reinsurance
The U.S. Traditional sub-segment provides life reinsurance to domestic clients for a variety
of life products through yearly renewable term agreements, coinsurance, and modified coinsurance.
This business has been accepted under many different rate scales, with rates often tailored to suit
the underlying product and the needs of the ceding company. Premiums typically vary for smokers
and non-smokers, males and females, and may include a preferred underwriting class discount.
Reinsurance premiums are paid in accordance with the treaty, regardless of the premium mode for the
underlying primary insurance. This business is made up of facultative and automatic treaty
business.
Automatic business, including financial reinsurance treaties, is generated pursuant to
treaties which generally require that the underlying policies meet the ceding companys
underwriting criteria, although a number of such policies may be rated substandard. In contrast to
facultative reinsurance, reinsurers do not engage in underwriting assessments of each risk assumed
through an automatic treaty.
Because the Company does not apply its underwriting standards to each policy ceded to it under
automatic treaties, the U.S. operations generally require ceding companies to keep a portion of the
business written on an automatic basis,
12
thereby increasing the ceding companies incentives to underwrite risks with due care and, when
appropriate, to contest claims diligently.
The U.S. facultative reinsurance operation involves the assessment of the risks inherent in
(i) multiple impairments, such as heart disease, high blood pressure, and diabetes; (ii) cases
involving large policy face amounts; and (iii) financial risk cases, i.e., cases involving policies
disproportionately large in relation to the financial characteristics of the proposed insured. The
U.S. operations marketing efforts have focused on developing facultative relationships with client
companies because management believes facultative reinsurance represents a substantial segment of
the reinsurance activity of many large insurance companies and also serves as an effective means of
expanding the U.S. operations automatic business. In 2009, 2008 and 2007, approximately 19.3%,
19.5%, and 19.9%, respectively, of the U.S. gross premiums were written on a facultative basis.
The U.S. operations have emphasized personalized service and prompt response to requests for
facultative risk assessment.
Only a portion of approved facultative applications ultimately result in reinsurance. This is
because applicants for impaired risk policies often submit applications to several primary
insurers, which in turn seek facultative reinsurance from several reinsurers. Ultimately, only one
insurance company and one reinsurer are likely to obtain the business. The Company tracks the
percentage of declined and placed facultative applications on a client-by-client basis and
generally works with clients to seek to maintain such percentages at levels deemed acceptable.
Because the Company applies its underwriting standards to each application submitted to it
facultatively, it generally does not require ceding companies to retain a portion of the underlying
risk when business is written on a facultative basis.
In addition, several of the Companys U.S. clients have purchased life insurance policies
insuring the lives of their executives. These policies have generally been issued to fund deferred
compensation plans and have been reinsured with the Company. The Companys consolidated balance
sheets included interest-sensitive contract reserves of $1.2 billion and $1.1 billion as of
December 31, 2009 and 2008, respectively, and policy loans of $1.1 billion as of both December 31,
2009 and 2008, associated with this business.
Asset-Intensive Reinsurance
Asset-intensive reinsurance primarily concentrates on the investment risk within underlying
annuities and corporate-owned life insurance policies. Most of these agreements are coinsurance,
coinsurance funds withheld, or modified coinsurance of primarily investment risk such that the
Company recognizes profits or losses primarily from the spread between the investment earnings and
the interest credited on the underlying annuity contract liabilities. Reinsurance of such business
was reflected in interest-sensitive contract liabilities of approximately $6.3 billion and $6.5
billion as of December 31, 2009 and 2008, respectively.
Annuities are normally limited by the size of the deposit from any single depositor. The
Company also reinsures certain variable annuity products that contain guaranteed minimum death or
living benefits. Corporate-owned life insurance normally involves a large number of insureds
associated with each deposit, and the Companys underwriting guidelines limit the size of any
single deposit. The individual policies associated with any single deposit are typically issued
within pre-set guaranteed issue parameters. A significant amount of this business is written on a
modified coinsurance or coinsurance with funds withheld basis. See Managements Discussion and
Analysis of Financial Condition and Results of OperationsInvestments and Note 4 Investments
in the Notes to Consolidated Financial Statements for additional information.
The Company primarily targets highly-rated, financially secure companies as clients for
asset-intensive business. These companies may wish to limit their own exposure to certain
products. Ongoing asset/liability analysis is required for the management of asset-intensive
business. The Company performs this analysis internally, in conjunction with asset/liability
analysis performed by the ceding companies.
Financial Reinsurance
The Companys U.S. Financial Reinsurance sub-segment assists ceding companies in meeting
applicable regulatory requirements while enhancing the ceding companies financial strength and
regulatory surplus position. The Company commits cash or assumes regulatory insurance liabilities
from the ceding companies. Generally, such amounts are offset by receivables from ceding companies
that are repaid by the future profits from the reinsured block of business. The Company structures
its financial reinsurance transactions so that the projected future profits of the underlying
reinsured business significantly exceed the amount of regulatory surplus provided to the ceding
company.
The Company primarily targets highly-rated insurance companies for financial reinsurance due
to the credit risk associated with this business. A careful analysis is performed before providing
any regulatory surplus enhancement to the ceding company. This analysis is intended to ensure that
the Company understands the risks of the underlying insurance
13
product and that the transaction has a high likelihood of being repaid through the future profits
of the underlying business. If the future profits of the business are not sufficient to repay the
Company or if the ceding company becomes financially distressed and is unable to make payments
under the treaty, the Company may incur losses. A staff of actuaries and accountants tracks
experience for each treaty on a quarterly basis in comparison to expected models. This sub-segment
also retrocedes most of its financial reinsurance business to other insurance companies to
alleviate the strain on regulatory surplus created by this business.
Customer Base
The U.S. reinsurance operation markets life reinsurance primarily to the largest U.S. life
insurance companies. The Company estimates that approximately 86 of the top 100 U.S. life
insurance companies, based on premiums, are clients. These treaties generally are terminable by
either party on 90 days written notice, but only with respect to future new business. Existing
business generally is not terminable, unless the underlying policies terminate or are recaptured.
In 2009, the U.S. reinsurance operations largest client generated approximately $573.0 million or
16.3% of U.S. operations gross premiums. In addition, 62 other clients each generated annual gross
premiums of $5.0 million or more, and the aggregate gross premiums from these clients represented
approximately 80.3% of U.S. operations gross premiums. For the purpose of this disclosure,
companies that are within the same insurance holding company structure are combined.
Canada Operations
The Canada operations represented 10.7%, 10.0%, and 9.9% of the Companys net premiums in
2009, 2008 and 2007, respectively. In 2009, the Canadian life operations assumed $43.9 billion in
new business, predominately representing recurring new business, as opposed to in force
transactions. Approximately 84.5% of the 2009 recurring new business was written on an automatic
basis.
The Company operates in Canada primarily through RGA Canada, a wholly-owned subsidiary. RGA
Canada is a leading life reinsurer in Canada, based on new individual life insurance production,
assisting clients with capital management and mortality and morbidity risk management and is
primarily engaged in traditional individual life reinsurance, as well as creditor, critical
illness, and group life and health reinsurance. Creditor insurance covers the outstanding balance
on personal, mortgage or commercial loans in the event of death, disability or critical illness and
is generally shorter in duration than traditional life insurance.
Clients include most of the life insurers in Canada, although the number of life insurers is
much smaller compared to the U.S. During 2009, the three largest clients represented $334.5
million, or 37.9%, of gross premiums. Three other clients individually represented more than 5% of
Canadas gross premiums. Together, these three clients represented 18.4% of Canadas gross
premiums.
As of December 31, 2009, RGA Canada had two offices and maintained a staff of 104 people at
the Montreal office and 19 people at the office in Toronto. RGA Canada employs its own
underwriting, actuarial, claims, pricing, accounting, systems, marketing and administrative staff.
Europe & South Africa Operations
The Europe & South Africa operations represented 13.7%, 13.2%, and 13.8% of the Companys net
premiums in 2009, 2008 and 2007, respectively. This segment primarily provides life reinsurance to
clients located in France, Germany, India, Italy, Mexico, the Netherlands, Poland, South Africa,
Spain and the UK. The principal types of business have been reinsurance of life products through
yearly renewable term and coinsurance agreements, the reinsurance of critical illness coverage that
provides a benefit in the event of the diagnosis of a pre-defined critical illness and to a lesser
extent, the reinsurance of longevity risk related to payout annuities. The reinsurance agreements
of critical illness coverage may be either facultative or automatic agreements. Premiums earned
from critical illness coverage represented 26.2% of the total gross premiums for this segment in
2009. The segments five largest clients, all part of the Companys UK operations, generated
approximately $400.8 million, or 49.4%, of the segments gross premiums in 2009.
During 2000, RGA established a UK regulated reinsurer and began operating in the UK, where an
increasing number of insurers were ceding the mortality and accelerated critical illness risks of
individual life products on a quota share basis and reinsuring the longevity risk related to payout
annuities and reinsurance of bulk annuities and individually underwritten impaired life annuities.
During the years since, RGA has grown its UK operations significantly and is now recognized as an
established participant in this market with significant market share. The reinsurers present in
the market include the large global companies with which the Company also competes in other
markets. In 2009, the UK operations generated approximately 69.8% of the segments gross premiums.
14
In 1998, the Company established RGA South Africa, with offices in Cape Town and Johannesburg,
to provide life reinsurance in South Africa. In South Africa, the Companys subsidiary has managed
to establish a substantial position in the individual facultative market, through excellent service
and competitive pricing, and has gained an increasing share in the automatic market. Life
reinsurance is also provided on group cases. The Company is concentrating on the life insurance
market.
In Spain, the Company has business relationships with more than 50 companies covering both
individual and group life business; in 2007 this operation became a branch. A representative
office was opened in 1998 in Mexico City to directly assist clients in this market. In 2002, RGA
opened an office in India which markets life reinsurance support on individual and group business.
During 2006, RGA opened a representative office in Poland to directly assist clients in the central
and eastern European market; in 2009 this operation became a branch. During 2007, RGA opened a
branch office in France and a representative office in Italy to directly assist clients in those
markets; in 2009 the Italy operation became a branch. In 2008, RGA opened a branch office in
Germany to directly assist clients in the region. During 2009, RGA opened a representative office
in the Netherlands to directly assist clients in this market.
RGAs subsidiaries in the UK and South Africa employ their own underwriting, actuarial,
claims, pricing, accounting, marketing, and administration staff with additional support provided
by the Companys corporate staff in the U.S. Divisional management through RGA International
Corporation (Nova Scotia ULC), based in Toronto, also provides services for these and other
international markets. As of December 31, 2009, this segment employed 77 people in Toronto, 79
people in the UK, 63 people in South Africa, 68 people in mainland Europe and Ireland, 12 people in
Mexico, 43 people in India and 52 people in St. Louis.
Asia Pacific Operations
The Asia Pacific operations represented 17.4%, 18.7%, and 17.6% of the Companys net premiums
in 2009, 2008 and 2007, respectively. The Company has a presence in the Asia Pacific region with
licensed branch offices and/or representative offices in Hong Kong, Japan, South Korea, Taiwan, New
Zealand, Labuan (Malaysia) and China. The Company also established a reinsurance subsidiary in
Australia in January 1996.
During 2009, the 10 largest clients, six in Australia, two in Korea and two in Japan,
generated approximately $582.4 million, or 56.7% of the total gross premiums for the Asia Pacific
operations. The Australian business, as a whole, generated approximately $452.7 million, or 44.0%
of the total gross premiums for the Asia Pacific operations in 2009.
The principal types of reinsurance for this segment include life, critical illness, disability
income, superannuation, and non-traditional reinsurance. Superannuation is the Australian
government mandated compulsory retirement savings program. Superannuation funds accumulate
retirement funds for employees, and in addition, offer life and disability insurance coverage.
Reinsurance agreements may be either facultative or automatic agreements covering primarily
individual risks and in some markets, group risks.
Within the Asia Pacific segment, as of December 31, 2009, 35 people were on staff in the Hong
Kong office, 57 people were on staff in the Japan office, 17 people were on staff in the Taiwan
office, 30 people were on staff in the South Korean office, six people were on staff in the Beijing
office, one person was on staff in the New Zealand office, 50 people were on staff in the
International Division Sydney office, 10 were on staff at the St. Louis office, and RGA Australian
Holdings maintained a staff of 75. The Hong Kong, Japan, Taiwan, Beijing and South Korea offices
provide full reinsurance services and are supported by the Companys U.S. and International
Division Sydney office. RGA Australia employs its own underwriting, actuarial, claims, pricing,
accounting, systems, marketing, and administration service with additional support provided by the
Companys U.S. and International Division Sydney office.
Corporate and Other
Corporate and Other operations include investment income from invested assets not allocated to
support segment operations and undeployed proceeds from the Companys capital raising efforts, in
addition to unallocated investment related gains or losses. Corporate expenses consist of the
offset to capital charges allocated to the operating segments within the policy acquisition costs
and other insurance expenses line item, unallocated overhead and executive costs, and interest
expense related to debt and the $225.0 million of 5.75% Company-obligated mandatorily redeemable
trust preferred securities. Additionally, Corporate and Other includes results from, among others,
RGA Technology Partners, Inc. (RTP), a wholly-owned subsidiary that develops and markets
technology solutions for the insurance industry and the investment income and expense associated
with the Companys collateral finance facility. Effective January 1, 2009, due to immateriality,
the discontinued accident and health operations were included in the results of the Corporate and
Other segment. More information about the Companys discontinued accident and health division may
be found in Note 21
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Discontinued Operations in the Notes to Consolidated Financial Statements. In the fourth quarter
of 2009, the Company wrote off its remaining interest in its direct insurance operations in
Argentina, recording a $3.0 million investment-related loss. This loss was in addition to the
Companys recognition of a $10.5 million foreign currency translation loss in 2007 related to the
pending sale.
D. Financial Information About Foreign Operations
The Companys foreign operations are primarily in Canada, the Asia Pacific region, and Europe
& South Africa. Revenue, income (loss) before income taxes, which include investment related gains
(losses), interest expense, depreciation and amortization, and identifiable assets attributable to
these geographic regions are identified in Note 17 Segment Information in the Notes to
Consolidated Financial Statements. Although there are risks inherent to foreign operations, such
as currency fluctuations and restrictions on the movement of funds, as described in Item 1A Risk
Factors, the Companys financial position and results of operations have not been materially
adversely affected thereby to date.
E. Available Information
Copies of the Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports are available free of charge through the
Companys website (www.rgare.com) as soon as reasonably practicable after the Company
electronically files such reports with the Securities and Exchange
Commission (www.sec.gov).
Information provided on such websites does not constitute part of this Annual Report on Form 10-K.
Item 1A. RISK FACTORS
In the Risk Factors below, we refer to the Company as we, us, or
our. Investing in our securities involves certain risks. Any of the following risks
could materially adversely affect our business, results of operations, or financial condition and
could result in a loss of your investment.
Risks Related to Our Business
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity
needs, access to capital and cost of capital.
The capital and credit markets have experienced varying degrees of volatility and disruption.
In some cases, the markets have exerted downward pressure on availability of liquidity and credit
capacity for certain issuers.
We need liquidity to pay our operating expenses, interest on our debt and dividends on our
capital stock and to replace certain maturing liabilities. Without sufficient liquidity, we will
be forced to curtail our operations, and our business will suffer. The principal sources of our
liquidity are reinsurance premiums under reinsurance treaties and cash flow from our investment
portfolio and other assets. Sources of liquidity in normal markets also include proceeds from the
issuance of a variety of short- and long-term instruments, including medium- and long-term debt,
junior subordinated debt securities, capital securities and common stock.
In the event current resources do not satisfy our needs, we may have to seek additional
financing. The availability of additional financing will depend on a variety of factors such as
market conditions, the general availability of credit, the volume of trading activities, the
overall availability of credit to the financial services industry, our credit ratings and credit
capacity, as well as the possibility that customers or lenders could develop a negative perception
of our long- or short-term financial prospects if we incur large investment losses or if the level
of our business activity decreased due to a market downturn. Similarly, our access to funds may be
impaired if regulatory authorities or rating agencies take negative actions against us. Our
internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to
successfully obtain additional financing on favorable terms, or at all.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our
access to capital required to operate our business, most significantly our reinsurance operations.
Such market conditions may limit our ability to replace, in a timely manner, maturing liabilities;
satisfy statutory capital requirements; generate fee income and market-related revenue to meet
liquidity needs; and access the capital necessary to grow our business. As such, we may be forced
to delay raising capital, issue shorter tenor securities than we prefer, or bear an unattractive
cost of capital which could decrease our profitability and significantly reduce our financial
flexibility. At various points during the past twelve months, our credit spreads widened
considerably. Further, our ability to finance our statutory reserve requirements is limited in the
current marketplace. If capacity continues to be limited for a prolonged period of time, our
ability to obtain new funding for such purposes may be hindered and, as a result, it may limit or
adversely affect our ability to write additional business in a cost-
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effective manner. Our results of operations, financial condition, cash flows and statutory
capital position could be materially adversely affected by disruptions in the financial markets.
Difficult conditions in the global capital markets and the economy generally may materially
adversely affect our business and results of operations.
Our results of operations are materially affected by conditions in the global capital markets
and the economy generally, both in the United States and elsewhere around the world. Fixed income
markets experienced a period of extreme volatility, which negatively affected market liquidity
conditions. Fixed income instruments experienced decreased liquidity, increased price volatility,
credit downgrade events, and increased probability of default. Many fixed income securities became
less liquid and more difficult to value and sell. Domestic and international equity markets also
experienced heightened volatility and turmoil, with issuers (such as us) that have exposure to the
mortgage and credit markets particularly affected. These events and the continuing market
upheavals may have an adverse effect on us, in part because we have a large investment portfolio
and are also dependent upon customer behavior. Our revenues may decline in such circumstances and
our profit margins may erode. In addition, in the event of extreme prolonged market events, such
as the global credit crisis, we could incur significant investment-related losses. Even in the
absence of a market downturn, we are exposed to substantial risk of loss due to market volatility.
The liquidity and value of some of our investments has significantly diminished as volatility has
increased.
We hold certain investments that may lack liquidity, such as privately placed fixed maturity
securities; mortgage loans; policy loans; and equity real estate. Even some of our very high
quality assets have been more illiquid as a result of the recent challenging market conditions.
If we require significant amounts of cash on short notice in excess of normal cash
requirements or are required to post or return collateral in connection with our investment
portfolio, derivatives transactions or securities lending activities, we may have difficulty
selling these investments in a timely manner, be forced to sell them for less than we otherwise
would have been able to realize, or both.
The impairment of other financial institutions could adversely affect us.
We have exposure to many different industries and counterparties, and routinely execute
transactions with counterparties in the financial services industry, including brokers and dealers,
insurance companies, commercial banks, investment banks, investment funds and other institutions.
Many of these transactions expose us to credit risk in the event of default of our counterparty.
In addition, with respect to secured and other transactions that provide for us to hold collateral
posted by the counterparty, our credit risk may be exacerbated when the collateral we hold cannot
be liquidated at prices sufficient to recover the full amount of our exposure. We also have
exposure to these financial institutions in the form of unsecured debt instruments, derivative
transactions and equity investments. There can be no assurance that any such losses or impairments
to the carrying value of these assets would not materially and adversely affect our business and
results of operations.
Our requirements to post collateral or make payments related to declines in market value of
specified assets may expose us to counterparty risk and adversely affect our liquidity.
Some of our transactions with financial and other institutions specify the circumstances under
which the parties are required to post collateral. The amount of collateral we may be required to
post under these agreements may increase under certain circumstances, which could adversely affect
our liquidity. In addition, under the terms of some of our transactions we may be required to make
payment to our counterparties related to any decline in the market value of the specified assets.
Defaults on our mortgage loans and volatility in performance may adversely affect our
profitability.
Our mortgage loans face default risk and are principally collateralized by commercial
properties. Mortgage loans are stated on our balance sheet at unpaid principal balance, adjusted
for any unamortized premium or discount, deferred fees or expenses, and are net of valuation
allowances. We establish valuation allowances for estimated impairments as of the balance sheet
date. Such valuation allowances are based on the excess carrying value of the loan over the
present value of expected future cash flows discounted at the loans original effective interest
rate, the value of the loans collateral if the loan is in the process of foreclosure or otherwise
collateral dependent, or the loans market value if the loan is being sold. At December 31, 2009,
we had valuation allowances of $5.8 million related to our mortgage loans. The performance of our
mortgage loan investments, however, may fluctuate in the future. An increase in the default rate
of our mortgage loan investments could have a material adverse effect on our results of operations
and financial condition.
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Further, any geographic or sector concentration of our mortgage loans may have adverse effects
on our investment portfolios and consequently on our consolidated results of operations or
financial condition. While we seek to mitigate this risk by having a broadly diversified
portfolio, events or developments that have a negative effect on any particular geographic region
or sector may have a greater adverse effect on the investment portfolios to the extent that the
portfolios are concentrated. Moreover, our ability to sell assets relating to such particular
groups of related assets may be limited if other market participants are seeking to sell at the
same time.
Our investments are reflected within the consolidated financial statements utilizing different
accounting bases and accordingly we may not have recognized differences, which may be significant,
between cost and fair value in our consolidated financial statements.
Our principal investments are in fixed maturity and equity securities, short-term investments,
mortgage loans, policy loans, funds withheld at interest and other invested assets. The carrying
value of such investments is as follows:
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Fixed maturity and equity securities are classified as available-for-sale and are
reported at their estimated fair value. Unrealized investment gains and losses on
these securities are recorded as a separate component of accumulated other
comprehensive income or loss, net of related deferred acquisition costs and deferred
income taxes. |
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Short-term investments include investments with remaining maturities of one year or
less, but greater than three months, at the time of acquisition and are stated at
amortized cost, which approximates fair value. |
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Mortgage and policy loans are stated at unpaid principal balance. Additionally,
mortgage loans are adjusted for any unamortized premium or discount, deferred fees or
expenses, net of valuation allowances. |
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Funds withheld at interest represent amounts contractually withheld by ceding
companies in accordance with reinsurance agreements. The value of the assets withheld
and interest income are recorded in accordance with specific treaty terms. |
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We primarily use the cost method of accounting for investments in real estate joint
ventures and other limited partnership interests since we have a minor equity
investment and virtually no influence over the joint ventures or the partnerships
operations. These investments are reflected in other invested assets on the balance
sheet. |
Investments not carried at fair value in our consolidated financial statements principally,
mortgage loans, policy loans, real estate joint ventures, and other limited partnerships may have
fair values which are substantially higher or lower than the carrying value reflected in our
consolidated financial statements. Each of such asset classes is regularly evaluated for
impairment under the accounting guidance appropriate to the respective asset class.
Our valuation of fixed maturity and equity securities and derivatives include methodologies,
estimations and assumptions which are subject to differing interpretations and could result in
changes to investment valuations that may materially adversely affect our results of operations or
financial condition.
Fixed maturity, equity securities and short-term investments which are reported at fair value
on the consolidated balance sheet represent the majority of our total cash and invested assets. We
have categorized these securities into a three-level hierarchy, based on the priority of the inputs
to the respective valuation technique. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). An asset or liabilitys classification within the fair
value hierarchy is based on the lowest level of significant input to its valuation. For example, a
Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and
unobservable (Level 3). Therefore, gains and losses for such assets and liabilities categorized
within Level 3 may include changes in fair value that are attributable to both observable market
inputs (Levels 1 and 2) and unobservable market inputs (Level 3).
The determination of fair values in the absence of quoted market prices is based on:
(i) valuation methodologies; (ii) securities we deem to be comparable; and (iii) assumptions deemed
appropriate given the circumstances. The fair value estimates are made at a specific point in
time, based on available market information and judgments about financial instruments, including
estimates of the timing and amounts of expected future cash flows and the credit standing of the
issuer or counterparty. Factors considered in estimating fair value include: coupon rate,
maturity, estimated duration, call provisions, sinking fund requirements, credit rating, industry
sector of the issuer, and quoted market prices of comparable securities. The use of different
methodologies and assumptions may have a material effect on the estimated fair value amounts.
During periods of market disruption including periods of significantly rising or high interest
rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of our
securities, for example alternative residential mortgage
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loan (Alt-A) securities and sub-prime mortgage-backed securities, if trading becomes less
frequent and/or market data becomes less observable. There may be certain asset classes that were
in active markets with significant observable data that become illiquid due to the current
financial environment. In such cases, more securities may fall to Level 3 and thus require more
subjectivity and management judgment. As such, valuations may include inputs and assumptions that
are less observable or require greater estimation as well as valuation methods which are more
sophisticated or require greater estimation thereby resulting in values which may be less than the
value at which the investments may be ultimately sold. Further, rapidly changing and unprecedented
credit and equity market conditions could materially impact the valuation of securities as reported
within our consolidated financial statements and the period-to-period changes in value could vary
significantly. Decreases in value may have a material adverse effect on our results of operations
or financial condition.
The reported value of our relatively illiquid types of investments, our investments in the
asset classes described in the paragraph above and, at times, our high quality, generally liquid
asset classes, do not necessarily reflect the lowest current market price for the asset. If we
were forced to sell certain of our assets in the current market, there can be no assurance that we
will be able to sell them for the prices at which we have recorded them and we may be forced to
sell them at significantly lower prices.
The determination of the amount of allowances and impairments taken on our investments is highly
subjective and could materially impact our results of operations or financial position.
The determination of the amount of allowances and impairments vary by investment type and is
based upon our periodic evaluation and assessment of known and inherent risks associated with the
respective asset class. Such evaluations and assessments are revised as conditions change and new
information becomes available. Management updates its evaluations regularly and reflects changes
in allowances and impairments in operations as such evaluations are revised. There can be no
assurance that our management has accurately assessed the level of impairments taken, allowances
reflected in our financial statements and potential impact on regulatory capital. Furthermore,
additional impairments may need to be taken or allowances provided for in the future. Historical
trends may not be indicative of future impairments or allowances.
For example, the cost of our fixed maturity and equity securities is adjusted for impairments
in value deemed to be other-than-temporary in the period in which the determination is made. The
assessment of whether impairments have occurred is based on managements case-by-case evaluation of
the underlying reasons for the decline in fair value. Our management considers a wide range of
factors about the security issuer and uses their best judgment in evaluating the cause of the
decline in the estimated fair value of the security and in assessing the prospects for near-term
recovery. Inherent in managements evaluation of the security are assumptions and estimates about
the operations of the issuer and its future earnings potential. Considerations in the impairment
evaluation process include, but are not limited to:
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the length of time and the extent to which the market value has been below cost or
amortized cost; |
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the potential for impairments of securities when the issuer is experiencing
significant financial difficulties; |
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the potential for impairments in an entire industry sector or sub-sector; |
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the potential for impairments in certain economically depressed geographic
locations; |
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the potential for impairments of securities where the issuer, series of issuers or
industry has suffered a catastrophic type of loss or has exhausted natural resources; |
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for fixed maturity securities, whether or not we have the intent to sell, or more
likely than not, would be required to sell the security before the recovery of its
value to an amount equal to or greater than cost or amortized cost; |
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for equity securities, our ability and intent to hold the security for a period of
time sufficient to allow for the recovery of its value to an almost equal to or greater
than cost or amortized cost; |
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unfavorable changes in forecasted cash flows on mortgage-backed and asset-backed
securities; and |
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other subjective factors, including concentrations and information obtained from
regulators and rating agencies. |
Defaults, downgrades or other events impairing the value of our fixed maturity securities portfolio
may reduce our earnings.
We are subject to the risk that the issuers, or guarantors, of fixed maturity securities we
own may default on principal and interest payments they owe us. At December 31, 2009, the fixed
maturity securities of $11.8 billion in our investment portfolio represented 59.6% of our total
cash and invested assets. The occurrence of a major economic downturn (such as the current
downturn in the economy), acts of corporate malfeasance, widening risk spreads, or other events
that adversely affect the issuers or guarantors of these securities could cause the value of our
fixed maturity securities portfolio and our net income to decline and the default rate of the fixed
maturity securities in our investment portfolio to increase. A ratings downgrade affecting issuers
or guarantors of particular securities, or similar trends that could worsen the credit quality
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of issuers, such as the corporate issuers of securities in our investment portfolio, could
also have a similar effect. With economic uncertainty, credit quality of issuers or guarantors
could be adversely affected. Any event reducing the value of these securities other than on a
temporary basis could have a material adverse effect on our business, results of operations and
financial condition.
A downgrade in our ratings or in the ratings of our reinsurance subsidiaries could adversely affect
our ability to compete.
Ratings are an important factor in our competitive position. Rating organizations
periodically review the financial performance and condition of insurers, including our reinsurance
subsidiaries. These ratings are based on an insurance companys ability to pay its obligations and
are not directed toward the protection of investors. Rating organizations assign ratings based
upon several factors. While most of the factors considered relate to the rated company, some of
the factors relate to general economic conditions and circumstances outside the rated companys
control. The various rating agencies periodically review and evaluate our capital adequacy in
accordance with their established guidelines and capital models. In order to maintain our existing
ratings, we may commit from time to time to manage our capital at levels commensurate with such
guidelines and models. If our capital levels are insufficient to fulfill any such commitments, we
could be required to reduce our risk profile by, for example, retroceding some of our business or
by raising additional capital by issuing debt, hybrid, or equity securities. Any such actions
could have a material adverse impact on our earnings or materially dilute our shareholders equity
ownership interests.
Any downgrade in the ratings of our reinsurance subsidiaries could adversely affect their
ability to sell products, retain existing business, and compete for attractive acquisition
opportunities. Ratings are subject to revision or withdrawal at any time by the assigning rating
organization. A rating is not a recommendation to buy, sell or hold securities, and each rating
should be evaluated independently of any other rating. We believe that the rating agencies
consider the ratings of a parent company when assigning a rating to a subsidiary of that company.
The ability of our subsidiaries to write reinsurance partially depends on their financial condition
and is influenced by their ratings. In addition, a significant downgrade in the rating or outlook
of RGA, among other factors, could adversely affect our ability to raise and then contribute
capital to our subsidiaries for the purpose of facilitating their operations and growth. A
significant downgrade could increase our own cost of capital. For example, the facility fee and
interest rate for our credit facilities are based on our senior long-term debt ratings. A decrease
in those ratings could result in an increase in costs for the credit facilities. Also, if there is
a downgrade in the rating of RGA, some of our reinsurance contracts would require us to post
collateral to secure our obligations under these reinsurance contracts. Accordingly, we believe a
ratings downgrade of RGA, or of our affiliates, could have a negative effect on our ability to
conduct business.
We cannot assure you that actions taken by our ratings agencies would not result in a material
adverse effect on our business and results of operations. In addition, it is unclear what effect,
if any, a ratings change would have on the price of our securities in the secondary market.
We make assumptions when pricing our products relating to mortality, morbidity, lapsation and
expenses, and significant deviations in experience could negatively affect our financial results.
Our reinsurance contracts expose us to mortality risk, which is the risk that the level of
death claims may differ from that which we assumed in pricing our life, critical illness and
annuity reinsurance contracts. Some of our reinsurance contracts expose us to morbidity risk,
which is the risk that an insured person will become critically ill or disabled. Our risk analysis
and underwriting processes are designed with the objective of controlling the quality of the
business and establishing appropriate pricing for the risks we assume. Among other things, these
processes rely heavily on our underwriting, our analysis of mortality and morbidity trends, lapse
rates, expenses and our understanding of medical impairments and their effect on mortality or
morbidity.
We expect mortality, morbidity and lapse experience to fluctuate somewhat from period to
period, but believe they should remain fairly constant over the long term. Mortality, morbidity or
lapse experience that is less favorable than the mortality, morbidity or lapse rates that we used
in pricing a reinsurance agreement will negatively affect our net income because the premiums we
receive for the risks we assume may not be sufficient to cover the claims and profit margin.
Furthermore, even if the total benefits paid over the life of the contract do not exceed the
expected amount, unexpected increases in the incidence of deaths or illness can cause us to pay
more benefits in a given reporting period than expected, adversely affecting our net income in any
particular reporting period. Likewise, adverse experience could impair our ability to offset
certain unamortized deferred acquisition costs and adversely affect our net income in any
particular reporting period.
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RGA is an insurance holding company, and our ability to pay principal, interest and/or dividends on
securities is limited.
RGA is an insurance holding company, with our principal assets consisting of the stock of our
reinsurance company subsidiaries, and substantially all of our income is derived from those
subsidiaries. Our ability to pay principal and interest on any debt securities or dividends on any
preferred or common stock depends in part on the ability of our reinsurance company subsidiaries,
our principal sources of cash flow, to declare and distribute dividends or to advance money to RGA.
We are not permitted to pay common stock dividends or make payments of interest or principal on
securities which rank equal or junior to our subordinated debentures, until we pay any accrued and
unpaid interest on our subordinated debentures. Our reinsurance company subsidiaries are subject
to various statutory and regulatory restrictions, applicable to insurance companies generally, that
limit the amount of cash dividends, loans and advances that those subsidiaries may pay to us.
Covenants contained in some of our debt agreements and regulations relating to capital requirements
affecting some of our more significant subsidiaries also restrict the ability of certain
subsidiaries to pay dividends and other distributions and make loans to us. In addition, we cannot
assure you that more stringent dividend restrictions will not be adopted, as discussed below under
" Our reinsurance subsidiaries are highly regulated, and changes in these regulations could
negatively affect our business.
As a result of our insurance holding company structure, in the event of the insolvency,
liquidation, reorganization, dissolution or other winding-up of one of our reinsurance
subsidiaries, all creditors of that subsidiary would be entitled to payment in full out of the
assets of such subsidiary before we, as shareholder, would be entitled to any payment. Our
subsidiaries would have to pay their direct creditors in full before our creditors, including
holders of any class of common stock, preferred stock or debt securities of RGA, could receive any
payment from the assets of such subsidiaries.
If our investment strategy is unsuccessful, we could suffer losses.
The success of our investment strategy is crucial to the success of our business. In
particular, we structure our investments to match our anticipated liabilities under reinsurance
treaties to the extent we believe necessary. If our calculations with respect to these reinsurance
liabilities are incorrect, or if we improperly structure our investments to match such liabilities,
we could be forced to liquidate investments prior to maturity at a significant loss.
Our investment guidelines also permit us to invest up to 10% of our investment portfolio in
non-investment grade fixed maturity securities. While any investment carries some risk, the risks
associated with lower-rated securities are greater than the risks associated with investment grade
securities. The risk of loss of principal or interest through default is greater because
lower-rated securities are usually unsecured and are often subordinated to an issuers other
obligations. Additionally, the issuers of these securities frequently have high debt levels and
are thus more sensitive to difficult economic conditions, individual corporate developments and
rising interest rates which could impair an issuers capacity or willingness to meet its financial
commitment on such lower-rated securities. As a result, the market price of these securities may
be quite volatile, and the risk of loss is greater.
The success of any investment activity is affected by general economic conditions, which may
adversely affect the markets for interest-rate-sensitive securities and equity securities,
including the level and volatility of interest rates and the extent and timing of investor
participation in such markets. Unexpected volatility or illiquidity in the markets in which we
directly or indirectly hold positions could adversely affect us.
Interest rate fluctuations could negatively affect the income we derive from the difference between
the interest rates we earn on our investments and interest we pay under our reinsurance contracts.
Significant changes in interest rates expose reinsurance companies to the risk of reduced
investment income or actual losses based on the difference between the interest rates earned on
investments and the credited interest rates paid on outstanding reinsurance contracts. Both rising
and declining interest rates can negatively affect the income we derive from these interest rate
spreads. During periods of rising interest rates, we may be contractually obligated to increase
the crediting rates on our reinsurance contracts that have cash values. However, we may not have
the ability to immediately acquire investments with interest rates sufficient to offset the
increased crediting rates on our reinsurance contracts. During periods of falling interest rates,
our investment earnings will be lower because new investments in fixed maturity securities will
likely bear lower interest rates. We may not be able to fully offset the decline in investment
earnings with lower crediting rates on underlying annuity products related to certain of our
reinsurance contracts. While we develop and maintain asset/liability management programs and
procedures designed to reduce the volatility of our income when interest rates are rising or
falling, we cannot assure you that changes in interest rates will not affect our interest rate
spreads.
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Changes in interest rates may also affect our business in other ways. Lower interest rates
may result in lower sales of certain insurance and investment products of our customers, which
would reduce the demand for our reinsurance of these products.
The availability and cost of collateral, including letters of credit, asset trusts and other credit
facilities, could adversely affect our operations and financial condition.
Regulatory reserve requirements in various jurisdictions in which we operate may be
significantly higher than the reserves required under GAAP. Accordingly, we reinsure, or
retrocede, business to affiliated and unaffiliated reinsurers to reduce the amount of regulatory
reserves and capital we are required to hold in certain jurisdictions. A regulation in the United
States, commonly referred to as Regulation XXX, requires a relatively high level of regulatory, or
statutory, reserves that U.S. life insurance and life reinsurance companies must hold on their
statutory financial statements for various types of life insurance business, primarily certain
level term life products. The reserve levels required under Regulation XXX increase over time and
are normally in excess of reserves required under GAAP. The degree to which these reserves will
increase and the ultimate level of reserves will depend upon the mix of our business and future
production levels in the United States. Based on the assumed rate of growth in our current business
plan, and the increasing level of regulatory reserves associated with some of this business, we
expect the amount of required regulatory reserves to grow significantly.
In order to reduce the effect of Regulation XXX, our principal U.S. operating subsidiary, RGA
Reinsurance, has retroceded Regulation XXX-related reserves to affiliated and unaffiliated
reinsurers. Additionally, some of our reinsurance subsidiaries in other jurisdictions enter into
various reinsurance arrangements with affiliated and unaffiliated reinsurers from time to time in
order to reduce their statutory capital and reserve requirements. As a general matter, for us to
reduce regulatory reserves on business that we retrocede, the affiliated or unaffiliated reinsurer
must provide an equal amount of collateral. Such collateral may be provided through a capital
markets securitization, in the form of a letter of credit from a commercial bank or through the
placement of assets in trust for our benefit.
In connection with these reserve requirements, we face the following risks:
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The availability of collateral and the related cost of such collateral in the future
could affect the type and volume of business we reinsure and could increase our costs. |
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We may need to raise additional capital to support higher regulatory reserves, which
could increase our overall cost of capital. |
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If we, or our retrocessionaires, are unable to obtain or provide sufficient
collateral to support our statutory ceded reserves, we may be required to increase
regulatory reserves. In turn, this reserve increase could significantly reduce our
statutory capital levels and adversely affect our ability to satisfy required
regulatory capital levels that apply to us, unless we are able to raise additional
capital to contribute to our operating subsidiaries. |
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Because term life insurance is a particularly price-sensitive product, any increase
in insurance premiums charged on these products by life insurance companies, in order
to compensate them for the increased statutory reserve requirements or higher costs of
insurance they face, may result in a significant loss of volume in their life insurance
operations, which could, in turn, adversely affect our life reinsurance operations. |
We cannot assure you that we will be able to implement actions to mitigate the effect of
increasing regulatory reserve requirements.
We could be forced to sell investments at a loss to cover policyholder withdrawals, recaptures of
reinsurance treaties or other events.
Some of the products offered by our insurance company customers allow policyholders and
contract holders to withdraw their funds under defined circumstances. Our reinsurance subsidiaries
manage their liabilities and configure their investment portfolios so as to provide and maintain
sufficient liquidity to support anticipated withdrawal demands and contract benefits and maturities
under reinsurance treaties with these customers. While our reinsurance subsidiaries own a
significant amount of liquid assets, a portion of their assets are relatively illiquid.
Unanticipated withdrawal or surrender activity could, under some circumstances, require our
reinsurance subsidiaries to dispose of assets on unfavorable terms, which could have an adverse
effect on us. Reinsurance agreements may provide for recapture rights on the part of our insurance
company customers. Recapture rights permit these customers to reassume all or a portion of the
risk formerly ceded to us after an agreed upon time, usually ten years, subject to various
conditions.
Recapture of business previously ceded does not affect premiums ceded prior to the recapture,
but may result in immediate payments to our insurance company customers and a charge for costs that
we deferred when we acquired the
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business but are unable to recover upon recapture. Under some circumstances, payments to our
insurance company customers could require our reinsurance subsidiaries to dispose of assets on
unfavorable terms.
Changes in the equity markets, interest rates and/or volatility affects the profitability of
variable annuities with guaranteed living benefits that we reinsure; therefore, such changes may
have a material adverse effect on our business and profitability.
We reinsure variable annuity products that include guaranteed minimum living benefits. These
include guaranteed minimum withdrawal benefits (GMWB), guaranteed minimum accumulation benefits
(GMAB) and guaranteed minimum income benefits (GMIB). The amount of reserves related to these
benefits is based on their fair value and is affected by changes in equity markets, interest rates
and volatility. Accordingly, strong equity markets, increases in interest rates and decreases in
volatility will generally decrease the fair value of the liabilities underlying the benefits.
Conversely, a decrease in the equity markets along with a decrease in interest rates and an
increase in volatility will generally result in an increase in the fair value of the liabilities
underlying the benefits, which has the effect of increasing the amount of reserves that we must
carry. Such an increase in reserves would result in a charge to our earnings in the quarter in
which we increase our reserves. We maintain a customized dynamic hedge program that is designed to
mitigate the risks associated with income volatility around the change in reserves on guaranteed
benefits. However, the hedge positions may not be effective to exactly offset the changes in the
carrying value of the guarantees due to, among other things, the time lag between changes in their
values and corresponding changes in the hedge positions, high levels of volatility in the equity
markets and derivatives markets, extreme swings in interest rates, contract holder behavior
different than expected, and divergence between the performance of the underlying funds and hedging
indices. These factors, individually or collectively, may have a material adverse effect on our
net income, financial condition or liquidity.
We are exposed to foreign currency risk.
We are a multi-national company with operations in numerous countries and, as a result, are
exposed to foreign currency risk to the extent that exchange rates of foreign currencies are
subject to adverse change over time. The U.S. dollar value of our net investments in foreign
operations, our foreign currency transaction settlements and the periodic conversion of the
foreign-denominated earnings to U.S. dollars (our reporting currency) are each subject to adverse
foreign exchange rate movements. Approximately 38% of our revenues and 32% of our fixed maturity
securities available for sale were denominated in currencies other than the U.S. dollar as of and
for the year ended December 31, 2009.
We depend on the performance of others, and their failure to perform in a satisfactory manner would
negatively affect us.
In the normal course of business, we seek to limit our exposure to losses from our reinsurance
contracts by ceding a portion of the reinsurance to other insurance enterprises or
retrocessionaires. We cannot assure you that these insurance enterprises or retrocessionaires will
be able to fulfill their obligations to us. As of December 31, 2009, the retrocession pool members
participating in our excess retention pool that have been reviewed by A.M. Best Company, were rated
A-, the fourth highest rating out of fifteen possible ratings, or better. We are also subject to
the risk that our clients will be unable to fulfill their obligations to us under our reinsurance
agreements with them.
We rely upon our insurance company clients to provide timely, accurate information. We may
experience volatility in our earnings as a result of erroneous or untimely reporting from our
clients. We work closely with our clients and monitor their reporting to minimize this risk. We
also rely on original underwriting decisions made by our clients. We cannot assure you that these
processes or those of our clients will adequately control business quality or establish appropriate
pricing.
For some reinsurance agreements, the ceding company withholds and legally owns and manages
assets equal to the net statutory reserves, and we reflect these assets as funds withheld at
interest on our balance sheet. In the event that a ceding company were to become insolvent, we
would need to assert a claim on the assets supporting our reserve liabilities. We attempt to
mitigate our risk of loss by offsetting amounts for claims or allowances that we owe the ceding
company with amounts that the ceding company owes to us. We are subject to the investment
performance on the withheld assets, although we do not directly control them. We help to set, and
monitor compliance with, the investment guidelines followed by these ceding companies. However, to
the extent that such investment guidelines are not appropriate, or to the extent that the ceding
companies do not adhere to such guidelines, our risk of loss could increase, which could materially
adversely affect our financial condition and results of operations. During 2009, interest earned
on funds withheld represented 5.4% of our consolidated revenues. Funds withheld at interest
totaled $4.9 billion at December 31, 2009 and $4.5 billion as of December 31, 2008.
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We use the services of third-party investment managers to manage certain assets where our
investment management expertise is limited. We rely on these investment managers to provide
investment advice and execute investment transactions that are within our investment policy
guidelines. Poor performance on the part of our outside investment managers could negatively
affect our financial performance.
As with all financial services companies, our ability to conduct business depends on consumer
confidence in the industry and our financial strength. Actions of competitors, and financial
difficulties of other companies in the industry, and related adverse publicity, could undermine
consumer confidence and harm our reputation.
Natural and man-made disasters, catastrophes, and events, including the threat of terrorist
attacks, epidemics and pandemics, may adversely affect our business and results of operations.
Natural disasters and terrorist attacks, as well as epidemics and pandemics, can adversely
affect our business and results of operations because they accelerate mortality and morbidity risk.
Terrorist attacks on the United States and in other parts of the world and the threat of future
attacks could have a negative effect on our business.
We believe our reinsurance programs are sufficient to reasonably limit our net losses for
individual life claims relating to potential future natural disasters and terrorist attacks.
However, the consequences of further natural disasters, terrorist attacks, armed conflicts,
epidemics and pandemics are unpredictable, and we may not be able to foresee events that could have
an adverse effect on our business.
We operate in a competitive industry which could adversely affect our market share.
The reinsurance industry is highly competitive, and we encounter significant competition in
all lines of business from other reinsurance companies, as well as competition from other providers
of financial services. Our competitors vary by geographic market. We believe our primary
competitors in the North American life reinsurance market are currently the following, or their
affiliates: Transamerica Occidental Life Insurance Company, a subsidiary of Aegon, N.V., Swiss Re
Life, Munich Reinsurance Company and Generali Re. We believe our primary competitors in the
international life reinsurance markets are Swiss Re Life and Health Ltd., General Re, Munich
Reinsurance Company, Hannover Reinsurance and SCOR Global Reinsurance. Many of our competitors
have greater financial resources than we do. Our ability to compete depends on, among other
things, our ability to maintain strong financial strength ratings from rating agencies, pricing and
other terms and conditions of reinsurance agreements, and our reputation, service, and experience
in the types of business that we underwrite. However, competition from other reinsurers could
adversely affect our competitive position.
Our target market is generally large life insurers. We compete based on the strength of our
underwriting operations, insights on mortality trends based on our large book of business, and
responsive service. We believe our quick response time to client requests for individual
underwriting quotes and our underwriting expertise are important elements to our strategy and lead
to other business opportunities with our clients. Our business will be adversely affected if we
are unable to maintain these competitive advantages or if our international strategy is not
successful.
Tax law changes or a prolonged economic downturn could reduce the demand for insurance products,
which could adversely affect our business.
Under the Internal Revenue Code, income tax payable by policyholders on investment earnings is
deferred during the accumulation period of some life insurance and annuity products. To the extent
that the Internal Revenue Code is revised to reduce the tax-deferred status of life insurance and
annuity products, or to increase the tax-deferred status of competing products, all life insurance
companies would be adversely affected with respect to their ability to sell such products, and,
depending on grandfathering provisions, by the surrenders of existing annuity contracts and life
insurance policies. In addition, life insurance products are often used to fund estate tax
obligations. Congress has adopted legislation to eliminate the estate tax. Under this legislation,
our U.S. life insurance company customers could face reduced demand for some of their life
insurance products, which in turn could negatively affect our reinsurance business. Further, the
Obama Administration has proposed certain changes to individual income tax rates, changes to the
taxation of our international operations and rules applicable to certain policies. We cannot
predict what future tax initiatives may be proposed and enacted that could affect us.
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Changes in tax laws, Treasury and other regulations promulgated thereunder, or interpretations
of such laws or regulations could increase our corporate taxes. The Obama Administration has
proposed corporate tax changes. Changes in corporate tax rates could affect the value of deferred
tax assets and deferred tax liabilities. Furthermore, the value of deferred tax assets could be
affected by future earnings levels.
We cannot predict whether any tax legislation impacting corporate taxes or insurance products
will be enacted, what the specific terms of any such legislation will be or whether, if at all, any
legislation would have a material adverse effect on our financial condition and results of
operations.
In addition, a general economic downturn or a downturn in the equity and other capital markets
could adversely affect the market for many annuity and life insurance products. Because we obtain
substantially all of our revenues through reinsurance arrangements that cover a portfolio of life
insurance products, as well as annuities, our business would be harmed if the market for annuities
or life insurance was adversely affected. In addition, the market for annuity reinsurance products
is currently not well developed, and we cannot assure you that such market will develop in the
future.
Our reinsurance subsidiaries are highly regulated, and changes in these regulations could
negatively affect our business.
Our reinsurance subsidiaries are subject to government regulation in each of the jurisdictions
in which they are licensed or authorized to do business. Governmental agencies have broad
administrative power to regulate many aspects of the insurance business, which may include premium
rates, marketing practices, advertising, policy forms, and capital adequacy. These agencies are
concerned primarily with the protection of policyholders rather than shareholders or holders of
debt securities. Moreover, insurance laws and regulations, among other things, establish minimum
capital requirements and limit the amount of dividends, tax distributions, and other payments our
reinsurance subsidiaries can make without prior regulatory approval, and impose restrictions on the
amount and type of investments we may hold. The State of Missouri also regulates RGA as an
insurance holding company.
Recently, insurance regulators have increased their scrutiny of the insurance regulatory
framework in the United States and some state legislatures have considered or enacted laws that
alter, and in many cases increase, state authority to regulate insurance holding companies and
insurance companies. In light of recent legislative developments, the National Association of
Insurance Commissioners, or NAIC, and state insurance regulators have begun re-examining existing
laws and regulations, specifically focusing on insurance company investments and solvency issues,
guidelines imposing minimum capital requirements based on business levels and asset mix,
interpretations of existing laws, the development of new laws, the implementation of non-statutory
guidelines, and the definition of extraordinary dividends, including a more stringent standard for
allowance of extraordinary dividends. We are unable to predict whether, when or in what form the
State of Missouri will enact a new measure for extraordinary dividends, and we cannot assure you
that more stringent restrictions will not be adopted from time to time in other jurisdictions in
which our reinsurance subsidiaries are domiciled, which could, under certain circumstances,
significantly reduce dividends or other amounts payable to us by our subsidiaries unless they
obtain approval from insurance regulatory authorities. We cannot predict the effect that any NAIC
recommendations or proposed or future legislation or rule-making in the United States or elsewhere
may have on our financial condition or operations.
Acquisitions and significant transactions involve varying degrees of risk that could affect our
profitability.
We have made, and may in the future make, strategic acquisitions, either of selected blocks of
business or other companies. Acquisitions may expose us to operational challenges and various
risks, including:
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the ability to integrate the acquired business operations and data with our systems; |
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the availability of funding sufficient to meet increased capital needs; |
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the ability to fund cash flow shortages that may occur if anticipated revenues are
not realized or are delayed, whether by general economic or market conditions or
unforeseen internal difficulties; and |
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the possibility that the value of investments acquired in an acquisition, may be
lower than expected or may diminish due to credit defaults or changes in interest rates
and that liabilities assumed may be greater than expected (due to, among other factors,
less favorable than expected mortality or morbidity experience). |
A failure to successfully manage the operational challenges and risks associated with or
resulting from significant transactions, including acquisitions, could adversely affect our
financial condition or results of operations.
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Our international operations involve inherent risks.
In 2009, approximately 31.1% of our net premiums and $135.9 million of income from continuing
operations before income taxes came from our operations in Europe & South Africa and Asia Pacific.
One of our strategies is to grow these international operations. International operations subject
us to various inherent risks. In addition to the regulatory and foreign currency risks identified
above, other risks include the following:
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managing the growth of these operations effectively, particularly given the recent
rates of growth; |
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changes in mortality and morbidity experience and the supply and demand for our
products that are specific to these markets and that may be difficult to anticipate; |
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political and economic instability in the regions of the world where we operate; |
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uncertainty arising out of foreign government sovereignty over our international
operations; and |
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potentially uncertain or adverse tax consequences, including the repatriation of
earnings from our non-U.S. subsidiaries. |
We cannot assure you that we will be able to manage these risks effectively or that they will
not have an adverse effect on our business, financial condition or results of operations.
Our risk management policies and procedures could leave us exposed to unidentified or unanticipated
risk, which could negatively affect our business or result in losses.
Our risk management policies and procedures to identify, monitor, and manage both internal and
external risks may not predict future exposures, which could be different or significantly greater
than expected. These identified risks may not be the only risks facing us. Additional risks and
uncertainties not currently known to us, or that we currently deem to be immaterial, may adversely
affect our business, financial condition and/or operating results.
Unanticipated events in our disaster recovery systems and management continuity planning could
impair our ability to conduct business.
In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout,
a computer virus, a terrorist attack or war, unanticipated problems with our disaster recovery
systems could have a material adverse impact on our ability to conduct business and on our results
of operations and financial position, particularly if those problems affect our computer-based data
processing, transmission, storage and retrieval systems and destroy valuable data. We depend
heavily upon computer systems to provide reliable service, data and reports. Despite our
implementation of a variety of security measures, our servers could be subject to physical and
electronic break-ins, and similar disruptions from unauthorized tampering with our computer
systems. In addition, in the event that a significant number of our managers were unavailable in
the event of a disaster, our ability to effectively conduct business could be severely compromised.
These interruptions also may interfere with our clients ability to provide data and other
information and our employees ability to perform their job responsibilities.
Risks Related to Ownership of Our Common Stock
We may not pay dividends on our common stock.
Our shareholders may not receive future dividends. Historically, we have paid quarterly
dividends ranging from $0.027 per share in 1993 to $0.09 per share in 2009. All future payments of
dividends, however, are at the discretion of our board of directors and will depend on our
earnings, capital requirements, insurance regulatory conditions, operating conditions, and such
other factors as our board of directors may deem relevant. The amount of dividends that we can pay
will depend in part on the operations of our reinsurance subsidiaries. Under certain
circumstances, we may be contractually prohibited from paying dividends on our common stock due to
restrictions in certain debt and trust preferred securities.
RGAs anti-takeover provisions may delay or prevent a change in control of RGA, which could
adversely affect the price of our common stock.
Certain provisions in our articles of incorporation and bylaws, as well as Missouri law, may
delay or prevent a change of control of RGA, which could adversely affect the price of our common
stock. Our articles of incorporation and bylaws contain some provisions that may make the
acquisition of control of RGA without the approval of our board of directors more difficult,
including provisions relating to the nomination, election and removal of directors, the structure
of the board of directors and limitations on actions by our shareholders. In addition, Missouri
law also imposes some restrictions on mergers and other business combinations between RGA and
holders of 20% or more of our outstanding common stock.
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Furthermore, our articles of incorporation are intended to limit stock ownership of RGA stock
(other than shares acquired through the divestiture by MetLife or other exempted transactions) to
less than 5% of the value of the aggregate outstanding shares of RGA stock during the restriction
period. We have also adopted a Section 382 shareholder rights plan designed to deter shareholders
from becoming a 5-percent shareholder (as defined by Section 382 of the Internal Revenue Code and
the related Treasury regulations) without the approval of our board of directors.
These provisions may have unintended anti-takeover effects. These provisions of our articles
of incorporation and bylaws and Missouri law may delay or prevent a change in control of RGA, which
could adversely affect the price of our common stock.
Applicable insurance laws may make it difficult to effect a change of control of RGA.
Before a person can acquire control of a U.S. insurance company, prior written approval must
be obtained from the insurance commission of the state where the domestic insurer is domiciled.
Missouri insurance laws and regulations provide that no person may acquire control of us, and thus
indirect control of our Missouri reinsurance subsidiaries, including RGA Reinsurance, unless:
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such person has provided certain required information to the Missouri Department of
Insurance; and |
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such acquisition is approved by the Director of Insurance of the State of Missouri,
whom we refer to as the Missouri Director of Insurance, after a public hearing. |
Under Missouri insurance laws and regulations, any person acquiring 10% or more of the
outstanding voting securities of a corporation, such as our common stock, is presumed to have
acquired control of that corporation and its subsidiaries.
Canadian federal insurance laws and regulations provide that no person may directly or
indirectly acquire control of or a significant interest in our Canadian insurance subsidiary,
RGA Canada, unless:
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such person has provided information, material and evidence to the Canadian
Superintendent of Financial Institutions as required by him, and |
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such acquisition is approved by the Canadian Minister of Finance. |
For this purpose, significant interest means the direct or indirect beneficial ownership by
a person, or group of persons acting in concert, of shares representing 10% or more of a given
class, and control of an insurance company exists when:
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a person, or group of persons acting in concert, beneficially owns or controls an
entity that beneficially owns securities, such as our common stock, representing more
than 50% of the votes entitled to be cast for the election of directors and such votes
are sufficient to elect a majority of the directors of the insurance company, or |
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a person has any direct or indirect influence that would result in control in fact
of an insurance company. |
Prior to granting approval of an application to directly or indirectly acquire control of a
domestic or foreign insurer, an insurance regulator may consider such factors as the financial
strength of the applicant, the integrity of the applicants board of directors and executive
officers, the applicants plans for the future operations of the domestic insurer and any
anti-competitive results that may arise from the consummation of the acquisition of control.
Future stock sales, including sales by any selling shareholders, may dilute the value or affect the
price of our common stock.
Our board of directors has the authority, without action or vote of the shareholders, to issue
any or all authorized but unissued shares of our common stock, including securities convertible
into or exchangeable for our common stock and authorized but unissued shares under our stock option
and other equity compensation plans. In the future, we may issue such additional securities,
through public or private offerings, in order to raise additional capital. Any such issuance will
dilute the percentage ownership of shareholders and may dilute the per share projected earnings or
book value of the common stock. In addition, option holders may exercise their options at any time
when we would otherwise be able to obtain additional equity capital on more favorable terms.
MetLife retained an approximate 4.1% interest in RGA through the retention of 3,000,000 shares
of common stock, and agreed that it will sell, exchange or otherwise dispose of its remaining
recently acquired stock by September 12, 2013. Any disposition by MetLife of its remaining shares
of common stock could result in a substantial amount of RGA equity securities entering the market,
which may adversely affect the price of such common stock.
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The price of our common stock may fluctuate significantly.
The overall market and the price of our common stock may continue to fluctuate as a result of
many factors in addition to those discussed in the preceding risk factors. These factors, some or
all of which are beyond our control, include:
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actual or anticipated fluctuations in our operating results; |
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changes in expectations as to our future financial performance or changes in
financial estimates of securities analysts; |
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success of our operating and growth strategies; |
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investor anticipation of strategic and technological threats, whether or not
warranted by actual events; |
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operating and stock price performance of other comparable companies; and |
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realization of any of the risks described in these risk factors or those set forth
in any subsequent Annual Report on Form 10-K or Quarterly Reports on Form 10-Q. |
In addition, the stock market has historically experienced volatility that often has been
unrelated or disproportionate to the operating performance of particular companies. These broad
market and industry fluctuations may adversely affect the trading price of our common stock,
regardless of our actual operating performance.
The acquisition restrictions contained in our articles of incorporation and our
Section 382 shareholder rights plan, which are intended to help preserve RGA and its subsidiaries
net operating losses (NOLs) and other tax attributes, may not be effective or may have unintended
negative effects.
We have recognized and may continue to recognize substantial NOLs, and other tax attributes,
for U.S. federal income tax purposes. Under the Internal Revenue Code, we may carry forward
these NOLs, in certain circumstances to offset any current and future taxable income and thus
reduce our federal income tax liability, subject to certain requirements and restrictions. To the
extent that the NOLs do not otherwise become limited, we believe that we will be able to carry
forward a substantial amount of NOLs and, therefore, these NOLs are a substantial asset to RGA.
However, if RGA and its subsidiaries experience an ownership change, as defined in Section 382 of
the Internal Revenue Code and related Treasury regulations, their ability to use the NOLs could be
substantially limited, and the timing of the usage of the NOLs could be substantially delayed,
which consequently could significantly impair the value of that asset.
To reduce the likelihood of an ownership change, in light of MetLifes recent divestiture of
most of its RGA stock, we have established acquisition restrictions in our articles of
incorporation and our board of directors adopted a Section 382 shareholder rights plan. The
Section 382 shareholder rights plan is designed to protect shareholder value by attempting to
protect against a limitation on the ability of RGA and its subsidiaries to use their existing NOLs
and other tax attributes. The acquisition restrictions in our articles of incorporation are also
intended to restrict certain acquisitions of RGA stock to help preserve the ability of RGA and its
subsidiaries to utilize their NOLs and other tax attributes by avoiding the limitations imposed by
Section 382 of the Internal Revenue Code and the related Treasury regulations. The acquisition
restrictions and the Section 382 shareholder rights plan are generally designed to restrict or
deter direct and indirect acquisitions of RGA stock if such acquisition would result in an RGA
shareholder becoming a 5-percent shareholder or increase the percentage ownership of RGA stock that
is treated as owned by an existing 5-percent shareholder.
Although the acquisition restrictions and the Section 382 shareholder rights plan are intended
to reduce the likelihood of an ownership change that could adversely affect RGA and its
subsidiaries, we can give no assurance that such restrictions would prevent all transfers that
could result in such an ownership change. In particular, we have been advised by our counsel that,
absent a court determination, there can be no assurance that the acquisition restrictions will be
enforceable against all of the RGA shareholders, and that they may be subject to challenge on
equitable grounds. In particular, it is possible that the acquisition restrictions may not be
enforceable against the RGA shareholders who voted against or abstained from voting on the
restrictions at our recent special meeting of shareholders or who do not have notice of the
restrictions at the time when they subsequently acquire their shares.
Under certain circumstances, our board of directors may determine it is in the best interest
of RGA and its shareholders to exempt certain 5-percent shareholders from the operation of the
Section 382 shareholder rights plan, in light of the provisions of the recapitalization and
distribution agreement. Accordingly, our board of directors may determine that it is in the best
interest of the Company not to enforce the Section 382 shareholder rights plan.
The acquisition restrictions and Section 382 shareholder rights plan also require any person
attempting to become a holder of 5% or more (by value) of RGA stock, as determined under the
Internal Revenue Code, to seek the approval of our board of directors. This may have an unintended
anti-takeover effect because our board of directors may be able to prevent any future takeover.
Similarly, any limits on the amount of stock that a shareholder may own could have the effect of
making
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it more difficult for shareholders to replace current management. Additionally, because the
acquisition restrictions and Section 382 shareholder rights plan have the effect of restricting a
shareholders ability to dispose of or acquire RGA stock, the liquidity and market value of RGA
stock might suffer. The acquisition restrictions and the Section 382 shareholder rights plan will
remain in effect for the restriction period, which is until the earlier of (a) September 13,
2011, or (b) such other date as our board of directors in good faith determines they are no longer
in the best interests of RGA and its shareholders. The acquisition restrictions may be waived by
our board of directors. Shareholders are advised to monitor carefully their ownership of RGA stock
and consult their own legal advisors and/or RGA to determine whether their ownership of RGA stock
approaches the proscribed level.
The occurrence of various events may adversely affect the ability of RGA and its subsidiaries to
fully utilize NOLs and other tax attributes.
RGA and its subsidiaries have a substantial amount of NOLs and other tax attributes, for
U.S. federal income tax purposes, that are available both currently and in the future to offset
taxable income and gains. Events outside of our control may cause RGA (and, consequently, its
subsidiaries) to experience an ownership change under Section 382 of the Internal Revenue Code
and the related Treasury regulations, and limit the ability of RGA and its subsidiaries to utilize
fully such NOLs and other tax attributes. Moreover, the MetLife split-off increased the likelihood
of RGA experiencing such an ownership change.
In general, an ownership change occurs when, as of any testing date, the percentage of stock
of a corporation owned by one or more 5-percent shareholders, as defined in the Internal Revenue
Code and the related Treasury regulations, has increased by more than 50 percentage points over the
lowest percentage of stock of the corporation owned by such shareholders at any time during the
three-year period preceding such date. In general, persons who own 5% or more (by value) of a
corporations stock are 5-percent shareholders, and all other persons who own less than 5% (by
value) of a corporations stock are treated, together, as a single, public group 5-percent
shareholder, regardless of whether they own an aggregate of 5% or more (by value) of a
corporations stock. If a corporation experiences an ownership change, it is generally subject to
an annual limitation, which limits its ability to use its NOLs and other tax attributes to an
amount equal to the equity value of the corporation multiplied by the federal long-term tax-exempt
rate.
If we were to experience an ownership change, we could potentially have in the future higher
U.S. federal income tax liabilities than we would otherwise have had and it may also result in
certain other adverse consequences to RGA. In this connection, we have adopted the
Section 382 shareholder rights plan and the acquisition restrictions set forth in Article Fourteen
to our articles of incorporation, in order to reduce the likelihood that RGA and its subsidiaries
will experience an ownership change under Section 382 of the Internal Revenue Code. There can be
no assurance, however, that these efforts will prevent the MetLife split-off, together with certain
other transactions involving our stock, from causing us to experience an ownership change and the
adverse consequences that may arise therefrom, as described above under The acquisition
restrictions contained in our articles of incorporation and our Section 382 shareholder rights
plan, which are intended to help preserve RGA and its subsidiaries NOLs and other tax attributes,
may not be effective or may have unintended negative effects.
Item 1B. UNRESOLVED STAFF COMMENTS
The Company has no unresolved staff comments from the Securities and Exchange Commission.
Item 2. PROPERTIES
The Company leases its headquarters facility in Chesterfield, Missouri, which consists of
approximately 185,501 square feet. In addition, the Company leases approximately 262,446 square
feet of office space in 26 locations throughout the U.S., Canada, Europe, South Africa, and the
Asia Pacific region.
Most of the Companys leases in the U.S. and other countries have lease terms of three to five
years, although some leases have terms of up to 10 years. As provided in Note 12 Lease
Commitments in the Notes to Consolidated Financial Statements, the rental expense on operating
leases for office space and equipment totaled $13.9 million for 2009.
The Company believes its facilities have been generally well maintained and are in good
operating condition. The Company believes the facilities are sufficient for its current and
projected future requirements.
Item 3. LEGAL PROCEEDINGS
The Company is subject to litigation in the normal course of its business. The Company
currently has no material litigation. A legal reserve is established when the Company is notified
of an arbitration demand or litigation or is notified
29
that an arbitration demand or litigation is imminent, it is probable that the Company will
incur a loss as a result and the amount of the probable loss is reasonably capable of being
estimated. However, if such material litigation did arise, it is possible that an adverse outcome
on any particular arbitration or litigation situation could have a material adverse effect on the
Companys consolidated financial position and/or net income in a particular reporting period.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters that were submitted to a vote of security holders during the fourth
quarter of 2009.
PART II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
Information about the market price of the Companys common equity, dividends and related
stockholder matters is contained in Item 8 under the caption Quarterly Data (Unaudited) and in
Item 1 under the caption Regulation Restrictions on Dividends and Distributions. Additionally,
insurance companies are subject to statutory regulations that restrict the payment of dividends.
See Item 1 under the caption Regulation Restrictions on Dividends and Distributions. See Item
8, Note 3 Stock Transactions in the Notes to Consolidated Financial Statements for information
regarding board approved stock repurchase plans.
The following table summarizes information regarding securities authorized for issuance under
equity compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities to be |
|
|
|
|
|
Number of securities |
|
|
issued upon exercise of |
|
Weighted-average exercise |
|
remaining available for |
|
|
outstanding options, warrants |
|
price of outstanding options, |
|
future issuance under equity |
Plan category |
|
and rights |
|
warrants and rights |
|
compensation plans |
Equity compensation
plans approved by
security holders |
|
|
3,794,553 |
(1) |
|
$ |
39.96 |
(2) (3) |
|
|
1,733,826 |
(4) |
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,794,553 |
(1) |
|
$ |
39.96 |
(2) (3) |
|
|
1,733,826 |
(4) |
|
|
|
(1) |
|
Includes the number of securities to be issued upon exercises under the following plans:
Flexible Stock Plan 3,739,605; Flexible Stock Plan for Directors 17,250; and Phantom
Stock Plan for Directors 37,698. |
|
(2) |
|
Does not include 556,216 performance contingent units outstanding under the Flexible Stock
Plan or 37,698 phantom units outstanding under the Phantom Stock Plan for Directors because
those securities do not have an exercise price (i.e. a unit is a hypothetical share of
Company common stock with a value equal to the fair market value of the common stock). |
|
(3) |
|
Reflects the blended weighted-average exercise price of outstanding options under the
Flexible Stock Plan ($40.01) and Flexible Stock Plan for Directors ($30.66). |
|
(4) |
|
Includes the number of securities remaining available for future issuance under the
following plans: Flexible Stock Plan 1,625,200; Flexible Stock Plan for Directors -
90,653; and Phantom Stock Plan for Directors 17,973 |
Set forth below is a graph for the Companys common stock for the period beginning December 31,
2004 and ending December 31, 2009. The graph compares the cumulative total return on the Companys
common stock, based on the market price of the common stock and assuming reinvestment of dividends,
with the cumulative total return of companies in the Standard & Poors 500 Stock Index and the
Standard & Poors Insurance (Life/Health) Index. The indices are included for comparative purposes
only. They do not necessarily reflect managements opinion that such indices are an appropriate
measure of the relative performance of the Companys common stock, and are not intended to forecast
or be indicative of future performance of the common stock.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Total Return |
|
|
12/04 |
|
12/05 |
|
12/06 |
|
12/07 |
|
12/08 |
|
12/09 |
Reinsurance Group of America, Incorporated |
|
|
100.00 |
|
|
|
99.37 |
|
|
|
116.72 |
|
|
|
110.66 |
|
|
|
90.95 |
|
|
|
102.19 |
|
S & P 500 |
|
|
100.00 |
|
|
|
104.91 |
|
|
|
121.48 |
|
|
|
128.16 |
|
|
|
80.74 |
|
|
|
102.11 |
|
S & P Life & Health Insurance |
|
|
100.00 |
|
|
|
122.51 |
|
|
|
142.74 |
|
|
|
158.45 |
|
|
|
81.89 |
|
|
|
94.64 |
|
Copyright ® 2010, Standard & Poors, a division of The McGraw-Hill Companies, Inc. All rights
reserved.
Item 6. SELECTED FINANCIAL DATA
The selected financial data presented for, and as of the end of, each of the years in the
five-year period ended December 31, 2009, have been prepared in accordance with accounting
principles generally accepted in the United States of America. All amounts shown are in millions,
except per share and operating data. The following data should be read in conjunction with the
Consolidated Financial Statements and the Notes to Consolidated Financial Statements appearing in
Part II Item 8 and Managements Discussion and Analysis of Financial Condition and Results of
Operations appearing in Part II Item 7.
31
Selected Consolidated Financial and Operating Data
(in millions, except per share and operating data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or For the Years Ended December 31, |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Income Statement Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
5,725.2 |
|
|
$ |
5,349.3 |
|
|
$ |
4,909.0 |
|
|
$ |
4,346.0 |
|
|
$ |
3,866.8 |
|
Investment income, net of related expenses |
|
|
1,122.5 |
|
|
|
871.3 |
|
|
|
907.9 |
|
|
|
779.7 |
|
|
|
639.2 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(128.8 |
) |
|
|
(113.3 |
) |
|
|
(7.5 |
) |
|
|
(1.1 |
) |
|
|
(0.5 |
) |
Other-than-temporary impairments on fixed maturity securities
transferred to accumulated other comprehensive income |
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
146.9 |
|
|
|
(533.9 |
) |
|
|
(171.2 |
) |
|
|
3.6 |
|
|
|
21.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment related gains (losses), net |
|
|
34.1 |
|
|
|
(647.2 |
) |
|
|
(178.7 |
) |
|
|
2.5 |
|
|
|
21.0 |
|
Other revenues |
|
|
185.0 |
|
|
|
107.8 |
|
|
|
80.2 |
|
|
|
65.5 |
|
|
|
57.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
7,066.8 |
|
|
|
5,681.2 |
|
|
|
5,718.4 |
|
|
|
5,193.7 |
|
|
|
4,584.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
4,819.4 |
|
|
|
4,461.9 |
|
|
|
3,984.0 |
|
|
|
3,488.4 |
|
|
|
3,187.9 |
|
Interest credited |
|
|
323.7 |
|
|
|
233.2 |
|
|
|
246.1 |
|
|
|
244.8 |
|
|
|
208.4 |
|
Policy acquisition costs and other insurance expenses |
|
|
958.3 |
|
|
|
357.9 |
|
|
|
647.8 |
|
|
|
716.3 |
|
|
|
636.3 |
|
Other operating expenses |
|
|
294.9 |
|
|
|
242.9 |
|
|
|
236.7 |
|
|
|
204.4 |
|
|
|
154.4 |
|
Interest expense |
|
|
69.9 |
|
|
|
76.2 |
|
|
|
76.9 |
|
|
|
62.0 |
|
|
|
41.4 |
|
Collateral finance facility expense (1) |
|
|
8.3 |
|
|
|
28.7 |
|
|
|
52.0 |
|
|
|
26.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
6,474.5 |
|
|
|
5,400.8 |
|
|
|
5,243.5 |
|
|
|
4,742.3 |
|
|
|
4,228.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
592.3 |
|
|
|
280.4 |
|
|
|
474.9 |
|
|
|
451.4 |
|
|
|
356.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
185.2 |
|
|
|
92.6 |
|
|
|
166.6 |
|
|
|
158.1 |
|
|
|
120.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
407.1 |
|
|
|
187.8 |
|
|
|
308.3 |
|
|
|
293.3 |
|
|
|
235.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued accident and health operations,
net of income taxes |
|
|
|
|
|
|
(11.0 |
) |
|
|
(14.5 |
) |
|
|
(5.1 |
) |
|
|
(11.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
407.1 |
|
|
$ |
176.8 |
|
|
$ |
293.8 |
|
|
$ |
288.2 |
|
|
$ |
224.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
5.59 |
|
|
$ |
2.94 |
|
|
$ |
4.98 |
|
|
$ |
4.79 |
|
|
$ |
3.77 |
|
Discontinued operations |
|
|
|
|
|
|
(0.17 |
) |
|
|
(0.23 |
) |
|
|
(0.08 |
) |
|
|
(0.19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5.59 |
|
|
$ |
2.77 |
|
|
$ |
4.75 |
|
|
$ |
4.71 |
|
|
$ |
3.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
5.55 |
|
|
$ |
2.88 |
|
|
$ |
4.80 |
|
|
$ |
4.65 |
|
|
$ |
3.70 |
|
Discontinued operations |
|
|
|
|
|
|
(0.17 |
) |
|
|
(0.23 |
) |
|
|
(0.08 |
) |
|
|
(0.18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5.55 |
|
|
$ |
2.71 |
|
|
$ |
4.57 |
|
|
$ |
4.57 |
|
|
$ |
3.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares, in thousands |
|
|
73,327 |
|
|
|
65,271 |
|
|
|
64,231 |
|
|
|
63,062 |
|
|
|
63,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share on common stock |
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
19,224.1 |
|
|
$ |
15,610.7 |
|
|
$ |
16,397.7 |
|
|
$ |
14,612.9 |
|
|
$ |
12,331.5 |
|
Total assets |
|
|
25,249.5 |
|
|
|
21,658.8 |
|
|
|
21,598.0 |
|
|
|
19,036.8 |
|
|
|
16,193.9 |
|
Policy liabilities |
|
|
17,643.6 |
|
|
|
16,045.5 |
|
|
|
15,045.5 |
|
|
|
13,354.5 |
|
|
|
11,726.3 |
|
Long-term debt |
|
|
1,216.1 |
|
|
|
918.2 |
|
|
|
896.1 |
|
|
|
676.2 |
|
|
|
674.4 |
|
Collateral finance facility (1) |
|
|
850.0 |
|
|
|
850.0 |
|
|
|
850.4 |
|
|
|
850.4 |
|
|
|
|
|
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company |
|
|
159.2 |
|
|
|
159.0 |
|
|
|
158.9 |
|
|
|
158.7 |
|
|
|
158.6 |
|
Total stockholders equity |
|
|
3,867.9 |
|
|
|
2,616.8 |
|
|
|
3,189.8 |
|
|
|
2,815.4 |
|
|
|
2,527.5 |
|
Total stockholders equity per share |
|
$ |
52.99 |
|
|
$ |
36.03 |
|
|
$ |
51.42 |
|
|
$ |
45.85 |
|
|
$ |
41.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data (in billions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed ordinary life reinsurance in force |
|
$ |
2,325.1 |
|
|
$ |
2,108.1 |
|
|
$ |
2,119.9 |
|
|
$ |
1,941.4 |
|
|
$ |
1,713.2 |
|
Assumed new business production |
|
|
321.0 |
|
|
|
305.0 |
|
|
|
302.4 |
|
|
|
374.6 |
|
|
|
364.4 |
|
|
|
|
(1) |
|
During 2006, the Companys subsidiary, Timberlake Financial, issued $850.0 million floating
rate insured notes. See Note 16 Collateral Finance Facility in the Notes to Consolidated
Financial Statements for additional information. |
32
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking and Cautionary Statements
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 including, among others, statements relating to projections of the
strategies, earnings, revenues, income or loss, ratios, future financial performance, and growth
potential of the Company. The words intend, expect, project, estimate, predict,
anticipate, should, believe, and other similar expressions also are intended to identify
forward-looking statements. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events and actual results,
performance, and achievements could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements.
Numerous important factors could cause actual results and events to differ materially from
those expressed or implied by forward-looking statements including, without limitation, (1) adverse
capital and credit market conditions and their impact on the Companys liquidity, access to capital
and cost of capital, (2) the impairment of other financial institutions and its effect on the
Companys business, (3) requirements to post collateral or make payments due to declines in market
value of assets subject to the Companys collateral arrangements, (4) the fact that the
determination of allowances and impairments taken on the Companys investments is highly
subjective, (5) adverse changes in mortality, morbidity, lapsation or claims experience, (6)
changes in the Companys financial strength and credit ratings and the effect of such changes on
the Companys future results of operations and financial condition, (7) inadequate risk analysis
and underwriting, (8) general economic conditions or a prolonged economic downturn affecting the
demand for insurance and reinsurance in the Companys current and planned markets, (9) the
availability and cost of collateral necessary for regulatory reserves and capital, (10) market or
economic conditions that adversely affect the value of the Companys investment securities or
result in the impairment of all or a portion of the value of certain of the Companys investment
securities, that in turn could affect regulatory capital, (11) market or economic conditions that
adversely affect the Companys ability to make timely sales of investment securities, (12) risks
inherent in the Companys risk management and investment strategy, including changes in investment
portfolio yields due to interest rate or credit quality changes, (13) fluctuations in U.S. or
foreign currency exchange rates, interest rates, or securities and real estate markets, (14)
adverse litigation or arbitration results, (15) the adequacy of reserves, resources and accurate
information relating to settlements, awards and terminated and discontinued lines of business, (16)
the stability of and actions by governments and economies in the markets in which the Company
operates, (17) competitive factors and competitors responses to the Companys initiatives, (18)
the success of the Companys clients, (19) successful execution of the Companys entry into new
markets, (20) successful development and introduction of new products and distribution
opportunities, (21) the Companys ability to successfully integrate and operate reinsurance
business that the Company acquires, (22) regulatory action that may be taken by state Departments
of Insurance with respect to the Company, (23) the Companys dependence on third parties, including
those insurance companies and reinsurers to which the Company cedes some reinsurance, third-party
investment managers and others, (24) the threat of natural disasters, catastrophes, terrorist
attacks, epidemics or pandemics anywhere in the world where the Company or its clients do business,
(25) changes in laws, regulations, and accounting standards applicable to the Company, its
subsidiaries, or its business, (26) the effect of the Companys status as an insurance holding
company and regulatory restrictions on its ability to pay principal of and interest on its debt
obligations, and (27) other risks and uncertainties described in this document and in the Companys
other filings with the Securities and Exchange Commission (SEC).
Forward-looking statements should be evaluated together with the many risks and uncertainties
that affect the Companys business, including those mentioned in this document and the cautionary
statements described in the periodic reports the Company files with the SEC. These forward-looking
statements speak only as of the date on which they are made. The Company does not undertake any
obligations to update these forward-looking statements, even though the Companys situation may
change in the future. The Company qualifies all of its forward-looking statements by these
cautionary statements. For a discussion of these risks and uncertainties that could cause actual
results to differ materially from those contained in the forward-looking statements, you are
advised to see Item 1A Risk Factors.
Overview
RGA is an insurance holding company that was formed on December 31, 1992. The consolidated
financial statements include the assets, liabilities, and results of operations of RGA, RGA
Reinsurance, RGA Barbados, RGA Americas, RGA Canada, RGA Australia, RGA UK and RGA Atlantic as well
as several other subsidiaries subject to an ownership position of greater than fifty percent
(collectively, the Company).
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The Company is primarily engaged in traditional individual and group life, annuity, critical
illness and financial reinsurance. RGA and its predecessor, the Reinsurance Division of General
American, a Missouri life insurance company, have been engaged in the business of life reinsurance
since 1973. Approximately 68.7% of the Companys 2009 net premiums were from its more established
operations in North America, represented by its U.S. and Canada segments.
The Company derives revenues primarily from renewal premiums from existing reinsurance
treaties, new business premiums from existing or new reinsurance treaties, income earned on
invested assets, and fees earned from financial reinsurance transactions.
The Companys primary business is life reinsurance, which involves reinsuring life insurance
policies that are often in force for the remaining lifetime of the underlying individuals insured,
with premiums earned typically over a period of 10 to 30 years. Each year, however, a portion of
the business under existing treaties terminates due to, among other things, lapses or voluntary
surrenders of underlying policies, deaths of insureds, and the exercise of recapture options by
ceding companies.
As is customary in the reinsurance business, life insurance clients continually update,
refine, and revise reinsurance information provided to the Company. Such revised information is
used by the Company in preparation of its financial statements and the financial effects resulting
from the incorporation of revised data are reflected currently.
The Companys long-term profitability primarily depends on the volume and amount of death
claims incurred and the ability to adequately price the risks it assumes. While death claims are
reasonably predictable over a period of many years, claims become less predictable over shorter
periods and are subject to significant fluctuation from quarter to quarter and year to year.
Effective January 1, 2008, the Company increased the maximum amount of coverage that it retains per
life in the U.S. from $6.0 million to $8.0 million. This increase does not affect business written
prior to January 1, 2008. Claims in excess of this retention amount are retroceded to
retrocessionaires; however, the Company remains fully liable to the ceding company for the entire
amount of risk it assumes. The increase in the Companys U.S. retention limit from $6.0 million to
$8.0 million reduces the amount of premiums it pays to retrocessionaires, but increases the maximum
effect a single death claim can have on its results and therefore may result in additional
volatility to its results. For other countries, particularly those with higher risk factors or
smaller books of business, the Company systematically reduces its retention. The Company has a
number of retrocession arrangements whereby certain business in force is retroceded on an automatic
or facultative basis.
The Company has five main geographic-based operational segments, each of which is a distinct
reportable segment: U.S., Canada, Europe & South Africa, Asia Pacific and Corporate and Other. The
U.S. operations provide traditional life, long-term care, annuity, and financial reinsurance
primarily to domestic clients. The Canada operations provide insurers with reinsurance of
traditional life products as well as creditor reinsurance, group life and health reinsurance and
non-guaranteed critical illness products. Europe & South Africa operations include traditional life
reinsurance and critical illness business from Europe & South Africa, in addition to other markets
the Company is developing. Asia Pacific operations provide primarily traditional and group life
reinsurance, critical illness and, to a lesser extent, financial reinsurance. Corporate and Other
includes results from, among others, RTP, a wholly-owned subsidiary that develops and markets
technology solutions for the insurance industry and the investment income and expense associated
with the Companys collateral finance facility. Effective January 1, 2009, due to immateriality,
the discontinued accident and health operations were included in the results of the Corporate and
Other segment. The consolidated statements of income for 2008 and 2007 reflect this line of
business as a discontinued operation. More information about the Companys discontinued accident
and health division may be found in Note 21 Discontinued Operations in the Notes to
Consolidated Financial Statements. The Company measures segment performance based on profit or
loss from operations before income taxes.
The Company allocates capital to its segments based on an internally developed economic
capital model, the purpose of which is to measure the risk in the business and to provide a basis
upon which capital is deployed. The economic capital model considers the unique and specific
nature of the risks inherent in RGAs businesses. As a result of the economic capital allocation
process, a portion of investment income and investment related gains and losses are credited to the
segments based on the level of allocated capital. In addition, the segments are charged for excess
capital utilized above the allocated economic capital basis. This charge is included in policy
acquisition costs and other insurance expenses.
The Company believes it is one of the leading life reinsurers in North America based on
premiums and the amount of life reinsurance in force. The Company believes, based on an industry
survey of 2008 information prepared by Munich American at the request of the Society of Actuaries
Reinsurance Section (SOA survey), that it has the second largest market share in North America as
measured by life insurance in force. The Companys approach to the North American market has been
to:
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focus on large, high quality life insurers as clients; |
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provide quality facultative underwriting and automatic reinsurance capacity; and |
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deliver responsive and flexible service to its clients. |
In 1994, the Company began using its North American underwriting expertise and industry
knowledge to expand into international markets and now has subsidiaries, branches or representative
offices in Australia, Barbados, Bermuda, China, France, Germany, Hong Kong, India, Ireland, Italy,
Japan, Mexico, the Netherlands, Poland, South Africa, South Korea, Spain, Taiwan and the United
Kingdom. These operations are included in either the Companys Asia Pacific segment or its Europe
& South Africa segment. The Company generally starts new operations from the ground up in these
markets as opposed to acquiring existing operations, and it often enters these markets to support
its North American clients as they expand internationally. Based on information from a nationally
recognized rating agency, the Company believes it is the third largest life reinsurer in the world
based on 2008 net life reinsurance premiums. While the Company believes information provided by
the rating agency is generally reliable, the Company has not independently verified the data. The
rating agency does not guarantee the accuracy and completeness of the information. The Company
conducts business with the majority of the largest U.S. and international life insurance companies.
The Company has also developed its capacity and expertise in the reinsurance of asset-intensive
products (primarily annuities and corporate-owned life insurance) and financial reinsurance.
Industry Trends
The Company believes that the following trends in the life insurance industry will continue to
create demand for life reinsurance.
Outsourcing of Mortality. The SOA survey indicates that U.S. life reinsurance in force has
tripled from $2.7 trillion in 1998 to $8.1 trillion at year-end 2008. The Company believes
this trend reflects the continued utilization by life insurance companies of reinsurance to
manage capital and mortality risk and to develop competitive products. However, the survey
results indicate a smaller percentage of new business was reinsured in 2008 than previous
years, which has caused premium growth rates in the U.S. life reinsurance market to moderate
from previous years. The Company believes the decline in new business being reinsured is
likely a reaction by ceding companies to a broad-based increase in reinsurance rates in the
market and stronger capital positions maintained by ceding companies in recent years.
However, the Company believes reinsurers will continue to be an integral part of the life
insurance market due to their ability to efficiently aggregate a significant volume of life
insurance in force, creating economies of scale and greater diversification of risk. As a
result of having larger amounts of data at their disposal compared to primary life insurance
companies, reinsurers tend to have better insights into mortality trends, creating more
efficient pricing for mortality risk.
Capital Management. Regulatory environments, rating agencies and competitive business
pressures are causing life insurers to reinsure as a means to:
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manage risk-based capital by shifting mortality and other risks to reinsurers,
thereby reducing amounts of reserves and capital they need to maintain; |
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release capital to pursue new business initiatives; and |
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unlock the capital supporting, and value embedded in, non-core product lines. |
Consolidation and Reorganization Within the Life Reinsurance and Life Insurance Industry.
As a result of consolidations in recent years within the life reinsurance industry, there
are fewer competitors. According to the SOA survey, as of December 31, 2008, the top five
companies held approximately 71.0% of the market share in North America based on life
reinsurance in force, whereas in 1998, the top five companies held approximately 54.2% of
the market share. As a consequence, the Company believes the life reinsurance pricing
environment will remain attractive for the remaining life reinsurers, particularly those
with a significant market presence and strong ratings.
The SOA surveys indicate that the authors obtained information from participating or
responding companies and do not guarantee the accuracy and completeness of their
information. Additionally, the surveys do not survey all reinsurance companies, but the
Company believes most of its principal competitors are included. While the Company believes
these surveys to be generally reliable, the Company has not independently verified their
data.
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Additionally, merger and acquisition transactions within the life insurance industry
continue. The Company believes that reorganizations and consolidations of life insurers
will continue. As reinsurance services are increasingly used to facilitate these
transactions and manage risk, the Company expects demand for its products to continue.
Changing Demographics of Insured Populations. The aging of the population in North America
is increasing demand for financial products among baby boomers who are concerned about
protecting their peak income stream and are considering retirement and estate planning. The
Company believes that this trend is likely to result in continuing demand for annuity
products and life insurance policies, larger face amounts of life insurance policies and
higher mortality risk taken by life insurers, all of which should fuel the need for insurers
to seek reinsurance coverage.
The Company continues to follow a two-part business strategy to capitalize on industry trends.
Continue Growth of North American Business. The Companys strategy includes continuing to
grow each of the following components of its North American operations:
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Facultative Reinsurance. Based on discussions with the Companys clients, an
industry survey and informal knowledge about the industry, the Company believes it
is a leader in facultative underwriting in North America. The Company intends to
maintain that status by emphasizing its underwriting standards, prompt response on
quotes, competitive pricing, capacity and flexibility in meeting customer needs.
The Company believes its facultative business has allowed it to develop close,
long-standing client relationships and generate additional business opportunities
with its facultative clients. In every year since 2007, the Companys U.S.
facultative operation has processed over 100,000 facultative submissions. |
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Automatic Reinsurance. The Company intends to expand its presence in the North
American automatic reinsurance market by using its mortality expertise and breadth
of products and services to gain additional market share. |
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In Force Block Reinsurance. There are occasions to grow the business by
reinsuring in force blocks, as insurers and reinsurers seek to exit various non-core
businesses and increase financial flexibility in order to, among other things,
redeploy capital and pursue merger and acquisition activity. |
Continue Expansion Into Selected Markets and Products. The Companys strategy includes
building upon the expertise and relationships developed in its North American business
platform to continue its expansion into selected markets and products, including:
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International Markets. Management believes that international markets offer
opportunities for growth, and the Company intends to capitalize on these
opportunities by establishing a presence in selected markets. Since 1994, the
Company has entered new markets internationally, including, in the mid-to-late
1990s, Australia, Hong Kong, Japan, Malaysia, New Zealand, South Africa, Spain,
Taiwan and the UK, and beginning in 2002, China, India and South Korea. The Company
received regulatory approval to open a representative office in China in 2005,
opened representative offices in Poland and Germany in 2006, opened new offices in
France and Italy in 2007 and opened a representative office in the Netherlands in
2009. Before entering new markets, the Company evaluates several factors including: |
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the size of the insured population, |
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competition, |
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the level of reinsurance penetration, |
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regulation, |
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existing clients with a presence in the market, and |
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the economic, social and political environment. |
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As previously indicated, the Company generally starts new operations in these markets
from the ground up as opposed to acquiring existing operations, and it often enters
these markets to support its large international clients as they expand into
additional markets. Many of the markets that the Company has entered since 1994, or
may enter in the future, are not utilizing life reinsurance, including facultative
life reinsurance, at the same levels as the North American market, and therefore, the
Company believes these markets represent opportunities for increasing reinsurance penetration. In
particular, management believes |
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markets such as Japan and South Korea are beginning
to realize the benefits that reinsurers bring to the life insurance market.
Additionally, the Company believes that in certain European markets, ceding companies
may want to reduce counterparty exposure to their existing life reinsurers, creating
opportunities for the Company. |
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Asset intensive and Other Products. The Company intends to continue leveraging
its existing client relationships and reinsurance expertise to create customized
reinsurance products and solutions. Industry trends, particularly the increased
pace of consolidation and reorganization among life insurance companies and changes
in products and product distribution, are expected to enhance existing opportunities
for asset intensive and other products. The Company began reinsuring annuities with
guaranteed minimum benefits on a limited basis in 2007. To date, most of the
Companys asset-intensive business and other products have been written in the U.S.;
however, the Company believes opportunities outside of the U.S. may further develop
in the near future, particularly in Japan. The Company also reinsures the longevity
risk related to payout annuities in the UK, and in 2008 entered the U.S. healthcare
reinsurance market with a primary focus on long-term care and Medicare supplement
insurance. In 2010, the Company expanded into the group reinsurance market in North
America with the acquisition of ReliaStar Life Insurance Companys U.S. and Canadian
operations. See Note 22 Subsequent Event in the Notes to Consolidated Financial
Statements for additional information on the acquisition. |
Results of Operations
Consolidated
Consolidated income from continuing operations increased $219.3 million, or 116.7%, and
decreased $120.5 million, or 39.1%, in 2009 and 2008, respectively. Diluted earnings per share
from continuing operations were $5.55 in 2009 compared to $2.88 in 2008 and $4.80 in 2007. The
increase in income in 2009 was primarily due to a favorable change in the fair value of embedded
derivatives within the U.S. segment due to the impact of tightening credit spreads in the U.S. debt
markets. Also contributing to the favorable results were increased net premiums and investment
income and the recognition in other revenues of a gain on the repurchase of long-term debt of $38.9
million. The decrease in income in 2008 compared to 2007 reflects an increase in investment
related losses due to the recognition of investment impairments and an increase in the unrealized
loss due to an unfavorable change in the fair value of embedded derivatives within the U.S.
Asset-Intensive sub-segment due primarily to the impact of widening credit spreads in the U.S. debt
markets. Also contributing to the decrease in income in 2008 was unfavorable mortality experience
in the U.S. Traditional sub-segment. Offsetting these negative income items in 2008 were increases
in premium levels in all segments and favorable mortality experience in the Canada, Europe & South
Africa and Asia Pacific segments. Foreign currency exchange fluctuations resulted in a decrease to
income from continuing operations of approximately $8.7 million in 2009 and an increase of
approximately $4.2 million in 2008.
The Company recognizes in consolidated income from continuing operations, changes in the fair
value of embedded derivatives on modified coinsurance or funds withheld treaties, equity-indexed
annuity treaties (EIAs) and variable annuity products. The change in the value of embedded
derivatives related to reinsurance treaties written on a modified coinsurance or funds withheld
basis are subject to the general accounting principles for Derivatives and Hedging related to
embedded derivatives. The unrealized gains and losses associated with these embedded derivatives,
after adjustment for deferred acquisition costs, had a favorable effect on income from continuing
operations of $139.2 million in 2009 and an unfavorable effect of $93.3 million in 2008,
respectively, as compared to the prior years. Changes in risk-free rates used in the fair value
estimates of embedded derivatives associated with EIAs affect the amount of unrealized gains and
losses the Company recognizes. The unrealized gains and losses associated with EIAs, after
adjustment for deferred acquisition costs and retrocession, affected income from continuing
operations favorably by $11.6 million in 2009 and unfavorably by $9.9 million in 2008,
respectively, as compared to the prior years. The change in the Companys liability for variable
annuities associated with guaranteed minimum living benefits affects the amount of unrealized gains
and losses the Company recognizes. The unrealized gains and losses associated with guaranteed
minimum living benefits, after adjustment for deferred acquisition costs, affected income from
continuing operations unfavorably by $30.5 million and $0.9 million in 2009 and 2008, respectively,
as compared to the prior years.
The combined changes in these three types of embedded derivatives, after adjustment for
deferred acquisition costs and retrocession, resulted in an increase of approximately $120.4
million and a decrease of approximately $104.1 million in consolidated income from continuing
operations in 2009 and 2008, respectively, as compared to the prior years. These fluctuations do
not affect current cash flows, crediting rates or spread performance on the underlying treaties.
Therefore,
management believes it is helpful to distinguish between the effects of changes in these
embedded derivatives and the
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primary factors that drive profitability of the underlying treaties,
namely investment income, fee income, and interest credited.
Consolidated net premiums increased $375.9 million, or 7.0%, and $440.3 million, or 9.0%, in
2009 and 2008, respectively, due to growth in life reinsurance in force and scheduled premium
increases on treaties written on a yearly-renewable-term basis. Consolidated assumed insurance in
force was $2.3 trillion, $2.1 trillion and $2.1 trillion as of December 31, 2009, 2008 and 2007,
respectively. The Company added new business production, measured by face amount of insurance in
force, of $321.0 billion, $305.0 billion and $302.4 billion during 2009, 2008 and 2007,
respectively. Management believes industry consolidation, reduced capital levels in the life
insurance industry and the established practice of reinsuring mortality risks should continue to
provide opportunities for growth at levels comparable to 2009 and 2008. Foreign currency
fluctuations relative to the prior year unfavorably affected net premiums by approximately $207.6
million and approximately $50.3 million in 2009 and 2008, respectively.
Consolidated investment income, net of related expenses, increased $251.2 million, or 28.8%,
and decreased $36.6 million, or 4.0%, in 2009 and 2008, respectively, primarily due to market value
changes related to the Companys funds withheld at interest investment related to the reinsurance
of certain equity-indexed annuity products, which are substantially offset by a corresponding
change in interest credited to policyholder account balances. The increase in investment income in
2009 also reflects a larger average invested asset base offset by a lower effective investment
portfolio yield. Largely offsetting the decrease in investment income in 2008 was a larger average
invested asset base and a higher effective investment portfolio yield. Average invested assets at
amortized cost, excluding funds withheld, totaled $13.0 billion, $11.7 billion and $10.6 billion in
2009, 2008 and 2007, respectively. The average yield earned on investments, excluding funds
withheld, was 5.75%, 6.02% and 5.96% in 2009, 2008 and 2007, respectively. The Company expects the
average yield to vary from year to year depending on a number of variables, including the
prevailing interest rate and credit spread environment, changes in the mix of the underlying
investments, and the timing of dividends and distributions on certain investments.
Total investment related gains (losses), net improved by $681.4 million and declined by $468.5
million in 2009 and 2008, respectively. The improvement in 2009 is due to favorable changes in the
value of embedded derivatives associated with reinsurance treaties written on a modified
coinsurance or funds withheld basis of $506.2 million and guaranteed minimum living benefits of
$520.2 million partially offset by an increase in net hedging losses related to the liabilities
associated with guaranteed minimum living benefits of $392.3 million. The decline in 2008 is due
to an increase of $122.6 million in investment impairments and unfavorable changes in the value of
embedded derivatives associated with reinsurance treaties written on a modified coinsurance or
funds withheld basis of $285.9 million and guaranteed minimum living benefits of $258.5 million
partially offset by an increase in net hedging gains related to the liabilities associated with
guaranteed minimum living benefits of $178.8 million. See the discussion of Investments in the
Liquidity and Capital Resources section of Managements Discussion and Analysis for additional
information on impairment losses. Investment income and investment related gains and losses are
allocated to the operating segments based upon average assets and related capital levels deemed
appropriate to support the segment business volumes.
The consolidated provision for income taxes from continuing operations represents
approximately 31.3%, 33.0%, and 35.1% of pre-tax income for 2009, 2008 and 2007, respectively. The
2009 effective tax rate was affected by the recognition of a previously uncertain tax position in
addition to the recognition of a deferred tax asset for which a valuation allowance previously
existed and by earnings of non-U.S. subsidiaries in which the Company is permanently reinvested
whose statutory tax rates are less than the U.S. statutory tax rate. In 2008, the consolidated
effective tax rate was lower than expected due to a decrease in the tax liability related to the
Companys uncertain tax position. The Company calculated tax benefits related to its discontinued
operations of $5.9 million and $7.8 million for 2008 and 2007, respectively. The effective tax
rate on discontinued operations is approximately 35% for both 2008 and 2007.
Critical Accounting Policies
The Companys accounting policies are described in Note 2 Summary of Significant Accounting
Policies in the Notes to Consolidated Financial Statements. The Company believes its most
critical accounting policies include the capitalization and amortization of deferred acquisition
costs (DAC); the establishment of liabilities for future policy benefits, other policy claims and
benefits, including incurred but not reported claims; the valuation of fixed maturity investments
and investment impairments, if any; embedded derivatives; accounting for income taxes; and the
establishment of arbitration or litigation reserves. The balances of these accounts require
extensive use of assumptions and estimates, particularly related to the future performance of the
underlying business.
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Additionally, for each of the Companys reinsurance contracts, it must determine if the
contract provides indemnification against loss or liability relating to insurance risk, in
accordance with applicable accounting standards. The Company must review all contractual features,
particularly those that may limit the amount of insurance risk to which the Company is subject or
features that delay the timely reimbursement of claims. If the Company determines that the
possibility of a significant loss from insurance risk will occur only under remote circumstances,
it records the contract under a deposit method of accounting with the net amount receivable or
payable reflected in premiums receivable and other reinsurance balances or other reinsurance
liabilities on the consolidated balance sheets. Fees earned on the contracts are reflected as
other revenues, as opposed to net premiums, on the consolidated statements of income.
Differences in experience compared with the assumptions and estimates utilized in the
justification of the recoverability of DAC, in establishing reserves for future policy benefits and
claim liabilities, or in the determination of other-than-temporary impairments to investment
securities can have a material effect on the Companys results of operations and financial
condition.
Deferred Acquisition Costs (DAC)
Costs of acquiring new business, which vary with and are primarily related to the production
of new business, have been deferred to the extent that such costs are deemed recoverable from
future premiums or gross profits. DAC amounts reflect the Companys expectations about the future
experience of the business in force and include commissions and allowances as well as certain costs
of policy issuance and underwriting. Some of the factors that can affect the carrying value of DAC
include mortality assumptions, interest spreads and policy lapse rates. For traditional life and
related coverages, the Company performs periodic tests to determine that DAC remains recoverable at
all times, including at issue, and the cumulative amortization is re-estimated and, if necessary,
adjusted by a cumulative charge to current operations. For its asset-intensive business, the
Company updates the estimated gross profits with actual gross profits each reporting period,
resulting in an increase or decrease to DAC to reflect the difference in the actual gross profits
versus the previously estimated gross profits. As a result of recoverability testing for new
business issues, a charge of approximately $7.7 million to current operations was recorded for in
the Asset Intensive sub-segment in 2009 with projected revenue deemed insufficient to cover future
benefits and expenses. As of December 31, 2009, the Company estimates that approximately 91.2% of
its DAC balance is collateralized by surrender fees due to the Company and the reduction of policy
liabilities, in excess of termination values, upon surrender or lapse of a policy.
Liabilities for Future Policy Benefits and Other Policy Liabilities
Liabilities for future policy benefits under long-term life insurance policies (policy
reserves) are computed based upon expected investment yields, mortality and withdrawal (lapse)
rates, and other assumptions, including a provision for adverse deviation from expected claim
levels. The Company primarily relies on its own valuation and administration systems to establish
policy reserves. The policy reserves the Company establishes may differ from those established by
the ceding companies due to the use of different mortality and other assumptions. However, the
Company relies upon its ceding company clients to provide accurate data, including policy-level
information, premiums and claims, which is the primary information used to establish reserves. The
Companys administration departments work directly with its clients to help ensure information is
submitted by them in accordance with the reinsurance contracts. Additionally, the Company performs
periodic audits of the information provided by ceding companies. The Company establishes reserves
for processing backlogs with a goal of clearing all backlogs within a ninety-day period. The
backlogs are usually due to data errors the Company discovers or computer file compatibility
issues, since much of the data reported to the Company is in electronic format and is uploaded to
its computer systems.
The Company periodically reviews actual historical experience and relative anticipated
experience compared to the assumptions used to establish aggregate policy reserves. Further, the
Company establishes premium deficiency reserves if actual and anticipated experience indicates that
existing aggregate policy reserves, together with the present value of future gross premiums, are
not sufficient to cover the present value of future benefits, settlement and maintenance costs and
to recover unamortized acquisition costs. The premium deficiency reserve is established through a
charge to income, as well as a reduction to unamortized acquisition costs and, to the extent there
are no unamortized acquisition costs, an increase to future policy benefits. Because of the many
assumptions and estimates used in establishing reserves and the long-term nature of the Companys
reinsurance contracts, the reserving process, while based on actuarial science, is inherently
uncertain. If the Companys assumptions, particularly on mortality, are inaccurate, its reserves
may be inadequate to pay claims and there could be a material adverse effect on its results of
operations and financial condition.
Other policy claims and benefits include claims payable for incurred but not reported losses,
which are determined using case-basis estimates and lag studies of past experience. These
estimates are periodically reviewed and any adjustments
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to such estimates, if necessary, are reflected in current operations. The time lag from the
date of the claim or death to the date when the ceding company reports the claim to the Company can
be several months and can vary significantly by ceding company and business segment. The Company
updates its analysis of incurred but not reported claims, including lag studies, on a periodic
basis and adjusts its claim liabilities accordingly. The adjustments in a given period are
generally not significant relative to the overall policy liabilities.
Valuation of Fixed Maturity Securities
The Company primarily invests in fixed maturity securities, including bonds and redeemable
preferred stocks. These securities are classified as available-for-sale and accordingly are
carried at fair value on the consolidated balance sheets. The difference between amortized cost
and fair value is reflected as an unrealized gain or loss, less applicable deferred taxes as well
as related adjustments to deferred acquisition costs, if applicable, in accumulated other
comprehensive income (AOCI) in stockholders equity. The determinations of fair value may
require extensive use of assumptions and inputs. In addition, other-than-temporary impairment
losses related to non-credit factors are recognized in AOCI.
The Company performs regular analysis and review of the various techniques, assumptions and
inputs utilized in determining fair value to ensure that the valuation approaches utilized are
appropriate and consistently applied, and that the various assumptions are reasonable. The Company
also utilizes information from third parties, such as pricing services and brokers, to assist in
determining fair values for certain assets and liabilities; however, management is ultimately
responsible for all fair values presented in the Companys financial statements. The Company
performs analysis and review of the information and prices received from third parties to ensure
that the prices represent a reasonable estimate of the fair value. This process involves
quantitative and qualitative analysis and is overseen by the Companys investment and accounting
personnel. Examples of procedures performed include, but are not limited to, initial and ongoing
review of third party pricing services and techniques, review of pricing trends and monitoring of
recent trade information. In addition, the Company utilizes both internal and external cash flow
models to analyze the reasonableness of fair values utilizing credit spread and other market
assumptions, where appropriate. As a result of the analysis, if the Company determines there is a
more appropriate fair value based upon the available market data, the price received from the third
party is adjusted accordingly.
When available, fair values are based on quoted prices in active markets that are regularly
and readily obtainable. Generally, these are very liquid investments and the valuation does not
require management judgment. When quoted prices in active markets are not available, fair value is
based on market standard valuation techniques, primarily a combination of a market approach,
including matrix pricing and an income approach. The assumptions and inputs used by management in
applying these techniques include, but are not limited to: interest rates, credit standing of the
issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund
requirements, maturity, estimated duration and assumptions regarding liquidity and future cash
flows.
The significant inputs to the market standard valuation techniques for certain types of
securities with reasonable levels of price transparency are inputs that are observable in the
market or can be derived principally from or corroborated by observable market data. Such
observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted
prices in markets that are not active and observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation techniques for
determining the estimated fair value of certain types of securities that trade infrequently, and
therefore have little or no price transparency, rely on inputs that are significant to the
estimated fair value that are not observable in the market or cannot be derived principally from or
corroborated by observable market data. These unobservable inputs can be based in large part on
management judgment or estimation, and cannot be supported by reference to market activity. Even
though unobservable, these inputs are based on assumptions deemed appropriate given the
circumstances and are consistent with what other market participants would use when pricing such
securities.
The use of different techniques, assumptions and inputs may have a material effect on the
estimated fair values of the Companys securities holdings.
Additionally, the Company evaluates its intent to sell fixed maturity securities and whether
it is more likely than not that it will be required to sell fixed maturity securities, along with
factors such as the financial condition of the issuer, payment performance, the extent to which the
market value has been below amortized cost, compliance with covenants, general market and industry
sector conditions, and various other factors. Securities, based on managements judgments, with an
other-than-temporary impairment in value are written down to managements estimate of fair value.
40
Valuation of Embedded Derivatives
The Company reinsures certain annuity products that contain terms that are deemed to be
embedded derivatives, primarily equity-indexed annuities and variable annuities with guaranteed
minimum benefits. The Company assesses each identified embedded derivative to determine whether it
is required to be bifurcated under the general accounting principles for Derivatives and Hedging.
If the instrument would not be accounted for in its entirety at fair value and it is determined
that the terms of the embedded derivative are not clearly and closely related to the economic
characteristics of the host contract, and that a separate instrument with the same terms would
qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract
and reported separately. Such embedded derivatives are carried on the consolidated balance sheets
at fair value with the host contract.
The valuation of the various embedded derivatives requires complex calculations based on
actuarial and capital market inputs assumptions related to estimates of future cash flows. Such
assumptions include, but are not limited to, assumptions regarding equity market performance,
equity market volatility, interest rates, credit spreads, benefits and related contract charges,
mortality, lapses, withdrawals, benefit selections and non-performance risk. These assumptions
have a significant impact on the value of the embedded derivatives. For example, independent
future decreases in equity market returns, future decreases in interest rates and future increases
in equity market volatilities would increase the value of the embedded liability derivative
associated with guaranteed minimum withdrawal benefits on variable annuities at December 31, 2009,
resulting in an increase in investment related losses. See Market Risk disclosures in
Managements Discussion and Analysis of Financial Condition and Results of Operations for
additional information.
Additionally, reinsurance treaties written on a modified coinsurance or funds withheld basis
are subject to the general accounting principles for Derivatives and Hedging related to embedded
derivatives. The majority of the Companys funds withheld at interest balances are associated with
its reinsurance of annuity contracts, the majority of which are subject to the general accounting
principles for Derivatives and Hedging related to embedded derivatives. Management believes the
embedded derivative feature in each of these reinsurance treaties is similar to a total return swap
on the assets held by the ceding companies. The valuation of these embedded derivatives is
sensitive to the credit spread environment. Decreases or increases in credit spreads result in an
increase or decrease in value of the embedded derivative and therefore an increase in investment
related gains or losses, respectively. See Managements Discussion and Analysis of Financial
Condition and Results of Operations for the U.S. Asset-Intensive Segment for additional
information.
Income Taxes
Income taxes represent the net amount of income taxes that the Company expects to pay to or
receive from various taxing jurisdictions in connection with its operations. The Company provides
for federal, state and foreign income taxes currently payable, as well as those deferred due to
temporary differences between the financial reporting and tax bases of assets and liabilities. The
Companys accounting for income taxes represents managements best estimate of various events and
transactions.
Deferred tax assets and liabilities resulting from temporary differences between the financial
reporting and tax bases of assets and liabilities are measured at the balance sheet date using
enacted tax rates expected to apply to taxable income in the years the temporary differences are
expected to reverse.
The realization of deferred tax assets depends upon the existence of sufficient taxable income
within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction.
The Company has significant deferred tax assets related to net operating and capital losses. Most
of the Companys exposure related to its deferred tax assets are within legal entities that file a
consolidated United States federal income tax return. The Company has projected its ability to
utilize its net operating losses and has determined that all of these losses are expected to be
utilized prior to their expiration. The Company has also done extensive analysis of its capital
losses and has determined that sufficient unrealized capital gains exist within its investment
portfolios that should offset any capital loss realized. It is also the Companys intention to
hold all unrealized loss securities until maturity or until their market value recovers.
41
The Company will establish a valuation allowance when management determines, based on
available information, that it is more likely than not that deferred income tax assets will not be
realized. Significant judgment is required in determining whether valuation allowances should be
established as well as the amount of such allowances. When making such determination,
consideration is given to, among other things, the following:
(i) |
|
future taxable income exclusive of reversing temporary differences and carryforwards; |
|
(ii) |
|
future reversals of existing taxable temporary differences; |
|
(iii) |
|
taxable income in prior carryback years; and |
|
(iv) |
|
tax planning strategies. |
The Company may be required to change its provision for income taxes in certain circumstances.
Examples of such circumstances include when the ultimate deductibility of certain items is
challenged by taxing authorities, when it becomes clear that certain items will not be challenged,
or when estimates used in determining valuation allowances on deferred tax assets significantly
change or when receipt of new information indicates the need for adjustment in valuation
allowances. Additionally, future events such as changes in tax legislation could have an impact on
the provision for income tax and the effective tax rate. Any such changes could significantly
affect the amounts reported in the consolidated financial statements in the year these changes
occur.
Arbitration and Litigation Reserves
The Company at times is a party to various litigation and arbitrations. The Company cannot
predict or determine the ultimate outcome of any pending litigation or arbitrations or even provide
useful ranges of potential losses. A legal reserve is established when the Company is notified of
an arbitration demand or litigation or is notified that an arbitration demand or litigation is
imminent, it is probable that the Company will incur a loss as a result and the amount of the
probable loss is reasonably capable of being estimated. However, it is possible that an adverse
outcome on any particular arbitration or litigation situation could have a material adverse effect
on the Companys consolidated financial position and/or net income in a particular reporting
period.
U.S. Operations
U.S. operations consist of two major sub-segments: Traditional and
Non-Traditional. The Traditional sub-segment primarily specializes in mortality-risk reinsurance.
The Non-Traditional sub-segment consists of Asset-Intensive and Financial Reinsurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009 |
|
|
|
|
|
Non-Traditional |
|
|
(dollars in thousands) |
|
Traditional |
|
Asset-Intensive |
|
Financial Reinsurance |
|
Total U.S. |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
3,313,864 |
|
|
$ |
6,859 |
|
|
$ |
|
|
|
$ |
3,320,723 |
|
Investment income, net of related expenses |
|
|
428,541 |
|
|
|
386,642 |
|
|
|
(286 |
) |
|
|
814,897 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(88,352 |
) |
|
|
(7,917 |
) |
|
|
(225 |
) |
|
|
(96,494 |
) |
Other-than-temporary impairments on fixed maturity
securities transferred to accumulated other comprehensive
income |
|
|
15,040 |
|
|
|
557 |
|
|
|
35 |
|
|
|
15,632 |
|
Other investment related gains (losses), net |
|
|
(10,572 |
) |
|
|
117,001 |
|
|
|
288 |
|
|
|
106,717 |
|
|
|
|
Total investment related gains (losses), net |
|
|
(83,884 |
) |
|
|
109,641 |
|
|
|
98 |
|
|
|
25,855 |
|
Other revenues |
|
|
3,197 |
|
|
|
70,566 |
|
|
|
20,296 |
|
|
|
94,059 |
|
|
|
|
Total revenues |
|
|
3,661,718 |
|
|
|
573,708 |
|
|
|
20,108 |
|
|
|
4,255,534 |
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
2,837,808 |
|
|
|
6,971 |
|
|
|
|
|
|
|
2,844,779 |
|
Interest credited |
|
|
63,178 |
|
|
|
260,364 |
|
|
|
|
|
|
|
323,542 |
|
Policy acquisition costs and other insurance expenses |
|
|
450,358 |
|
|
|
259,112 |
|
|
|
1,188 |
|
|
|
710,658 |
|
Other operating expenses |
|
|
54,651 |
|
|
|
10,176 |
|
|
|
3,010 |
|
|
|
67,837 |
|
|
|
|
Total benefits and expenses |
|
|
3,405,995 |
|
|
|
536,623 |
|
|
|
4,198 |
|
|
|
3,946,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
255,723 |
|
|
$ |
37,085 |
|
|
$ |
15,910 |
|
|
$ |
308,718 |
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Traditional |
|
|
For the year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
Financial |
|
Total |
(dollars in thousands) |
|
Traditional |
|
Asset-Intensive |
|
Reinsurance |
|
U.S. |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
3,093,074 |
|
|
$ |
6,558 |
|
|
$ |
|
|
|
$ |
3,099,632 |
|
Investment income, net of related expenses |
|
|
394,917 |
|
|
|
176,106 |
|
|
|
588 |
|
|
|
571,611 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(69,050 |
) |
|
|
(8,422 |
) |
|
|
(486 |
) |
|
|
(77,958 |
) |
Other-than-temporary impairments on fixed maturity
securities transferred to accumulated other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
(2,854 |
) |
|
|
(514,976 |
) |
|
|
237 |
|
|
|
(517,593 |
) |
|
|
|
Total investment related gains (losses), net |
|
|
(71,904 |
) |
|
|
(523,398 |
) |
|
|
(249 |
) |
|
|
(595,551 |
) |
Other revenues |
|
|
377 |
|
|
|
56,775 |
|
|
|
15,280 |
|
|
|
72,432 |
|
|
|
|
Total revenues |
|
|
3,416,464 |
|
|
|
(283,959 |
) |
|
|
15,619 |
|
|
|
3,148,124 |
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
2,661,963 |
|
|
|
11,241 |
|
|
|
|
|
|
|
2,673,204 |
|
Interest credited |
|
|
60,448 |
|
|
|
172,366 |
|
|
|
|
|
|
|
232,814 |
|
Policy acquisition costs and other insurance expenses (income) |
|
|
415,117 |
|
|
|
(298,810 |
) |
|
|
1,041 |
|
|
|
117,348 |
|
Other operating expenses |
|
|
47,943 |
|
|
|
7,990 |
|
|
|
2,737 |
|
|
|
58,670 |
|
|
|
|
Total benefits and expenses |
|
|
3,185,471 |
|
|
|
(107,213 |
) |
|
|
3,778 |
|
|
|
3,082,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
230,993 |
|
|
$ |
(176,746 |
) |
|
$ |
11,841 |
|
|
$ |
66,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Traditional |
|
|
For the year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
Financial |
|
Total |
(dollars in thousands) |
|
Traditional |
|
Asset-Intensive |
|
Reinsurance |
|
U.S. |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
2,868,403 |
|
|
$ |
6,356 |
|
|
$ |
|
|
|
$ |
2,874,759 |
|
Investment income (loss), net of related expenses |
|
|
352,553 |
|
|
|
271,638 |
|
|
|
(53 |
) |
|
|
624,138 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(2,767 |
) |
|
|
(2,755 |
) |
|
|
(2 |
) |
|
|
(5,524 |
) |
Other-than-temporary impairments on fixed maturity
securities transferred to accumulated other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
(11,003 |
) |
|
|
(153,403 |
) |
|
|
(5 |
) |
|
|
(164,411 |
) |
|
|
|
Total investment related gains (losses), net |
|
|
(13,770 |
) |
|
|
(156,158 |
) |
|
|
(7 |
) |
|
|
(169,935 |
) |
Other revenues |
|
|
922 |
|
|
|
38,006 |
|
|
|
23,117 |
|
|
|
62,045 |
|
|
|
|
Total revenues |
|
|
3,208,108 |
|
|
|
159,842 |
|
|
|
23,057 |
|
|
|
3,391,007 |
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
2,344,185 |
|
|
|
5,875 |
|
|
|
(124 |
) |
|
|
2,349,936 |
|
Interest credited |
|
|
58,595 |
|
|
|
185,726 |
|
|
|
|
|
|
|
244,321 |
|
Policy acquisition costs and other insurance expenses (income) |
|
|
417,958 |
|
|
|
(16,499 |
) |
|
|
6,410 |
|
|
|
407,869 |
|
Other operating expenses |
|
|
49,746 |
|
|
|
7,069 |
|
|
|
4,138 |
|
|
|
60,953 |
|
|
|
|
Total benefits and expenses |
|
|
2,870,484 |
|
|
|
182,171 |
|
|
|
10,424 |
|
|
|
3,063,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
337,624 |
|
|
$ |
(22,329 |
) |
|
$ |
12,633 |
|
|
$ |
327,928 |
|
|
|
|
Income before income taxes for the U.S. operations segment increased by $242.6 million,
or 367.1%, and decreased by $261.8 million, or 79.8%, in 2009 and 2008, respectively. The increase
in income before income taxes in 2009 and decrease in 2008 can primarily be attributed to the
impact of changes in credit spreads on the fair value of embedded derivatives associated with
treaties written on a modified coinsurance or funds withheld basis. Decreases or increases in
credit spreads result in an increase or decrease in value of the embedded derivative, and
therefore, an increase or decrease in investment related gains or losses, respectively. In
addition, the decrease in income in 2008 reflects an increase in investment impairments. See the
discussion of Investments in the Liquidity and Capital Resources section of Managements
Discussion and Analysis for additional information on impairment losses. Higher than expected
claims in the Traditional sub-segment adversely affected income before income taxes in 2009 and
2008.
Traditional Reinsurance
The U.S. Traditional sub-segment provides life and health reinsurance to domestic clients for
a variety of products through yearly renewable term, coinsurance and modified coinsurance
agreements. These reinsurance arrangements may involve either facultative or automatic agreements.
This sub-segment added new business production, measured by face amount of insurance in force, of
$135.0 billion, $134.4 billion and $164.2 billion during 2009, 2008 and 2007, respectively.
Management believes industry consolidation, reduced capital levels in the life insurance industry
and the established practice
43
of reinsuring mortality risks should continue to provide opportunities
for new business at levels comparable to 2009 and 2008.
Income before income taxes for the U.S. Traditional sub-segment increased by $24.7 million, or
10.7%, and decreased by $106.6 million, or 31.6% in 2009 and 2008, respectively. The increase in
2009 was primarily driven by an increase in business and slightly better mortality experience as
compared to 2008. This was partially offset by increased investment related losses in 2009. The
decrease in 2008 was due to an increase in investment related losses of $58.1 million and adverse
mortality experience compared to 2007. The increase in investment related losses in 2008 was due
to the aforementioned realized investment losses, recognized primarily in the third quarter of
2008.
Net premiums for the U.S. Traditional sub-segment grew $220.8 million, or 7.1%, and $224.7
million, or 7.8% in 2009 and 2008, respectively. These increases in net premiums were driven
primarily by the growth of total U.S. Traditional business in force and increasing premium sales
associated with treaties written on a yearly renewable term basis. Total face amount was $1,285.5
million, $1,269.0 million and $1,226.8 million as of December 31, 2009 and 2008, and 2007,
respectively.
Net investment income increased $33.6 million, or 8.5%, and $42.4 million, or 12.0%, in 2009
and 2008, respectively, primarily due to growth in the invested asset base. Additionally, 2008
reflects an increase in the average yield earned on investments compared to 2007. Investment
related losses increased $12.0 million and $58.1 million in 2009 and 2008, respectively, due
primarily to investment impairments associated with fixed maturity securities.
Investment income and investment related gains and losses are allocated to the various
operating segments based on average assets and related capital levels deemed appropriate to support
the segment business volumes. Investment performance varies with the composition of investments
and the relative allocation of capital to the operating segments.
Claims and other policy benefits as a percentage of net premiums (loss ratios) were 85.6%,
86.1% and 81.7% in 2009, 2008 and 2007, respectively. The loss ratios in 2009 and 2008 reflect
somewhat higher mortality than expected due primarily to an increase in the number of large claims
($1 million or more per claim), while mortality experience was favorable in 2007. Although
reasonably predictable over a period of years, death claims can be volatile over shorter periods.
Management views recent experience as normal volatility that is inherent in the business.
Interest credited expense increased $2.7 million, or 4.5%, and $1.9 million, or 3.2%, in 2009
and 2008, respectively. The 2009 and 2008 increases are the result of one treaty that had a slight
increase in its asset base with a credited loan rate remaining constant at 5.6% since 2007.
Interest credited in this case relates to amounts credited on cash value products which also have a
significant mortality component. The amount of interest credited fluctuates in step with changes
in deposit levels, cash surrender values and investment performance. Income before income taxes is
affected by the spread between the investment income and the interest credited on the underlying
products.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were
13.6%, 13.4% and 14.6% in 2009, 2008 and 2007, respectively. Overall, while these ratios are
expected to remain in a predictable range, they may fluctuate from period to period due to varying
allowance levels within coinsurance-type arrangements. In addition, the amortization pattern of
previously capitalized amounts, which are subject to the form of the reinsurance agreement and the
underlying insurance policies, may vary. Also, the mix of first year coinsurance business versus
yearly renewable term business can cause the percentage to fluctuate from period to period.
Other operating expenses increased $6.7 million, or 14.0%, and decreased $1.8 million, or 3.6%
in 2009 and 2008, respectively. Other operating expenses, as a percentage of net premiums, were
1.6%, 1.6% and 1.7% in 2009, 2008 and 2007, respectively. The expense ratio tends to fluctuate
only slightly from period to period due to maturity and scale of this operation.
Asset-Intensive Reinsurance
The U.S. Asset-Intensive sub-segment assumes primarily investment risk within underlying
annuities and corporate-owned life insurance policies. Most of these agreements are coinsurance,
coinsurance with funds withheld or modified coinsurance whereby the Company recognizes profits or
losses primarily from the spread between the investment income earned and the interest credited on
the underlying deposit liabilities.
Impact of certain derivatives:
Income for the asset-intensive business tends to be volatile due to changes in the fair value
of certain derivatives, including embedded derivatives associated with reinsurance treaties
structured on a modified coinsurance (Modco) basis or funds withheld basis, as well as embedded
derivatives associated with the Companys reinsurance of equity-indexed annuities
44
and variable
annuities with guaranteed minimum benefit riders. The following table summarizes the
asset-intensive results and quantifies the impact of these embedded derivatives for the periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
|
|
|
(dollars in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
573,708 |
|
|
$ |
(283,959 |
) |
|
$ |
159,842 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives Modco/Funds withheld treaties |
|
|
78,394 |
|
|
|
(427,798 |
) |
|
|
(141,905 |
) |
Guaranteed minimum benefit riders and related free standing derivatives |
|
|
38,911 |
|
|
|
(89,004 |
) |
|
|
(9,284 |
) |
|
|
|
Revenues before certain derivatives |
|
|
456,403 |
|
|
|
232,843 |
|
|
|
311,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
536,623 |
|
|
|
(107,213 |
) |
|
|
182,171 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives Modco/Funds withheld treaties |
|
|
45,254 |
|
|
|
(246,722 |
) |
|
|
(104,381 |
) |
Guaranteed minimum benefit riders and related free standing derivatives |
|
|
76,858 |
|
|
|
(94,179 |
) |
|
|
|
|
Equity-indexed annuities |
|
|
(2,659 |
) |
|
|
15,207 |
|
|
|
|
|
|
|
|
Benefits and expenses before certain derivatives |
|
|
417,170 |
|
|
|
218,481 |
|
|
|
286,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
37,085 |
|
|
|
(176,746 |
) |
|
|
(22,329 |
) |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives Modco/Funds withheld treaties |
|
|
33,140 |
|
|
|
(181,076 |
) |
|
|
(37,524 |
) |
Guaranteed minimum benefit riders and related free standing derivatives |
|
|
(37,947 |
) |
|
|
5,175 |
|
|
|
(9,284 |
) |
Equity-indexed annuities |
|
|
2,659 |
|
|
|
(15,207 |
) |
|
|
|
|
|
|
|
Income before income taxes and certain derivatives |
|
|
39,233 |
|
|
|
14,362 |
|
|
|
24,479 |
|
|
|
|
Modco/Funds Withheld Treaties- Represents the change in the fair value of embedded
derivatives on funds withheld at interest associated with treaties written on a modified
coinsurance or funds withheld basis, allowing for deferred acquisition expenses. Changes in the
fair value of the embedded derivative are driven by changes in investment credit spreads, including
the Companys own credit spread. Generally, an increase in investment credit spreads, ignoring
changes in the Companys own credit spread, will have a negative impact on the fair value of the
embedded derivative (decrease in income).
In 2009, the change in fair value of the embedded derivative increased revenues by $78.4
million, partially offset by the related deferred acquisition expenses of $45.3 million, for a
positive pre-tax income impact of $33.1 million, primarily due to a decrease in investment credit
spreads. During 2008, credit spreads widened sharply, particularly in the second half of the year.
As a result, the change in fair value of the embedded derivative decreased revenues by $427.8
million, partially offset by the related deferred acquisition expenses of $246.7 million, for a
negative pre-tax income impact of $181.1 million.
Guaranteed Minimum Benefit Riders- Represents the impact related to guaranteed minimum
benefits associated with the Companys reinsurance of variable annuities. The fair value changes
of the guaranteed minimum benefits along with the changes in fair value of the free standing
derivatives purchased by the Company to hedge the liability are reflected in revenues, while the
related impact on deferred acquisition expenses is reflected in expenses. In 2009, the change in
the fair value of the guaranteed minimum benefits, after allowing for changes in the associated
free standing derivatives, was $38.9 million and deferred acquisition expenses were $76.9 million
for a negative pre-tax income impact of $38.0 million. In 2008, the change in the fair value of the
guaranteed minimum benefits after allowing for changes in the associated hedge instruments was
negative $89.0 million and deferred acquisition expenses were negative $94.2 million for a pre-tax
income impact of $5.2 million.
Equity-Indexed Annuities- Represents the impact of changes in the risk-free rate on the
calculation of the fair value of embedded derivative liabilities associated with equity-indexed
annuities, after adjustments for related deferred acquisition expenses and retrocession. In 2009
and 2008, expenses decreased $2.7 million and increased $15.2 million respectively.
The changes in derivatives discussed above are considered unrealized by management and do not
affect current cash flows, crediting rates or spread performance on the underlying treaties.
Fluctuations occur period to period primarily due to changing investment conditions including, but
not limited to, interest rate movements (including risk-free rates and credit
45
spreads), implied
volatility and equity market performance, all of which are factors in the calculations of fair
value. Therefore, management believes it is helpful to distinguish between the effects of changes
in these derivatives and the primary factors that drive profitability of the underlying treaties,
namely investment income, fee income, and interest credited.
Discussion and analysis before certain derivatives:
The increase in income before taxes and certain derivatives in 2009 of $24.9 million is
primarily due to improvement in the broader U.S. financial markets and related favorable impacts on
the underlying annuity account values. In addition, investment related gains in funds withheld
portfolios, included in investment income, increased $20.5 million before deferred acquisition
costs. These increases were partially offset by an $7.7 million increase in policy acquisition
costs as a result of deferred acquisition costs recoverability testing of deferred acquisition
costs for new business issues. The decrease in income before income taxes and derivatives in 2008
of $10.1 million was primarily due to a combination of investment related losses in funds withheld
portfolios, included in investment income, of $15.3 million before deferred acquisition costs and
an increase in realized investment related losses of approximately $7.1 million, net of deferred
acquisition costs. Higher mortality and fee income earned on the variable annuity transactions
also contributed to income in both 2009 and 2008.
The 2009 increase of $223.6 million and the 2008 decrease of $78.2 million in revenue before
certain derivatives, was driven by changes in investment income related to equity options held in a
funds withheld portfolio associated with equity-indexed annuity treaties. Increases and decreases
in investment income related to equity options were mostly offset by corresponding increases and
decreases in interest credited expense. Also impacting revenue were investment related gains and
losses in the funds withheld portfolios which increased approximately $20.5 million in 2009 and
decreased $15.3 million in 2008, both before deferred acquisition costs. These investment related
gains and losses are reflected in investment income.
The average invested asset base supporting this sub-segment was $5.1 billion, $5.1 billion and
$4.8 billion for 2009, 2008 and 2007, respectively. The asset base in 2009 was relatively flat
compared to 2008 due to annuity contract surrenders which led to a decline in the account value and
related invested asset base, offset by new business written on an existing equity-indexed treaty.
The growth in the asset base in 2008 was driven by new business on an existing equity-indexed
treaty, a new fixed-annuity transaction and a new guaranteed investment contract, together adding
approximately $700.0 million to the asset base of this sub-segment. Invested assets outstanding
were $5.2 billion as of December 31, 2009 compared to $5.1 billion in 2008. As of December 31,
2009, $3.6 billion of the invested assets were funds withheld at interest, of which 94.9% of the
balance was associated with equity-indexed annuity treaties with one client. As of December 31,
2008, $3.4 billion of the invested assets were funds withheld at interest, of which 91.1% of the
balance was associated with equity-indexed annuity treaties with one client.
The 2009 increase of $198.7 million and the 2008 decrease of $68.1 million in benefits and
expenses before certain derivatives were primarily due to changes in the interest credited expense
related to equity option income on funds withheld equity-indexed annuity treaties. These changes
were mostly offset by a corresponding increase or decrease in investment income.
Financial Reinsurance
The U.S. Financial Reinsurance sub-segment income before income taxes consists primarily of
net fees earned on financial reinsurance transactions. Financial reinsurance risks are assumed by
the U.S. segment and a portion are retroceded to other insurance companies or brokered business in
which the Company does not participate in the assumption of risk. The fees earned from financial
reinsurance contracts and brokered business are reflected in other revenues, and the fees paid to
retrocessionaires are reflected in policy acquisition costs and other insurance expenses.
Income before income taxes increased by $4.1 million, or 34.4%, and decreased by $0.8 million,
or 6.3%, in 2009 and 2008, respectively. The increase in 2009 was primarily related to new
treaties written in the fourth quarter. The decrease in 2008 was primarily due to one treaty,
which was recaptured late in 2007.
At December 31, 2009, 2008 and 2007, the amount of reinsurance assumed from client companies,
as measured by pre-tax statutory surplus, was $1.2 billion, $0.5 billion and $0.5 billion,
respectively. The pre-tax statutory surplus amounts include all business assumed or brokered by
the Company in the U.S. Fees earned from this business can vary significantly depending on the
size of the transactions and the timing of their completion, and therefore, can fluctuate from
period to period.
46
Canada Operations
The Company conducts reinsurance business in Canada through RGA Canada, a wholly-owned
subsidiary. RGA Canada assists clients with capital management and mortality and morbidity risk
management, and is primarily engaged in traditional individual life reinsurance, as well as
creditor, critical illness, and group life and health reinsurance.
Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the
event of death, disability or critical illness and is generally shorter in duration than
traditional life insurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
|
|
|
(dollars in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
614,831 |
|
|
$ |
534,271 |
|
|
$ |
487,136 |
|
Investment income, net of related expenses |
|
|
137,750 |
|
|
|
140,434 |
|
|
|
124,634 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(168 |
) |
|
|
(2,608 |
) |
|
|
(5 |
) |
Other-than-temporary impairments on fixed maturity
securities transferred to accumulated other comprehensive
income |
|
|
26 |
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
23,662 |
|
|
|
1,519 |
|
|
|
7,458 |
|
|
|
|
Total investment related gains (losses), net |
|
|
23,520 |
|
|
|
(1,089 |
) |
|
|
7,453 |
|
Other revenues |
|
|
1,134 |
|
|
|
18,332 |
|
|
|
182 |
|
|
|
|
Total revenues |
|
|
777,235 |
|
|
|
691,948 |
|
|
|
619,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
501,061 |
|
|
|
456,072 |
|
|
|
425,498 |
|
Interest credited |
|
|
75 |
|
|
|
365 |
|
|
|
726 |
|
Policy acquisition costs and other insurance expenses |
|
|
146,990 |
|
|
|
110,177 |
|
|
|
91,234 |
|
Other operating expenses |
|
|
22,774 |
|
|
|
23,068 |
|
|
|
20,404 |
|
|
|
|
Total benefits and expenses |
|
|
670,900 |
|
|
|
589,682 |
|
|
|
537,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
106,335 |
|
|
$ |
102,266 |
|
|
$ |
81,543 |
|
|
|
|
Reinsurance in force for the Canada operation totaled approximately $276.8 billion,
$209.5 billion, and $217.7 billion at December 31, 2009, 2008, and 2007, respectively. On a
Canadian dollar basis, reinsurance in force for the Canada operation reflected continued growth and
totaled approximately C$290.2 billion, C$255.4 billion, and C$217.4 billion at December 31, 2009,
2008, and 2007, respectively.
Income before income taxes increased by $4.1 million, or 4.0%, and $20.7 million, or 25.4%, in
2009 and 2008, respectively. The increase in income before income taxes in 2009 was primarily due
to an increase in investment related gains of $24.6 million compared to 2008. This increase was
largely offset by a generally weaker Canadian dollar, which resulted in a decrease in income before
income taxes of approximately $5.8 million. The segments 2009 results also reflect slightly
adverse mortality experience, excluding creditor business, compared to very favorable mortality in
2008. In addition, the 2008 income before income taxes reflects the favorable net effect of $6.8
million from the recaptures of a previously assumed and a previously retroceded treaty. The
increase in income before income taxes in 2008 compared to 2007 was primarily due to higher premium
volume, favorable mortality experience and an increase in the aforementioned recapture fees which
added $6.8 million. The 2008 increase was largely offset by a decrease of $8.5 million in
investment related gains and losses. In 2008, strength in the Canadian dollar resulted in an
increase in income before income taxes of approximately $0.7 million.
Net premiums increased $80.6 million, or 15.1%, and $47.1 million, or 9.7%, in 2009 and 2008,
respectively. Premiums from creditor treaties increased by $63.6 million in 2009 and $14.4 million
in 2008. On a Canadian dollar basis, net premiums increased approximately 23.0% in 2009 compared
to 2008. Creditor and group life and health premiums represented 29.0%, 20.9% and 17.5% of net
premiums in 2009, 2008 and 2007, respectively. The remaining increases are primarily due to new
business from both new and existing treaties. The segment added new business production, measured
by face amount of insurance in force, of $43.9 billion, $51.2 billion and $46.8 billion during
2009, 2008 and 2007, respectively. Management believes industry consolidation, changing capital
levels in the life insurance industry and the established practice of reinsuring mortality risks
should continue to provide opportunities for new business, albeit at rates less than historically
experienced. Additionally, foreign currency exchange fluctuation in the Canadian dollar resulted
in a decrease in net premiums of approximately $42.2 million and an increase of approximately $2.2
million in 2009 and 2008,
47
respectively. Premium levels can be significantly influenced by currency
fluctuations, large transactions, mix of business and reporting practices of ceding companies, and
therefore may fluctuate from period to period.
Net investment income decreased $2.7 million, or 1.9%, and increased $15.8 million, or 12.7%,
in 2009 and 2008, respectively. The effect of changes in the Canadian dollar exchange rates
resulted in a decrease in net investment income of approximately $9.3 million and an increase of
approximately $0.9 million in 2009 and 2008, respectively. Investment income and investment
related gains and losses are allocated to the segments based upon average assets and related
capital levels deemed appropriate to support segment business volumes. Investment performance
varies with the composition of
investments and the relative allocation of capital to the operating segments. The increase in
investment income in 2008 was mainly the result of an increase in the allocated asset base due to
growth in the underlying business volume.
Other revenues decreased by $17.2 million in 2009 but increased by $18.2 million in 2008
compared to 2007. The decrease in 2009 was primarily due to the absence of recapture fees while
the increase in 2008 was due to an increase of $16.2 million in recapture fees.
Loss ratios for this segment were 81.5%, 85.4% and 87.3% in 2009, 2008 and 2007, respectively.
The loss ratios on creditor reinsurance business are normally lower than traditional reinsurance,
while allowances (policy acquisition costs) are normally higher as a percentage of premiums. Loss
ratios for creditor business were 35.7%, 52.0% and 44.8% in 2009, 2008 and 2007, respectively. The
higher creditor loss ratio in 2008 reflects the release of retroceded reserves of $10.4 million
from the recapture of a previously retroceded block of creditor business. Excluding creditor
business and the aforementioned recaptures in 2008, the loss ratios for this segment were 97.8%,
92.9% and 96.2% in 2009, 2008 and 2007, respectively. The higher loss ratio in 2009 is primarily
the result of slightly adverse mortality experience compared to very favorable mortality experience
in 2008. The lower loss ratio for 2008 is primarily due to favorable mortality experience compared
to 2007. Historically, the loss ratio increased primarily as the result of several large permanent
level premium in force blocks assumed in 1997 and 1998. These blocks are mature blocks of
long-term permanent level premium business in which mortality as a percentage of net premiums is
expected to be higher than historical ratios. The nature of permanent level premium policies
requires the Company to set up actuarial liabilities and invest the amounts received in excess of
early-year mortality costs to fund claims in later years when those level premiums may not cover
expected increasing mortality or claim costs. Excluding creditor business, claims and other policy
benefits, as a percentage of net premiums and investment income were 75.0%, 70.1% and 73.5% in
2009, 2008 and 2007, respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums totaled
23.9%, 20.6% and 18.7% in 2009, 2008 and 2007, respectively. Policy acquisition costs and other
insurance expenses as a percentage of net premiums for creditor business were 55.5%, 51.6% and
49.6% in 2009, 2008 and 2007, respectively. Excluding foreign exchange and creditor business,
policy acquisition costs and other insurance expenses as a percentage of net premiums were 12.6%,
12.4% and 11.6% in 2009, 2008 and 2007, respectively. Overall, while these ratios are expected to
remain in a predictable range, they may fluctuate from period to period due to varying allowance
levels, significantly caused by the mix of first year coinsurance business versus yearly renewable
term business. In addition, the amortization pattern of previously capitalized amounts, which are
subject to the form of the reinsurance agreement and the underlying insurance policies, may vary.
Other operating expenses decreased $0.3 million, or 1.3%, and increased $2.7 million, or
13.1%, in 2009 and 2008, respectively. The effect of changes in the Canadian dollar exchange rates
resulted in a decrease in operating expenses of approximately $1.2 million and an increase of
approximately $1.1 million in 2009 and 2008, respectively. Other operating expenses as a
percentage of net premiums were 3.7%, 4.3% and 4.2% in 2009, 2008 and 2007, respectively.
Europe & South Africa Operations
The Europe & South Africa segment includes operations in France, Germany, India, Italy,
Mexico, the Netherlands, Poland, South Africa, Spain and the UK. The segment provides life
reinsurance for a variety of products through yearly renewable term and coinsurance agreements,
reinsurance of critical illness coverage and to a lesser extent, the reinsurance of longevity risk
related to payout annuities. Reinsurance agreements may be facultative or automatic agreements
covering primarily individual risks and in some markets, group risks.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
|
|
|
(dollars in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
781,952 |
|
|
$ |
707,768 |
|
|
$ |
678,551 |
|
Investment income, net of related expenses |
|
|
32,240 |
|
|
|
32,993 |
|
|
|
26,167 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(3,418 |
) |
|
|
(9,857 |
) |
|
|
(209 |
) |
Other-than-temporary impairments on fixed maturity
securities transferred to accumulated other comprehensive
income |
|
|
558 |
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
4,112 |
|
|
|
1,170 |
|
|
|
(1,974 |
) |
|
|
|
Total investment related gains (losses), net |
|
|
1,252 |
|
|
|
(8,687 |
) |
|
|
(2,183 |
) |
Other revenues (losses) |
|
|
11,436 |
|
|
|
401 |
|
|
|
(144 |
) |
|
|
|
Total revenues |
|
|
826,880 |
|
|
|
732,475 |
|
|
|
702,391 |
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
656,485 |
|
|
|
532,292 |
|
|
|
515,660 |
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
1,019 |
|
Policy acquisition costs and other insurance expenses |
|
|
37,753 |
|
|
|
69,422 |
|
|
|
84,749 |
|
Other operating expenses |
|
|
80,301 |
|
|
|
65,075 |
|
|
|
53,496 |
|
|
|
|
Total benefits and expenses |
|
|
774,539 |
|
|
|
666,789 |
|
|
|
654,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
52,341 |
|
|
$ |
65,686 |
|
|
$ |
47,467 |
|
|
|
|
Income before income taxes decreased by $13.3 million, or 20.3%, and increased by $18.2
million or 38.4%, in 2009 and 2008, respectively. The decrease in income before income taxes in
2009 was primarily due to an increase in claims and other policy benefits and an unfavorable
foreign currency exchange fluctuation partially offset by a decrease in policy acquisition costs
and other insurance expenses. In addition, a retrocession block of business was recaptured in 2009
that increased income before income taxes by $6.0 million. The increase in income before income
taxes for 2008 was primarily due to increased net premiums and decreased policy acquisition costs
and other insurance expenses partially offset by adverse claims experience and an unfavorable
foreign currency exchange fluctuation. In addition, a block of business was recaptured in 2008
that increased income before income taxes by $6.1 million. Unfavorable foreign currency exchange
fluctuations contributed to a decrease in income before income taxes totaling approximately $2.1
million and $8.6 million in 2009 and 2008, respectively.
Net premiums grew by $74.2 million, or 10.5%, and $29.2 million, or 4.3%, in 2009 and 2008,
respectively. These increases were primarily the result of new business from both new and existing
treaties. The segment added new business production, measured by face amount of insurance in
force, of $121.1 billion, $87.5 billion and $61.3 billion during 2009, 2008 and 2007, respectively.
During 2009 and 2008, there were unfavorable foreign currency exchange fluctuations, particularly
from the British pound, the euro and the South African rand weakening against the U.S. dollar,
which decreased net premiums by approximately $107.5 million and $47.7 million, respectively.
A significant portion of the net premiums for the segment, in each period presented, relates
to reinsurance of critical illness coverage, primarily in the UK. This coverage provides a benefit
in the event of the diagnosis of a pre-defined critical illness. Net premiums earned from this
coverage totaled $212.1 million, $236.4 million and $235.2 million in 2009, 2008 and 2007,
respectively. Premium levels can be significantly influenced by currency fluctuations, large
transactions and reporting practices of ceding companies and therefore can fluctuate from period to
period.
Net investment income decreased $0.8 million, or 2.3%, and increased $6.8 million, or 26.1%,
in 2009 and 2008, respectively. The decrease in 2009 can primarily be attributed to a decrease in
investment yield. The increase in 2008 can be attributed to growth in the invested asset base and
increased investment yield. Investment income and investment related gains and losses are
allocated to the various operating segments based on average assets and related capital levels
deemed appropriate to support the segment business volumes. Investment performance varies with the
composition of investments and the relative allocation of capital to the operating segments.
Loss ratios for this segment were 84.0%, 75.2% and 76.0% in 2009, 2008 and 2007, respectively.
During 2009, a retrocession block of business was recaptured which had the effect of increasing
the loss ratio. Excluding this recapture, the loss ratio for 2009 was 82.2%. During 2008, a block
of business was recaptured which had the effect of lowering the loss ratio. Excluding this
recapture, the loss ratio for 2008 was 77.0%. The increases in the loss ratios for 2009 and 2008
were primarily due to unfavorable claims experience in the UK and South Africa. Although
reasonably predictable over a period
49
of years, death claims can be volatile over shorter periods.
Management views recent experience as normal volatility that is inherent in the business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were
4.8%, 9.8% and 12.5% for 2009, 2008 and 2007, respectively. Excluding the aforementioned
recaptures, policy acquisition costs and other insurance expenses as a percentage of net premiums
were 6.3% in 2009 and 8.8% in 2008. These percentages fluctuate due to timing of client company
reporting, variations in the mixture of business and the relative maturity of the business. In
addition, as the segment grows, renewal premiums, which have lower allowances than first-year
premiums, represent a greater percentage of the total net premiums.
Other operating expenses increased $15.2 million, or 23.4%, and $11.6 million, or 21.6%, in
2009 and 2008, respectively. Other operating expenses as a percentage of net premiums totaled
10.3%, 9.2% and 7.9% in 2009, 2008 and 2007, respectively. These increases were due to higher
costs associated with maintaining and supporting the segments increase in business over the past
several years and the Companys recent expansion into Central Europe. The Company believes that
sustained growth in net premiums should lessen the burden of start-up expenses and expansion costs
over time.
Asia Pacific Operations
The Asia Pacific segment includes operations in Australia, Hong Kong, Japan, Malaysia,
Singapore, New Zealand, South Korea, Taiwan and mainland China. The principal types of reinsurance
include life, critical illness, disability income, superannuation, and financial reinsurance.
Superannuation is the Australian government mandated compulsory retirement savings program.
Superannuation funds accumulate retirement funds for employees, and, in addition, offer life and
disability insurance coverage. Reinsurance agreements may be facultative or automatic agreements
covering primarily individual risks and in some markets, group risks.
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
|
|
|
(dollars in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
998,927 |
|
|
$ |
1,000,814 |
|
|
$ |
864,550 |
|
Investment income, net of related expenses |
|
|
61,335 |
|
|
|
47,400 |
|
|
|
36,388 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(6,172 |
) |
|
|
(4,997 |
) |
|
|
(150 |
) |
Other-than-temporary impairments on fixed maturity
securities transferred to accumulated other comprehensive
income |
|
|
804 |
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
5,165 |
|
|
|
2,336 |
|
|
|
(1,379 |
) |
|
|
|
Total investment related gains (losses), net |
|
|
(203 |
) |
|
|
(2,661 |
) |
|
|
(1,529 |
) |
Other revenues |
|
|
25,029 |
|
|
|
12,320 |
|
|
|
9,197 |
|
|
|
|
Total revenues |
|
|
1,085,088 |
|
|
|
1,057,873 |
|
|
|
908,606 |
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
817,052 |
|
|
|
799,376 |
|
|
|
692,859 |
|
Policy acquisition costs and other insurance expenses |
|
|
106,405 |
|
|
|
107,076 |
|
|
|
99,285 |
|
Other operating expenses |
|
|
78,085 |
|
|
|
65,912 |
|
|
|
56,372 |
|
|
|
|
Total benefits and expenses |
|
|
1,001,542 |
|
|
|
972,364 |
|
|
|
848,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
83,546 |
|
|
$ |
85,509 |
|
|
$ |
60,090 |
|
|
|
|
Income before income taxes decreased by $2.0 million, or 2.3%, and increased by $25.4
million, or 42.3%, in 2009 and 2008, respectively. The decrease in income before income taxes in
2009 was primarily related to increased claims and other policy benefits throughout the segment.
The increase in income before income taxes in 2008 was primarily due to increased net premiums and
favorable mortality experience throughout the segment. Foreign currency exchange fluctuations
resulted in a negligible increase to income before income taxes in 2009 and an increase of
approximately $3.6 million in 2008.
Net premiums decreased by $1.9 million, or 0.2%, and increased by $136.3 million, or 15.8%, in
2009 and 2008, respectively. The decrease in premiums in 2009 was due to a decrease of $61.3
million, collectively, in Korea, Taiwan and New Zealand largely offset by an increase of $54.3
million, collectively, in Australia, Hong Kong and Japan compared to 2008. The premium growth in
2008 was primarily the result of increases in Australia, Korea, Taiwan and Japan, collectively
adding approximately $121.4 million to net premiums compared to 2007. The segment added new
business production, measured by face amount of insurance in force, of $21.0 billion, $31.9 billion
and $30.1 billion during 2009, 2008 and 2007,
50
respectively. Premium levels can be significantly
influenced by currency fluctuations, large transactions and reporting practices of ceding companies
and can fluctuate from period to period.
Throughout most of 2009, there were unfavorable foreign currency fluctuations, particularly in
the Australian dollar, Korean won, New Zealand dollar and Taiwanese dollar, against the U.S.
dollar. The overall effect of changes in Asia Pacific segment currencies was a decrease in 2009
net premiums of approximately $58.0 million compared to 2008. The unfavorable foreign currency
exchange fluctuation in 2009 was partially offset by an increase in net premiums that was primarily
the result of new business from both new and existing treaties. During 2008, there was an
unfavorable foreign currency fluctuation, particularly in the Korean won, offset by a favorable
fluctuation in the Japanese yen, against the U.S. dollar. The overall effect of changes in local
Asia Pacific segment currencies was a decrease in 2008 net premiums of approximately $5.0 million
compared to 2007.
A portion of the net premiums for the segment, in each period presented, relates to
reinsurance of critical illness coverage. This coverage provides a benefit in the event of the
diagnosis of a pre-defined critical illness. Reinsurance of critical illness in the Asia Pacific
operations is offered primarily in South Korea, Australia and Hong Kong. Net premiums from this
coverage totaled $181.2 million, $213.8 million, and $189.8 million in 2009, 2008 and 2007,
respectively.
Net investment income increased $13.9 million, or 29.4%, and $11.0 million, or 30.3%, in 2009
and 2008, respectively. These increases can be primarily attributed to growth in the invested
asset base. Investment income and investment related gains and losses are allocated to the various
operating segments based on average assets and related capital levels deemed appropriate to support
the segment business volumes. Investment performance varies with the composition of investments
and the relative allocation of capital to the operating segments.
Other revenues increased by $12.7 million, or 103.2%, and $3.1 million, or 34.0%, in 2009 and
2008, respectively. The primary source of other revenues is fees from financial reinsurance
treaties in Japan. At December 31, 2009 and 2008, the amount of reinsurance assumed from client
companies, as measured by pre-tax statutory surplus, was $0.5 billion and $0.6 billion,
respectively. Fees earned from this business can vary significantly depending on the size of the
transactions and the timing of their completion and therefore can fluctuate from period to period.
Loss ratios for this segment were 81.8%, 79.9% and 80.1% for 2009, 2008 and 2007,
respectively. The increase in 2009 compared with 2008 was primarily related to an increase in
benefits as a percentage of net premiums in Australia, New Zealand and Taiwan. Loss ratios between
2008 and 2007 were relatively consistent. Although reasonably predictable over a period of years,
death claims can be volatile over shorter periods. Management views recent experience as normal
volatility that is inherent in the business. Loss ratios will fluctuate due to timing of client
company reporting, variations in the mixture of business and the relative maturity of the business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were
10.7%, 10.7% and 11.5% for 2009, 2008 and 2007, respectively. The ratio of policy acquisition
costs and other insurance expenses as a percentage of net premiums should generally decline as the
business matures; however, the percentage does fluctuate periodically due to timing of client
company reporting and variations in the mixture of business.
Other operating expenses increased $12.2 million, or 18.5%, and $9.5 million, or 16.9%, in
2009 and 2008, respectively. Other operating expenses as a percentage of net premiums totaled
7.8%, 6.6% and 6.5% in 2009, 2008 and 2007, respectively. The timing of premium flows and the
level of costs associated with the entrance into and development of new markets in the growing Asia
Pacific segment may cause other operating expenses as a percentage of net premiums to fluctuate
over periods of time.
Corporate and Other
Corporate and Other revenues include investment income from invested assets not allocated to
support segment operations and undeployed proceeds from the Companys capital raising efforts, in
addition to unallocated investment related gains and losses. Corporate expenses consist of the
offset to capital charges allocated to the operating segments within the policy acquisition costs
and other insurance expenses line item, unallocated overhead and executive costs, and interest
expense related to debt and trust preferred securities. Additionally, Corporate and Other includes
results from, among others, RTP, a wholly-owned subsidiary that develops and markets technology
solutions for the insurance industry and the investment income and expense associated with the
Companys collateral finance facility. Effective January 1, 2009, due to immateriality, the
discontinued accident and health operations were included in the results of the Corporate and Other
segment.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, |
|
|
|
|
|
|
(dollars in thousands) |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
8,728 |
|
|
$ |
6,816 |
|
|
$ |
4,030 |
|
Investment income, net of related expenses |
|
|
76,240 |
|
|
|
78,838 |
|
|
|
96,577 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(22,582 |
) |
|
|
(17,893 |
) |
|
|
(1,573 |
) |
Other-than-temporary impairments on fixed maturity
securities transferred to (from) accumulated other
comprehensive income |
|
|
(975 |
) |
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
7,281 |
|
|
|
(21,324 |
) |
|
|
(10,949 |
) |
|
|
|
Total investment related gains (losses), net |
|
|
(16,276 |
) |
|
|
(39,217 |
) |
|
|
(12,522 |
) |
Other revenues |
|
|
53,393 |
|
|
|
4,346 |
|
|
|
8,867 |
|
|
|
|
Total revenues |
|
|
122,085 |
|
|
|
50,783 |
|
|
|
96,952 |
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits (income) |
|
|
49 |
|
|
|
988 |
|
|
|
43 |
|
Interest credited |
|
|
121 |
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses (income) |
|
|
(43,480 |
) |
|
|
(46,124 |
) |
|
|
(35,305 |
) |
Other operating expenses |
|
|
45,782 |
|
|
|
30,192 |
|
|
|
45,387 |
|
Interest expense |
|
|
69,940 |
|
|
|
76,161 |
|
|
|
76,906 |
|
Collateral finance facility expense |
|
|
8,268 |
|
|
|
28,723 |
|
|
|
52,031 |
|
|
|
|
Total benefits and expenses |
|
|
80,680 |
|
|
|
89,940 |
|
|
|
139,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
41,405 |
|
|
$ |
(39,157 |
) |
|
$ |
(42,110 |
) |
|
|
|
Income (loss) before income taxes increased by $80.6 million, or 205.7%, and $3.0
million, or 7.0%, in 2009 and 2008, respectively. The increase in income in 2009 is primarily due
to a $22.9 million decrease in investment related losses, a $49.0 million increase in other
revenues, a $20.5 million decrease in collateral finance facility expense and a $6.2 million
decrease in interest expense slightly offset by a $15.6 million increase in other expenses. The
increase in income in 2008 is primarily due to a $26.7 million increase in investment related
losses, due to investment impairments, a $17.7 million decrease in investment income, largely
offset by a $23.3 million decrease in collateral finance facility expense, a $10.8 million decrease
in policy acquisition costs and other insurance expenses and a $15.2 million decrease in other
operating expenses.
Total revenues increased $71.3 million, or 140.4%, and decreased $46.2 million, or 47.6%, in
2009 and 2008, respectively. The increase in revenues in 2009 was due to an decrease in investment
related losses of $22.9 million, reflecting improved economic conditions, and an increase in other
revenues related to the recognition of a gain on the repurchase of long-term debt of $38.9 million
and a $4.8 million foreign exchange gain on the repayment of debt related to the Companys credit
facility denominated in British pounds. Slightly offsetting these increases were investment
related losses of $3.0 million related to the expected final disposition of the Companys direct
insurance operations in Argentina and a decrease in investment income of $2.6 million. The
decrease in revenues in 2008 was due to a $17.7 million decrease in net investment income largely
due to lower investment returns on floating rate investments used to fund the Companys collateral
finance facility and a $26.7 million increase in investment related losses due to realized
investment losses as compared to the recognition of a $10.5 million currency translation loss
recognized in 2007 related to the pending sale of the direct insurance operations in Argentina.
Total benefits and expenses decreased $9.3 million or 10.3%, and decreased $49.1 million or
35.3%, in 2009 and 2008, respectively. The decrease in total benefits and expenses in 2009 was
primarily due to a $20.5 million decrease in collateral finance facility expense due to reduced
variable interest rates and decreased interest expense of $6.2 million primarily due to lower
interest provisions for income taxes related to uncertain tax positions. The decrease in interest
expense related to the above-mentioned debt repurchase was largely offset by additional interest
expense related to the issuance of $400.0 million in senior notes in the fourth quarter of 2009.
These decreases were partially offset by a $15.6 million increase in other expenses due to
increased compensation-related costs. The decrease in total benefits and expenses in 2008 was
primarily due to a $23.3 million decrease in collateral finance facility expense due to
substantially reduced variable interest rates in the current year. Additionally, other operating
expenses decreased $15.2 million in 2008 primarily related to a decrease in equity based
compensation and policy acquisition costs and other insurance expenses decreased $10.8 million,
primarily due to increased charges to the operating segments for the use of capital.
52
Discontinued Operations
Effective January 1, 2009, due to immateriality, the discontinued accident and health
operations were included in the results of the Corporate and Other segment. The consolidated
statements of income for 2008 and 2007 reflect this line of business as a discontinued operation.
The calculation of the claim reserve liability for the entire portfolio of accident and health
business requires management to make estimates and assumptions that affect the reported claim
reserve levels. The loss from discontinued accident and health operations, net of income taxes,
decreased to $11.0 million in 2008 from $14.4 million in 2007 due primarily to fewer settlements
arising out of previously contested matters. Revenues associated with discontinued operations,
which were not reported on a gross basis in the Companys consolidated statements of income in 2008
and 2007 totaled $2.1 million and $2.0 million, respectively. As of December 31, 2009, there were
no arbitrations or claims disputes associated with the Companys discontinued accident and health
operations.
Deferred Acquisition Costs
DAC related to interest-sensitive life and investment-type contracts is amortized over the
lives of the contracts, in relation to the present value of estimated gross profits (EGP) from
mortality, investment income, and expense margins. The EGP for asset-intensive products include
the following components: (1) estimates of fees charged to policyholders to cover mortality,
surrenders and maintenance costs; (2) expected interest rate spreads between income earned and
amounts credited to policyholder accounts; and (3) estimated costs of administration. EGP is also
reduced by the Companys estimate of future losses due to defaults in fixed maturity securities as
well as the change in reserves for embedded derivatives. DAC is sensitive to changes in
assumptions regarding these EGP components, and any change in such assumptions could have an effect
on the Companys profitability.
The Company periodically reviews the EGP valuation model and assumptions so that the
assumptions reflect a reasonable view of future experience. Two assumptions are considered to be
most significant: (1) estimated interest spread, and (2) estimated future policy lapses. The
following table reflects the possible change that would occur in a given year if assumptions, as a
percentage of current deferred policy acquisition costs related to asset-intensive products
($1,177.6 million as of December 31, 2009), are changed as illustrated:
|
|
|
|
|
|
|
|
|
|
|
One-Time Increase |
|
One-Time Decrease |
Quantitative Change in Significant Assumptions: |
|
in DAC |
|
in DAC |
Estimated interest spread increasing
(decreasing) 25 basis points from the current
spread |
|
|
2.15 |
% |
|
|
-2.26 |
% |
|
|
|
|
|
|
|
|
|
Estimated future policy lapse rates decreasing
(increasing) 20% on a permanent basis
(including surrender charges) |
|
|
1.91 |
% |
|
|
-1.31 |
% |
In general, a change in assumption that improves the Companys expectations regarding EGP is
going to have the effect of deferring the amortization of DAC into the future, thus increasing
earnings and the current DAC balance. DAC can be no greater than the initial DAC balance plus
interest and would be subject to recoverability testing which is ignored for purposes of this
analysis. Conversely, a change in assumption that decreases EGP will have the effect of speeding
up the amortization of DAC, thus reducing earnings and lowering the DAC balance. The Company also
adjusts DAC to reflect changes in the unrealized gains and losses on available-for-sale fixed
maturity securities since these changes affect EGP. This adjustment to DAC is reflected in
accumulated other comprehensive income.
The DAC associated with the Companys non-asset-intensive business is less sensitive to
changes in estimates for investment yields, mortality and lapses. In accordance with generally
accepted accounting principles, the estimates include provisions for the risk of adverse deviation
and are not adjusted unless experience significantly deteriorates to the point where a premium
deficiency exists.
53
The following table displays DAC balances for asset-intensive business and non-asset-intensive
business by segment as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Intensive |
|
Non-Asset-Intensive |
|
Total |
(dollars in thousands) |
|
DAC |
|
DAC |
|
DAC |
U.S. |
|
$ |
1,177,619 |
|
|
$ |
1,340,526 |
|
|
$ |
2,518,145 |
|
Canada |
|
|
|
|
|
|
317,125 |
|
|
|
317,125 |
|
Europe & South Africa |
|
|
|
|
|
|
458,188 |
|
|
|
458,188 |
|
Asia Pacific |
|
|
|
|
|
|
404,561 |
|
|
|
404,561 |
|
Corporate and Other |
|
|
|
|
|
|
953 |
|
|
|
953 |
|
|
|
|
Total |
|
$ |
1,177,619 |
|
|
$ |
2,521,353 |
|
|
$ |
3,698,972 |
|
|
|
|
As of December 31, 2009, the Company estimates that approximately 91.2% of its DAC balance is
collateralized by surrender fees due to the Company and the reduction of policy liabilities, in
excess of termination values, upon surrender or lapse of a policy.
Liquidity and Capital Resources
Current Market Environment
During 2008, the capital and credit markets experienced extreme volatility and disruption.
Between September 2008 and the first quarter of 2009, the volatility and disruptions intensified
significantly. This environment was driven by, among other things, heightened concerns over
conditions in the U.S. housing and mortgage markets, the availability and cost of credit, the
health of U.S. and global financial institutions, a decline in business and consumer confidence and
increased unemployment. Turmoil in the U.S. and global financial markets resulted in bankruptcies,
credit defaults, consolidations and government interventions. The U.S. and global financial
markets have improved significantly since the first quarter of 2009.
Results of operations in 2009 reflect a favorable change in the value of embedded derivatives
as credit spreads tightened significantly since the first quarter of 2009. Gross unrealized losses
in the Companys fixed maturity and equity securities available-for-sale have improved from
$1,552.8 million at March 31, 2009 and $1,416.4 million at December 31, 2008 to $584.9 million at
December 31, 2009. Likewise, gross unrealized gains have also improved. The recent market
conditions have adversely affected the Companys results of operations and financial position.
From the third quarter of 2008 through the end of 2009, the Company incurred significant investment
related losses as a result of impairments. Results of operations in 2008 also reflected a
significant unfavorable change in the value of embedded derivatives, which is a direct result of
widening credit spreads and changes in the risk-free rates in the U.S. debt markets.
The Company continues to be in a position to hold its investment securities until recovery,
provided it remains comfortable with the credit of the issuer. The Company does not rely on
short-term funding or commercial paper, and therefore, to date, has experienced no liquidity
pressure, nor does it anticipate such pressure in the foreseeable future. The Company has
selectively reduced its exposure to distressed security issuers through security sales. Although
management believes the Companys current capital base is adequate to support its business at
current operating levels, it continues to monitor new business opportunities and any associated new
capital needs that could arise from the changing financial landscape.
As witnessed during parts of 2008 and 2009, a general economic downturn or a downturn in the
equity and other capital markets can adversely affect the market for many annuity and life
insurance products. Because the Company obtains substantially all of its revenues through life and
annuity reinsurance, its business would be adversely affected if the market for annuities or life
insurance was adversely affected.
The Holding Company
RGA is an insurance holding company whose primary uses of liquidity include, but are not
limited to, the immediate capital needs of its operating companies, dividends paid to its
shareholders and interest payments on its indebtedness (See Note 15 Debt and Trust Preferred
Securities in the Notes to Consolidated Financial Statements). The primary sources of RGAs
liquidity include proceeds from its capital raising efforts, interest income on undeployed
corporate investments, interest income received on surplus notes with RGA Reinsurance and RCM, and
dividends from operating subsidiaries. As the Company continues its expansion efforts, RGA will
continue to be dependent upon these sources of liquidity.
The Company believes that it has sufficient liquidity for the next 12 months to fund its cash
needs under various scenarios that include the potential risk of the early recapture of a
reinsurance treaty by the ceding company and significantly
54
higher than expected death claims.
Historically, the Company has generated positive net cash flows from operations. However, in the
event of significant unanticipated cash requirements beyond normal liquidity, the Company has
multiple liquidity alternatives available based on market conditions and the amount and timing of
the liquidity need. These options include borrowings under committed credit facilities, secured
borrowings, the ability to issue long-term debt, preferred securities or common equity and, if
necessary, the sale of invested assets subject to market conditions.
See Note 3 Stock Transactions and Note 15 Debt and Trust Preferred Securities in the
Notes to Consolidated Financial Statements for additional information regarding the Companys
securities transactions.
Statutory Dividend Limitations
RCM and RGA Reinsurance are subject to Missouri statutory provisions that restrict the payment
of dividends. They may not pay dividends in any 12-month period in excess of the greater of the
prior years statutory net gain from
operations or 10% of statutory capital and surplus at the preceding year-end, without regulatory
approval. The applicable statutory provisions only permit an insurer to pay a shareholder dividend
from unassigned surplus. Any dividends paid by RGA Reinsurance would be paid to RCM, its parent
company, which in turn has restrictions related to its ability to pay dividends to RGA. RCMs
primary asset is its investment in RGA Reinsurance. As of January 1, 2010, RCM and RGA Reinsurance
could pay maximum dividends, without prior approval, of approximately $141.3 million and $146.6
million, respectively. The MDI allows RCM to pay a dividend to RGA to the extent RCM received the
dividend from RGA Reinsurance, without limitation related to the level of unassigned surplus.
Dividend payments from other subsidiaries are subject to regulations in the jurisdiction of
domicile.
The dividend limitations for RCM and RGA Reinsurance are based on statutory financial results.
Statutory accounting practices differ in certain respects from accounting principles used in
financial statements prepared in conformity with GAAP. Significant differences include deferred
acquisition costs, deferred income taxes, required investment reserves, reserve calculation
assumptions and surplus notes.
Valuation of Life Insurance Policies Model Regulation (Regulation XXX)
The Valuation of Life Insurance Policies Model Regulation, commonly referred to as Regulation
XXX, was implemented in the U.S. for various types of life insurance business beginning January 1,
2000. Regulation XXX significantly increased the level of reserves that U.S. life insurance and
life reinsurance companies must hold on their statutory financial statements for various types of
life insurance business, primarily certain level premium term life products. The reserve levels
required under Regulation XXX increase over time and are normally in excess of reserves required
under GAAP. In situations where primary insurers have reinsured business to reinsurers that are
unlicensed and unaccredited in the U.S., the reinsurer must provide collateral equal to its
reinsurance reserves in order for the ceding company to receive statutory financial statement
credit. Reinsurers have historically utilized letters of credit for the benefit of the ceding
company, or have placed assets in trust for the benefit of the ceding company as the primary forms
of collateral. The increasing nature of the statutory reserves under Regulation XXX will likely
require increased levels of collateral from reinsurers in the future to the extent the reinsurer
remains unlicensed and unaccredited in the U.S.
In order to manage the effect of Regulation XXX on its statutory financial statements, RGA
Reinsurance has retroceded a majority of Regulation XXX reserves to unaffiliated and affiliated
unlicensed reinsurers. RGA Reinsurances statutory capital may be significantly reduced if the
unaffiliated or affiliated reinsurer is unable to provide the required collateral to support RGA
Reinsurances statutory reserve credits and RGA Reinsurance cannot find an alternative source for
collateral.
Shareholder Dividends
Historically, RGA has paid quarterly dividends ranging from $0.027 per share in 1993 to $0.09
per share in 2009. In January 2010, the quarterly dividend was increased to $0.12 per share. All
future payments of dividends are at the discretion of RGAs board of directors and will depend on
the Companys earnings, capital requirements, insurance regulatory conditions, operating
conditions, and other such factors as the board of directors may deem relevant. The amount of
dividends that RGA can pay will depend in part on the operations of its reinsurance subsidiaries.
Under certain circumstances, RGA may be contractually prohibited from paying dividends on common
stock, see discussion below in Debt and Trust Preferred Securities.
Debt and Trust Preferred Securities
Certain of the Companys debt agreements contain financial covenant restrictions related to,
among other things, liens, the issuance and disposition of stock of restricted subsidiaries,
minimum requirements of net worth, maximum ratios of debt to capitalization and change in control
provisions. A material ongoing covenant default could require immediate
55
payment of the amount due,
including principal, under the various agreements. Additionally, the Companys debt agreements
contain cross-default covenants, which would make outstanding borrowings immediately payable in the
event of a material covenant default under any of the agreements which remains uncured, including,
but not limited to, non-payment of indebtedness when due for an amount in excess of $100.0 million,
bankruptcy proceedings, or any event which results in the acceleration of the maturity of
indebtedness. The facility fee and interest rate for the Companys credit facilities are based on
its senior long-term debt ratings. A decrease in those ratings could result in an increase in
costs for the credit facilities. As of December 31, 2009, the Company had $1,216.1 million in
outstanding borrowings under its long-term debt agreements and was in compliance with all covenants
under those agreements. The ability of the Company to make debt principal and interest payments
depends primarily on the earnings and surplus of subsidiaries, investment earnings on undeployed
capital proceeds, and the Companys ability to raise additional funds.
In November 2009, RGA issued 6.45% Senior Notes due November 15, 2019 with a face amount of
$400.0 million. These senior notes were registered with the Securities and Exchange Commission.
The net proceeds from the offering were approximately $396.3 million and were designated for
general corporate purposes. Capitalized issue costs were approximately $3.0 million.
During 2009, the Company repurchased $80.2 million face amount of its 6.75% junior
subordinated debentures for $39.2 million. The debt was purchased by RGA Reinsurance. As a
result, the Company recorded a pre-tax gain of $38.9 million, after fees and unamortized discount,
in other revenues in 2009.
In March 2007, RGA issued 5.625% Senior Notes due March 15, 2017 with a face amount of $300.0
million. These senior notes were registered with the Securities and Exchange Commission. The net
proceeds from the offering were approximately $295.3 million, a portion of which were used to pay
down $50.0 million of indebtedness under a U.S. bank credit facility. The remaining net proceeds
are designated for general corporate purposes. Capitalized issue costs were approximately $2.4
million.
The Company maintains three revolving credit facilities, including a syndicated credit
facility with an overall capacity of $750.0 million that expires in September 2012. The Company
may borrow cash and may obtain letters of credit in multiple currencies under this facility. As of
December 31, 2009, the Company had no cash borrowings outstanding and $373.9 million in issued, but
undrawn, letters of credit under this facility. The Companys other credit facilities consist of a
£15.0 million credit facility that expires in May 2011, and an A$50.0 million Australian credit
facility that expires in March 2011, with no outstanding balances as of December 31, 2009.
As of December 31, 2009, the average interest rate on long-term and short-term debt
outstanding, excluding the Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Company (Trust Preferred
Securities), was 6.38% compared to 6.39% at the end of 2008. Interest is expensed on the face
amount, or $225.0 million, of the Trust Preferred Securities at a rate of 5.75%.
Based on the historic cash flows and the current financial results of the Company, management
believes RGAs cash flows will be sufficient to enable RGA to meet its obligations for at least the
next 12 months.
Collateral Finance Facility
In June 2006, RGAs subsidiary, Timberlake Financial, issued $850.0 million of Series A
Floating Rate Insured Notes due June 2036 in a private placement. The notes were issued to fund
the collateral requirements for statutory reserves required by the U.S. Valuation of Life Policies
Model Regulation (commonly referred to as Regulation XXX) on specified term life insurance policies
reinsured by RGA Reinsurance. Proceeds from the notes, along with a $112.8 million direct
investment by the Company, were deposited into a series of accounts that collateralize the notes
and are not available to satisfy the general obligations of the Company. As of December 31, 2009,
the Company held assets in trust and in custody of $876.7 million for this purpose. Interest on
the notes will accrue at an annual rate of 1-month LIBOR plus a base rate margin, payable monthly
and totaled $8.3 million and $28.7 million in 2009 and 2008, respectively. The payment of interest
and principal on the notes is insured by a monoline insurance company through a financial guaranty
insurance policy. The notes represent senior, secured indebtedness of Timberlake Financial without
legal recourse to RGA or its other subsidiaries. Timberlake Financial will rely primarily upon the
receipt of interest and principal payments on a surplus note and dividend payments from its
wholly-owned subsidiary, Timberlake Re, a South Carolina captive insurance company, to make
payments of interest and principal on the notes. The ability of Timberlake Re to make interest and
principal payments on the surplus note and dividend payments to Timberlake Financial is contingent
upon South Carolina regulatory approval, the return on Timberlake Res investment assets and the
performance of specified term life insurance policies with guaranteed level premiums retroceded by
RGAs subsidiary, RGA Reinsurance, to Timberlake Re.
56
In accordance with the general accounting principles for Consolidation, Timberlake Financial
is considered to be a variable interest entity and the Company is deemed to hold the primary
beneficial interest. As a result, Timberlake Financial has been consolidated in the Companys
financial statements. The Companys consolidated balance sheets include the assets of Timberlake
Financial recorded as fixed maturity investments and other invested assets, which consists of
restricted cash and cash equivalents, with the liability for the notes recorded as collateral
finance facility. The Companys consolidated statements of income include the investment return of
Timberlake Financial as investment income and the cost of the facility is reflected in collateral
finance facility expense.
Reinsurance Operations
Reinsurance agreements, whether facultative or automatic, generally provide recapture
provisions. Most U.S.-based reinsurance treaties include a recapture right for ceding companies,
generally after 10 years. Outside of the U.S., treaties
primarily include a mutually agreed upon recapture provision. Recapture rights permit the ceding
company to reassume all or a portion of the risk formerly ceded to the reinsurer. In some
situations, the Company has the right to place assets in trust for the benefit of the ceding party
in lieu of recapture. Additionally, certain treaties may grant recapture rights to ceding
companies in the event of a significant decrease in RGA Reinsurances NAIC risk based capital ratio
or financial strength rating. The RBC ratio trigger varies by treaty at amounts between 125% and
225% of the NAICs company action level. Financial strength rating triggers vary by treaty with
the majority of the triggers reached if RGA Reinsurances financial strength rating falls five
notches from its current rating of AA- to the BBB level on the S&P scale. Recapture of
business previously ceded does not affect premiums ceded prior to the recapture of such business,
but would reduce premiums in subsequent periods. Upon recapture, the Company would reflect a net
gain or loss on the settlement of the assets and liabilities associated with the treaty. In some
cases, the ceding company is required to pay the Company a recapture fee. The Company estimates
approximately $294.5 billion of its gross assumed in force business, as of December 31, 2009, was
subject to treaties where the ceding company could recapture in the event minimum levels of
financial condition or ratings were not maintained.
Assets in Trust
Some treaties give ceding companies the right to request that the Company place assets in
trust for the benefit of the cedant to support statutory reserve credits in the event of a
downgrade of the Companys ratings to specified levels, generally non-investment grade levels, or
if minimum levels of financial condition are not maintained. As of December 31, 2009, these
treaties had approximately $1,059.3 million in statutory reserves. Assets placed in trust continue
to be owned by the Company, but their use is restricted based on the terms of the trust agreement.
Securities with an amortized cost of $1,022.4 million were held in trust for the benefit of certain
subsidiaries of the Company to satisfy collateral requirements for reinsurance business at December
31, 2009. Additionally, securities with an amortized cost of $1,755.6 million as of December 31,
2009 were held in trust to satisfy collateral requirements under certain third-party reinsurance
treaties. Under certain conditions, RGA may be obligated to move reinsurance from one RGA
subsidiary company to another RGA subsidiary or make payments under the treaty. These conditions
include change in control or ratings of the subsidiary, insolvency, nonperformance under a treaty,
or loss of reinsurance license of such subsidiary. If RGA was ever required to perform under these
obligations, the risk to the consolidated company under the reinsurance treaties would not change;
however, additional capital may be required due to the change in jurisdiction of the subsidiary
reinsuring the business, which could lead to a strain on liquidity.
Proceeds from the notes issued by Timberlake Financial and the Companys direct investment in
Timberlake Financial were deposited into a series of trust accounts as collateral and are not
available to satisfy the general obligations of the Company. As of December 31, 2009 the Company
held deposits in trust and in custody of $876.7 million for this purpose, which is not included
above. See Collateral Finance Facility above for additional information on the Timberlake notes.
Guarantees
RGA has issued guarantees to third parties on behalf of its subsidiaries for the payment of
amounts due under certain credit facilities, reinsurance treaties and office lease obligations,
whereby if a subsidiary fails to meet an obligation, RGA or one of its other subsidiaries will make
a payment to fulfill the obligation. In limited circumstances, treaty guarantees are granted to
ceding companies in order to provide additional security, particularly in cases where RGAs
subsidiary is relatively new, unrated, or not of significant size, relative to the ceding company.
Liabilities supported by the treaty guarantees, before consideration for any legally offsetting
amounts due from the guaranteed party, totaled $330.3 million and $273.6 million as of December 31,
2009 and 2008, respectively, and are reflected on the Companys consolidated balance sheets in
future policy benefits. Potential guaranteed amounts of future payments will vary depending on
production levels
57
and underwriting results. Guarantees related to trust preferred securities and
credit facilities provide additional security to third parties should a subsidiary fail to make
principal and/or interest payments when due. As of December 31, 2009, RGAs exposure related to
these guarantees was $159.2 million. RGA has issued payment guarantees on behalf of two of its
subsidiaries in the event the subsidiaries fail to make payment under their office lease
obligations, the exposure of which was $4.3 million as of December 31, 2009.
In addition, the Company indemnifies its directors and officers pursuant to its charters and
by-laws. Since this indemnity generally is not subject to limitation with respect to duration or
amount, the Company does not believe that it is possible to determine the maximum potential amount
due under this indemnity in the future.
Balance Sheet Arrangements
The Company had commitments to fund investments in limited partnerships, commercial mortgage
loans and private placement investments in the amount of $86.6 million, $12.6 million and $7.0
million, respectively, at December 31, 2009. The Company anticipates that the majority of its
current commitments will be invested over the next five years, however, contractually, these
commitments could become due at the request of the counterparties. Investments in limited
partnerships are carried at cost after consideration of any other-than-temporary impairments and
included in other invested assets in the consolidated balance sheets.
In order to reduce the level of statutory reserves, primarily in the U.S. and Canada, which
generally exceed reserves required on an economic basis, the Company has entered into various
reinsurance agreements with affiliated and unaffiliated reinsurers. In order for the Company to
receive statutory reserve credit, the reinsurer must provide collateral for the benefit of the
Company, usually in the form of assets in trust or letters of credit.
The Company has not engaged in trading activities involving non-exchange-traded contracts
reported at fair value, nor has it engaged in relationships or transactions with persons or
entities that derive benefits from their non-independent relationship with the Company.
Cash Flows
The Companys principal cash inflows from its reinsurance operations include premiums and
deposit funds received from ceding companies. The primary liquidity concerns with respect to these
cash flows are early recapture of the reinsurance contract by the ceding company and lapses of
annuity products reinsured by the Company. The Companys principal cash inflows from its investing
activities result from investment income and the maturity and sales of invested assets. The
primary liquidity concern with respect to these cash inflows relates to the risk of default by
debtors and interest rate volatility. The Company manages these risks very closely. See
Investments and Interest Rate Risk below.
Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash
inflows and current cash and equivalents on hand include selling short-term investments or fixed
maturity securities and drawing funds under existing credit facilities, under which the Company had
availability of $445.3 million as of December 31, 2009. The Company also has $685.6 million of
funds available through collateralized borrowings from the Federal Home Loan Bank of Des Moines
(FHLB).
The Companys principal cash outflows primarily relate to the payment of claims liabilities,
interest credited, operating expenses, income taxes, and principal and interest under debt and
other financing obligations. The Company seeks to limit its exposure to loss on any single insured
and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or
reinsurers under excess coverage and coinsurance contracts (See Note 2, Summary of Significant
Accounting Policies of the Notes to Consolidated Financial Statements). The Company performs
annual financial reviews of its retrocessionaires to evaluate financial stability and performance.
The Company has never experienced a material default in connection with retrocession arrangements,
nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires;
however, no assurance can be given as to the future performance of such retrocessionaires nor to
the recoverability of future claims. The Companys management believes its current sources of
liquidity are adequate to meet its cash requirements for the next 12 months.
The Companys net cash flows provided by operating activities for the years ended December 31,
2009, 2008 and 2007, were $1,364.2 million, $727.0 million and $1,099.3 million, respectively.
Cash flows from operating activities are affected by the timing of premiums received, claims paid
and working capital changes. Operating cash increased $637.3 million during 2009 as cash from
premiums and investment income increased $277.7 million and $246.9 million, respectively, while
operating net cash outlays decreased by $112.7 million. During 2008, operating cash decreased
$372.3 million as cash from premiums increased $357.2 million but was more than offset by decreased
investment income of $40.7 million and by higher operating net cash outlays of $688.8 million. The
Company believes the short-term cash requirements
58
of its business operations will be sufficiently
met by the positive cash flows generated. Additionally, the Company believes it maintains a
high-quality fixed maturity portfolio with positive liquidity characteristics. These securities
are available-for-sale and could be sold if necessary to meet the Companys short- and long-term
obligations, subject to market conditions.
Net cash used in investing activities was $1,939.1 million, $1,073.2 million and $976.9
million in 2009, 2008 and 2007, respectively. Changes in cash used in investing activities
primarily relate to the management of the Companys investment portfolios and the investment of
excess cash generated by operating and financing activities. The increase in net cash used in
investing activities in 2009 was due in part to the investment of proceeds from the issuance of
common stock in
the fourth quarter of 2008 and senior notes issued in the fourth quarter of 2009. The
increase in net cash used in investing activities in 2008 was primarily due to the investment of
proceeds from investment type contracts.
Net cash provided by financing activities was $195.0 million, $841.2 million and $116.6
million in 2009, 2008 and 2007, respectively. The decrease in cash provided by financing
activities in 2009 was largely due to reduced deposits under investment type contracts, a $335.5
million decrease in the cash collateral received under derivative contracts due to a change in the
value of the underlying derivatives and $62.5 million related to the repurchase and repayment of
long-term debt. The increase in cash provided by financing activities in 2008 was largely due to
deposits under investment type contracts and a $159.8 million increase in the cash collateral
received under derivative contracts due to a change in the value of the underlying derivatives.
Issuances of Company securities resulted in increases in cash provided by financing activities of
$64.5 million and $36.6 million in 2009 and 2008, respectively.
Contractual Obligations
The following table displays the Companys contractual obligations, including obligations
arising from its reinsurance business (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period |
|
|
|
|
|
|
Less than 1 |
|
|
|
|
|
|
|
|
Total |
|
Year |
|
1 - 3 Years |
|
4 - 5 Years |
|
After 5 Years |
Future policy benefits1 |
|
$ |
(1,293.3 |
) |
|
$ |
(645.2 |
) |
|
$ |
(963.8 |
) |
|
$ |
(574.2 |
) |
|
$ |
889.9 |
|
Interest-sensitive contract liabilities2 |
|
|
13,070.5 |
|
|
|
905.2 |
|
|
|
1,908.0 |
|
|
|
1,895.5 |
|
|
|
8,361.8 |
|
Long term debt, including interest |
|
|
2,581.5 |
|
|
|
52.0 |
|
|
|
290.4 |
|
|
|
76.9 |
|
|
|
2,162.2 |
|
Fixed Rate Trust Pref Sec., including interest3 |
|
|
758.7 |
|
|
|
12.9 |
|
|
|
25.9 |
|
|
|
25.9 |
|
|
|
694.0 |
|
Collateral finance facility, including interest |
|
|
901.2 |
|
|
|
10.0 |
|
|
|
86.0 |
|
|
|
71.1 |
|
|
|
734.1 |
|
Other policy claims and benefits |
|
|
2,229.1 |
|
|
|
2,229.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
37.8 |
|
|
|
9.3 |
|
|
|
12.7 |
|
|
|
11.1 |
|
|
|
4.7 |
|
Limited partnerships |
|
|
86.6 |
|
|
|
86.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment purchase commitments |
|
|
19.9 |
|
|
|
19.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,392.0 |
|
|
$ |
2,679.8 |
|
|
$ |
1,359.2 |
|
|
$ |
1,506.3 |
|
|
$ |
12,846.7 |
|
|
|
|
|
|
|
1 |
|
Future policyholder benefits include liabilities related primarily to the
Companys reinsurance of life and health insurance products. Amounts presented in the table above
represent the estimated obligations as they become due to ceding companies for benefits under such
contracts, and also include future premiums, allowances and other amounts due to or from the ceding
companies as the result of the Companys assumptions of mortality, morbidity, policy lapse and
surrender risk as appropriate to the respective product. Total payments may vary materially from
prior years due to the assumption of new treaties or as a result of changes in projections of
future experience. All estimated cash payments presented in the table above are undiscounted as to
interest, net of estimated future premiums on policies currently in force and gross of any
reinsurance recoverable. The sum of the undiscounted estimated cash flows shown for all years in
the table is a negative obligation of $(1,293.3) million compared to the discounted liability
amount of $7,748.5 million included on the consolidated balance
sheet, substantially all due to the
effects of discounting the estimated cash flows. The time value of money is not factored into the
calculations in the table above. In addition, differences will arise due to changes in the
projection of future benefit payments compared with those developed when the reserve was
established. Expected premiums exceed expected policy benefit payments and allowances due to the
nature of the reinsurance treaties, which generally have increasing premium rates that exceed the
increasing benefit payments. |
59
|
|
|
2 |
|
Interest-sensitive contract liabilities include amounts related to the Companys
reinsurance of asset-intensive products, primarily deferred annuities and corporate-owned life
insurance. Amounts presented in the table above represent the estimated obligations as they become
due both to and from ceding companies relating to activity of the underlying policyholders.
Amounts presented in the table above represent the estimated obligations under such contracts
undiscounted as to interest, including assumptions related to surrenders, withdrawals, premium
persistency, partial withdrawals, surrender charges, annuitizations, mortality, future interest
credited rates and policy loan utilization. The sum of the obligations shown for all years in the
table of $13,070.5 million exceeds the liability amount of $7,666.0 million included on the
consolidated balance sheet principally due to the lack of discounting and accounting for separate
account contracts. |
|
3 |
|
Assumes that all securities will be held until the stated maturity date of March
18, 2051. For additional information on these securities, see Company-Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Company in Note 2 Summary of Significant Accounting Policies in the Notes to
Consolidated Financial Statements. |
Excluded from the table above are deferred income tax liabilities, unrecognized tax benefits,
and accrued interest of $613.2 million, $221.0 million, and $34.1 million, respectively, for which
the Company cannot reliably determine the timing of payment. Current income tax payable is also
excluded from the table.
The net funded status of the Companys pension and other postretirement liabilities included
within other liabilities has been excluded from the amounts presented in the table above. As of
December 31, 2009, the Company had a net unfunded balance of $47.4 million related to pension and
other postretirement liabilities. See Note 10 Employee Benefit Plans in the Notes to
Consolidated Financial Statements for information related to the Companys obligations and funding
requirements for pension and other post-employment benefits.
Letters of Credit
The Company has obtained letters of credit, issued by banks, in favor of various affiliated
and unaffiliated insurance companies from which the Company assumes business. These letters of
credit represent guarantees of performance under the reinsurance agreements and allow ceding
companies to take statutory reserve credits. Certain of these letters of credit contain financial
covenant restrictions similar to those described in the Debt and Trust Preferred Securities
discussion above. At December 31, 2009, there were approximately $21.4 million of outstanding bank
letters of credit in favor of third parties. Additionally, the Company utilizes letters of credit
to secure statutory reserve credits when it retrocedes business to its subsidiaries, including
Parkway Re, RGA Americas, RGA Barbados and RGA Atlantic. The Company cedes business to its
affiliates to help reduce the amount of regulatory capital required in certain jurisdictions, such
as the U.S. and the UK. The capital required to support the business in the affiliates reflects
more realistic expectations than the original jurisdiction of the business, where capital
requirements are often considered to be quite conservative. As of December 31, 2009, $617.5
million in letters of credit from various banks were outstanding, but undrawn, backing reinsurance
between the various subsidiaries of the Company.
Based on the growth of the Companys business and the pattern of reserve levels under
Regulation XXX associated with term life business, the amount of ceded reserve credits is expected
to grow. This growth will require the Company to obtain additional letters of credit, put
additional assets in trust, or utilize other mechanisms to support the reserve credits. If the
Company is unable to support the reserve credits, the regulatory capital levels of several of its
subsidiaries may be significantly reduced. The reduction in regulatory capital would not directly
affect the Companys consolidated shareholders equity under GAAP; however, it could affect the
Companys ability to write new business and retain existing business.
The Company maintains a syndicated revolving credit facility with an overall capacity of
$750.0 million, which is scheduled to mature in September 2012. The Company may borrow cash and
may obtain letters of credit in multiple currencies under the facility. At December 31, 2009, the
Company had $373.9 million in issued, but undrawn, letters of credit under this facility, which is
included in the total above. Applicable letter of credit fees and fees payable for the credit
facility depend upon the Companys senior unsecured long-term debt rating. In September 2009,
the Company entered into a ten-year, $200.0 million letter of credit facility agreement. This
letter of credit is expected to be fully utilized through 2016 and then amortize to zero by 2019.
As of December 31, 2009, the Company had $200.0 million in issued, but undrawn, letters of credit
under this new facility, which is included in the total above. Letter of credit fees for this
facility are fixed for the term of the facility. Fees associated with the Companys other letters
of credit are not fixed for periods in excess of one year and are based on the Companys ratings
and the general availability of these instruments in the marketplace.
In 2006, the Company entered into a reinsurance agreement that requires it to post collateral
for a portion of the business being reinsured. As part of the collateral requirements, a third
party financial institution has issued a letter of credit
60
for the benefit of the ceding company (the beneficiary), which may draw on the letter of
credit to be reimbursed for valid claim payments not made by RGA pursuant to the reinsurance
treaty. RGA is not a direct obligor under the letter of credit. To the extent the letter of
credit is drawn by the beneficiary, reimbursement to the third party financial institution will be
through reduction in amounts owed to RGA by the third party financial institution under a secured
structured loan. RGAs liability under the reinsurance agreement will be reduced by any amount
drawn by the ceding company under the letter of credit. As of December 31, 2009, the structured
loan totaled $150.7 million and the amount of the letter of credit totaled $150.7 million. The
structured loan is recorded in other invested assets on RGAs consolidated balance sheets.
Asset / Liability Management
The Company manages its invested assets using an approach that is intended to balance quality,
diversification, asset/liability matching, liquidity and investment return. The goals of the
investment process are to optimize after-tax, risk-adjusted investment income and after-tax,
risk-adjusted total return while managing the assets and liabilities on a cash flow and duration
basis.
The Company has established target asset portfolios for each major insurance product, which
represent the investment strategies intended to profitably fund its liabilities within acceptable
risk parameters. These strategies include objectives and limits for effective duration, yield
curve sensitivity and convexity, liquidity, asset sector concentration and credit quality.
The Companys liquidity position (cash and cash equivalents and short-term investments) was
$633.1 million and $933.5 million at December 31, 2009 and December 31, 2008, respectively.
Liquidity needs are determined from valuation analyses conducted by operational units and are
driven by product portfolios. Periodic evaluations of demand liabilities and short-term liquid
assets are designed to adjust specific portfolios, as well as their durations and maturities, in
response to anticipated liquidity needs.
The Company periodically sells investment securities under agreements to repurchase the same
securities. These arrangements are used for purposes of short-term financing. There were no
securities subject to these agreements outstanding at December 31, 2009 or 2008. The book value of
securities subject to these agreements, if any, are included in fixed maturity securities while the
repurchase obligations would be reported in other liabilities in the consolidated statement of
financial position. The Company also occasionally enters into arrangements to purchase securities
under agreements to resell the same securities. Amounts outstanding, if any, are reported in cash
and cash equivalents. These agreements are primarily used as yield enhancement alternatives to
other cash equivalent investments. There were no agreements outstanding at December 31, 2009 or
2008.
RGA Reinsurance is a member of the FHLB and holds $27.8 million of common stock in the FHLB,
which is included in other invested assets on the Companys consolidated balance sheets. RGA
Reinsurance occasionally enters into traditional funding agreements with the FHLB but had no
outstanding traditional funding agreements with the FHLB at December 31, 2009 or 2008.
In addition, RGA Reinsurance has also entered into funding agreements with the FHLB under
guaranteed investment contracts whereby RGA Reinsurance has issued the funding agreements in
exchange for cash and for which the FHLB has been granted a blanket lien on RGA Reinsurances
commercial and residential mortgage-backed securities and commercial mortgage loans used to
collateralize RGA Reinsurances obligations under the funding agreements. RGA Reinsurance
maintains control over these pledged assets, and may use, commingle, encumber or dispose of any
portion of the collateral as long as there is no event of default and the remaining qualified
collateral is sufficient to satisfy the collateral maintenance level. The funding agreements and
the related security agreements represented by this blanket lien provide that upon any event of
default by RGA Reinsurance, the FHLBs recovery is limited to the amount of RGA Reinsurances
liability under the outstanding funding agreements. The amount of the Companys liability for the
funding agreements with the FHLB under guaranteed investment contracts was $399.3 million and
$199.3 million at December 31, 2009 and 2008, respectively, which is included in interest sensitive
contract liabilities. The advances on these agreements are collateralized primarily by commercial
and residential mortgage-backed securities and commercial mortgage loans.
The Companys asset-intensive products are primarily supported by investments in fixed
maturity securities reflected on the Companys balance sheet and under funds withheld arrangements
with the ceding company. Investment guidelines are established to structure the investment
portfolio based upon the type, duration and behavior of products in the liability portfolio so as
to achieve targeted levels of profitability. The Company manages the asset-intensive business to
provide a targeted spread between the interest rate earned on investments and the interest rate
credited to the underlying interest-sensitive contract liabilities. The Company periodically
reviews models projecting different interest rate scenarios and their
61
effect on profitability. Certain of these asset-intensive agreements, primarily in the U.S.
operating segment, are generally funded by fixed maturity securities that are withheld by the
ceding company.
Investments
The Company had total cash and invested assets of $19.7 billion and $16.5 billion at December
31, 2009 and 2008, respectively, as illustrated below (dollars in thousands):
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
2008 |
Fixed maturity securities, available-for-sale |
|
$ |
11,763,358 |
|
|
$ |
8,531,804 |
|
Mortgage loans on real estate |
|
|
791,668 |
|
|
|
775,050 |
|
Policy loans |
|
|
1,136,564 |
|
|
|
1,096,713 |
|
Funds withheld at interest |
|
|
4,895,356 |
|
|
|
4,520,398 |
|
Short-term investments |
|
|
121,060 |
|
|
|
58,123 |
|
Other invested assets |
|
|
516,086 |
|
|
|
628,649 |
|
Cash and cash equivalents |
|
|
512,027 |
|
|
|
875,403 |
|
|
|
|
Total cash and invested assets |
|
$ |
19,736,119 |
|
|
$ |
16,486,140 |
|
|
|
|
The following table presents consolidated invested assets, net investment income and
investment yield, excluding funds withheld. Funds withheld assets are primarily associated with
the reinsurance of annuity contracts on which the Company earns a spread. Fluctuations in the
yield on funds withheld assets are generally offset by a corresponding adjustment to the interest
credited on the liabilities (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase / (Decrease) |
|
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
Average invested
assets at amortized
cost |
|
$ |
13,013,390 |
|
|
$ |
11,653,879 |
|
|
$ |
10,637,020 |
|
|
|
11.7 |
% |
|
|
9.6 |
% |
Net investment income |
|
|
747,730 |
|
|
|
701,039 |
|
|
|
633,621 |
|
|
|
6.7 |
% |
|
|
10.6 |
% |
Investment yield
(ratio of net
investment income to
average invested
assets) |
|
|
5.75 |
% |
|
|
6.02 |
% |
|
|
5.96 |
% |
|
(27)bps |
|
6 bps |
Investment yield decreased in 2009 as the decline of certain key indices such as LIBOR
resulted in lower investment returns on the Companys floating rate investments. In addition,
recent economic conditions, have resulted in the decision to maintain a higher level of liquidity.
Thus, the Company invested some of its cash flows in highly liquid assets with shorter maturities
than what was previously held in the portfolio, which has also contributed to the decrease in the
average yield of the portfolio. Investment yield increased in 2008 as the economic environment
allowed the Company to invest in securities with higher spreads than those already held in the
portfolio. Also in 2008, new liability structures with longer duration targets allowed the Company
to invest in securities with longer maturities than what was held in the portfolio, which, in a
positively-sloped yield curve environment, has also contributed to the increase in the average
yields of the portfolio.
All investments held by RGA and its subsidiaries are monitored for conformance with the
qualitative and quantitative limits prescribed by the applicable jurisdictions insurance laws and
regulations. In addition, the operating companies boards of directors periodically review their
respective investment portfolios. The Companys investment strategy is to maintain a predominantly
investment-grade, fixed maturity portfolio, to provide adequate liquidity for expected reinsurance
obligations, and to maximize total return through prudent asset management. The Companys
asset/liability duration matching differs between operating segments. Based on Canadian reserve
requirements, the Canadian liabilities are matched with long-duration Canadian assets. The
duration of the Canadian portfolio exceeds twenty years. The average duration for all the
Companys portfolios, when consolidated, ranges between eight and ten years. See Note 4
Investments in the Notes to Consolidated Financial Statements for additional information
regarding the Companys investments.
62
Fixed Maturities and Equity Securities Available-for-Sale
The following tables provide information relating to investments in fixed maturity securities
and equity securities by sector as of December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
temporary |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
% of |
|
impairments |
2009 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Total |
|
in AOCI (1) |
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
3,689,797 |
|
|
$ |
180,635 |
|
|
$ |
147,384 |
|
|
$ |
3,723,048 |
|
|
|
31.7 |
% |
|
$ |
|
|
Canadian and Canadian provincial
governments |
|
|
1,984,475 |
|
|
|
394,498 |
|
|
|
25,746 |
|
|
|
2,353,227 |
|
|
|
20.0 |
|
|
|
|
|
Residential mortgage-backed securities |
|
|
1,494,021 |
|
|
|
32,538 |
|
|
|
70,015 |
|
|
|
1,456,544 |
|
|
|
12.4 |
|
|
|
(7,018 |
) |
Foreign corporate securities |
|
|
1,627,806 |
|
|
|
77,340 |
|
|
|
33,398 |
|
|
|
1,671,748 |
|
|
|
14.2 |
|
|
|
|
|
Asset-backed securities |
|
|
522,760 |
|
|
|
9,307 |
|
|
|
80,131 |
|
|
|
451,936 |
|
|
|
3.8 |
|
|
|
(2,194 |
) |
Commercial mortgage-backed securities |
|
|
1,177,621 |
|
|
|
20,670 |
|
|
|
169,427 |
|
|
|
1,028,864 |
|
|
|
8.7 |
|
|
|
(13,690 |
) |
U.S. government and agencies |
|
|
540,001 |
|
|
|
1,085 |
|
|
|
15,027 |
|
|
|
526,059 |
|
|
|
4.5 |
|
|
|
|
|
State and political subdivisions |
|
|
107,233 |
|
|
|
273 |
|
|
|
17,744 |
|
|
|
89,762 |
|
|
|
0.8 |
|
|
|
|
|
Other foreign government securities |
|
|
473,243 |
|
|
|
2,198 |
|
|
|
13,271 |
|
|
|
462,170 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
11,616,957 |
|
|
$ |
718,544 |
|
|
$ |
572,143 |
|
|
$ |
11,763,358 |
|
|
|
100.0 |
% |
|
$ |
(22,902 |
) |
|
|
|
Non-redeemable preferred stock |
|
$ |
123,648 |
|
|
$ |
1,878 |
|
|
$ |
12,328 |
|
|
$ |
113,198 |
|
|
|
66.0 |
% |
|
|
|
|
Other equity securities |
|
|
58,008 |
|
|
|
760 |
|
|
|
409 |
|
|
|
58,359 |
|
|
|
34.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
181,656 |
|
|
$ |
2,638 |
|
|
$ |
12,737 |
|
|
$ |
171,557 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 4 Investments under Fixed Maturities and Equity Securities
Available-for-Sale in the Notes to Consolidated Financial Statements for additional
information regarding AOCI. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
% of |
|
2008 |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Total |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
3,577,116 |
|
|
$ |
34,262 |
|
|
$ |
598,745 |
|
|
$ |
3,012,633 |
|
|
|
35.3 |
% |
Canadian and Canadian provincial
governments |
|
|
1,500,511 |
|
|
|
397,899 |
|
|
|
7,171 |
|
|
|
1,891,239 |
|
|
|
22.2 |
|
Residential mortgage-backed securities |
|
|
1,231,123 |
|
|
|
24,838 |
|
|
|
106,776 |
|
|
|
1,149,185 |
|
|
|
13.5 |
|
Foreign corporate securities |
|
|
1,112,018 |
|
|
|
14,335 |
|
|
|
152,920 |
|
|
|
973,433 |
|
|
|
11.4 |
|
Asset-backed securities |
|
|
484,577 |
|
|
|
2,098 |
|
|
|
147,297 |
|
|
|
339,378 |
|
|
|
4.0 |
|
Commercial mortgage-backed securities |
|
|
1,085,062 |
|
|
|
2,258 |
|
|
|
326,730 |
|
|
|
760,590 |
|
|
|
8.9 |
|
U.S. government and agencies |
|
|
7,555 |
|
|
|
876 |
|
|
|
|
|
|
|
8,431 |
|
|
|
0.1 |
|
State and political subdivisions |
|
|
46,537 |
|
|
|
|
|
|
|
7,883 |
|
|
|
38,654 |
|
|
|
0.4 |
|
Other foreign government securities |
|
|
338,349 |
|
|
|
20,062 |
|
|
|
150 |
|
|
|
358,261 |
|
|
|
4.2 |
|
|
|
|
Total fixed maturity securities |
|
$ |
9,382,848 |
|
|
$ |
496,628 |
|
|
$ |
1,347,672 |
|
|
$ |
8,531,804 |
|
|
|
100.0 |
% |
|
|
|
Non-redeemable preferred stock |
|
$ |
187,510 |
|
|
$ |
49 |
|
|
$ |
64,160 |
|
|
$ |
123,399 |
|
|
|
77.4 |
% |
Other equity securities |
|
|
40,582 |
|
|
|
|
|
|
|
4,607 |
|
|
|
35,975 |
|
|
|
22.6 |
|
|
|
|
Total equity securities |
|
$ |
228,092 |
|
|
$ |
49 |
|
|
$ |
68,767 |
|
|
$ |
159,374 |
|
|
|
100.0 |
% |
|
|
|
The Companys fixed maturity securities are invested primarily in U.S. and foreign
corporate bonds, mortgage- and asset-backed securities, and Canadian government securities. As of
December 31, 2009 and 2008, approximately 94.8% and 96.7%, respectively, of the Companys
consolidated investment portfolio of fixed maturity securities was investment-grade.
Important factors in the selection of investments include diversification, quality, yield,
total rate of return potential and call protection. The relative importance of these factors is
determined by market conditions and the underlying product or portfolio characteristics. Cash
equivalents are primarily invested in high-grade money market instruments. The largest asset class
in which fixed maturities were invested was in corporate securities, which represented
approximately 45.9% of total fixed maturities at December 31, 2009, compared to 46.7% at December
31, 2008. The tables below show the major
industry types and weighted average credit ratings, which comprise the U.S. and foreign
corporate fixed maturity holdings at December 31, 2009 and 2008 (dollars in thousands):
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
Amortized |
|
Estimated |
|
|
|
|
|
Average |
|
|
Cost |
|
Fair Value |
|
% of Total |
|
Credit Ratings |
|
|
|
Finance |
|
$ |
1,411,464 |
|
|
$ |
1,358,925 |
|
|
|
25.2 |
% |
|
|
A- |
|
Industrial |
|
|
1,670,610 |
|
|
|
1,735,522 |
|
|
|
32.2 |
|
|
BBB+ |
Foreign (1) |
|
|
1,627,352 |
|
|
|
1,671,090 |
|
|
|
30.9 |
|
|
|
A |
|
Utility |
|
|
603,958 |
|
|
|
624,710 |
|
|
|
11.6 |
|
|
BBB+ |
Other |
|
|
4,219 |
|
|
|
4,549 |
|
|
|
0.1 |
|
|
|
A |
|
|
|
|
Total |
|
$ |
5,317,603 |
|
|
$ |
5,394,796 |
|
|
|
100.0 |
% |
|
|
A- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Amortized |
|
Estimated |
|
|
|
|
|
Average |
|
|
Cost |
|
Fair Value |
|
% of Total |
|
Credit Ratings |
|
|
|
Finance |
|
$ |
1,475,205 |
|
|
$ |
1,155,906 |
|
|
|
29.0 |
% |
|
|
A |
|
Industrial |
|
|
1,520,330 |
|
|
|
1,339,200 |
|
|
|
33.6 |
|
|
BBB+ |
Foreign (1) |
|
|
1,112,018 |
|
|
|
973,433 |
|
|
|
24.4 |
|
|
|
A |
|
Utility |
|
|
542,737 |
|
|
|
480,809 |
|
|
|
12.1 |
|
|
BBB+ |
Other |
|
|
38,844 |
|
|
|
36,718 |
|
|
|
0.9 |
|
|
AA- |
|
|
|
Total |
|
$ |
4,689,134 |
|
|
$ |
3,986,066 |
|
|
|
100.0 |
% |
|
|
A- |
|
|
|
|
|
|
|
(1) |
|
Includes U.S. dollar-denominated debt obligations of foreign obligors and other foreign
investments. |
The National Association of Insurance Commissioners (NAIC) assigns securities quality
ratings and uniform valuations called NAIC Designations which are used by insurers when preparing
their statutory filings. The NAIC assigns designations to publicly traded as well as privately
placed securities. The designations assigned by the NAIC range from class 1 to class 6, with
designations in classes 1 and 2 generally considered investment grade (BBB or higher rating agency
designation). NAIC designations in classes 3 through 6 are generally considered below investment
grade (BB or lower rating agency designation).
The quality of the Companys available-for-sale fixed maturity securities portfolio, as
measured at fair value and by the percentage of fixed maturity securities invested in various
ratings categories, relative to the entire available-for-sale fixed maturity security portfolio, at
December 31, 2009 and 2008 was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
NAIC |
|
Rating Agency |
|
Amortized |
|
Estimated |
|
% of |
|
Amortized |
|
Estimated |
|
% of |
Designation |
|
Designation |
|
Cost |
|
Fair Value |
|
Total |
|
Cost |
|
Fair Value |
|
Total |
|
1 |
|
|
AAA/AA/A |
|
$ |
8,457,812 |
|
|
$ |
8,716,920 |
|
|
|
74.1 |
% |
|
$ |
7,001,968 |
|
|
$ |
6,607,730 |
|
|
|
77.4 |
% |
|
2 |
|
|
BBB |
|
|
2,401,885 |
|
|
|
2,433,144 |
|
|
|
20.7 |
|
|
|
1,991,276 |
|
|
|
1,649,513 |
|
|
|
19.3 |
|
|
3 |
|
|
BB |
|
|
455,539 |
|
|
|
381,242 |
|
|
|
3.3 |
|
|
|
268,276 |
|
|
|
195,088 |
|
|
|
2.3 |
|
|
4 |
|
|
B |
|
|
210,252 |
|
|
|
145,206 |
|
|
|
1.2 |
|
|
|
77,830 |
|
|
|
50,064 |
|
|
|
0.6 |
|
|
5 |
|
|
CCC and lower |
|
|
75,486 |
|
|
|
70,165 |
|
|
|
0.6 |
|
|
|
33,945 |
|
|
|
22,538 |
|
|
|
0.3 |
|
|
6 |
|
|
In or near default |
|
|
15,983 |
|
|
|
16,681 |
|
|
|
0.1 |
|
|
|
9,553 |
|
|
|
6,871 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,616,957 |
|
|
$ |
11,763,358 |
|
|
|
100.0 |
% |
|
$ |
9,382,848 |
|
|
$ |
8,531,804 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
64
The Companys fixed maturity portfolio includes structured securities. The following table
shows the types of structured securities the Company held at December 31, 2009 and 2008 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
Amortized |
|
Estimated |
|
Amortized |
|
Estimated |
|
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
$ |
771,787 |
|
|
$ |
797,354 |
|
|
$ |
851,507 |
|
|
$ |
868,479 |
|
Non-agency |
|
|
722,234 |
|
|
|
659,190 |
|
|
|
379,616 |
|
|
|
280,706 |
|
|
|
|
Total residential mortgage-backed securities |
|
|
1,494,021 |
|
|
|
1,456,544 |
|
|
|
1,231,123 |
|
|
|
1,149,185 |
|
Commercial mortgage-backed securities |
|
|
1,177,621 |
|
|
|
1,028,864 |
|
|
|
1,085,062 |
|
|
|
760,590 |
|
Asset-backed securities |
|
|
522,760 |
|
|
|
451,936 |
|
|
|
484,577 |
|
|
|
339,378 |
|
|
|
|
Total |
|
$ |
3,194,402 |
|
|
$ |
2,937,344 |
|
|
$ |
2,800,762 |
|
|
$ |
2,249,153 |
|
|
|
|
The residential mortgage-backed securities include agency-issued pass-through securities,
collateralized mortgage obligations, a majority of which are guaranteed or otherwise supported by
the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, or the
Government National Mortgage Association. The weighted average credit rating of the residential
mortgage-backed securities was AA+ at December 31, 2009 and 2008. The principal risks inherent
in holding mortgage-backed securities are prepayment and extension risks, which will affect the
timing of when cash will be received and are dependent on the level of mortgage interest rates.
Prepayment risk is the unexpected increase in principal payments, primarily as a result of owner
refinancing. Extension risk relates to the unexpected slowdown in principal payments. In
addition, mortgage-backed securities face default risk should the borrower be unable to pay the
contractual interest or principal on their obligation. The Company monitors its mortgage-backed
securities to mitigate exposure to the cash flow uncertainties associated with these risks.
As of December 31, 2009 and 2008, the Company had exposure to commercial mortgage-backed
securities with amortized costs totaling $1,655.0 million and $1,573.4 million, and estimated fair
values of $1,439.1 and $1,143.3 million. Those amounts include exposure to commercial
mortgage-backed securities held directly in the Companys investment portfolios within fixed
maturity securities, as well as securities held by ceding companies that support the Companys
funds withheld at interest investment. The securities are highly rated with weighted average S&P
credit ratings of approximately AA and AA+ at December 31, 2009 and 2008, respectively.
Approximately 65.1% and 83.7%, based on estimated fair value, were classified in the
AAA category at December 31, 2009 and 2008, respectively. The Company recorded
other-than-temporary impairments of $7.8 million, net of non-credit adjustments, in its direct
investments in commercial mortgage-backed securities for the year ended December 31, 2009. The
Company did not record any other-than-temporary impairments in its direct investments in commercial
mortgage-backed securities in 2008. The following tables summarize the securities by rating and
underwriting year at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
AAA |
|
AA |
|
A |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
Underwriting Year |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
192,355 |
|
|
$ |
204,592 |
|
|
$ |
24,346 |
|
|
$ |
23,355 |
|
|
$ |
20,123 |
|
|
$ |
17,016 |
|
2004 |
|
|
46,462 |
|
|
|
45,390 |
|
|
|
2,363 |
|
|
|
2,361 |
|
|
|
11,632 |
|
|
|
8,388 |
|
2005 |
|
|
159,802 |
|
|
|
153,569 |
|
|
|
30,893 |
|
|
|
26,038 |
|
|
|
43,694 |
|
|
|
29,720 |
|
2006 |
|
|
292,369 |
|
|
|
280,475 |
|
|
|
41,649 |
|
|
|
34,854 |
|
|
|
41,128 |
|
|
|
34,859 |
|
2007 |
|
|
223,827 |
|
|
|
216,853 |
|
|
|
6,922 |
|
|
|
2,267 |
|
|
|
64,860 |
|
|
|
56,996 |
|
2008 |
|
|
19,050 |
|
|
|
19,790 |
|
|
|
29,211 |
|
|
|
26,617 |
|
|
|
|
|
|
|
|
|
2009 |
|
|
16,638 |
|
|
|
16,422 |
|
|
|
1,485 |
|
|
|
1,532 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
950,503 |
|
|
$ |
937,091 |
|
|
$ |
136,869 |
|
|
$ |
117,024 |
|
|
$ |
181,437 |
|
|
$ |
146,979 |
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued |
|
December 31, 2009 |
|
|
BBB |
|
Below Investment Grade |
|
Total |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
Underwriting Year |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
21,118 |
|
|
$ |
15,634 |
|
|
$ |
2,980 |
|
|
$ |
2,309 |
|
|
$ |
260,922 |
|
|
$ |
262,906 |
|
2004 |
|
|
1,918 |
|
|
|
1,634 |
|
|
|
|
|
|
|
|
|
|
|
62,375 |
|
|
|
57,773 |
|
2005 |
|
|
24,580 |
|
|
|
16,718 |
|
|
|
25,318 |
|
|
|
17,148 |
|
|
|
284,287 |
|
|
|
243,193 |
|
2006 |
|
|
26,257 |
|
|
|
19,091 |
|
|
|
47,951 |
|
|
|
22,392 |
|
|
|
449,354 |
|
|
|
391,671 |
|
2007 |
|
|
82,460 |
|
|
|
68,428 |
|
|
|
128,193 |
|
|
|
62,440 |
|
|
|
506,262 |
|
|
|
406,984 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
25,384 |
|
|
|
12,204 |
|
|
|
73,645 |
|
|
|
58,611 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,123 |
|
|
|
17,954 |
|
|
|
|
Total |
|
$ |
156,333 |
|
|
$ |
121,505 |
|
|
$ |
229,826 |
|
|
$ |
116,493 |
|
|
$ |
1,654,968 |
|
|
$ |
1,439,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
AAA |
|
AA |
|
A |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
Underwriting Year |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
250,720 |
|
|
$ |
254,690 |
|
|
$ |
24,276 |
|
|
$ |
17,518 |
|
|
$ |
28,432 |
|
|
$ |
16,744 |
|
2004 |
|
|
50,245 |
|
|
|
46,737 |
|
|
|
2,147 |
|
|
|
999 |
|
|
|
10,603 |
|
|
|
3,835 |
|
2005 |
|
|
200,140 |
|
|
|
136,101 |
|
|
|
2,530 |
|
|
|
682 |
|
|
|
54,173 |
|
|
|
30,079 |
|
2006 |
|
|
306,478 |
|
|
|
234,575 |
|
|
|
16,219 |
|
|
|
6,074 |
|
|
|
45,346 |
|
|
|
31,379 |
|
2007 |
|
|
362,226 |
|
|
|
256,163 |
|
|
|
50,648 |
|
|
|
14,343 |
|
|
|
59,013 |
|
|
|
20,636 |
|
2008 |
|
|
30,017 |
|
|
|
28,501 |
|
|
|
23,387 |
|
|
|
10,698 |
|
|
|
18,342 |
|
|
|
11,186 |
|
|
|
|
Total |
|
$ |
1,199,826 |
|
|
$ |
956,767 |
|
|
$ |
119,207 |
|
|
$ |
50,314 |
|
|
$ |
215,909 |
|
|
$ |
113,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB |
|
Below Investment Grade |
|
Total |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
Underwriting Year |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
18,144 |
|
|
$ |
11,938 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
321,572 |
|
|
$ |
300,890 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,995 |
|
|
|
51,571 |
|
2005 |
|
|
3,679 |
|
|
|
776 |
|
|
|
|
|
|
|
|
|
|
|
260,522 |
|
|
|
167,638 |
|
2006 |
|
|
15,283 |
|
|
|
8,709 |
|
|
|
1,305 |
|
|
|
941 |
|
|
|
384,631 |
|
|
|
281,678 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471,887 |
|
|
|
291,142 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,746 |
|
|
|
50,385 |
|
|
|
|
Total |
|
$ |
37,106 |
|
|
$ |
21,423 |
|
|
$ |
1,305 |
|
|
$ |
941 |
|
|
$ |
1,573,353 |
|
|
$ |
1,143,304 |
|
|
|
|
Asset-backed securities include credit card and automobile receivables, sub-prime
mortgage-backed securities, home equity loans, manufactured housing bonds and collateralized debt
obligations. The Companys asset-backed securities are diversified by issuer and contain both
floating and fixed rate securities and had a weighted average credit rating of AA at December 31,
2009 and 2008. The Company owns floating rate securities that represent approximately 19.0% and
20.0% of the total fixed maturity securities at December 31, 2009 and 2008, respectively. These
investments have a higher degree of income variability than the other fixed income holdings in the
portfolio due to the floating rate nature of the interest payments. The Company holds these
investments to match specific floating rate liabilities primarily reflected in the consolidated
balance sheets as collateral finance facility. In addition to the risks associated with floating
rate securities, principal risks in holding asset-backed securities are structural, credit and
capital market risks. Structural risks include the securities priority in the issuers capital
structure, the adequacy of and ability to realize proceeds from collateral, and the potential for
prepayments. Credit risks include consumer or corporate credits such as credit card holders,
equipment lessees, and corporate obligors. Capital market risks include general level of interest
rates and the liquidity for these securities in the marketplace.
66
As of December 31, 2009 and 2008, the Company held investments in securities with sub-prime
mortgage exposure with amortized costs totaling $164.6 million and $230.1 million, and estimated
fair values of $104.3 million and $147.8 million, respectively. Those amounts include exposure to
sub-prime mortgages through securities held directly in the Companys investment portfolios within
asset-backed securities, as well as securities backing the Companys funds withheld at interest
investment. The weighted average S&P credit ratings on these securities was approximately BBB+
and AA- at December 31, 2009 and 2008, respectively. Additionally, the Company has largely
avoided investing in securities originated since the second half of 2005, which management believes
was a period of lessened underwriting quality. The Company recorded other-than-temporary
impairments of $40.6 million, net of non-credit adjustments, and $11.6 million, in its subprime
portfolio for the years ended December 31, 2009 and 2008, respectively, due primarily to the
increased likelihood that some or all of the remaining scheduled principal and interest payments on
select securities will not be received. The following tables summarize the securities by rating
and underwriting year at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
AAA |
|
AA |
|
A |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
Underwriting Year |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
7,782 |
|
|
$ |
6,599 |
|
|
$ |
1,841 |
|
|
$ |
1,438 |
|
|
$ |
5,231 |
|
|
$ |
3,197 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
14,784 |
|
|
|
11,227 |
|
|
|
5,280 |
|
|
|
3,803 |
|
2005 |
|
|
15,034 |
|
|
|
12,181 |
|
|
|
23,248 |
|
|
|
20,349 |
|
|
|
6,506 |
|
|
|
2,779 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,816 |
|
|
$ |
18,780 |
|
|
$ |
39,873 |
|
|
$ |
33,014 |
|
|
$ |
17,017 |
|
|
$ |
9,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB |
|
Below Investment Grade |
|
Total |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
Underwriting Year |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
975 |
|
|
$ |
431 |
|
|
$ |
2,739 |
|
|
$ |
1,116 |
|
|
$ |
18,568 |
|
|
$ |
12,781 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
18,249 |
|
|
|
9,327 |
|
|
|
38,313 |
|
|
|
24,357 |
|
2005 |
|
|
23,419 |
|
|
|
12,162 |
|
|
|
18,215 |
|
|
|
8,243 |
|
|
|
86,422 |
|
|
|
55,714 |
|
2006 |
|
|
4,985 |
|
|
|
1,507 |
|
|
|
4,566 |
|
|
|
2,563 |
|
|
|
9,551 |
|
|
|
4,070 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
11,709 |
|
|
|
7,372 |
|
|
|
11,709 |
|
|
|
7,372 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,379 |
|
|
$ |
14,100 |
|
|
$ |
55,478 |
|
|
$ |
28,621 |
|
|
$ |
164,563 |
|
|
$ |
104,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
AAA |
|
AA |
|
A |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
Underwriting Year |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
11,007 |
|
|
$ |
9,116 |
|
|
$ |
6,509 |
|
|
$ |
4,320 |
|
|
$ |
1,813 |
|
|
$ |
1,227 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
21,220 |
|
|
|
13,437 |
|
|
|
33,728 |
|
|
|
26,228 |
|
2005 |
|
|
37,134 |
|
|
|
27,793 |
|
|
|
36,424 |
|
|
|
26,471 |
|
|
|
6,514 |
|
|
|
2,582 |
|
2006 |
|
|
135 |
|
|
|
134 |
|
|
|
4,500 |
|
|
|
2,076 |
|
|
|
4,998 |
|
|
|
1,991 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
888 |
|
|
|
283 |
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,276 |
|
|
$ |
37,043 |
|
|
$ |
69,541 |
|
|
$ |
46,587 |
|
|
$ |
47,053 |
|
|
$ |
32,028 |
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued |
|
December 31, 2008 |
|
|
BBB |
|
Below Investment Grade |
|
Total |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
|
|
|
|
|
Estimated |
Underwriting Year |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
413 |
|
|
$ |
77 |
|
|
$ |
807 |
|
|
$ |
106 |
|
|
$ |
20,549 |
|
|
$ |
14,846 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
7,900 |
|
|
|
5,727 |
|
|
|
62,848 |
|
|
|
45,392 |
|
2005 |
|
|
11,908 |
|
|
|
6,529 |
|
|
|
17,905 |
|
|
|
5,739 |
|
|
|
109,885 |
|
|
|
69,114 |
|
2006 |
|
|
3,442 |
|
|
|
2,618 |
|
|
|
3,287 |
|
|
|
449 |
|
|
|
16,362 |
|
|
|
7,268 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
19,588 |
|
|
|
10,880 |
|
|
|
20,476 |
|
|
|
11,163 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,763 |
|
|
$ |
9,224 |
|
|
$ |
49,487 |
|
|
$ |
22,901 |
|
|
$ |
230,120 |
|
|
$ |
147,783 |
|
|
|
|
Alt-A is a classification of mortgage loans where the risk profile of the borrower falls
between prime and sub-prime. At December 31, 2009 and 2008, the Companys Alt-A securities
had an amortized cost of $176.6 million and $197.7 million, respectively, with an unrealized loss of $21.9
million and $39.9 million, respectively. As of December 31, 2009, 56.4% of the Alt-A securities
were rated AA− or better. This amount includes securities directly held by the Company and
securities held by ceding companies that support the Companys funds withheld at interest
investment. The Company recorded other-than-temporary impairments of $14.6 million, net of
non-credit adjustments, and $16.5 million, in its Alt-A securities portfolio for the years ended
December 31, 2009 and 2008, respectively, due primarily to the increased likelihood that some or
all of the remaining scheduled principal and interest payments on certain securities will not be
received.
At December 31, 2009 and 2008, the Companys fixed maturity and funds withheld portfolios
included approximately $601.8 million and $538.2 million, respectively, in estimated fair value, of
securities that are insured by various financial guarantors, or less than five percent of
consolidated investments. The securities are diversified between municipal bonds and asset-backed
securities with well diversified collateral pools. The Company invested in insured collateralized
debt obligation (CDO) structures backing sub-prime investments of approximately $0.2 million and
$0.1 million at December 31, 2009 and 2008, respectively. The insured securities are primarily
investment grade, at issuance, without the benefit of the insurance provided by the financial
guarantor and therefore the Company does not expect to incur significant realized losses as a
result of the financial difficulties encountered by several of the financial guarantors. In
addition to the insured securities, the Company held investment-grade securities issued by
financial guarantors totaling $8.3 million and $13.4 million in amortized cost at December 31, 2009
and 2008, respectively.
The Company does not invest in the common equity securities of Fannie Mae and Freddie Mac,
both government sponsored entities; however, as of December 31, 2009 and 2008, the Company held in
its general portfolio $41.0 million and $6.8 million, respectively, amortized cost in direct
exposure in the form of senior unsecured agency and preferred securities with the increase
attributable to purchases of senior unsecured agency debentures. Additionally, as of December 31,
2009 and 2008, the portfolios held by the Companys ceding companies that support its funds
withheld asset contain approximately $543.6 million and $359.6 million, respectively, in amortized
cost of unsecured agency bond holdings and no equity exposure. As of December 31, 2009 and 2008,
indirect exposure in the form of secured, structured mortgaged securities issued by Fannie Mae and
Freddie Mac totaled approximately $0.9 billion and $1.1 billion, respectively, in amortized cost
across the Companys general and funds withheld portfolios. Including the funds withheld
portfolios, the Companys direct holdings in the form of preferred securities had a total book
value of $0.7 million and $0.7 million at December 31, 2009 and 2008, respectively. As a result of
the U.S. government intervention and cessation of dividend payments, the Company recorded an
other-than-temporary impairment of its preferred holdings of Fannie Mae and Freddie Mac totaling
$12.2 million in 2008. The Company did not record any further other-than-temporary impairments on
its preferred holdings of Fannie Mae and Freddie Mac in 2009.
The Company monitors its fixed maturity securities and equity securities to determine
impairments in value and evaluates factors such as financial condition of the issuer, payment
performance, the length of time and the extent to which the market value has been below amortized
cost, compliance with covenants, general market conditions and industry sector, current intent and
ability to hold securities and various other subjective factors. Based on managements judgment,
securities determined to have an other-than-temporary impairment in value are written down to fair
value. See Investments Other-than-Temporary Impairment in Note 2 Summary of Significant
Accounting Policies in the Notes to Consolidated Financial Statements for additional information.
The Company recorded $132.3 million, net of non-credit adjustments, $131.1 million and $8.5 million
in other-than-temporary investment impairments in 2009, 2008 and 2007, respectively. The
68
impairments in 2008 and 2009 are due primarily to the continued turmoil in the U.S. and global
financial markets which has resulted in bankruptcies, credit defaults, consolidations and
government interventions. The table below summarizes other-than-temporary impairments for 2009,
net of non-credit adjustments, 2008 and 2007 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
Asset Class |
|
|
|
|
|
|
|
|
|
|
|
|
Subprime / Alt-A / Other structured securities |
|
$ |
71,789 |
|
|
$ |
30,361 |
|
|
$ |
68 |
|
Corporate / Other fixed maturity securities |
|
|
41,000 |
|
|
|
82,952 |
|
|
|
7,393 |
|
Equity securities |
|
|
11,058 |
|
|
|
17,232 |
|
|
|
1,020 |
|
Other |
|
|
8,471 |
|
|
|
526 |
|
|
|
|
|
|
|
|
Total |
|
$ |
132,318 |
|
|
$ |
131,071 |
|
|
$ |
8,481 |
|
|
|
|
During 2009 and 2008, the Company sold fixed maturity securities and equity securities with
fair values of $687.8 million and $536.7 million at losses of $73.0 million and $24.1 million,
respectively, or at 90.4% and 95.7% of book value, respectively. The Company generally does not
engage in short-term buying and selling of securities.
At December 31, 2009 and 2008, the Company had $584.9 million and $1,416.4 million,
respectively, of gross unrealized losses related to its fixed maturity and equity securities. These
securities are concentrated, calculated as a percentage of gross unrealized losses, as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
Sector: |
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
|
26 |
% |
|
|
46 |
% |
Canadian and Canada provincial governments |
|
|
4 |
|
|
|
1 |
|
Residential mortgage-backed securities |
|
|
12 |
|
|
|
7 |
|
Foreign corporate securities |
|
|
7 |
|
|
|
12 |
|
Asset-backed securities |
|
|
14 |
|
|
|
10 |
|
Commercial mortgage-backed securities |
|
|
29 |
|
|
|
23 |
|
State and political subdivisions |
|
|
3 |
|
|
|
1 |
|
U.S. government and agencies |
|
|
3 |
|
|
|
|
|
Other foreign government securities |
|
|
2 |
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Industry: |
|
|
|
|
|
|
|
|
Finance |
|
|
25 |
% |
|
|
33 |
% |
Asset-backed |
|
|
13 |
|
|
|
10 |
|
Industrial |
|
|
7 |
|
|
|
19 |
|
Mortgage-backed |
|
|
41 |
|
|
|
31 |
|
Government |
|
|
12 |
|
|
|
1 |
|
Utility |
|
|
2 |
|
|
|
6 |
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
The following table presents the total gross unrealized losses for 1,316 and 1,716 fixed
maturity securities and equity securities at December 31, 2009 and 2008, respectively, where the
estimated fair value had declined and remained below amortized cost by the indicated amount
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
Number of |
|
Unrealized |
|
|
|
|
|
Number of |
|
Unrealized |
|
|
|
|
Securities |
|
Losses |
|
% of Total |
|
Securities |
|
Losses |
|
% of Total |
Less than 20% |
|
|
1,112 |
|
|
$ |
254,075 |
|
|
|
43.4 |
% |
|
|
980 |
|
|
$ |
324,390 |
|
|
|
22.9 |
% |
20% or more for
less than six
months |
|
|
38 |
|
|
|
69,322 |
|
|
|
11.9 |
|
|
|
561 |
|
|
|
796,747 |
|
|
|
56.3 |
|
20% or more for six
months or greater |
|
|
166 |
|
|
|
261,483 |
|
|
|
44.7 |
|
|
|
175 |
|
|
|
295,302 |
|
|
|
20.8 |
|
|
|
|
Total |
|
|
1,316 |
|
|
$ |
584,880 |
|
|
|
100.0 |
% |
|
|
1,716 |
|
|
$ |
1,416,439 |
|
|
|
100.0 |
% |
|
|
|
69
As of December 31, 2009 and 2008, respectively, 71.4% and 92.7% of these securities were
investment grade and 43.4% and 22.9% had fair values that were less than 20% below cost. The amount
of the unrealized loss on these securities was primarily attributable to a widening of credit
spreads since the time the securities were purchased.
While all of these securities are monitored for potential impairment, the Company believes due
to continued uncertain market conditions and liquidity concerns, and the high levels of price
volatility, the extent and duration of a decline in value have become less indicative of when there
has been credit deterioration with respect to an issuer. The Companys determination of whether a
decline in value is other-than-temporary includes the Companys analysis of the underlying credit
and the extent and duration of a decline in value. The Companys credit analysis of an investment
includes determining whether the issuer is current on its contractual payments, evaluating whether
it is probable that the Company will be able to collect all amounts due according to the
contractual terms of the security and analyzing the overall ability of the Company to recover the
amortized cost of the investment. The Company continues to consider valuation declines as a
potential indicator of credit deterioration.
The following tables present the estimated fair values and gross unrealized losses, including
other-than-temporary impairment losses reported in AOCI, for the 1,316 and 1,716 fixed maturity
securities and equity securities that have estimated fair values below amortized cost at December
31, 2009 and 2008, respectively. These investments are presented by class and grade of security,
as well as the length of time the estimated fair value has remained below amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Equal to or greater than |
|
|
|
|
Less than 12 months |
|
12 months |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
(dollars in thousands) |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
373,049 |
|
|
$ |
27,625 |
|
|
$ |
679,908 |
|
|
$ |
89,711 |
|
|
$ |
1,052,957 |
|
|
$ |
117,336 |
|
Canadian and Canadian provincial
governments |
|
|
494,718 |
|
|
|
15,374 |
|
|
|
135,315 |
|
|
|
10,372 |
|
|
|
630,033 |
|
|
|
25,746 |
|
Residential mortgage-backed
securities |
|
|
402,642 |
|
|
|
23,671 |
|
|
|
197,320 |
|
|
|
20,185 |
|
|
|
599,962 |
|
|
|
43,856 |
|
Foreign corporate securities |
|
|
362,406 |
|
|
|
5,262 |
|
|
|
182,300 |
|
|
|
24,693 |
|
|
|
544,706 |
|
|
|
29,955 |
|
Asset-backed securities |
|
|
48,651 |
|
|
|
1,927 |
|
|
|
166,603 |
|
|
|
57,262 |
|
|
|
215,254 |
|
|
|
59,189 |
|
Commercial mortgage-backed
securities |
|
|
177,360 |
|
|
|
10,312 |
|
|
|
425,793 |
|
|
|
79,297 |
|
|
|
603,153 |
|
|
|
89,609 |
|
U.S. government and agencies |
|
|
496,514 |
|
|
|
15,027 |
|
|
|
|
|
|
|
|
|
|
|
496,514 |
|
|
|
15,027 |
|
State and political subdivisions |
|
|
34,612 |
|
|
|
3,397 |
|
|
|
40,945 |
|
|
|
11,437 |
|
|
|
75,557 |
|
|
|
14,834 |
|
Other foreign government securities |
|
|
240,216 |
|
|
|
8,370 |
|
|
|
30,321 |
|
|
|
4,901 |
|
|
|
270,537 |
|
|
|
13,271 |
|
|
|
|
|
|
|
|
Investment grade securities |
|
|
2,630,168 |
|
|
|
110,965 |
|
|
|
1,858,505 |
|
|
|
297,858 |
|
|
|
4,488,673 |
|
|
|
408,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
|
35,477 |
|
|
|
11,293 |
|
|
|
168,375 |
|
|
|
18,755 |
|
|
|
203,852 |
|
|
|
30,048 |
|
Asset-backed securities |
|
|
6,738 |
|
|
|
3,256 |
|
|
|
24,408 |
|
|
|
17,686 |
|
|
|
31,146 |
|
|
|
20,942 |
|
Foreign corporate securities |
|
|
1,755 |
|
|
|
17 |
|
|
|
3,771 |
|
|
|
3,426 |
|
|
|
5,526 |
|
|
|
3,443 |
|
Residential mortgage-backed
securities |
|
|
10,657 |
|
|
|
1,909 |
|
|
|
66,756 |
|
|
|
24,250 |
|
|
|
77,413 |
|
|
|
26,159 |
|
Commercial mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
57,179 |
|
|
|
79,818 |
|
|
|
57,179 |
|
|
|
79,818 |
|
State and political subdivisions |
|
|
|
|
|
|
|
|
|
|
5,170 |
|
|
|
2,910 |
|
|
|
5,170 |
|
|
|
2,910 |
|
|
|
|
|
|
|
|
Non-investment grade securities |
|
|
54,627 |
|
|
|
16,475 |
|
|
|
325,659 |
|
|
|
146,845 |
|
|
|
380,286 |
|
|
|
163,320 |
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
2,684,795 |
|
|
$ |
127,440 |
|
|
$ |
2,184,164 |
|
|
$ |
444,703 |
|
|
$ |
4,868,959 |
|
|
$ |
572,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
8,320 |
|
|
$ |
1,263 |
|
|
$ |
68,037 |
|
|
$ |
11,065 |
|
|
$ |
76,357 |
|
|
$ |
12,328 |
|
Other equity securities |
|
|
5 |
|
|
|
15 |
|
|
|
7,950 |
|
|
|
394 |
|
|
|
7,955 |
|
|
|
409 |
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
8,325 |
|
|
$ |
1,278 |
|
|
$ |
75,987 |
|
|
$ |
11,459 |
|
|
$ |
84,312 |
|
|
$ |
12,737 |
|
|
|
|
|
|
|
|
Total number of securities in
an unrealized loss position |
|
|
582 |
|
|
|
|
|
|
|
734 |
|
|
|
|
|
|
|
1,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Equal to or greater than |
|
|
|
|
Less than 12 months |
|
12 months |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
(dollars in thousands) |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
1,407,547 |
|
|
$ |
240,299 |
|
|
$ |
810,115 |
|
|
$ |
281,947 |
|
|
$ |
2,217,662 |
|
|
$ |
522,246 |
|
Canadian and Canadian provincial
governments |
|
|
114,754 |
|
|
|
2,751 |
|
|
|
89,956 |
|
|
|
4,420 |
|
|
|
204,710 |
|
|
|
7,171 |
|
Residential mortgage-backed
securities |
|
|
190,525 |
|
|
|
58,026 |
|
|
|
213,310 |
|
|
|
39,794 |
|
|
|
403,835 |
|
|
|
97,820 |
|
Foreign corporate securities |
|
|
508,102 |
|
|
|
82,490 |
|
|
|
140,073 |
|
|
|
59,816 |
|
|
|
648,175 |
|
|
|
142,306 |
|
Asset-backed securities |
|
|
118,608 |
|
|
|
40,139 |
|
|
|
173,505 |
|
|
|
99,147 |
|
|
|
292,113 |
|
|
|
139,286 |
|
Commercial mortgage-backed
securities |
|
|
523,475 |
|
|
|
200,567 |
|
|
|
188,638 |
|
|
|
126,163 |
|
|
|
712,113 |
|
|
|
326,730 |
|
State and political subdivisions |
|
|
20,403 |
|
|
|
1,947 |
|
|
|
18,250 |
|
|
|
5,936 |
|
|
|
38,653 |
|
|
|
7,883 |
|
Other foreign government securities |
|
|
16,419 |
|
|
|
33 |
|
|
|
4,125 |
|
|
|
117 |
|
|
|
20,544 |
|
|
|
150 |
|
|
|
|
|
|
|
|
Investment grade securities |
|
|
2,899,833 |
|
|
|
626,252 |
|
|
|
1,637,972 |
|
|
|
617,340 |
|
|
|
4,537,805 |
|
|
|
1,243,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
|
140,426 |
|
|
|
36,615 |
|
|
|
60,378 |
|
|
|
39,884 |
|
|
|
200,804 |
|
|
|
76,499 |
|
Asset-backed securities |
|
|
3,465 |
|
|
|
2,060 |
|
|
|
11,156 |
|
|
|
5,951 |
|
|
|
14,621 |
|
|
|
8,011 |
|
Foreign corporate securities |
|
|
24,637 |
|
|
|
7,227 |
|
|
|
2,032 |
|
|
|
3,387 |
|
|
|
26,669 |
|
|
|
10,614 |
|
Residential mortgage-backed
securities |
|
|
8,089 |
|
|
|
5,944 |
|
|
|
4,496 |
|
|
|
3,012 |
|
|
|
12,585 |
|
|
|
8,956 |
|
|
|
|
|
|
|
|
Non-investment grade securities |
|
|
176,617 |
|
|
|
51,846 |
|
|
|
78,062 |
|
|
|
52,234 |
|
|
|
254,679 |
|
|
|
104,080 |
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
3,076,450 |
|
|
$ |
678,098 |
|
|
$ |
1,716,034 |
|
|
$ |
669,574 |
|
|
$ |
4,792,484 |
|
|
$ |
1,347,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
49,376 |
|
|
$ |
22,316 |
|
|
$ |
61,249 |
|
|
$ |
41,844 |
|
|
$ |
110,625 |
|
|
$ |
64,160 |
|
Other equity securities |
|
|
11,804 |
|
|
|
4,607 |
|
|
|
|
|
|
|
|
|
|
|
11,804 |
|
|
|
4,607 |
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
61,180 |
|
|
$ |
26,923 |
|
|
$ |
61,249 |
|
|
$ |
41,844 |
|
|
$ |
122,429 |
|
|
$ |
68,767 |
|
|
|
|
|
|
|
|
Total number of securities in
an unrealized loss position |
|
|
1,039 |
|
|
|
|
|
|
|
677 |
|
|
|
|
|
|
|
1,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company does not intend to sell these fixed maturity
securities and does not believe it is more likely than not that it will be required to sell these
fixed maturity securities before the recovery of the fair value up to the current amortized cost of
the investment, which may be maturity. However, as facts and circumstances change, the Company may
sell fixed maturity securities in the ordinary course of managing its portfolio to meet
diversification, credit quality, asset-liability management and liquidity profile. As of December
31, 2009, the Company has the ability and intent to hold the equity securities until the recovery
of the fair value up to the current cost of the investment. However, from time to time if facts
and circumstances change, the Company may sell equity securities in the ordinary course of managing
its portfolio to meet diversification, credit quality and liquidity profile.
As of December 31, 2009 and 2008, respectively, the Company classified approximately 15.3% and
17.1% of its fixed maturity securities in the Level 3 category (refer to Note 6 Fair Value of
Financial Instruments in the Notes to Consolidated Financial Statements for additional
information). These securities primarily consist of private placement corporate securities with an
inactive trading market and asset-backed securities with subprime exposure in the Level 3 category
due to the current market uncertainty associated with these securities and the Companys
utilization of information from third parties.
Mortgage Loans on Real Estate
Mortgage loans represented approximately 4.0% and 4.7% of the Companys cash and invested
assets as of December 31, 2009 and 2008, respectively. As of December 31, 2009, all mortgages were
U.S. based with approximately 86.6% invested in mortgages on commercial offices, industrial
properties and retail locations. The Companys mortgage loans generally range in size up to $15.0
million, with the average mortgage loan investment as of December 31, 2009 totaling approximately
$4.3 million. The mortgage loan portfolio was diversified by geographic region and property type
as discussed further in Note 4 Investments in the Notes to Consolidated Financial Statements.
Valuation allowances on mortgage loans are established based upon losses expected by
management to be realized in connection with future dispositions or settlement of mortgage loans,
including foreclosures. The valuation allowances are established after management considers, among
other things, the value of underlying collateral and payment capabilities of debtors. Any
subsequent adjustments to the valuation allowances will be treated as investment gains or losses.
Information
71
regarding the Companys loan valuation allowances for mortgage loans as of December 31,
2009 and 2008 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
Balance at January 1, |
|
$ |
526 |
|
|
$ |
|
|
Additions |
|
|
8,327 |
|
|
|
526 |
|
Deductions |
|
|
(3,069 |
) |
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
5,784 |
|
|
$ |
526 |
|
|
|
|
Information regarding the portion of the Companys mortgage loans that were impaired as of
December 31, 2009 and 2008 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
Impaired loans with valuation allowances |
|
$ |
14,967 |
|
|
$ |
3,853 |
|
Impaired loans without valuation allowances |
|
|
14,317 |
|
|
|
18,125 |
|
|
|
|
Subtotal |
|
|
29,284 |
|
|
|
21,978 |
|
Less: Valuation allowances on impaired loans |
|
|
5,784 |
|
|
|
526 |
|
|
|
|
Impaired loans |
|
$ |
23,500 |
|
|
$ |
21,452 |
|
|
|
|
The Companys average investment in impaired loans was $3.3 million and $3.7 million as
of December 31, 2009 and 2008 respectively. Interest income on impaired loans was $0.8 million and
$1.3 million for the twelve months ended December 31, 2009 and 2008, respectively.
Policy Loans
Policy loans comprised approximately 5.8% and 6.7% of the Companys cash and invested assets
as of December 31, 2009 and 2008, respectively, substantially all of which are associated with one
client. These policy loans present no credit risk because the amount of the loan cannot exceed the
obligation due the ceding company upon the death of the insured or surrender of the underlying
policy. The provisions of the treaties in force and the underlying policies determine the policy
loan interest rates. Because policy loans represent premature distributions of policy liabilities,
they have the effect of reducing future disintermediation risk. In addition, the Company earns a
spread between the interest rate earned on policy loans and the interest rate credited to
corresponding liabilities.
Funds Withheld at Interest
The majority of the Companys funds withheld at interest balances are associated with its
reinsurance of annuity contracts. The funds withheld receivable balance totaled $4.9 billion and
$4.5 billion at December 31, 2009 and 2008, respectively, of which $3.4 billion and $3.1 billion,
respectively, were subject to the general accounting principles for Derivatives and Hedging related
to embedded derivatives. Under these principles, the Companys funds withheld receivable under
certain reinsurance arrangements incorporate credit risk exposures that are unrelated or only
partially related to the creditworthiness of the obligor and include an embedded derivative feature
that is not clearly and closely related to the host contract. Therefore, the embedded derivative
feature must be measured at fair value on the consolidated balance sheets and changes in fair value
reported in income. See Embedded Derivatives in Note 2 Summary of Significant Accounting
Policies in the Notes to Consolidated Financial Statements for further discussion.
Funds withheld at interest comprised approximately 24.8% and 27.4% of the Companys cash and
invested assets as of December 31, 2009 and 2008, respectively. Of the $4.9 billion funds withheld
at interest balance as of December 31, 2009, $3.4 billion of the balance is associated with one
client. For reinsurance agreements written on a modified coinsurance basis and certain agreements
written on a coinsurance basis, assets equal to the net statutory reserves are withheld and legally
owned and managed by the ceding company, and are reflected as funds withheld at interest on the
Companys consolidated balance sheets. In the event of a ceding companys insolvency, the Company
would need to assert a claim on the assets supporting its reserve liabilities. However, the risk
of loss to the Company is mitigated by its ability to offset amounts it owes the ceding company for
claims or allowances with amounts owed by the ceding company. Interest accrues to these assets at
rates defined by the treaty terms and the Company estimated the yields were approximately 7.69%,
3.54% and 6.42% for the years ended December 31, 2009, 2008 and 2007, respectively. Changes in
these estimated yields are affected by equity options held in the funds withheld portfolio
associated with equity-indexed annuity treaties. The Company is subject to the investment
performance on the withheld assets, although it does not directly control them. These assets are
primarily fixed maturity investment securities and pose risks similar to the fixed maturity
securities the Company owns. To mitigate this risk, the Company helps set the investment
guidelines followed by the ceding company and monitors
72
compliance. Ceding companies with funds
withheld at interest had an average rating of A and A+ at December 31, 2009 and 2008,
respectively. Certain ceding companies maintain segregated portfolios for the benefit of the
Company.
Based on data provided by ceding companies at December 31, 2009 and 2008, funds withheld at
interest were approximately (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Estimated |
|
Estimated |
Underlying Security Type: |
|
Book Value |
|
Fair Value |
|
Fair Value |
Segregated portfolios: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade U.S. corporate securities |
|
$ |
1,919,159 |
|
|
$ |
1,942,720 |
|
|
|
50.5 |
% |
Below investment grade U.S. corporate securities |
|
|
202,713 |
|
|
|
157,109 |
|
|
|
4.1 |
|
Structured securities |
|
|
1,133,204 |
|
|
|
945,167 |
|
|
|
24.6 |
|
Foreign corporate securities |
|
|
13,169 |
|
|
|
14,701 |
|
|
|
0.4 |
|
U.S. government and agency debentures |
|
|
499,763 |
|
|
|
543,226 |
|
|
|
14.2 |
|
Derivatives(1) |
|
|
160,382 |
|
|
|
197,860 |
|
|
|
5.2 |
|
Other |
|
|
37,161 |
|
|
|
36,487 |
|
|
|
1.0 |
|
|
|
|
Total segregated portfolios |
|
|
3,965,551 |
|
|
|
3,837,270 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-segregated portfolios |
|
|
1,364,299 |
|
|
|
1,364,299 |
|
|
|
|
|
Embedded derivatives(2) |
|
|
(434,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funds withheld at interest |
|
$ |
4,895,356 |
|
|
$ |
5,201,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Estimated |
|
Estimated |
Underlying Security Type: |
|
Book Value |
|
Fair Value |
|
Fair Value |
Segregated portfolios: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment grade U.S. corporate securities |
|
$ |
1,737,178 |
|
|
$ |
1,442,007 |
|
|
|
44.8 |
% |
Below investment grade U.S. corporate securities |
|
|
73,245 |
|
|
|
59,336 |
|
|
|
1.8 |
|
Structured securities |
|
|
1,141,435 |
|
|
|
892,895 |
|
|
|
27.7 |
|
Foreign corporate securities |
|
|
15,531 |
|
|
|
14,819 |
|
|
|
0.5 |
|
U.S. government and agency debentures |
|
|
740,782 |
|
|
|
784,421 |
|
|
|
24.3 |
|
Derivatives(1) |
|
|
22,906 |
|
|
|
(971 |
) |
|
|
|
|
Other |
|
|
29,743 |
|
|
|
29,743 |
|
|
|
0.9 |
|
|
|
|
Total segregated portfolios |
|
|
3,760,820 |
|
|
|
3,222,250 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-segregated portfolios |
|
|
1,272,466 |
|
|
|
1,272,466 |
|
|
|
|
|
Embedded derivatives(2) |
|
|
(512,888 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funds withheld at interest |
|
$ |
4,520,398 |
|
|
$ |
4,494,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Derivatives primarily consist of S&P 500 options which are used to hedge
liabilities and interest credited for equity-indexed annuity contracts reinsured by
the Company. |
|
(2) |
|
Represents the fair value of embedded derivatives related to reinsurance
written on a modified coinsurance or funds withheld basis and subject to the general
accounting principles for Derivatives and Hedging related to embedded derivatives for
the segregated portfolios. When the segregated portfolios are presented on a fair
value basis in the Estimated Fair Value column, the calculation of a separate
embedded derivative is not applicable. |
Based on data provided by the ceding companies at December 31, 2009, the maturity distribution
of the segregated portfolio portion of funds withheld at interest was approximately (dollars in
thousands):
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
% of Total |
|
|
|
|
|
|
Estimated |
|
Estimated |
Maturity: |
|
Book Value |
|
Fair Value |
|
Fair Value |
Within one year |
|
$ |
154,251 |
|
|
$ |
190,367 |
|
|
|
4.5 |
% |
More than one, less than five years |
|
|
464,526 |
|
|
|
464,345 |
|
|
|
11.0 |
|
More than five, less than ten years |
|
|
822,715 |
|
|
|
826,186 |
|
|
|
19.6 |
|
Ten years or more |
|
|
2,911,546 |
|
|
|
2,743,859 |
|
|
|
64.9 |
|
|
|
|
Subtotal |
|
|
4,353,038 |
|
|
|
4,224,757 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Reverse repurchase agreements |
|
|
(387,487 |
) |
|
|
(387,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total all years |
|
$ |
3,965,551 |
|
|
$ |
3,837,270 |
|
|
|
|
|
|
|
|
|
|
|
|
Other Invested Assets
Other invested assets represented approximately 2.6% and 3.8% of the Companys cash and
invested assets as of December 31, 2009 and 2008, respectively. Other invested assets include
equity securities, non-redeemable preferred stocks, limited partnership interests, structured loans
and derivative contracts.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
Equity securities |
|
$ |
58,359 |
|
|
$ |
35,975 |
|
Non-redeemable preferred stock |
|
|
113,198 |
|
|
|
123,399 |
|
Limited partnerships |
|
|
156,573 |
|
|
|
140,077 |
|
Structured loans |
|
|
150,677 |
|
|
|
101,380 |
|
Derivatives |
|
|
24,156 |
|
|
|
206,341 |
|
Other |
|
|
13,123 |
|
|
|
21,477 |
|
|
|
|
Total other invested assets |
|
$ |
516,086 |
|
|
$ |
628,649 |
|
|
|
|
The Company recorded $12.0 million, $17.2 million and $1.0 million in
other-than-temporary impairments on other invested assets in 2009, 2008 and 2007, respectively.
The Company has utilized derivative financial instruments, primarily to protect the Company
against possible changes in the fair value of its investment portfolio as a result of interest rate
changes, to hedge liabilities associated with the reinsurance of variable annuities with guaranteed
living benefits and to manage the portfolios effective yield, maturity and duration. In addition,
the Company has used derivative financial instruments to reduce the risk associated with
fluctuations in foreign currency exchange rates. The Company uses both exchange-traded and
customized over-the-counter derivative financial instruments. The Companys use of derivative
financial instruments historically has not been significant to its financial position.
The following table presents the notional amounts and fair value of investment related
derivative instruments held at December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
|
|
|
|
Carrying Value/ |
|
|
|
|
|
Carrying Value/ |
|
|
Notional |
|
Fair Value |
|
Notional |
|
Fair Value |
|
|
Amount |
|
Assets |
|
Liabilities |
|
Amount |
|
Assets |
|
Liabilities |
Interest rate swaps |
|
$ |
1,410,353 |
|
|
$ |
17,962 |
|
|
$ |
47,738 |
|
|
$ |
694,499 |
|
|
$ |
155,189 |
|
|
$ |
2,484 |
|
Financial futures |
|
|
200,436 |
|
|
|
|
|
|
|
|
|
|
|
260,568 |
|
|
|
|
|
|
|
|
|
Foreign currency
swaps |
|
|
226,715 |
|
|
|
|
|
|
|
9,008 |
|
|
|
296,497 |
|
|
|
48,943 |
|
|
|
|
|
Foreign currency
forwards |
|
|
40,500 |
|
|
|
2,200 |
|
|
|
|
|
|
|
31,300 |
|
|
|
2,209 |
|
|
|
|
|
Consumer Price
Index (CPI) swaps |
|
|
124,034 |
|
|
|
1,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps |
|
|
367,500 |
|
|
|
2,363 |
|
|
|
249 |
|
|
|
290,000 |
|
|
|
|
|
|
|
7,705 |
|
|
|
|
|
|
Total |
|
$ |
2,369,538 |
|
|
$ |
24,156 |
|
|
$ |
56,995 |
|
|
$ |
1,572,864 |
|
|
$ |
206,341 |
|
|
$ |
10,189 |
|
|
|
|
|
|
74
The Company may be exposed to credit-related losses in the event of non-performance by
counterparties to derivative financial instruments. Generally, the current credit exposure of the
Companys derivative contracts is limited to the net positive fair value at the reporting date less
collateral held by the Company. The Company held derivative assets related to its derivative
contracts with counterparties of $24.2 million and $206.3 million at December 31, 2009 and 2008,
respectively. However, due to counterparty netting arrangements, the Company had no credit
exposure at December 31, 2009. In addition, the derivative assets of $206.3 million held by the
Company at December 31, 2008 were collateralized with $159.8 million of cash collateral from the
counterparty. The decrease in derivative assets in 2009 is primarily due to the termination of the
Companys foreign currency swaps used to hedge its investment in its Canada operation, which were
outstanding as of December 31, 2008.
The Company manages its credit risk related to over-the-counter derivatives by entering into
transactions with creditworthy counterparties, maintaining collateral arrangements and through the
use of master agreements that provide for a single net payment to be made by one counterparty to
another at each due date and upon termination. Because exchange-traded futures are affected
through regulated exchanges, and positions are marked to market on a daily basis, the Company has
minimal exposure to credit-related losses in the event of nonperformance by counterparties to such
derivative instruments. See Note 5 Derivative Instruments in the Notes to Consolidated
Financial Statements for more information regarding the Companys derivative instruments.
Enterprise Risk Management
Corporate Risk Management
RGA maintains a corporate risk management framework which is responsible for assessing,
measuring and monitoring risks facing the enterprise. This includes development and implementation
of mitigation strategies to reduce exposures to these risks to acceptable levels. Risk management
is an integral part of the Companys culture and every day activities. It includes guidelines and
controls in areas such as pricing, underwriting, currency, administration, investments, asset
liability management, counterparty exposure, financing, regulatory change, business continuity
planning, human resources, liquidity, sovereign risks and technology development.
The corporate risk management framework is directed by the chief risk officer. Risk
management officers from all areas of the Company support the chief risk officer in this effort.
The chief risk officer provides quarterly risk management updates to the board of directors,
executive management and the internal risk management officers.
Specific risk assessments and descriptions can be found below and in Item 1A Risk
Factors.
Mortality Risk Management
In the event that mortality or morbidity experience develops in excess of expectations, some
reinsurance treaties allow for increases to future premium rates. Other treaties include
experience refund provisions, which may also help reduce RGAs mortality risk. In the normal
course of business, the Company seeks to limit its exposure to loss on any single insured and to
recover a portion of claims paid by ceding reinsurance to other insurance enterprises or
retrocessionaires under excess coverage and coinsurance contracts. In the U.S., the Company
retains a maximum of $8.0 million of coverage per individual life. In certain limited situations,
due to the acquisition of in force blocks of business, the Company has retained more than $8.0
million per individual policy. In total, there are 17 such cases of over-retained policies, for
amounts averaging $1.6 million over the Companys normal retention limit. The largest amount in
excess of the Companys retention on any one life is $6.3 million. The Company enters into
agreements with other reinsurers to mitigate the risk related to the over-retained policies.
Additionally, due to some lower face amount reinsurance coverages provided by the Company in
addition to individual life, such as group life, disability and health, under certain
circumstances, the Company could potentially incur claims totaling more than $8.0 million per
individual life in the U.S. For other countries, particularly those with higher risk factors or
smaller books of business, the Company systematically reduces its retention. The Company has a
number of retrocession arrangements whereby certain business in force is retroceded on an automatic
or facultative basis.
The Company maintains a catastrophe insurance program (Program) that renews on September 7th
of each year. The current Program began September 7, 2009, and covers events involving 10 or more
insured deaths from a single occurrence. The Company retains the first $20 million in claims, the
Program covers the next $80 million in claims, and the Company retains all claims in excess of $100
million. The Program covers reinsurance programs worldwide and includes losses due to acts of
terrorism, including terrorism losses due to nuclear, chemical and/or biological events. The
Program excludes, among other things, losses from earthquakes occurring in California, and would
not cover losses from pandemics. The Program is insured by 14 insurance companies and Lloyds
Syndicates, with only one single entity providing more than $10 million of coverage.
75
Counterparty Risk Reinsurance
In the normal course of business, the Company seeks to limit its exposure to reinsurance
contracts by ceding a portion of the reinsurance to other insurance companies or reinsurers.
Should a counterparty not be able to fulfill its
obligation to the Company under a reinsurance agreement, the impact could be material to the
Companys financial condition and results of operations.
Generally, RGAs insurance subsidiaries retrocede amounts in excess of their retention to RGA
Reinsurance, Parkway Re, RGA Barbados, RGA Americas, RGA Worldwide or RGA Atlantic. External
retrocessions are arranged through the Companys retrocession pools for amounts in excess of its
retention. As of December 31, 2009, all retrocession pool members in this excess retention pool
reviewed by the A.M. Best Company were rated A-, the fourth highest rating out of fifteen
possible ratings, or better. For a majority of the retrocessionaires that were not rated, letters
of credit or trust assets have been given as additional security in favor of RGA Reinsurance. In
addition, the Company performs annual financial and in force reviews of its retrocessionaires to
evaluate financial stability and performance.
The Company has never experienced a material default in connection with retrocession
arrangements, nor has it experienced any material difficulty in collecting claims recoverable from
retrocessionaires; however, no assurance can be given as to the future performance of such
retrocessionaires or as to the recoverability of any such claims.
The Company relies upon its clients to provide timely, accurate information. The Company may
experience volatility in its earnings as a result of erroneous or untimely reporting from its
clients. The Company works closely with its clients and monitors this risk in an effort to
minimize its exposure.
Market Risk
Market risk is the risk of loss that may occur when fluctuation in interest and currency
exchange rates and equity and commodity prices change the value of a financial instrument. Both
derivative and non-derivative financial instruments have market risk so the Companys risk
management extends beyond derivatives to encompass all financial instruments held that are
sensitive to market risk. The Company is primarily exposed to interest rate risk and foreign
currency risk.
Interest Rate Risk:
This risk arises from many of the Companys primary activities, as the Company invests
substantial funds in interest-sensitive assets and also has certain interest-sensitive contract
liabilities. The Company manages interest rate risk and credit risk to maximize the return on the
Companys capital effectively and to preserve the value created by its business operations. As
such, certain management monitoring processes are designed to minimize the effect of sudden and/or
sustained changes in interest rates on fair value, cash flows, and net interest income. The
Company manages its exposure to interest rates principally by matching floating rate liabilities
with corresponding floating rate assets and by matching fixed rate liabilities with corresponding
fixed rate assets. On a limited basis, the Company uses equity options to minimize its exposure to
movements in equity markets that have a direct correlation with certain of its reinsurance
products.
The Companys exposure to interest rate price risk and interest rate cash flow risk is
reviewed on a quarterly basis. Interest rate price risk exposure is measured using interest rate
sensitivity analysis to determine the change in fair value of the Companys financial instruments
in the event of a hypothetical change in interest rates. Interest rate cash flow risk exposure is
measured using interest rate sensitivity analysis to determine the Companys variability in cash
flows in the event of a hypothetical change in interest rates.
In order to reduce the exposure of changes in fair values from interest rate fluctuations, the
Company has developed strategies to manage its liquidity and increase the interest rate sensitivity
of its asset base. From time to time, the Company has utilized the swap market to manage the
volatility of cash flows to interest rate fluctuations.
Interest rate sensitivity analysis is used to measure the Companys interest rate price risk
by computing estimated changes in fair value of fixed rate assets and liabilities in the event of a
hypothetical 10% change (increase or decrease) in market interest rates. The Company does not have
fixed rate instruments classified as trading securities. The Companys projected loss in fair
value of financial instruments in the event of a 10% unfavorable change in market interest rates at
its fiscal years ended December 31, 2009 and 2008 was $355.5 million and $169.6 million,
respectively.
The calculation of fair value is based on the net present value of estimated discounted cash
flows expected over the life of the market risk sensitive instruments, using market prepayment
assumptions and market rates of interest provided by independent broker quotations and other public
sources, with adjustments made to reflect the shift in the treasury yield curve as appropriate.
76
At December 31, 2009, the Companys estimated changes in fair value were within the targets
outlined in the Companys investment policy.
Interest rate sensitivity analysis is also used to measure the Companys interest rate cash
flow risk by computing estimated changes in the cash flows expected in the near term attributable
to floating rate assets and liabilities in the event of a range of assumed changes in market
interest rates. This analysis assesses the risk of loss in cash flows in the near term in market
risk sensitive floating rate instruments in the event of a hypothetical 10% change (increase or
decrease) in market interest rates. The Company does not have variable rate instruments classified
as trading securities. The Companys projected decrease in cash flows in the near term associated
with floating rate instruments in the event of a 10% unfavorable change in market interest rates at
its fiscal years ended December 31, 2009 and 2008 was $6.8 million and $2.7 million, respectively.
The cash flows from interest payments move in the same direction as interest rates for the
Companys floating rate instruments. The volatility in mortgage prepayments partially offsets the
cash flows from interest. At December 31, 2009, the Companys estimated changes in cash flows were
within the targets outlined in the Companys investment policy.
Computations of prospective effects of hypothetical interest rate changes are based on
numerous assumptions, including relative levels of market interest rates, and mortgage prepayments,
and should not be relied on as indicative of future results. Further, the computations do not
contemplate any actions management could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the computation of
the estimated fair value of fixed rate instruments and the estimated cash flows of floating rate
instruments, which constitute forward-looking statements. Actual values may differ materially from
those projections presented due to a number of factors, including, without limitation, market
conditions varying from assumptions used in the calculation of the fair value. In the event of a
change in interest rates, prepayments could deviate significantly from those assumed in the
calculation of fair value. Finally, the desire of many borrowers to repay their fixed rate
mortgage loans may decrease in the event of interest rate increases.
Foreign Currency Risk:
The Company is subject to foreign currency translation, transaction, and net income
exposure. The Company manages its exposure to currency principally by matching invested assets
with the underlying reinsurance liabilities to the extent possible. The Company has in place net
investment hedges for a portion of its investments in its Canada and Australia operations.
Translation differences resulting from translating foreign subsidiary balances to U.S. dollars are
reflected in stockholders equity on the consolidated balance sheets. The Company generally does
not hedge the foreign currency exposure of its subsidiaries transacting business in currencies
other than their functional currency (transaction exposure). The majority of the Companys foreign
currency transactions are denominated in Canadian dollars, British pounds, Australian dollars,
Japanese yen, Korean won, euros, and the South African rand.
Market Risk Associated with Annuities with Guaranteed Minimum Benefits:
The Company reinsures variable annuities including those with guaranteed minimum death
benefits (GMDB), guaranteed minimum income benefits (GMIB), guaranteed minimum accumulation
benefits (GMAB) and guaranteed minimum withdrawal benefits (GMWB). Strong equity markets,
increases in interest rates and decreases in volatility will generally decrease the fair value of
the liabilities underlying the benefits. Conversely, a decrease in the equity markets along with a
decrease in interest rates and an increase in volatility will generally result in an increase in
the fair value of the liabilities underlying the benefits, which has the effect of increasing
reserves and lowering earnings. The Company maintains a customized dynamic hedging program that is
designed to mitigate the risks associated with income volatility around the change in reserves on
guaranteed benefits. However, the hedge positions may not fully offset the changes in the carrying
value of the guarantees due to, among other things, time lags, high levels of volatility in the
equity and derivative markets, extreme swings in interest rates, unexpected contract holder
behavior, and divergence between the performance of the underlying funds and hedging indices.
These factors, individually or collectively, may have a material adverse effect on the Companys
net income, financial condition or liquidity. The table below provides a summary of variable
annuity account values and the fair value of the guaranteed benefits as of December 31, 2009 and
2008.
77
|
|
|
|
|
|
|
|
|
|
|
December 31, |
(dollars in millions) |
|
2009 |
|
2008 |
No guaranteed minimum benefits |
|
$ |
1,231.2 |
|
|
$ |
1,063.1 |
|
GMDB only |
|
|
78.7 |
|
|
|
53.5 |
|
GMIB only |
|
|
5.7 |
|
|
|
3.9 |
|
GMAB only |
|
|
62.1 |
|
|
|
43.7 |
|
GMWB only |
|
|
1,563.0 |
|
|
|
795.0 |
|
GMDB / WB |
|
|
437.4 |
|
|
|
287.1 |
|
Other |
|
|
34.3 |
|
|
|
24.3 |
|
|
|
|
Total variable annuity account values |
|
$ |
3,412.4 |
|
|
$ |
2,270.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of guaranteed living benefits |
|
$ |
23.7 |
|
|
$ |
276.4 |
|
Inflation
The primary, direct effect on the Company of inflation is the increase in
operating expenses. A large portion of the Companys operating expenses consists of salaries,
which are subject to wage increases at least partly affected by the rate of inflation. The rate of
inflation also has an indirect effect on the Company. To the extent that a governments policies
to control the level of inflation result in changes in interest rates, the Companys investment
income is affected.
New Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Effective
July 1, 2009, FASB Accounting Standards Codification (Codification) has become the source of
authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the Securities and Exchange Commission for public companies. This statement is
effective for financial statements issued for interim and annual periods ending after September 15,
2009. The Company adopted Codification on September 30, 2009 and has updated all disclosures to
reference Codification herein.
Consolidation and Business Combinations
In January 2010, the FASB amended the general accounting principles for Consolidation as it
relates to decreases in ownership of a subsidiary. This amendment clarifies the scope of the
decrease in ownership provisions. This amendment also requires additional disclosures about the
deconsolidation of a subsidiary or derecognition of a group of assets. The amendment is effective
for fiscal years and interim periods beginning after December 15, 2009. The adoption of this
amendment is not expected to have an impact on the consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Consolidation as it
relates to the assessment of a variable interest entity. This amendment also requires additional
disclosures to provide transparent information regarding the involvement in a variable interest
entity. The amendment is effective for fiscal years and interim periods beginning after November
15, 2009. The Company is currently evaluating the impact of this amendment on its consolidated
financial statements.
In December 2007, the FASB amended the general accounting principles for Business
Combinations. This amendment establishes principles and requirements for how an acquirer
recognizes and measures certain items in a business combination, as well as disclosures about the
nature and financial effects of a business combination. The FASB also amended the general
accounting principles for Consolidation as it relates to noncontrolling interests in consolidated
financial statements. This amendment establishes accounting and reporting standards surrounding
noncontrolling interest, or minority interests, which are the portions of equity in a subsidiary
not attributable, directly or indirectly, to a parent. The amendments are effective for fiscal
years beginning on or after December 15, 2008 and apply prospectively to business combinations.
Presentation and disclosure requirements related to noncontrolling interests must be
retrospectively applied. The adoption of these amendments did not have a material impact on the
Companys consolidated financial statements.
Investments
In April 2009, the FASB amended the general accounting principles for Investments as it
relates to the recognition and presentation of other-than-temporary impairments. This amendment
updates the other-than-temporary impairment guidance for debt securities to make it more
operational and to improve the presentation and disclosure of other-than-temporary impairments
(OTTI) on debt and equity securities in the financial statements. The recognition provisions
apply only to debt securities classified as available-for-sale and held-to-maturity, while the
presentation and disclosure
78
requirements apply to both debt and equity securities. An impaired debt
security will be considered other-than-temporarily impaired if the Company has the intent to sell
or it more likely than not will be required to sell prior to recovery of the amortized cost. If the
holder of a debt security does not expect recovery of the entire cost basis, even if there is no
intention to
sell the security, an OTTI has occurred. This amendment also changes how an entity recognizes
an OTTI for a debt security by separating the loss between the amount representing the credit loss
and the amount relating to other factors, if the Company does not have the intent to sell or it
more likely than not will not be required to sell prior to recovery of the amortized cost less any
current period credit loss. Credit losses will be recognized in net income and losses relating to
other factors will be recognized in accumulated other comprehensive income (AOCI). If the
Company has the intent to sell or it more likely than not will be required to sell before its
recovery of amortized cost less any current period credit loss, the entire OTTI will be recognized
in net income. This amendment is effective for interim and annual reporting periods ending after
June 15, 2009. The adoption of this amendment resulted in a net after-tax increase to retained
earnings and a decrease to accumulated other comprehensive income of $4.4 million, as of April 1,
2009. The required disclosures are provided in Note 4 Investments in the Notes to
Consolidated Financial Statements.
In January 2009, the FASB amended the general accounting principles for Investments as it
relates to determining other-than-temporary impairments on purchased beneficial interests and
beneficial interests that continue to be held by a transferor in securitized financial assets. The
primary effect of this amendment was to remove the requirement that a holder attempt to determine
the underlying cash flows on an asset-backed security based on the assumptions that a market
participant would make in determining the current fair value of the instrument. Instead, the focus
has been placed on determining the estimated cash flows as determined by the holder for all sources
including its own comprehensive credit analysis. The provisions of this amendment were required to
be applied prospectively for interim periods and fiscal years ending after December 15, 2008. The
adoption of this amendment did not have a significant impact on how the Company values its
structured investment securities.
Transfers and Servicing
In June 2009, the FASB amended the general accounting principles for Transfers and Servicing
as it relates to the transfers of financial assets. This amendment also requires additional
disclosures to address concerns regarding the transparency of transfers of financial assets. The
amendment is effective for fiscal years and interim periods beginning after November 15, 2009. The
Company is currently evaluating the impact of this amendment on its consolidated financial
statements.
In February 2008, the FASB amended the general accounting principles for Transfers and
Servicing as it relates to the accounting for transfers of financial assets and repurchase
financing transactions. This amendment provides guidance for evaluating whether to account for a
transfer of a financial asset and repurchase financing as a single transaction or as two separate
transactions. The amendment is effective prospectively for financial statements issued for fiscal
years beginning after November 15, 2008. The adoption of this amendment did not have a material
impact on the Companys consolidated financial statements.
Derivatives and Hedging
In March 2008, the FASB amended the general accounting principles for Derivatives and Hedging
as it relates to the disclosures about derivative instruments and hedging activities. This
amendment requires enhanced qualitative disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. The amendment is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008. The Company adopted this amendment in the first
quarter of 2009. The required disclosures are provided in Note 5 Derivative Instruments
in the Notes to Consolidated Financial Statements.
Fair Value Measurements and Disclosures
In January 2010, the FASB amended the general accounting principles for Fair Value
Measurements and Disclosures as it relates to the disclosures about fair value measurements. This
amendment requires new disclosures about the transfers in and out of Level 1 and 2 measurements and
also enhances disclosures about the activity within the Level 3 measurements. It also clarifies
the required level of disaggregation and the disclosures regarding valuation techniques and inputs
to fair value measurements. The amendment is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the enhanced Level 3 disclosures. Those disclosures
are effective for interim and annual reporting periods beginning after December 15, 2010. The
Company is currently evaluating the impact of this amendment on its consolidated financial
statements.
79
In September 2009, the FASB amended the general accounting principles for Fair Value
Measurements and Disclosures as it relates to the fair value measurement of investments in certain
entities that calculate net asset value per share. This amendment allows the fair value of certain
investments to be measured on the basis of the net asset value. It also
requires disclosure, by major category type, of the attributes of those investments, such as
the nature of any restrictions on redemption, any unfunded commitments, and the investment
strategies of the investees. The amendment is effective for interim and annual reporting periods
ending after December 15, 2009. The adoption of this amendment did not have a material impact on
the Companys consolidated financial statements.
In August 2009, the FASB amended the general accounting principles for Fair Value Measurements
and Disclosures as it relates to measuring liabilities at fair value. This amendment provides
guidance for measuring liabilities at fair value when a quoted price in an active market for the
identical liability is not available. It also clarifies that the inclusion of a separate input,
used in the fair value measurement, relating to the existence of a restriction that prevents the
transfer of a liability is not necessary. The amendment is effective for interim and annual
reporting beginning after issuance. The adoption of this amendment did not have a material impact
on the Companys consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Fair Value Measurements
and Disclosures as it relates to determining fair value when the volume and level of activity for
asset or liability have significantly decreased and identifying transactions that are not orderly.
This amendment provides additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased in relation to normal market
activity for the asset or liability and clarifies that the use of multiple valuation techniques may
be appropriate. It also provides additional guidance on circumstances that may indicate a
transaction is not orderly. Further, it requires additional disclosures about fair value
measurements in annual and interim reporting periods. This amendment is effective prospectively for
interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment
did not have a material impact on the Companys consolidated financial statements. The required
disclosures are provided in Note 6 Fair Value of Financial Instruments in the Notes
to Consolidated Financial Statements.
In October 2008, the FASB amended the general accounting principles for Fair Value
Measurements and Disclosures as it relates to determining the fair value of a financial asset when
the market for that asset is not active. This amendment clarifies the application of fair value in
a market that is not active and provides an example to illustrate key considerations in determining
the fair value of a financial asset when the market for that financial asset is not active. The
amendment was effective upon issuance on October 10, 2008, including prior periods for which
financial statements had not been issued. The Company did not consider it necessary to change any
valuation techniques as a result of the amendment. The Company also adopted an amendment that
delayed the effective date of fair value measurement for certain nonfinancial assets and
liabilities that are recorded at fair value on a nonrecurring basis. The effective date was
delayed until January 1, 2009 and impacts balance sheet items including nonfinancial assets and
liabilities in a business combination and the impairment testing of goodwill and long-lived assets.
The adoption of this amendment did not have a material impact on the Companys consolidated
financial statements.
In September 2006, the FASB amended the general accounting principles for Fair Value
Measurements and Disclosures as it relates to defining fair value, establishing a framework for
measuring fair value, establishing a fair value hierarchy based on the inputs used to measure fair
value and enhanced disclosure requirements for fair value measurements. The Company adopted the
amendment effective January 1, 2008. The Companys adoption of the amendment resulted in a pre-tax
gain of approximately $3.9 million, included in interest credited, related primarily to the
decrease in the fair value of embedded derivative liabilities associated with equity-indexed
annuity products primarily from the incorporation of nonperformance risk, also referred to as the
Companys own credit risk, into the fair value calculation.
Compensation
In December 2008, the FASB amended the general accounting principles for Compensation as it
relates to employers disclosures about postretirement benefit plan assets. This amendment provides
guidance for disclosure of the types of assets and associated risks in retirement plans. The new
disclosures are designed to provide additional insight into the major categories of plan assets,
the inputs and valuation techniques used to measure the fair value of plan assets, the effect of
fair value measurements using significant unobservable inputs on changes in plan assets for the
period, significant concentrations of risk within plan assets and how investment decisions are
made, including factors necessary to understanding investment policies and strategies. The
disclosures about plan assets required by this amendment is effective for financial statements with
fiscal years ending after December 15, 2009. The Company has adopted this amendment. The required
disclosures are provided in Note 10 Employee Benefit Plans in the Notes to Consolidated
Financial Statements.
80
Debt
In October 2009, the FASB amended the general accounting principles for Debt as it relates to
the accounting for own-share lending arrangements entered into in contemplation of a convertible
debt issuance or other financing. This amendment provides accounting and disclosure guidance for
own-share lending arrangements issued in contemplation of convertible debt issuance. The amendment
is effective for fiscal years and interim periods beginning after December 15, 2009. The adoption
of this amendment is not expected to have an impact on the consolidated financial statements.
Equity
In January 2010, the FASB amended the general accounting principles for Equity as it relates
to distributions to shareholders with components of stock and cash. This amendment clarifies that
the stock portion of a distribution to shareholders, which allows them to elect to receive cash or
stock with a limitation on the total amount of cash that shareholders can receive, is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
The amendment is effective for fiscal years and interim periods beginning after December 15, 2009.
The adoption of this amendment is not expected to have an impact on the consolidated financial
statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by Item 7A is contained in Item 7 under the caption Managements
Discussion and Analysis of Financial Condition and Results of OperationsMarket Risk
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
81
REINSURANCE
GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Assets |
|
|
|
|
|
|
|
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
Available-for-sale at fair value (amortized cost of $11,616,957 and
$9,382,848 at December 31, 2009 and 2008, respectively) |
|
$ |
11,763,358 |
|
|
$ |
8,531,804 |
|
Mortgage loans on real estate |
|
|
791,668 |
|
|
|
775,050 |
|
Policy loans |
|
|
1,136,564 |
|
|
|
1,096,713 |
|
Funds withheld at interest |
|
|
4,895,356 |
|
|
|
4,520,398 |
|
Short-term investments |
|
|
121,060 |
|
|
|
58,123 |
|
Other invested assets |
|
|
516,086 |
|
|
|
628,649 |
|
|
|
|
|
|
|
|
Total investments |
|
|
19,224,092 |
|
|
|
15,610,737 |
|
Cash and cash equivalents |
|
|
512,027 |
|
|
|
875,403 |
|
Accrued investment income |
|
|
107,447 |
|
|
|
87,424 |
|
Premiums receivable and other reinsurance balances |
|
|
850,096 |
|
|
|
640,235 |
|
Reinsurance ceded receivables |
|
|
716,480 |
|
|
|
735,155 |
|
Deferred policy acquisition costs |
|
|
3,698,972 |
|
|
|
3,610,334 |
|
Other assets |
|
|
140,387 |
|
|
|
99,530 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
25,249,501 |
|
|
$ |
21,658,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
7,748,480 |
|
|
$ |
6,431,530 |
|
Interest-sensitive contract liabilities |
|
|
7,666,002 |
|
|
|
7,690,942 |
|
Other policy claims and benefits |
|
|
2,229,083 |
|
|
|
1,923,018 |
|
Other reinsurance balances |
|
|
106,706 |
|
|
|
173,645 |
|
Deferred income taxes |
|
|
613,222 |
|
|
|
310,360 |
|
Other liabilities |
|
|
792,775 |
|
|
|
585,199 |
|
Long-term debt |
|
|
1,216,052 |
|
|
|
918,246 |
|
Collateral finance facility |
|
|
850,037 |
|
|
|
850,035 |
|
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company |
|
|
159,217 |
|
|
|
159,035 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
21,381,574 |
|
|
|
19,042,010 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities (See Note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 140,000,000 shares authorized;
shares issued: 73,363,523 at December 31, 2009 and 73,363,398 at December 31, 2008) |
|
|
734 |
|
|
|
734 |
|
Warrants |
|
|
66,912 |
|
|
|
66,914 |
|
Additional paid-in-capital |
|
|
1,463,101 |
|
|
|
1,450,041 |
|
Retained earnings |
|
|
2,055,549 |
|
|
|
1,682,087 |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Accumulated currency translation adjustment, net of income taxes |
|
|
210,878 |
|
|
|
19,794 |
|
Unrealized appreciation (depreciation) of securities, net of income taxes |
|
|
104,457 |
|
|
|
(553,407 |
) |
Pension and postretirement benefits, net of income taxes |
|
|
(16,126 |
) |
|
|
(14,658 |
) |
|
|
|
|
|
|
|
Total stockholders equity before treasury stock |
|
|
3,885,505 |
|
|
|
2,651,505 |
|
Less treasury shares held of 373,861 and 740,195 at cost at
December 31, 2009 and 2008, respectively |
|
|
(17,578 |
) |
|
|
(34,697 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
3,867,927 |
|
|
|
2,616,808 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
25,249,501 |
|
|
$ |
21,658,818 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
82
REINSURANCE
GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands, except per share data) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
5,725,161 |
|
|
$ |
5,349,301 |
|
|
$ |
4,909,026 |
|
Investment income, net of related expenses |
|
|
1,122,462 |
|
|
|
871,276 |
|
|
|
907,904 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(128,834 |
) |
|
|
(113,313 |
) |
|
|
(7,461 |
) |
Other-than-temporary impairments on fixed maturity securities
transferred to accumulated other comprehensive income |
|
|
16,045 |
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
146,937 |
|
|
|
(533,892 |
) |
|
|
(171,255 |
) |
|
|
|
|
|
|
|
|
|
|
Total investment related gains (losses), net |
|
|
34,148 |
|
|
|
(647,205 |
) |
|
|
(178,716 |
) |
Other revenues |
|
|
185,051 |
|
|
|
107,831 |
|
|
|
80,147 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
7,066,822 |
|
|
|
5,681,203 |
|
|
|
5,718,361 |
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
4,819,426 |
|
|
|
4,461,932 |
|
|
|
3,983,996 |
|
Interest credited |
|
|
323,738 |
|
|
|
233,179 |
|
|
|
246,066 |
|
Policy acquisition costs and other insurance expenses |
|
|
958,326 |
|
|
|
357,899 |
|
|
|
647,832 |
|
Other operating expenses |
|
|
294,779 |
|
|
|
242,917 |
|
|
|
236,612 |
|
Interest expense |
|
|
69,940 |
|
|
|
76,161 |
|
|
|
76,906 |
|
Collateral finance facility expense |
|
|
8,268 |
|
|
|
28,723 |
|
|
|
52,031 |
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
6,474,477 |
|
|
|
5,400,811 |
|
|
|
5,243,443 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
592,345 |
|
|
|
280,392 |
|
|
|
474,918 |
|
Provision for income taxes |
|
|
185,259 |
|
|
|
92,577 |
|
|
|
166,645 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
407,086 |
|
|
|
187,815 |
|
|
|
308,273 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued accident and health
operations, net of income taxes |
|
|
|
|
|
|
(11,019 |
) |
|
|
(14,439 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
407,086 |
|
|
$ |
176,796 |
|
|
$ |
293,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
5.59 |
|
|
$ |
2.94 |
|
|
$ |
4.98 |
|
Discontinued operations |
|
|
|
|
|
|
(0.17 |
) |
|
|
(0.23 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5.59 |
|
|
$ |
2.77 |
|
|
$ |
4.75 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
5.55 |
|
|
$ |
2.88 |
|
|
$ |
4.80 |
|
Discontinued operations |
|
|
|
|
|
|
(0.17 |
) |
|
|
(0.23 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5.55 |
|
|
$ |
2.71 |
|
|
$ |
4.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
83
REINSURANCE
GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
|
|
|
|
Paid In |
|
|
Retained |
|
|
Comprehensive |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Stock |
|
|
Warrants |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Income |
|
|
Stock |
|
|
Total |
|
Balance, January 1, 2007 |
|
$ |
|
|
|
$ |
631 |
|
|
$ |
66,915 |
|
|
$ |
1,081,433 |
|
|
$ |
1,285,174 |
|
|
|
|
|
|
$ |
433,351 |
|
|
$ |
(74,689 |
) |
|
$ |
2,792,815 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
293,834 |
|
|
$ |
293,834 |
|
|
|
|
|
|
|
|
|
|
|
293,834 |
|
Other comprehensive income (loss), net of income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,920 |
|
|
|
|
|
|
|
|
|
|
|
112,920 |
|
Unrealized investment losses, net of related
offsets and reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,411 |
) |
|
|
|
|
|
|
|
|
|
|
(22,411 |
) |
Unrealized pension and postretirement benefits adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,946 |
|
|
|
|
|
|
|
|
|
|
|
2,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93,455 |
|
|
|
93,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
387,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,256 |
) |
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,502 |
) |
|
|
(4,502 |
) |
Reissuance of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,523 |
|
|
|
(16,630 |
) |
|
|
|
|
|
|
|
|
|
|
30,593 |
|
|
|
36,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
|
|
|
|
631 |
|
|
|
66,915 |
|
|
|
1,103,956 |
|
|
|
1,540,122 |
|
|
|
|
|
|
|
526,806 |
|
|
|
(48,598 |
) |
|
|
3,189,832 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,796 |
|
|
$ |
176,796 |
|
|
|
|
|
|
|
|
|
|
|
176,796 |
|
Other comprehensive loss, net of income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202,193 |
) |
|
|
|
|
|
|
|
|
|
|
(202,193 |
) |
Unrealized investment losses, net of related
offsets and reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(866,577 |
) |
|
|
|
|
|
|
|
|
|
|
(866,577 |
) |
Unrealized pension and postretirement benefits adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,307 |
) |
|
|
|
|
|
|
|
|
|
|
(6,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,075,077 |
) |
|
|
(1,075,077 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(898,281 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,329 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,329 |
) |
Issuance of common stock, net of expenses |
|
|
|
|
|
|
103 |
|
|
|
|
|
|
|
331,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331,873 |
|
Warrant conversion |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,104 |
) |
|
|
(3,104 |
) |
Reissuance of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,309 |
|
|
|
(11,502 |
) |
|
|
|
|
|
|
|
|
|
|
17,005 |
|
|
|
19,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
|
|
|
|
734 |
|
|
|
66,914 |
|
|
|
1,450,041 |
|
|
|
1,682,087 |
|
|
|
|
|
|
|
(548,271 |
) |
|
|
(34,697 |
) |
|
|
2,616,808 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407,086 |
|
|
$ |
407,086 |
|
|
|
|
|
|
|
|
|
|
|
407,086 |
|
Other comprehensive income (loss), net of income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
191,084 |
|
|
|
|
|
|
|
|
|
|
|
191,084 |
|
Unrealized investment gains, net of related
offsets and reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
672,735 |
|
|
|
|
|
|
|
|
|
|
|
672,735 |
|
Reclassification adjustment for other-than-temporary impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,429 |
) |
|
|
|
|
|
|
|
|
|
|
(10,429 |
) |
Unrealized pension and postretirement benefits adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,468 |
) |
|
|
|
|
|
|
|
|
|
|
(1,468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
851,922 |
|
|
|
851,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,259,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of reclassifying noncredit component of previously recognized
impairment losses on fixed maturities, available for sale, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,442 |
|
|
|
|
|
|
|
(4,442 |
) |
|
|
|
|
|
|
|
|
Dividends to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,212 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,212 |
) |
Warrant conversion |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,607 |
) |
|
|
(1,607 |
) |
Reissuance of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,057 |
|
|
|
(11,854 |
) |
|
|
|
|
|
|
|
|
|
|
18,726 |
|
|
|
19,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
|
|
|
$ |
734 |
|
|
$ |
66,912 |
|
|
$ |
1,463,101 |
|
|
$ |
2,055,549 |
|
|
|
|
|
|
$ |
299,209 |
|
|
$ |
(17,578 |
) |
|
$ |
3,867,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
84
REINSURANCE
GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
407,086 |
|
|
$ |
176,796 |
|
|
$ |
293,834 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
(16,652 |
) |
|
|
(12,398 |
) |
|
|
(8,336 |
) |
Premiums receivable and other reinsurance balances |
|
|
(72,803 |
) |
|
|
(83,402 |
) |
|
|
(351 |
) |
Deferred policy acquisition costs |
|
|
3,357 |
|
|
|
(648,525 |
) |
|
|
(280,693 |
) |
Reinsurance ceded balances |
|
|
18,676 |
|
|
|
(12,842 |
) |
|
|
(158,743 |
) |
Future policy benefits, other policy claims and
benefits, and
other reinsurance balances |
|
|
907,732 |
|
|
|
715,521 |
|
|
|
950,269 |
|
Deferred income taxes |
|
|
(81,195 |
) |
|
|
47,617 |
|
|
|
101,758 |
|
Other assets and other liabilities, net |
|
|
337,707 |
|
|
|
14,840 |
|
|
|
81,913 |
|
Amortization of net investment premiums, discounts and other |
|
|
(134,524 |
) |
|
|
(89,942 |
) |
|
|
(75,655 |
) |
Investment related (gains) losses, net |
|
|
(34,148 |
) |
|
|
647,205 |
|
|
|
178,716 |
|
Gain on repurchase of long-term debt |
|
|
(38,875 |
) |
|
|
|
|
|
|
|
|
Excess tax benefits from share-based payment arrangement |
|
|
(2,605 |
) |
|
|
(3,815 |
) |
|
|
(4,476 |
) |
Other, net |
|
|
70,480 |
|
|
|
(24,073 |
) |
|
|
21,078 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
1,364,236 |
|
|
|
726,982 |
|
|
|
1,099,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of fixed maturity securities available-for-sale |
|
|
2,952,773 |
|
|
|
1,771,503 |
|
|
|
2,038,767 |
|
Maturities of fixed maturity securities available-for-sale |
|
|
66,791 |
|
|
|
130,370 |
|
|
|
82,369 |
|
Purchases of fixed maturity securities available-for-sale |
|
|
(4,693,875 |
) |
|
|
(2,726,438 |
) |
|
|
(2,824,961 |
) |
Cash invested in mortgage loans on real estate |
|
|
(84,107 |
) |
|
|
(4,475 |
) |
|
|
(157,045 |
) |
Cash invested in policy loans |
|
|
(67,039 |
) |
|
|
(66,077 |
) |
|
|
(64,923 |
) |
Cash invested in funds withheld at interest |
|
|
(76,594 |
) |
|
|
(89,743 |
) |
|
|
(84,844 |
) |
Principal payments on mortgage loans on real estate |
|
|
50,278 |
|
|
|
60,586 |
|
|
|
61,513 |
|
Principal payments on policy loans |
|
|
27,188 |
|
|
|
28,802 |
|
|
|
20,878 |
|
Change in short-term investments and other invested assets |
|
|
(114,473 |
) |
|
|
(177,690 |
) |
|
|
(48,623 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,939,058 |
) |
|
|
(1,073,162 |
) |
|
|
(976,869 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to stockholders |
|
|
(26,212 |
) |
|
|
(23,329 |
) |
|
|
(22,256 |
) |
Proceeds from long-term debt issuance |
|
|
396,344 |
|
|
|
|
|
|
|
295,311 |
|
Repurchase of long-term debt |
|
|
(39,960 |
) |
|
|
|
|
|
|
|
|
Net repayments under credit agreements |
|
|
(22,539 |
) |
|
|
|
|
|
|
(78,871 |
) |
Proceeds from offering of common stock, net and warrant conversion |
|
|
|
|
|
|
331,878 |
|
|
|
|
|
Purchases of treasury stock |
|
|
(1,607 |
) |
|
|
(3,104 |
) |
|
|
(4,502 |
) |
Excess tax benefits from share-based payment arrangement |
|
|
2,605 |
|
|
|
3,815 |
|
|
|
4,476 |
|
Exercise of stock options, net |
|
|
6,304 |
|
|
|
6,601 |
|
|
|
13,058 |
|
Change in securities sold under agreements to repurchase and cash
collateral for derivative positions |
|
|
(175,776 |
) |
|
|
129,657 |
|
|
|
30,094 |
|
Excess deposits (payments) on universal life and
other investment type policies and contracts |
|
|
55,840 |
|
|
|
395,645 |
|
|
|
(120,719 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
194,999 |
|
|
|
841,163 |
|
|
|
116,591 |
|
Effect of exchange rate changes on cash |
|
|
16,447 |
|
|
|
(23,931 |
) |
|
|
4,887 |
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
(363,376 |
) |
|
|
471,052 |
|
|
|
243,923 |
|
Cash and cash equivalents, beginning of period |
|
|
875,403 |
|
|
|
404,351 |
|
|
|
160,428 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
512,027 |
|
|
$ |
875,403 |
|
|
$ |
404,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
72,719 |
|
|
$ |
99,691 |
|
|
$ |
114,320 |
|
Cash paid for income taxes, net of refunds |
|
$ |
25,573 |
|
|
$ |
23,159 |
|
|
$ |
24,236 |
|
See accompanying notes to consolidated financial statements.
85
Reinsurance
Group of America, Incorporated
Notes to consolidated financial statements
For the years ended December 31, 2009, 2008 and 2007
Note 1 ORGANIZATION
Reinsurance Group of America, Incorporated (RGA) is an insurance holding company that was formed
on December 31, 1992. The consolidated financial statements include the assets, liabilities, and
results of operations of RGA, RGA Reinsurance Company (RGA Reinsurance), Reinsurance Company of
Missouri, Incorporated (RCM), RGA Reinsurance Company (Barbados) Ltd. (RGA Barbados), RGA
Americas Reinsurance Company, Ltd. (RGA Americas), RGA Life Reinsurance Company of Canada (RGA
Canada), RGA Reinsurance Company of Australia, Limited (RGA Australia), RGA Reinsurance UK
Limited (RGA UK) and RGA Atlantic Reinsurance Company, Ltd. (RGA Atlantic) as well as other
subsidiaries, subject to an ownership position of greater than fifty percent (collectively, the
Company).
The Company is primarily engaged in life reinsurance. Reinsurance is an arrangement under which an
insurance company, the reinsurer, agrees to indemnify another insurance company, the ceding
company, for all or a portion of the insurance risks underwritten by the ceding company.
Reinsurance is designed to (i) reduce the net liability on individual risks, thereby enabling the
ceding company to increase the volume of business it can underwrite, as well as increase the
maximum risk it can underwrite on a single life or risk; (ii) stabilize operating results by
leveling fluctuations in the ceding companys loss experience; (iii) assist the ceding company to
meet applicable regulatory requirements; and (iv) enhance the ceding companys financial strength
and surplus position.
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation and Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of America. The preparation of
financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates include those used in determining deferred policy
acquisition costs, premiums receivable, future policy benefits, other policy claims and benefits,
including incurred but not reported claims, provision for adverse litigation, income taxes, and
valuation of investments and investment impairments. Actual results could differ materially from
the estimates and assumptions used by management.
For each of its reinsurance contracts, the Company must determine if the contract provides
indemnification against loss or liability relating to insurance risk, in accordance with applicable
accounting standards. The Company must review all contractual features, particularly those that may
limit the amount of insurance risk to which the Company is subject to or features that delay the
timely reimbursement of claims. If the Company determines that a contract does not expose it to a
reasonable possibility of a significant loss from insurance risk, the Company records the contract
on a deposit method of accounting with the net amount payable/receivable reflected in other
reinsurance assets or liabilities on the consolidated balance sheets. Fees earned on the contracts
are reflected as other revenues, as opposed to premiums, on the consolidated statements of income.
The accompanying consolidated financial statements include the accounts of RGA and its
subsidiaries, both direct and indirect, subject to an ownership position greater than fifty
percent, and any variable interest entities where the Company is the primary beneficiary. Entities
in which the Company has an ownership position greater than twenty percent, but less than or equal
to fifty percent are reported under the equity method of accounting. The Company evaluates variable
interest entities in accordance with the general accounting principles for Consolidation.
Intercompany balances and transactions have been eliminated.
The Company has determined that there were no subsequent events, other than as disclosed in Note 22
Subsequent Event, that would require disclosure or adjustments to the accompanying consolidated
financial statements through February 26, 2010, the date the financial statements were issued.
86
Investments
Fixed Maturity Securities
Fixed maturity securities available-for-sale are reported at fair value and are so classified based
upon the possibility that such securities could be sold prior to maturity if that action enables
the Company to execute its investment philosophy and appropriately match investment results to
operating and liquidity needs.
Unrealized gains and losses on fixed maturity securities classified as available-for-sale, less
applicable deferred income taxes as well as related adjustments to deferred acquisition costs, if
applicable, are reflected as a direct charge or credit to accumulated other comprehensive income
(AOCI) in stockholders equity on the consolidated balance sheets.
Mortgage Loans on Real Estate
Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized
premium or discount and valuation allowances. A mortgage loan is considered to be impaired when,
based on the current information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the mortgage agreement. Valuation
allowances on mortgage loans are established based upon losses expected by management to be
realized in connection with future dispositions or settlement of mortgage loans, including
foreclosures. The Company establishes valuation allowances for estimated impairments as of the
balance sheet date. Such valuation allowances are based on the excess carrying value of the loan
over the present value of expected future cash flows discounted at the loans original effective
interest rate, the value of the loans collateral if the loan is in the process of foreclosure or
otherwise collateral dependent, or the loans market value if the loan is being sold. Any
subsequent adjustments to the valuation allowances will be treated as investment gains (losses),
net. The Company will continue to accrue interest on loans until it is probable the Company will
not receive interest or the loan is 90 days past due. Any interest accrued or received on the net
carrying amount of the impaired loan will be included in investment income or applied to the
principal of the loan.
Policy Loans
Policy loans are reported at the unpaid principal balance. Interest income on such loans is
recorded as earned using the contractually agreed upon interest rate.
Funds Withheld at Interest
Funds withheld at interest represent amounts contractually withheld by ceding companies in
accordance with reinsurance agreements. For agreements written on a modified coinsurance basis and
agreements written on a coinsurance funds withheld basis, assets equal to the net statutory
reserves are withheld and legally owned by the ceding company. Interest accrues to these assets at
rates defined by the treaty terms.
For reinsurance transactions executed through December 31, 1994, assets and liabilities related to
treaties written on a modified coinsurance basis with funds withheld are reported on a gross basis.
For modified coinsurance reinsurance transactions with funds withheld executed on or after December
31, 1994, assets and liabilities are reported on a net or gross basis, depending on the specific
details within each treaty. Reinsurance agreements reported on a net basis, where a legal right of
offset exists, are generally included in other reinsurance balances on the consolidated balance
sheets.
Short-term Investments
Short-term investments represent investments with original maturities of greater than three months
but less than twelve months and are stated at amortized cost, which approximates fair value.
Other Invested Assets
In addition to derivative contracts discussed below, other invested assets include equity
securities and preferred stocks, carried at fair value, and limited partnership interests and
structured loans, primarily carried at cost. Changes in fair value of equity securities and
preferred stocks are recorded through AOCI.
Other-than-Temporary Impairment
Impairment losses on equity securities are recognized in net income. The way in which impairment
losses on fixed maturity securities are recognized in the financial statements is dependent on the
facts and circumstances related to the specific security. If the Company intends to sell a security
or it is more likely than not that it would be required to sell a security before the recovery of
its amortized cost, less any recorded credit loss, it recognizes an other-than-temporary impairment
in net income for the difference between amortized cost and fair value. If the Company does not
expect to recover the amortized cost basis, it does not plan to sell the security and if it is not
more likely than not that it would be required to sell a security before the recovery of its
amortized cost,
87
less any recorded credit loss, the recognition of the other-than-temporary impairment is
bifurcated. The Company recognizes the credit loss portion in investment related gains (losses),
net and the non-credit loss portion in AOCI.
The cost of other invested assets is adjusted for impairments in value deemed to be
other-than-temporary in the period in which the determination is made. These impairments are
included within investment related gains (losses), net and the cost basis of the investment
securities is reduced accordingly. The Company does not change the revised cost basis for
subsequent recoveries in value. However, the Company will adjust the cost basis for any necessary
accretion or amortization.
The assessment of whether impairments have occurred is based on managements case-by-case
evaluation of the underlying reasons for the decline in fair value. See Note 4 Investments for
additional information regarding the Companys assessment of other-than-temporary impairments on
its securities.
Derivative Instruments
Overview
Derivatives are financial instruments whose values are derived from interest rates, foreign
currency exchange rates, or other financial indices. The Company utilizes a variety of derivative
instruments including swaps, forwards and futures, primarily to manage or hedge interest rate risk,
foreign currency risk and various other market risks associated with its business. The Company does
not invest in derivatives for speculative purposes. It is the Companys policy to enter into
derivative contracts primarily with highly rated parties. See Note 5 Derivative Instruments for
additional detail on the Companys derivative positions.
Accounting and Financial Statement Presentation of Derivatives
Derivatives are carried on the Companys consolidated balance sheets in other invested assets or as
liabilities within other liabilities, at fair value. Certain derivatives are subject to master
netting provisions and reported as a net asset or liability. On the date a derivative contract is
executed, the Company designates the derivative as (1) a fair value hedge, (2) a cash flow hedge,
(3) a foreign currency hedge, (4) a net investment hedge in a foreign operation or (5) held for
other risk management purposes, which primarily involve managing asset or liability risks
associated with the Companys reinsurance treaties which do not qualify for hedge accounting.
Under a fair value hedge, changes in the fair value of the hedging derivative, including amounts
measured as ineffectiveness, and changes in the fair value of the hedged item related to the
designated risk being hedged, are reported within investment related gains (losses), net. The fair
values of the hedging derivatives are exclusive of any accruals that are separately reported in the
consolidated statement of income within interest income or interest expense to match the location
of the hedged item.
Under a cash flow hedge, changes in the fair value of the hedging derivative measured as effective
are reported within AOCI, a separate component of stockholders equity, and the deferred gains or
losses on the derivative are reclassified into the consolidated statement of income when the
Companys earnings are affected by the variability in cash flows of the hedged item. Changes in the
fair value of the hedging instrument measured as ineffectiveness are reported within investment
related gains (losses), net. The fair values of the hedging derivatives are exclusive of any
accruals that are separately reported in the consolidated statement of income within interest
income or interest expense to match the location of the hedged item.
Changes in the fair value of derivatives that are designated and qualify as foreign currency hedges
are recorded in either current period earnings or AOCI, depending on whether the hedged transaction
is a fair value hedge or a cash flow hedge, respectively. Any hedge ineffectiveness is recorded
immediately in current period earnings as investment related gains (losses), net. Periodic
derivative net coupon settlements are recorded in the line item of the consolidated statements of
income in which the cash flows of the hedged item are recorded.
In a hedge of a net investment in a foreign operation, changes in the fair value of the hedging
derivative that are measured as effective are reported within AOCI consistent with the translation
adjustment for the hedged net investment in the foreign operation. Changes in the fair value of the
hedging instrument measured as ineffectiveness are reported within investment related gains
(losses), net.
Changes in
the fair value of free-standing derivative instruments,
which do not receive accounting hedge treatment, are reflected in investment related gains (losses), net.
Hedge Documentation and Hedge Effectiveness
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally
documents its risk management objective and strategy for undertaking the hedging transaction, as
well as its designation of the hedge as either
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(i) a fair value hedge; (ii) a cash flow hedge; (iii) a foreign currency hedge; or (iv) a hedge of
a net investment in a foreign operation. In this documentation, the Company sets forth how the
hedging instrument is expected to hedge the designated risks related to the hedged item and sets
forth the method that will be used to retrospectively and prospectively assess the hedging
instruments effectiveness and the method which will be used to measure ineffectiveness. A
derivative designated as a hedging instrument must be assessed as being highly effective in
offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at
inception and periodically throughout the life of the designated hedging relationship. Assessments
and measurement of hedge effectiveness are also subject to interpretation and estimation and
different interpretations or estimates may have a material effect on the amount reported in net
income.
The accounting for derivatives is complex and interpretations of the primary accounting standards
continue to evolve in practice. Judgment is applied in determining the availability and application
of hedge accounting designations and the appropriate accounting treatment under these accounting
standards. If it was determined that hedge accounting designations were not appropriately applied,
reported net income could be materially affected. Differences in judgment as to the availability
and application of hedge accounting designations and the appropriate accounting treatment may
result in a differing impact on the consolidated financial statements of the Company from that
previously reported.
Embedded Derivatives
The Company reinsures certain annuity products that contain terms that are deemed to be embedded
derivatives, primarily equity-indexed annuities and variable annuities with guaranteed minimum
benefits. The Company assesses each identified embedded derivative to determine whether it is
required to be bifurcated under the general accounting principles for Derivatives and Hedging. If
the instrument would not be reported for in its entirety at fair value and it is determined that
the terms of the embedded derivative are not clearly and closely related to the economic
characteristics of the host contract, and that a separate instrument with the same terms would
qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract
and accounted for separately. Such embedded derivatives are carried on the consolidated balance
sheets at fair value with the host contract. Changes in the fair value of embedded derivatives
associated with equity-indexed annuities are reflected in interest credited on the consolidated
statements of income and changes in the fair value of embedded derivatives associated with variable
annuity guaranteed minimum benefits are reflected in investment related gains (losses), net on the
consolidated statements of income. The Company has implemented a hedging strategy to mitigate the
volatility associated with its reinsurance of variable annuity guaranteed minimum benefits. The
hedging strategy is designed such that changes in the fair value of the hedge contracts, primarily
future and swap contracts, move in the opposite direction of changes in the fair value of the
embedded derivatives, except for those changes associated with market implied volatility. While the
Company actively manages its hedging program, it does not hedge market implied volatility, and the
hedges that are in place may not be totally effective in offsetting the embedded derivative changes
due to the many variables that must be managed.
Additionally, reinsurance treaties written on a modified coinsurance or funds withheld basis are
subject to the general accounting principles for Derivatives and Hedging related to embedded
derivatives.
The majority of the Companys funds withheld at interest balances are associated with its
reinsurance of annuity contracts, the majority of which were subject to the general accounting
principles for Derivatives and Hedging related to embedded derivatives. Management believes the
embedded derivative feature in each of these reinsurance treaties is similar to a total return swap
on the assets held by the ceding companies. The valuation of these embedded derivatives is
sensitive to the credit spread environment. The change in the fair value of these
embedded derivatives increased revenues in 2009 by $78.4 million and reduced revenues in 2008 by
$427.8 million. These changes in fair values of the embedded derivatives are net of a $301.7
million decrease in revenues and a $376.3 million increase in revenues for the years ended December
31, 2009 and 2008, respectively, associated with the Companys own credit risk. The change in fair
value, which is a non-cash item, also affects the amortization of deferred acquisition costs since
the Company is required to include it in its expectation of gross profits. The fair value of the
embedded derivatives is included in the funds withheld at interest line item on the consolidated
balance sheets. The change in the fair value of the embedded derivatives is recorded in investment
related gains (losses), net on the consolidated income statements.
In addition to its reinsured annuity contracts, the Company has entered into various financial
reinsurance treaties on a funds withheld and modified coinsurance basis. These treaties do not
transfer significant insurance risk and are recorded on a deposit method of accounting with the
Company earning a net fee. As a result of the experience refund provisions contained in these
treaties, the value of the embedded derivatives in these contracts is currently considered
immaterial. The Company monitors the performance of these treaties on a quarterly basis.
Significant adverse performance or losses on these treaties may result in a loss associated with
the embedded derivative.
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Fair Value Measurements
General accounting principles for Fair Value Measurements and Disclosures defines fair value,
establishes a framework for measuring fair value, establishes a fair value hierarchy based on the
inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
In compliance with these principles, the Company has categorized its financial instruments, based
on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair
value hierarchy gives the highest priority to quoted prices in active markets for identical assets
or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
If the inputs used to measure fair value fall within different levels of the hierarchy, the
category level is based on the lowest priority level input that is significant to the fair value
measurement of the instrument.
In accordance with the general accounting principles for Fair Value Measurements and Disclosures,
assets and liabilities recorded at fair value on the consolidated balance sheets are categorized as
follows:
|
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Level 1
|
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Unadjusted quoted prices in active markets for identical assets or liabilities. |
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Level 2
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Quoted prices in markets that are not active or inputs that are observable
either directly or indirectly. Level 2 inputs include quoted prices for similar assets
or liabilities other than quoted prices in Level 1; quoted prices in markets that are
not active; or other inputs that are observable or can be derived principally from or
corroborated by observable market data for substantially the full term of the assets or
liabilities. |
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|
Level 3
|
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Unobservable inputs that are supported by little or no market activity and
are significant to the fair value of the assets or liabilities. Unobservable inputs
reflect the reporting entitys own assumptions about the assumptions that market
participants would use in pricing the asset or liability. Level 3 assets and
liabilities include financial instruments whose value is determined using pricing
models, discounted cash flow methodologies, or similar techniques, as well as
instruments for which the determination of fair value requires significant management
judgment or estimation. |
See Note 6 Fair Value of Financial Instruments for further details on the Companys assets and
liabilities recorded at fair value.
Cash and Cash Equivalents
The Company considers all investments purchased with an original maturity of three months or less
to be cash equivalents.
Additional Information Regarding Statements of Cash Flows
Cash and cash equivalents include cash on deposit and highly liquid debt instruments purchased with
an original maturity of three months or less. The consolidated statements of cash flows includes
the results of discontinued operations in net cash from operations for all years presented, as the
effect of the discontinued operations on cash flows is not considered material.
Premiums Receivable
Premiums are accrued when due and in accordance with information received from the ceding company.
When a ceding company fails to report information on a timely basis, the Company records accruals
based on the terms of the reinsurance treaty as well as historical experience. Other management
estimates include adjustments for lapsed premiums given historical experience, the financial health
of specific ceding companies, collateral value and the legal right of offset on related amounts
(i.e. allowances and claims) owed to the ceding company. Under the legal right of offset provisions
in its reinsurance treaties, the Company can withhold payments for allowances and claims for unpaid
premiums. Based on its review of these factors and historical experience, the Company did not
believe a provision for doubtful accounts was necessary as of December 31, 2009 or 2008.
Deferred Policy Acquisition Costs
Costs of acquiring new business, which vary with and are primarily related to the production of new
business, have been deferred to the extent that such costs are deemed recoverable from future
premiums or gross profits. Such costs include commissions and allowances as well as certain costs
of policy issuance and underwriting. The Company performs periodic tests to establish that Deferred
Policy Acquisition Costs (DAC) remain recoverable at all times, including at issue, and if
financial performance significantly deteriorates to the point where a premium deficiency exists, a
cumulative charge to current operations will be recorded. As a result of recoverability testing for
new business issues, a charge of approximately $7.7 million to current operations was recorded in
the Asset Intensive sub-segment in 2009 with projected revenue deemed insufficient to cover future
benefits and expenses.
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Deferred costs related to traditional life insurance contracts, substantially all of which relate
to long-duration contracts, are amortized over the premium-paying period of the related policies in
proportion to the ratio of individual period premium revenues to total anticipated premium revenues
over the life of the policy. Such anticipated premium revenues are estimated using the same
assumptions used for computing liabilities for future policy benefits.
Deferred costs related to interest-sensitive life and investment-type policies are amortized over
the lives of the policies, in relation to the present value of estimated gross profits from
mortality, investment income less interest credited, and expense margins.
Other Reinsurance Balances
The Company assumes and retrocedes financial reinsurance contracts that represent low mortality
risk reinsurance treaties. These contracts are reported as deposits and are included in other
reinsurance assets/liabilities. The amount of revenue reported in other revenues on these contracts
represents fees and the cost of insurance under the terms of the reinsurance agreement. Balances
resulting from the assumption and/or subsequent transfer of benefits and obligations resulting from
cash flows related to variable annuities have also been classified as other reinsurance balance
assets and/or liabilities.
Goodwill and Value of Business Acquired
Goodwill and certain intangibles are not amortized into results of operations, but instead are
reviewed at least annually for impairment and written down and charged to results of operations
only in the periods in which the recorded value of goodwill and certain intangibles is more than
its fair value. From 2007 through 2009, there were no changes to goodwill as a result of
acquisitions or disposals. Goodwill as of December 31, 2009 and 2008 totaled $7.0 million including
accumulated amortization of $1.0 million, and was related to the purchase by the Companys U.S.
operations of RGA Financial Group L.L.C. in 2000. The value of business acquired is amortized in
proportion to the ratio of annual premium revenues to total anticipated premium revenues or in
relation to the present value of estimated profits. Anticipated premium revenues have been
estimated using assumptions consistent with those used in estimating reserves for future policy
benefits. The carrying value is reviewed at least annually for indicators of impairment in value.
The value of business acquired was approximately $1.3 million and $1.7 million, including
accumulated amortization of $12.1 million and $11.7 million, as of December 31, 2009 and 2008,
respectively. The value of business acquired amortization expense for the years ended December 31,
2009, 2008 and 2007 was $0.4 million, $0.4 million, and $0.6 million, respectively. These amortized
balances are included in other assets on the consolidated balance sheets. Amortization of the value
of business acquired is estimated to be $0.3 million, $0.2 million, $0.2 million, $0.1 million and
$0.1 million during 2010, 2011, 2012, 2013 and 2014, respectively.
Other Assets
In addition to the goodwill and value of business acquired previously discussed, other assets
primarily includes separate accounts, unamortized debt issuance costs, capitalized software, and
other capitalized assets. Capitalized software is stated at cost, less accumulated amortization.
Purchased software costs, as well as internal and external costs incurred to develop internal-use
computer software during the application development stage, are capitalized. As of December 31,
2009 and 2008, the Company had unamortized computer software costs of approximately $13.1 million
and $13.3 million, respectively. During 2009, 2008 and 2007, the Company amortized computer
software costs of $3.5 million, $3.4 million, and $4.4 million, respectively. Amortization of
software costs is recorded on a straight-line basis over periods ranging from three to ten years.
Carrying values are reviewed periodically for indicators of impairment in value.
Future Policy Benefits and Interest-Sensitive Contract Liabilities
Liabilities for future benefits on life policies are established in an amount adequate to meet the
estimated future obligations on policies in force. Liabilities for future policy benefits under
long-term life insurance policies have been computed based upon expected investment yields,
mortality and withdrawal (lapse) rates, and other assumptions. These assumptions include a margin
for adverse deviation and vary with the characteristics of the plan of insurance, year of issue,
age of insured, and other appropriate factors. Interest rates range from 4.0% to 6.3%. The
mortality and withdrawal assumptions are based on the Companys experience as well as industry
experience and standards. Liabilities for future benefits on interest-sensitive life and
investment-type contract liabilities are carried at the accumulated contract holder values without
reduction for potential surrender or withdrawal charges.
The Company periodically reviews actual and anticipated experience compared to the assumptions used
to establish policy benefits. The Company establishes premium deficiency reserves if actual and
anticipated experience indicates that existing policy liabilities together with the present value
of future gross premiums will not be sufficient to cover the present value of future benefits,
settlement and maintenance costs and to recover unamortized acquisition costs. The premium
deficiency
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reserve is established by a charge to income, as well as a reduction in unamortized acquisition
costs and, to the extent there are no unamortized acquisition costs, an increase in future policy
benefits.
In establishing reserves for future policy benefits, the Company assigns policy liability
assumptions to particular time frames (eras) in such a manner as to be consistent with the
underlying assumptions and economic conditions at the time the risks are assumed. The Company
maintains a consistent approach to setting the provision for adverse deviation between eras.
The reserving process includes normal periodic reviews of assumptions used and adjustments of
reserves to incorporate the refinement of the assumptions. Any such adjustments relate only to
policies assumed in recent periods and the adjustments are reflected by a cumulative charge or
credit to current operations.
The Company establishes future policy benefits for guaranteed minimum death benefits (GMDB)
relating to the reinsurance of certain variable annuity contracts by estimating the expected value
of death benefits in excess of the projected account balance and recognizing the excess
proportionally over the accumulation period based on total expected assessments. The Company
regularly evaluates estimates used and adjusts the additional liability balance, with a related
charge or credit to claims and other policy benefits, if actual experience or other evidence
suggests that earlier assumptions should be revised. The assumptions used in estimating the GMDB
liabilities are consistent with those used for amortizing DAC, and are thus subject to the same
variability and risk. The Companys GMDB liabilities at December 31, 2009 were not material.
The Company reinsures asset-intensive products, including annuities and corporate-owned life
insurance. The investment portfolios for these products are segregated for management purposes
within the general account of RGA Reinsurance. The liabilities under asset-intensive reinsurance
contracts reinsured on a coinsurance basis are included in interest-sensitive contract liabilities
on the consolidated balance sheets. Investment-type contracts principally include traditional
individual fixed annuities in the accumulation phase, equity-indexed annuities, non-variable group
annuity contracts and individual variable annuity contracts. Interest-sensitive contract
liabilities are equal to (i) policy account values, which consist of an accumulation of gross
premium payments; (ii) credited interest less expenses, mortality charges, and withdrawals; and
(iii) fair value adjustments relating to business combinations. Additionally, certain annuity
contracts the Company reinsures contain terms, such as guaranteed minimum benefits and equity
participation options, which are deemed to be embedded derivatives and are accounted for based on
the general accounting principles for Derivatives and Hedging.
The Company establishes liabilities for guaranteed minimum living benefits relating to certain
variable annuity products as follows:
Guaranteed minimum income benefits (GMIB) provide the contract holder, after a specified period
of time determined at the time of issuance of the variable annuity contract, with a minimum level
of income (annuity) payments. Under the reinsurance treaty, the Company makes a payment to the
ceding company equal to the GMIB net amount-at-risk at the time of annuitization and thus these
contracts meet the net settlement criteria of the general accounting principles for Derivatives and
Hedging and the Company assumes no mortality risk. Accordingly, the GMIB is considered an embedded
derivative, which is measured at fair value separately from the host variable annuity product.
Guaranteed minimum withdrawal benefits (GMWB) guarantee the contract holder a return of their
purchase payment via partial withdrawals, even if the account value is reduced to zero, provided
that the contract holders cumulative withdrawals in a contract year do not exceed a certain limit.
The initial guaranteed withdrawal amount is equal to the initial benefit base as defined in the
contract (typically, the initial purchase payments plus applicable bonus amounts). The GMWB is also
an embedded derivative, which is measured at fair value separately from the host variable annuity
product.
Guaranteed minimum accumulation benefits (GMAB) provide the contract holder, after a specified
period of time determined at the time of issuance of the variable annuity contract, with a minimum
accumulation of their purchase payments even if the account value is reduced to zero. The initial
guaranteed accumulation amount is equal to the initial benefit base as defined in the contract
(typically, the initial purchase payments plus applicable bonus amounts). The GMAB is also an
embedded derivative, which is measured at fair value separately from the host variable annuity
product.
For GMIB, GMWB and GMAB, the initial benefit base is increased by additional purchase payments made
within a certain time period and decreased by benefits paid and/or withdrawal amounts. After a
specified period of time, the benefit base may also increase as a result of an optional reset as
defined in the contract.
The fair values of the GMIB, GMWB and GMAB liabilities are reflected in interest-sensitive contract
liabilities on the consolidated balance sheets and are calculated based on actuarial and capital
market assumptions related to the projected cash flows, including benefits and related contract
charges, over the lives of the contracts, incorporating expectations concerning policyholder
behavior, such as lapses, withdrawals and benefit selections. In measuring the fair value of GMIBs,
GMWBs and GMABs, the Company attributes a portion of the fees collected from the policyholder equal
to the present value of
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expected future guaranteed minimum income, withdrawal and accumulation benefits (at inception). The
changes in fair value are reported in investment related gains (losses), net. Any additional fees
represent excess fees and are reported in other revenues on the consolidated statements of
income. These variable annuity guaranteed living benefits may be more costly than expected in
volatile or declining markets, causing an increase in interest-sensitive contract liabilities,
negatively affecting net income.
The Company reinsures equity-indexed annuity contracts. These contracts allow the contract holder
to elect an interest rate return or an equity market component where interest credited is based on
the performance of common stock market indices, such as the S&P 500 Index®, the Dow Jones
Industrial Average, or the NASDAQ. The equity market option is considered an embedded derivative,
similar to a call option, which is reflected at fair value on the consolidated balance sheets in
interest-sensitive contract liabilities. The fair value of embedded derivatives is computed based
on a projection of future equity option costs using a budget methodology, discounted back to the
balance sheet date using current market indicators of volatility and interest rates. Changes in the
fair value of the embedded derivatives are included as a component of interest credited on the
consolidated statements of income.
The Company periodically reviews its estimates of actuarial liabilities for interest-sensitive
contract liabilities and compares them with its actual experience. Differences between actual
experience and the assumptions used in pricing these guarantees and benefits and in the
establishment of the related liabilities result in variances in profit and could result in losses.
The effects of changes in such estimated liabilities are included in the results of operations in
the period in which the changes occur.
Other Policy Claims and Benefits
Claims payable for incurred but not reported losses are determined using case-basis estimates and
lag studies of past experience. The time lag from the date of the claim or death to when the ceding
company reports the claim to the Company can vary significantly by ceding company and business
segment, but generally averages around 2.9 months. The Company updates its analysis of incurred but
not reported, including lag studies, on a quarterly basis and adjusts its claim liabilities
accordingly.
Other Liabilities
Other liabilities primarily includes investments in transit, separate accounts, employee benefits,
current federal income taxes payable, and payables related to repurchase agreements. The Company
utilizes sales of investment securities with agreements to repurchase the same securities for
purposes of short-term financing. The repurchase obligation is a component of other liabilities.
There were no securities subject to these agreements outstanding at December 31, 2009 or 2008.
Income Taxes
RGA and its eligible subsidiaries file a consolidated federal income tax return. The U.S.
consolidated tax return includes the operations of RGA, RGA Americas, RGA Reinsurance, RGA
Barbados, RGA Technology Partners, Inc., RCM, RGA Sigma Reinsurance SPC, Timberlake Financial
L.L.C. (Timberlake Financial), Timberlake Reinsurance Company II (Timberlake Re), Reinsurance
Partners, Inc., RGA Worldwide Reinsurance Company, Ltd. (RGA Worldwide), formerly Triad Re, Ltd.,
and Parkway Reinsurance Company (Parkway Re). The Companys Argentine, Australian, certain
Barbadian, Bermudian, Canadian, South African, Indian, Irish, Singaporean and United Kingdom
subsidiaries are taxed under applicable local statutes.
Income taxes represent the net amount of income taxes that the Company expects to pay to or receive
from various taxing jurisdictions in connection with its operations. The Company provides for
federal, state and foreign income taxes currently payable, as well as those deferred due to
temporary differences between the financial reporting and tax bases of assets and liabilities. The
Companys accounting for income taxes represents managements best estimate of various events and
transactions.
Deferred tax assets and liabilities resulting from temporary differences between the financial
reporting and tax bases of assets and liabilities are measured at the balance sheet date using
enacted tax rates expected to apply to taxable income in the years the temporary differences are
expected to reverse.
The realization of deferred tax assets depends upon the existence of sufficient taxable income
within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction.
The Company has significant deferred tax assets related to net operating and capital losses. Most
of the Companys exposure related to its deferred tax assets are within legal entities that file a
consolidated U.S. federal income tax return. The Company has projected its ability to utilize its
net operating losses and has determined that all of these losses are expected to be utilized prior
to their expiration. The Company
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has also done extensive analysis of its capital losses and has determined that sufficient
unrealized capital gains exist within its investment portfolios that should offset any capital loss
realized. It is also the Companys intention to hold all unrealized loss securities until maturity
or until their market value recovers.
The Company will establish a valuation allowance when management determines, based on available
information, that it is more likely than not that deferred income tax assets will not be realized.
Significant judgment is required in determining whether valuation allowances should be established
as well as the amount of such allowances. When making such determination, consideration is given
to, among other things, the following:
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future taxable income exclusive of reversing temporary differences and carryforwards; |
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future reversals of existing taxable temporary differences; |
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(iii) |
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taxable income in prior carryback years; and |
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(iv) |
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tax planning strategies. |
The Company may be required to change its provision for income taxes in certain circumstances.
Examples of such circumstances include when the ultimate deductibility of certain items is
challenged by taxing authorities, when it becomes clear that certain items will not be challenged,
or when estimates used in determining valuation allowances on deferred tax assets significantly
change or when receipt of new information indicates the need for adjustment in valuation
allowances. Additionally, future events such as changes in tax legislation could have an impact on
the provision for income tax and the effective tax rate. Any such changes could significantly
affect the amounts reported in the consolidated financial statements in the year these changes
occur.
The Company classifies interest recognized as interest expense and penalties recognized as a
component of income tax.
Collateral Finance Facility
Collateral finance facility represents notes issued to fund collateral requirements for statutory
reserves on specified term life insurance policies reinsured by RGA Reinsurance. The cost of the
facility is reflected in collateral finance facility expense. See Note 16 Collateral Finance
Facility for additional information.
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures of the Company
During December 2001, RGA Capital Trust I (the Trust), a wholly-owned subsidiary of RGA, sold
Preferred Income Equity Redeemable Securities (PIERS) Units. Each unit consists of a preferred
security (Preferred Securities) issued by the Trust with a detachable warrant to purchase 1.2508
shares of RGA common stock. The Trust sold 4.5 million PIERS units. The fair value of the Preferred
Securities on the date issued, $158.1 million, was recorded in liabilities on the consolidated
balance sheets under the caption Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures. The coupon rate of the Preferred
Securities is 5.75% on a face amount of $225.0 million.
Warrants
The fair value of the detachable warrants on the date the PIERS units were issued is recorded in
stockholders equity on the consolidated balance sheets under the caption Warrants. In the
aggregate as of December 31, 2009, 4.5 million warrants to purchase approximately 5.6 million
shares of Company common stock at a price per share of $39.98 were outstanding. If on any date
after December 18, 2004, the closing price of RGA common stock exceeds and has exceeded a price per
share equal to $47.97 for at least 20 trading days within the immediately preceding 30 consecutive
trading days, the Company may redeem the warrants in whole for cash, RGA common stock, or a
combination of cash and RGA common stock.
Foreign Currency Translation
The translation of the foreign currency into U.S. dollars is performed for balance sheet accounts
using current exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted-average exchange rate during each year. Gains or losses, net of
applicable deferred income taxes, resulting from such translation are included in accumulated
currency translation adjustments, in AOCI on the consolidated balance sheets until the underlying
subsidiary is sold or substantially liquidated. The Companys material functional currencies are
the Canadian dollar, the British pound, the Australian dollar, the Japanese yen, the Korean won,
euros and the South African rand.
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Retrocession Arrangements and Reinsurance Ceded Receivables
The Company generally reports retrocession activity on a gross basis. Amounts paid or deemed to
have been paid for reinsurance are reflected in reinsurance ceded receivables. The cost of
reinsurance related to long-duration contracts is recognized over the terms of the reinsured
policies on a basis consistent with the reporting of those policies.
In the normal course of business, the Company seeks to limit its exposure to loss on any single
insured and to recover a portion of benefits paid by ceding reinsurance to other insurance
enterprises or reinsurers under excess coverage and coinsurance contracts. Effective January 1,
2008, the Company increased the maximum amount of coverage that it retains per life in the U.S.
from $6.0 million to $8.0 million. This increase does not affect business written prior to January
1, 2008, unless the Company elects to recapture eligible business previously ceded at a lower
retention level. Claims in excess of this retention amount are retroceded to retrocessionaires;
however, the Company remains fully liable to the ceding company for the entire amount of risk it
assumes. The increase in the Companys U.S. retention limit from $6.0 million to $8.0 million
reduces the amount of premiums it pays to retrocessionaires, but increases the maximum effect a
single death claim can have on its results and therefore may result in additional volatility to its
results. In certain limited situations, due to the acquisition of in force blocks of business, the
Company has retained more than $8.0 million per individual policy. In total, there are 17 such
cases of over-retained policies, for amounts averaging $1.6 million over the Companys normal
retention limit. The largest amount in excess of the Companys retention on any one life is $6.3
million. The Company enters into agreements with other reinsurers to mitigate the risk related to
the over-retained policies. Additionally, due to some lower face amount reinsurance coverages
provided by the Company in addition to individual life, such as group life, disability and health,
under certain circumstances, the Company could potentially incur claims totaling more than $8.0
million per individual life in the U.S. For other countries, particularly those with higher risk
factors or smaller books of business, the Company systematically reduces its retention. The Company
has a number of retrocession arrangements whereby certain business in force is retroceded on an
automatic or facultative basis.
Retrocessions are arranged through the Companys retrocession pools for amounts in excess of the
Companys retention limit. As of December 31, 2009, all rated retrocession pool participants
followed by the A.M. Best Company were rated A- or better. For a majority of the
retrocessionaires that were not rated, security in the form of letters of credit or trust assets
has been given as additional security in favor of RGA Reinsurance. In addition, the Company
performs annual financial reviews of its retrocessionaires to evaluate financial stability and
performance. In addition to its third party retrocessionaires, various RGA reinsurance subsidiaries
retrocede amounts in excess of their retention to RGA Reinsurance, RGA Barbados, RGA Americas, RGA
Worldwide or RGA Atlantic.
The Company has never experienced a material default in connection with retrocession arrangements,
nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires;
however, no assurance can be given as to the future performance of such retrocessionaires or as to
recoverability of any such claims.
Recognition of Revenues and Related Expenses
Life and health premiums are recognized as revenue when due from the insured, and are reported net
of amounts retroceded. Benefits and expenses are reported net of amounts retroceded and are
associated with earned premiums so that profits are recognized over the life of the related
contract. This association is accomplished through the provision for future policy benefits and the
amortization of deferred policy acquisition costs. Other revenue includes items such as treaty
recapture fees, fees associated with financial reinsurance and policy changes on interest-sensitive
and investment-type products that the Company reinsures. Any fees that are collected in advance of
the period benefited are deferred and recognized over the period benefited.
For certain reinsurance transactions involving in force blocks of business, the ceding company pays
a premium equal to the initial required reserve (future policy benefit). In such transactions, for
income statement presentation, the Company nets the expense associated with the establishment of
the reserve on the consolidated balance sheet against the premiums from the transaction.
Revenues for interest-sensitive and investment-type products consist of investment income, policy
charges for the cost of insurance, policy administration, and surrenders that have been assessed
against policy account balances during the period. Interest-sensitive contract liabilities for
these products represent policy account balances before applicable surrender charges. Deferred
policy acquisition costs are recognized as expenses over the term of the policies. Policy benefits
and claims that are charged to expenses include claims incurred in the period in excess of related
policy account balances and interest credited to policy account balances.
95
The following table presents the weighted average interest-crediting rates and minimum guaranteed
rate ranges for contracts containing guaranteed rates by major class of interest-sensitive product
as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Current weighted-average |
|
Minimum guaranteed |
Interest sensitive contract liability |
|
interest crediting rate |
|
rate ranges |
Traditional individual fixed annuities |
|
|
3.37 |
% |
|
|
2.50 4.50 |
% |
Equity-indexed annuities |
|
|
4.46 |
% |
|
|
2.00 3.00 |
% |
Individual variable annuity contracts |
|
|
6.38 |
% |
|
|
5.06 6.15 |
% |
Guaranteed investment contracts |
|
|
3.85 |
% |
|
|
0.00 4.50 |
% |
UL type policies |
|
|
5.20 |
% |
|
|
3.00 6.00 |
% |
The spread profits on the Companys fixed annuity and interest-sensitive whole life, universal life
(UL) and fixed portion of variable universal life (VUL) insurance policies are at risk if
interest rates decline and remain relatively low for a period of time, which has generally been the
case in recent years. Should interest rates remain at current levels that are significantly lower
than those existing prior to the declines of recent years, the average earned rate of return on the
Companys annuity and UL investment portfolios will continue to decline. Declining portfolio yields
may cause the spreads between investment portfolio yields and the interest rate credited to
contract holders to deteriorate as the Companys ability to manage spreads can become limited by
minimum guaranteed rates on annuity and UL policies. Minimum guaranteed rates on non-variable
annuity and UL policies generally range from 2.0% to 6.0%, with an average guaranteed rate of
approximately 2.9%.
The Company manages interest rate spreads for near term income through a combination of crediting
rate actions and portfolio management. Certain annuity products contain crediting rates that reset
annually, of which $843.4 million of account balances are not subject to surrender charges, with
69.6% of these already at their minimum guaranteed rates as of December 31, 2009. As such, certain
management monitoring processes are designed to minimize the effect of sudden and/or sustained
changes in interest rates on fair value, cash flows, and net interest income. The Company manages
its exposure to interest rates principally by matching floating rate liabilities with corresponding
floating rate assets and by matching fixed rate liabilities with corresponding fixed rate assets.
On a limited basis, the Company may use equity options or other derivatives to minimize its
exposure to movements in equity markets that have a direct correlation with certain of its
reinsurance products.
Investment income is recognized as it accrues or is legally due. Realized gains and losses on sales
of investments are included in investment related gains (losses), net, as are credit impairments
that are other-than-temporary in nature. The cost of investments sold is determined based upon the
specific identification method.
Net Earnings Per Share
Basic earnings per share exclude any dilutive effects of any outstanding options, warrants or
units. Diluted earnings per share include the dilutive effects assuming outstanding stock options,
warrants or units were exercised.
New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Effective
July 1, 2009, FASB Accounting Standards Codification (Codification) has become the source of
authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the Securities and Exchange Commission for public companies. This statement is
effective for financial statements issued for interim and annual periods ending after September 15,
2009. The Company adopted Codification on September 30, 2009 and has updated all disclosures to
reference Codification herein.
Consolidation and Business Combinations
In January 2010, the FASB amended the general accounting principles for Consolidation as it relates
to decreases in ownership of a subsidiary. This amendment clarifies the scope of the decrease in
ownership provisions. This amendment also requires additional disclosures about the deconsolidation
of a subsidiary or derecognition of a group of assets. The amendment is effective for fiscal years
and interim periods beginning after December 15, 2009. The adoption of this amendment is not
expected to have an impact on the consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Consolidation as it relates to
the assessment of a variable interest entity. This amendment also requires additional disclosures
to provide transparent information regarding the involvement in a variable interest entity. The
amendment is effective for fiscal years and interim periods beginning after November 15, 2009. The
Company is currently evaluating the impact of this amendment on its consolidated financial
statements.
96
In December 2007, the FASB amended the general accounting principles for Business Combinations.
This amendment establishes principles and requirements for how an acquirer recognizes and measures
certain items in a business combination, as well as disclosures about the nature and financial
effects of a business combination. The FASB also amended the general accounting principles for
Consolidation as it relates to noncontrolling interests in consolidated financial statements. This
amendment establishes accounting and reporting standards surrounding noncontrolling interest, or
minority interests, which are the portions of equity in a subsidiary not attributable, directly or
indirectly, to a parent. The amendments are effective for fiscal years beginning on or after
December 15, 2008 and apply prospectively to business combinations. Presentation and disclosure
requirements related to noncontrolling interests must be retrospectively applied. The adoption of
these amendments did not have a material impact on the Companys consolidated financial statements.
Investments
In April 2009, the FASB amended the general accounting principles for Investments as it relates to
the recognition and presentation of other-than-temporary impairments. This amendment updates the
other-than-temporary impairment guidance for debt securities to make it more operational and to
improve the presentation and disclosure of other-than-temporary impairments (OTTI) on debt and
equity securities in the financial statements. The recognition provisions apply only to debt
securities classified as available-for-sale and held-to-maturity, while the presentation and
disclosure requirements apply to both debt and equity securities. An impaired debt security will be
considered other-than-temporarily impaired if the Company has the intent to sell or it more likely
than not will be required to sell prior to recovery of the amortized cost. If the holder of a debt
security does not expect recovery of the entire cost basis, even if there is no intention to sell
the security, an OTTI has occurred. This amendment also changes how an entity recognizes an OTTI
for a debt security by separating the loss between the amount representing the credit loss and the
amount relating to other factors, if the Company does not have the intent to sell or it more likely
than not will not be required to sell prior to recovery of the amortized cost less any current
period credit loss. Credit losses will be recognized in net income and losses relating to other
factors will be recognized in AOCI. If the Company has the intent to sell or it more likely than
not will be required to sell before its recovery of amortized cost less any current period credit
loss, the entire OTTI will be recognized in net income. This amendment is effective for interim and
annual reporting periods ending after June 15, 2009. The adoption of this amendment resulted in a
net after-tax increase to retained earnings and a decrease to accumulated other comprehensive
income of $4.4 million, as of April 1, 2009. The required disclosures are provided in Note 4
Investments.
In January 2009, the FASB amended the general accounting principles for Investments as it relates
to determining other-than-temporary impairments on purchased beneficial interests and beneficial
interests that continue to be held by a transferor in securitized financial assets. The primary
effect of this amendment was to remove the requirement that a holder attempt to determine the
underlying cash flows on an asset-backed security based on the assumptions that a market
participant would make in determining the current fair value of the instrument. Instead, the focus
has been placed on determining the estimated cash flows as determined by the holder for all sources
including its own comprehensive credit analysis. The provisions of this amendment were required to
be applied prospectively for interim periods and fiscal years ending after December 15, 2008. The
adoption of this amendment did not have a significant impact on how the Company values its
structured investment securities.
Transfers and Servicing
In June 2009, the FASB amended the general accounting principles for Transfers and Servicing as it
relates to the transfers of financial assets. This amendment also requires additional disclosures
to address concerns regarding the transparency of transfers of financial assets. The amendment is
effective for fiscal years and interim periods beginning after November 15, 2009. The Company is
currently evaluating the impact of this amendment on its consolidated financial statements.
In February 2008, the FASB amended the general accounting principles for Transfers and Servicing as
it relates to the accounting for transfers of financial assets and repurchase financing
transactions. This amendment provides guidance for evaluating whether to account for a transfer of
a financial asset and repurchase financing as a single transaction or as two separate transactions.
The amendment is effective prospectively for financial statements issued for fiscal years beginning
after November 15, 2008. The adoption of this amendment did not have a material impact on the
Companys consolidated financial statements.
Derivatives and Hedging
In March 2008, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to the disclosures about derivative instruments and hedging activities. This amendment
requires enhanced qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. The
97
amendment is effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company adopted this amendment in the first quarter of 2009.
The required disclosures are provided in Note 5 Derivative Instruments.
Fair Value Measurements and Disclosures
In January 2010, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to the disclosures about fair value measurements. This amendment requires
new disclosures about the transfers in and out of Level 1 and 2 measurements and also enhances
disclosures about the activity within the Level 3 measurements. It also clarifies the required
level of disaggregation and the disclosures regarding valuation techniques and inputs to fair value
measurements. The amendment is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the enhanced Level 3 disclosures. Those disclosures are effective for
interim and annual reporting periods beginning after December 15, 2010. The Company is currently
evaluating the impact of this amendment on its consolidated financial statements.
In September 2009, the FASB amended the general accounting principles for Fair Value Measurements
and Disclosures as it relates to the fair value measurement of investments in certain entities that
calculate net asset value per share. This amendment allows the fair value of certain investments to
be measured on the basis of the net asset value. It also requires disclosure, by major category
type, of the attributes of those investments, such as the nature of any restrictions on redemption,
any unfunded commitments, and the investment strategies of the investees. The amendment is
effective for interim and annual reporting periods ending after December 15, 2009. The adoption of
this amendment did not have a material impact on the Companys consolidated financial statements.
In August 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to measuring liabilities at fair value. This amendment provides guidance
for measuring liabilities at fair value when a quoted price in an active market for the identical
liability is not available. It also clarifies that the inclusion of a separate input, used in the
fair value measurement, relating to the existence of a restriction that prevents the transfer of a
liability is not necessary. The amendment is effective for interim and annual reporting beginning
after issuance. The adoption of this amendment did not have a material impact on the Companys
consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining fair value when the volume and level of activity for asset
or liability have significantly decreased and identifying transactions that are not orderly. This
amendment provides additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased in relation to normal market
activity for the asset or liability and clarifies that the use of multiple valuation techniques may
be appropriate. It also provides additional guidance on circumstances that may indicate a
transaction is not orderly. Further, it requires additional disclosures about fair value
measurements in annual and interim reporting periods. This amendment is effective prospectively for
interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment did
not have a material impact on the Companys consolidated financial statements. The required
disclosures are provided in Note 6 Fair Value of Financial Instruments.
In October 2008, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining the fair value of a financial asset when the market for
that asset is not active. This amendment clarifies the application of fair value in a market that
is not active and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not active. The amendment
was effective upon issuance on October 10, 2008, including prior periods for which financial
statements had not been issued. The Company did not consider it necessary to change any valuation
techniques as a result of the amendment. The Company also adopted an amendment that delayed the
effective date of fair value measurement for certain nonfinancial assets and liabilities that are
recorded at fair value on a nonrecurring basis. The effective date was delayed until January 1,
2009 and impacts balance sheet items including nonfinancial assets and liabilities in a business
combination and the impairment testing of goodwill and long-lived assets. The adoption of this
amendment did not have a material impact on the Companys consolidated financial statements.
In September 2006, the FASB amended the general accounting principles for Fair Value Measurements
and Disclosures as it relates to defining fair value, establishing a framework for measuring fair
value, establishing a fair value hierarchy based on the inputs used to measure fair value and
enhanced disclosure requirements for fair value measurements. The Company adopted the amendment
effective January 1, 2008. The Companys adoption of the amendment resulted in a pre-tax gain of
approximately $3.9 million, included in interest credited, related primarily to the decrease in the
fair value of embedded
98
derivative liabilities associated with equity-indexed annuity products primarily from the
incorporation of nonperformance risk, also referred to as the Companys own credit risk, into the
fair value calculation.
Compensation
In December 2008, the FASB amended the general accounting principles for Compensation as it relates
to employers disclosures about postretirement benefit plan assets. This amendment provides guidance
for disclosure of the types of assets and associated risks in retirement plans. The new disclosures
are designed to provide additional insight into the major categories of plan assets, the inputs and
valuation techniques used to measure the fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in plan assets for the period,
significant concentrations of risk within plan assets and how investment decisions are made,
including factors necessary to understanding investment policies and strategies. The disclosures
about plan assets required by this amendment is effective for financial statements with fiscal
years ending after December 15, 2009. The Company has adopted this amendment. The required
disclosures are provided in Note 10 Employee Benefit Plans.
Debt
In October 2009, the FASB amended the general accounting principles for Debt as it relates to the
accounting for own-share lending arrangements entered into in contemplation of a convertible debt
issuance or other financing. This amendment provides accounting and disclosure guidance for
own-share lending arrangements issued in contemplation of convertible debt issuance. The amendment
is effective for fiscal years and interim periods beginning after December 15, 2009. The adoption
of this amendment is not expected to have an impact on the consolidated financial statements.
Equity
In January 2010, the FASB amended the general accounting principles for Equity as it relates to
distributions to shareholders with components of stock and cash. This amendment clarifies that the
stock portion of a distribution to shareholders, which allows them to elect to receive cash or
stock with a limitation on the total amount of cash that shareholders can receive, is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
The amendment is effective for fiscal years and interim periods beginning after December 15, 2009.
The adoption of this amendment is not expected to have an impact on the consolidated financial
statements.
Reclassification
The Company has reclassified the presentation of certain prior period information to conform to the
2009 presentation.
Note 3 STOCK TRANSACTIONS
On September 5, 2008, the shareholders of RGA approved a recapitalization and distribution
agreement by and between RGA and MetLife, Inc. (MetLife). In the recapitalization, each issued
and outstanding share of RGA common stock was reclassified as RGA class A common stock. The
recapitalization was completed on September 12, 2008. Immediately after the recapitalization,
MetLife and its subsidiaries, which held 32,243,539 shares of RGAs outstanding stock, exchanged
29,243,539 shares of RGA class A common stock for 29,243,539 shares of RGA class B common stock,
which featured enhanced voting rights. In turn, MetLife exchanged all of its RGA class B common
stock to MetLife shareholders for shares of MetLife common stock.
On November 4, 2008, RGA completed a public offering of 10,235,000 shares of RGA class A common
stock, $0.01 par value per share. The price per share was $33.89, and the aggregate value of the
transaction was approximately $346.9 million. The Company expects to use the net proceeds from the
offering to pursue reinsurance opportunities and for general corporate purposes.
On November 25, 2008, the shareholders of RGA approved a proposal to convert RGA class B
common stock into RGA class A common stock on a one-for-one basis, with such class A common stock
being automatically redesignated as common stock. In addition, the shareholders approved a
proposal to amend and restate RGAs articles of incorporation to eliminate provisions relating to
Class B common stock and RGAs dual-class common stock structure. As a result of the approval of
the proposals, all holders of the new single class of common stock have identical voting rights in
all respects.
In January 2009, the Company issued 13,096 shares of common stock from treasury and repurchased
from recipients 2,280 of its common shares at $42.82 per share in settlement of income tax
withholding requirements incurred by recipients of an equity incentive award. In February 2009,
the Company issued 164,630 shares of common stock from treasury and repurchased from recipients
42,976 of its common shares at $35.11 per share in settlement of income tax withholding
requirements incurred by recipients of an equity incentive award. Additionally, in February 2009,
non-employee directors were granted a total of 7,600 shares of common stock.
99
On January 23, 2002, the board of directors approved a stock repurchase program authorizing the
Company to purchase up to $50 million of its shares of stock, as conditions warrant. The boards
action allows management, at its discretion, to purchase shares on the open market. The Company
has approximately $43.4 million remaining under the approved program with no shares purchased since
2002. Purchased shares are held as treasury stock. The Company generally uses treasury shares to
support the future exercise of options or settlement of awards granted under its stock plans.
Note 4 INVESTMENTS
The Company had total cash and invested assets of $19.7 billion and $16.5 billion at December
31, 2009 and 2008, respectively, as illustrated below (dollars in thousands):
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
2008 |
Fixed maturity securities, available-for-sale |
|
$ |
11,763,358 |
|
|
$ |
8,531,804 |
|
Mortgage loans on real estate |
|
|
791,668 |
|
|
|
775,050 |
|
Policy loans |
|
|
1,136,564 |
|
|
|
1,096,713 |
|
Funds withheld at interest |
|
|
4,895,356 |
|
|
|
4,520,398 |
|
Short-term investments |
|
|
121,060 |
|
|
|
58,123 |
|
Other invested assets |
|
|
516,086 |
|
|
|
628,649 |
|
Cash and cash equivalents |
|
|
512,027 |
|
|
|
875,403 |
|
|
|
|
Total cash and invested assets |
|
$ |
19,736,119 |
|
|
$ |
16,486,140 |
|
|
|
|
All investments held by the Company are monitored for conformance with the qualitative and
quantitative limits prescribed by the applicable jurisdictions insurance laws and regulations. In
addition, the operating companies boards of directors periodically review their respective
investment portfolios. The Companys investment strategy is to maintain a predominantly
investment-grade, fixed maturity portfolio, to provide adequate liquidity for expected reinsurance
obligations, and to maximize total return through prudent asset management. The Companys
asset/liability duration matching differs between operating segments. Based on Canadian reserve
requirements, the Canadian liabilities are matched with long-duration Canadian assets. The
duration of the Canadian portfolio exceeds twenty years. The average duration for all the
Companys portfolios, when consolidated, ranges between eight and ten years.
Investment Income, Net of Related Expenses
Major categories of investment income, net of related expenses consist of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
Fixed maturity securities available-for-sale |
|
$ |
609,917 |
|
|
$ |
554,230 |
|
|
$ |
496,187 |
|
Mortgage loans on real estate |
|
|
46,652 |
|
|
|
49,324 |
|
|
|
49,961 |
|
Policy loans |
|
|
68,213 |
|
|
|
64,962 |
|
|
|
62,736 |
|
Funds withheld at interest |
|
|
382,351 |
|
|
|
175,228 |
|
|
|
276,741 |
|
Short-term investments |
|
|
4,692 |
|
|
|
4,343 |
|
|
|
9,573 |
|
Other invested assets |
|
|
28,777 |
|
|
|
38,218 |
|
|
|
25,533 |
|
|
|
|
Investment revenue |
|
|
1,140,602 |
|
|
|
886,305 |
|
|
|
920,731 |
|
Investment expense |
|
|
18,140 |
|
|
|
15,029 |
|
|
|
12,827 |
|
|
|
|
Investment income, net of
related expenses |
|
$ |
1,122,462 |
|
|
$ |
871,276 |
|
|
$ |
907,904 |
|
|
|
|
Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
Fixed maturities and equity securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment losses on fixed maturities |
|
$ |
(128,834 |
) |
|
$ |
(113,313 |
) |
|
$ |
(7,461 |
) |
Portion of loss recognized in accumulated other
comprehensive income (before taxes) |
|
|
16,045 |
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses on fixed
maturities recognized in earnings |
|
|
(112,789 |
) |
|
|
(113,313 |
) |
|
|
(7,461 |
) |
Impairment losses on equity securities |
|
|
(11,058 |
) |
|
|
(17,232 |
) |
|
|
(1,020 |
) |
Gain on investment activity |
|
|
113,872 |
|
|
|
32,381 |
|
|
|
23,570 |
|
Loss on investment activity |
|
|
(72,987 |
) |
|
|
(24,061 |
) |
|
|
(31,509 |
) |
Other impairment losses |
|
|
(8,471 |
) |
|
|
(526 |
) |
|
|
|
|
Foreign currency loss |
|
|
|
|
|
|
|
|
|
|
(10,492 |
) |
Derivatives and other, net |
|
|
125,581 |
|
|
|
(524,454 |
) |
|
|
(151,804 |
) |
|
|
|
Net gains (losses) |
|
$ |
34,148 |
|
|
$ |
(647,205 |
) |
|
$ |
(178,716 |
) |
|
|
|
100
The other-than-temporary impairments in 2008 and 2009 are due to the continued turmoil in the
U.S. and global financial markets which has resulted in bankruptcies, credit defaults,
consolidations and government interventions. The volatility in derivatives and other is primarily
due to changes in the fair value of embedded derivative liabilities associated with modified
coinsurance and funds withheld treaties and guaranteed minimum benefit riders.
In the fourth quarter of 2009, the Company wrote off its remaining interest in its direct insurance
operations in Argentina, recording a $3.0 million investment-related loss. This loss was in
addition to the Companys recognition of a $10.5 million foreign currency translation loss in 2007
related to the pending sale. Investment income and a portion of investment related gains and
losses are allocated to the segments based upon average assets and related capital levels deemed
appropriate to support the segment business volumes.
At December 31, 2009 and 2008 the Company owned non-income producing securities with amortized
costs of $29.2 million and $25.7 million, and estimated fair values of $29.3 million and $20.4
million, respectively. During 2009, 2008 and 2007 the Company sold fixed maturity securities and
equity securities with fair values of $687.8 million, $536.7 million, and $1,085.2 million, which
were below amortized cost, at losses of $73.0 million, $24.1 million and $31.5 million,
respectively. The Company generally does not engage in short-term buying and selling of
securities.
Other-Than-Temporary Impairments Fixed Maturity and Equity Securities
The Company has a process in place to identify fixed maturity and equity securities that could
potentially have credit impairments that are other-than-temporary. This process involves
monitoring market events that could impact issuers credit ratings, business climates, management
changes, litigation and government actions and other similar factors. This process also involves
monitoring late payments, pricing levels, downgrades by rating agencies, key financial ratios,
financial statements, revenue forecasts and cash flow projections as indicators of credit issues.
The Company reviews all securities to determine whether an other-than-temporary decline in value
exists and whether losses should be recognized. The Company considers relevant facts and
circumstances in evaluating whether a credit or interest rate-related impairment of a security is
other-than-temporary. Relevant facts and circumstances considered include: (1) the extent and
length of time the fair value has been below cost; (2) the reasons for the decline in fair value;
(3) the financial position and access to capital of the issuer, including the current and future
impact of any specific events; and (4) for fixed maturity securities, the Companys intent to sell
a security or whether it is more likely than not it will be required to sell the security before
the recovery of its amortized cost which, in some cases, may extend to maturity and for equity
securities, its ability and intent to hold the security for a period of time that allows for the
recovery in value. To the extent the Company determines that a security is deemed to be
other-than-temporarily impaired, an impairment loss is recognized.
On April 1, 2009, (Date of Adoption), the Company adopted the amended general accounting
principles for Investments as it relates to the recognition and presentation of
other-than-temporary impairments See Note 2 Summary of Significant Accounting Policies for
further discussion of the adoption. The amended recognition provisions apply only to fixed
maturity securities classified as available-for-sale and held-to-maturity, while the presentation
and disclosure requirements apply to both fixed maturity and equity securities.
For the nine-month period between the Date of Adoption and December 31, 2009, the Company
recognized $78.4 million of credit-related losses in asset-backed and U.S. corporate securities.
The Company estimates the amount of the credit loss component of a fixed maturity security
impairment as the difference between amortized cost and the present value of the expected cash
flows of the security. The present value is determined using the best estimate cash flows
discounted at the effective interest rate implicit to the security at the date of purchase or the
current yield to accrete an asset-backed or floating rate security. The techniques and assumptions
for establishing the best estimate cash flows vary depending on the type of security. The
asset-backed securities cash flow estimates are based on security-specific facts and circumstances
that may include collateral characteristics, expectations of delinquency and default rates, loss
severity and prepayment speeds and structural support, including subordination and guarantees. The
corporate fixed maturity security cash flow estimates are derived from scenario-based outcomes of
expected corporate restructurings or the disposition of assets using security specific facts and
circumstances including timing, security interests and loss severity.
In periods after an other-than-temporary impairment loss is recognized on a debt security, the
Company will report the impaired security as if it had been purchased on the date it was impaired
and will continue to estimate the present value of the estimated cash flows of the security.
Estimated cash flows exceeding the new amortized cost basis will be accreted as interest income.
The following table sets forth the amount of credit loss impairments on fixed maturity securities
held by the Company as of the dates indicated, for which a portion of the other-than-temporary
impairment loss was recognized in AOCI, and the corresponding changes in such amounts (dollars in
thousands):
101
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
December 31, 2009 |
|
Balance as of April 1, 2009 |
|
$ |
(17,132 |
) |
Credit losses for which an other-than-temporary impairment was not previously recognized |
|
|
(7,853 |
) |
Credit losses for which an other-than-temporary impairment was previously recognized |
|
|
(22,920 |
) |
|
|
|
|
Balance as of December 31, 2009 |
|
$ |
(47,905 |
) |
|
|
|
|
Fixed Maturities and Equity Securities Available-for-Sale
As mentioned above, the amended general accounting principles for Investments change how an entity
recognizes an other-than-temporary impairment for a fixed maturity security by separating the
other-than-temporary impairment loss between the amount representing the credit loss and the amount
relating to other factors, if the Company does not have the intent to sell or it more likely than
not will not be required to sell prior to recovery of the amortized cost less any current period
credit loss. Credit losses are recognized in net income and losses relating to other non-credit
factors are recognized in AOCI and included in unrealized losses in the 2009 table below. The
following tables provide information relating to investments in fixed maturity securities and
equity securities by sector as of December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
temporary |
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
% of |
|
impairments |
2009 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Total |
|
in AOCI |
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
3,689,797 |
|
|
$ |
180,635 |
|
|
$ |
147,384 |
|
|
$ |
3,723,048 |
|
|
|
31.7 |
% |
|
$ |
|
|
Canadian and Canadian provincial
governments |
|
|
1,984,475 |
|
|
|
394,498 |
|
|
|
25,746 |
|
|
|
2,353,227 |
|
|
|
20.0 |
|
|
|
|
|
Residential mortgage-backed securities |
|
|
1,494,021 |
|
|
|
32,538 |
|
|
|
70,015 |
|
|
|
1,456,544 |
|
|
|
12.4 |
|
|
|
(7,018 |
) |
Foreign corporate securities |
|
|
1,627,806 |
|
|
|
77,340 |
|
|
|
33,398 |
|
|
|
1,671,748 |
|
|
|
14.2 |
|
|
|
|
|
Asset-backed securities |
|
|
522,760 |
|
|
|
9,307 |
|
|
|
80,131 |
|
|
|
451,936 |
|
|
|
3.8 |
|
|
|
(2,194 |
) |
Commercial mortgage-backed securities |
|
|
1,177,621 |
|
|
|
20,670 |
|
|
|
169,427 |
|
|
|
1,028,864 |
|
|
|
8.7 |
|
|
|
(13,690 |
) |
U.S. government and agencies |
|
|
540,001 |
|
|
|
1,085 |
|
|
|
15,027 |
|
|
|
526,059 |
|
|
|
4.5 |
|
|
|
|
|
State and political subdivisions |
|
|
107,233 |
|
|
|
273 |
|
|
|
17,744 |
|
|
|
89,762 |
|
|
|
0.8 |
|
|
|
|
|
Other foreign government securities |
|
|
473,243 |
|
|
|
2,198 |
|
|
|
13,271 |
|
|
|
462,170 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
11,616,957 |
|
|
$ |
718,544 |
|
|
$ |
572,143 |
|
|
$ |
11,763,358 |
|
|
|
100.0 |
% |
|
$ |
(22,902 |
) |
|
|
|
Non-redeemable preferred stock |
|
$ |
123,648 |
|
|
$ |
1,878 |
|
|
$ |
12,328 |
|
|
$ |
113,198 |
|
|
|
66.0 |
% |
|
|
|
|
Other equity securities |
|
|
58,008 |
|
|
|
760 |
|
|
|
409 |
|
|
|
58,359 |
|
|
|
34.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
181,656 |
|
|
$ |
2,638 |
|
|
$ |
12,737 |
|
|
$ |
171,557 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
|
% of |
2008 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Total |
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
3,577,116 |
|
|
$ |
34,262 |
|
|
$ |
598,745 |
|
|
$ |
3,012,633 |
|
|
|
35.3 |
% |
Canadian and Canadian provincial
governments |
|
|
1,500,511 |
|
|
|
397,899 |
|
|
|
7,171 |
|
|
|
1,891,239 |
|
|
|
22.2 |
|
Residential mortgage-backed securities |
|
|
1,231,123 |
|
|
|
24,838 |
|
|
|
106,776 |
|
|
|
1,149,185 |
|
|
|
13.5 |
|
Foreign corporate securities |
|
|
1,112,018 |
|
|
|
14,335 |
|
|
|
152,920 |
|
|
|
973,433 |
|
|
|
11.4 |
|
Asset-backed securities |
|
|
484,577 |
|
|
|
2,098 |
|
|
|
147,297 |
|
|
|
339,378 |
|
|
|
4.0 |
|
Commercial mortgage-backed securities |
|
|
1,085,062 |
|
|
|
2,258 |
|
|
|
326,730 |
|
|
|
760,590 |
|
|
|
8.9 |
|
U.S. government and agencies |
|
|
7,555 |
|
|
|
876 |
|
|
|
|
|
|
|
8,431 |
|
|
|
0.1 |
|
State and political subdivisions |
|
|
46,537 |
|
|
|
|
|
|
|
7,883 |
|
|
|
38,654 |
|
|
|
0.4 |
|
Other foreign government securities |
|
|
338,349 |
|
|
|
20,062 |
|
|
|
150 |
|
|
|
358,261 |
|
|
|
4.2 |
|
|
|
|
Total fixed maturity securities |
|
$ |
9,382,848 |
|
|
$ |
496,628 |
|
|
$ |
1,347,672 |
|
|
$ |
8,531,804 |
|
|
|
100.0 |
% |
|
|
|
Non-redeemable preferred stock |
|
$ |
187,510 |
|
|
$ |
49 |
|
|
$ |
64,160 |
|
|
$ |
123,399 |
|
|
|
77.4 |
% |
Other equity securities |
|
|
40,582 |
|
|
|
|
|
|
|
4,607 |
|
|
|
35,975 |
|
|
|
22.6 |
|
|
|
|
Total equity securities |
|
$ |
228,092 |
|
|
$ |
49 |
|
|
$ |
68,767 |
|
|
$ |
159,374 |
|
|
|
100.0 |
% |
|
|
|
102
As of December 31, 2009, the Company held securities with a fair value of $448.3 million
issued by the Federal National Mortgage Corporation, $482.6 million that were issued by the United
States Treasury, $895.7 million that were issued by the Canadian province of Ontario and $679.9
million in one entity that were guaranteed by the Canadian province of Quebec, all of which
exceeded 10% of consolidated stockholders equity. As of December 31, 2008, the Company held
securities with a fair value of $383.0 million issued by the Federal Home Loan Mortgage
Corporation, $396.2 million issued by the Federal National Mortgage Corporation, $661.2 million
that were issued by the Canadian province of Ontario, $521.5 million in one entity that were
guaranteed by the Canadian province of Quebec, and $275.1 million issued by the Canadian province
of Quebec, all of which exceeded 10% of consolidated stockholders equity.
At December 31, 2009 and 2008 the Company held fixed maturity securities that were below investment
grade with book values of $757.3 million and $389.6 million, and estimated fair values of $613.3
million and $274.6 million, respectively.
The amortized cost and estimated fair value of fixed maturity securities available-for-sale at
December 31, 2009 are shown by contractual maturity for all securities except certain U.S.
government agencies securities, which are distributed to maturity year based on the Companys
estimate of the rate of future prepayments of principal over the remaining lives of the securities.
These estimates are derived from prepayment rates experienced at the interest rate levels
projected for the applicable underlying collateral and can be expected to vary from actual
experience. Actual maturities can differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment penalties.
At December 31, 2009, the contractual maturities of investments in fixed maturity securities were
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
Fair |
|
|
Cost |
|
Value |
|
|
|
Available-for-sale: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
178,771 |
|
|
$ |
180,992 |
|
Due after one year through five years |
|
|
1,489,390 |
|
|
|
1,520,896 |
|
Due after five years through ten years |
|
|
2,599,459 |
|
|
|
2,688,292 |
|
Due after ten years |
|
|
4,154,936 |
|
|
|
4,435,834 |
|
Asset and mortgage-backed securities |
|
|
3,194,401 |
|
|
|
2,937,344 |
|
|
|
|
Total |
|
$ |
11,616,957 |
|
|
$ |
11,763,358 |
|
|
|
|
Corporate Fixed Maturity Securities
The tables below show the major industry types and weighted average credit ratings, which comprise
the U.S. and foreign corporate fixed maturity holdings at December 31, 2009 and 2008 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
Amortized |
|
Estimated |
|
|
|
|
|
Average |
|
|
Cost |
|
Fair Value |
|
% of Total |
|
Credit Ratings |
|
|
|
Finance |
|
$ |
1,411,464 |
|
|
$ |
1,358,925 |
|
|
|
25.2 |
% |
|
|
A- |
|
Industrial |
|
|
1,670,610 |
|
|
|
1,735,522 |
|
|
|
32.2 |
|
|
BBB+ |
Foreign (1) |
|
|
1,627,352 |
|
|
|
1,671,090 |
|
|
|
30.9 |
|
|
|
A |
|
Utility |
|
|
603,958 |
|
|
|
624,710 |
|
|
|
11.6 |
|
|
BBB+ |
Other |
|
|
4,219 |
|
|
|
4,549 |
|
|
|
0.1 |
|
|
|
A |
|
|
|
|
Total |
|
$ |
5,317,603 |
|
|
$ |
5,394,796 |
|
|
|
100.0 |
% |
|
|
A- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
Amortized |
|
Estimated |
|
|
|
|
|
Average |
|
|
Cost |
|
Fair Value |
|
% of Total |
|
Credit Ratings |
|
|
|
Finance |
|
$ |
1,475,205 |
|
|
$ |
1,155,906 |
|
|
|
29.0 |
% |
|
|
A |
|
Industrial |
|
|
1,520,330 |
|
|
|
1,339,200 |
|
|
|
33.6 |
|
|
BBB+ |
Foreign (1) |
|
|
1,112,018 |
|
|
|
973,433 |
|
|
|
24.4 |
|
|
|
A |
|
Utility |
|
|
542,737 |
|
|
|
480,809 |
|
|
|
12.1 |
|
|
BBB+ |
Other |
|
|
38,844 |
|
|
|
36,718 |
|
|
|
0.9 |
|
|
AA- |
|
|
|
Total |
|
$ |
4,689,134 |
|
|
$ |
3,986,066 |
|
|
|
100.0 |
% |
|
|
A- |
|
|
|
|
103
(1) |
|
Includes U.S. dollar-denominated debt obligations of foreign obligors and other foreign
investments. |
At December 31, 2009 and 2008, the Company had $584.9 million and $1,416.4 million, respectively,
of gross unrealized losses related to its fixed maturity and equity securities. These securities
are concentrated, calculated as a percentage of gross unrealized losses, as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
Sector: |
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
|
26 |
% |
|
|
46 |
% |
Canadian and Canada provincial governments |
|
|
4 |
|
|
|
1 |
|
Residential mortgage-backed securities |
|
|
12 |
|
|
|
7 |
|
Foreign corporate securities |
|
|
7 |
|
|
|
12 |
|
Asset-backed securities |
|
|
14 |
|
|
|
10 |
|
Commercial mortgage-backed securities |
|
|
29 |
|
|
|
23 |
|
State and political subdivisions |
|
|
3 |
|
|
|
1 |
|
U.S. government and agencies |
|
|
3 |
|
|
|
|
|
Other foreign government securities |
|
|
2 |
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Industry: |
|
|
|
|
|
|
|
|
Finance |
|
|
25 |
% |
|
|
33 |
% |
Asset-backed |
|
|
13 |
|
|
|
10 |
|
Industrial |
|
|
7 |
|
|
|
19 |
|
Mortgage-backed |
|
|
41 |
|
|
|
31 |
|
Government |
|
|
12 |
|
|
|
1 |
|
Utility |
|
|
2 |
|
|
|
6 |
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
Unrealized Losses for Fixed Maturities and Equity Securities Available-for-Sale
The following table presents the total gross unrealized losses for 1,316 and 1,716 fixed maturity
securities and equity securities at December 31, 2009 and 2008, respectively, where the estimated
fair value had declined and remained below amortized cost by the indicated amount (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
December 31, 2008 |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
Number of |
|
Unrealized |
|
|
|
|
|
Number of |
|
Unrealized |
|
|
|
|
Securities |
|
Losses |
|
% of Total |
|
Securities |
|
Losses |
|
% of Total |
|
|
|
Less than 20% |
|
|
1,112 |
|
|
$ |
254,075 |
|
|
|
43.4 |
% |
|
|
980 |
|
|
$ |
324,390 |
|
|
|
22.9 |
% |
20% or more for
less than six
months |
|
|
38 |
|
|
|
69,322 |
|
|
|
11.9 |
|
|
|
561 |
|
|
|
796,747 |
|
|
|
56.3 |
|
20% or more for six
months or greater |
|
|
166 |
|
|
|
261,483 |
|
|
|
44.7 |
|
|
|
175 |
|
|
|
295,302 |
|
|
|
20.8 |
|
|
|
|
Total |
|
|
1,316 |
|
|
$ |
584,880 |
|
|
|
100.0 |
% |
|
|
1,716 |
|
|
$ |
1,416,439 |
|
|
|
100.0 |
% |
|
|
|
As of December 31, 2009 and 2008, respectively, 71.4% and 92.7% of these securities were investment
grade and 43.4% and 22.9% had fair values that were less than 20% below cost. The amount of the
unrealized loss on these securities was primarily attributable to a widening of credit spreads
since the time securities were purchased.
While all of these securities are monitored for potential impairment, the Company believes due to
continued uncertain market conditions and liquidity concerns, and the high levels of price
volatility, the extent and duration of a decline in value have become less indicative of when there
has been credit deterioration with respect to an issuer. The Companys determination of whether a
decline in value is other-than-temporary the Companys analysis of the underlying credit and the
extent and duration of a decline in value. The Companys credit analysis of an investment includes
determining whether the issuer is current on its contractual payments, evaluating whether it is
probable that the Company will be able to collect all amounts due according to the contractual
terms of the security and analyzing the overall ability of the Company to recover the
104
amortized cost of the investment. The Company continues to consider valuation declines as a
potential indicator of credit deterioration.
The following tables present the estimated fair values and gross unrealized losses, including
other-than-temporary impairment losses reported in AOCI, for the 1,316 and 1,716 fixed maturity
securities and equity securities that have estimated fair values below amortized cost as of
December 31, 2009 and 2008, respectively. These investments are presented by class and grade of
security, as well as the length of time the related market value has remained below amortized cost.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Equal to or greater than |
|
|
|
|
|
|
Less than 12 months |
|
|
12 months |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
(dollars in thousands) |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
373,049 |
|
|
$ |
27,625 |
|
|
$ |
679,908 |
|
|
$ |
89,711 |
|
|
$ |
1,052,957 |
|
|
$ |
117,336 |
|
Canadian and Canadian provincial
governments |
|
|
494,718 |
|
|
|
15,374 |
|
|
|
135,315 |
|
|
|
10,372 |
|
|
|
630,033 |
|
|
|
25,746 |
|
Residential mortgage-backed
securities |
|
|
402,642 |
|
|
|
23,671 |
|
|
|
197,320 |
|
|
|
20,185 |
|
|
|
599,962 |
|
|
|
43,856 |
|
Foreign corporate securities |
|
|
362,406 |
|
|
|
5,262 |
|
|
|
182,300 |
|
|
|
24,693 |
|
|
|
544,706 |
|
|
|
29,955 |
|
Asset-backed securities |
|
|
48,651 |
|
|
|
1,927 |
|
|
|
166,603 |
|
|
|
57,262 |
|
|
|
215,254 |
|
|
|
59,189 |
|
Commercial mortgage-backed
securities |
|
|
177,360 |
|
|
|
10,312 |
|
|
|
425,793 |
|
|
|
79,297 |
|
|
|
603,153 |
|
|
|
89,609 |
|
U.S. government and agencies |
|
|
496,514 |
|
|
|
15,027 |
|
|
|
|
|
|
|
|
|
|
|
496,514 |
|
|
|
15,027 |
|
State and political subdivisions |
|
|
34,612 |
|
|
|
3,397 |
|
|
|
40,945 |
|
|
|
11,437 |
|
|
|
75,557 |
|
|
|
14,834 |
|
Other foreign government securities |
|
|
240,216 |
|
|
|
8,370 |
|
|
|
30,321 |
|
|
|
4,901 |
|
|
|
270,537 |
|
|
|
13,271 |
|
|
|
|
|
|
|
|
Investment grade securities |
|
|
2,630,168 |
|
|
|
110,965 |
|
|
|
1,858,505 |
|
|
|
297,858 |
|
|
|
4,488,673 |
|
|
|
408,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
|
35,477 |
|
|
|
11,293 |
|
|
|
168,375 |
|
|
|
18,755 |
|
|
|
203,852 |
|
|
|
30,048 |
|
Asset-backed securities |
|
|
6,738 |
|
|
|
3,256 |
|
|
|
24,408 |
|
|
|
17,686 |
|
|
|
31,146 |
|
|
|
20,942 |
|
Foreign corporate securities |
|
|
1,755 |
|
|
|
17 |
|
|
|
3,771 |
|
|
|
3,426 |
|
|
|
5,526 |
|
|
|
3,443 |
|
Residential mortgage-backed
securities |
|
|
10,657 |
|
|
|
1,909 |
|
|
|
66,756 |
|
|
|
24,250 |
|
|
|
77,413 |
|
|
|
26,159 |
|
Commercial mortgage-backed
securities |
|
|
|
|
|
|
|
|
|
|
57,179 |
|
|
|
79,818 |
|
|
|
57,179 |
|
|
|
79,818 |
|
State and political subdivisions |
|
|
|
|
|
|
|
|
|
|
5,170 |
|
|
|
2,910 |
|
|
|
5,170 |
|
|
|
2,910 |
|
|
|
|
|
|
|
|
Non-investment grade securities |
|
|
54,627 |
|
|
|
16,475 |
|
|
|
325,659 |
|
|
|
146,845 |
|
|
|
380,286 |
|
|
|
163,320 |
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
2,684,795 |
|
|
$ |
127,440 |
|
|
$ |
2,184,164 |
|
|
$ |
444,703 |
|
|
$ |
4,868,959 |
|
|
$ |
572,143 |
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
8,320 |
|
|
$ |
1,263 |
|
|
$ |
68,037 |
|
|
$ |
11,065 |
|
|
$ |
76,357 |
|
|
$ |
12,328 |
|
Other equity securities |
|
|
5 |
|
|
|
15 |
|
|
|
7,950 |
|
|
|
394 |
|
|
|
7,955 |
|
|
|
409 |
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
8,325 |
|
|
$ |
1,278 |
|
|
$ |
75,987 |
|
|
$ |
11,459 |
|
|
$ |
84,312 |
|
|
$ |
12,737 |
|
|
|
|
|
|
|
|
Total number of securities in
an unrealized loss position |
|
|
582 |
|
|
|
|
|
|
|
734 |
|
|
|
|
|
|
|
1,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Equal to or greater than |
|
|
|
|
Less than 12 months |
|
12 months |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
(dollars in thousands) |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
1,407,547 |
|
|
$ |
240,299 |
|
|
$ |
810,115 |
|
|
$ |
281,947 |
|
|
$ |
2,217,662 |
|
|
$ |
522,246 |
|
Canadian and Canadian provincial
governments |
|
|
114,754 |
|
|
|
2,751 |
|
|
|
89,956 |
|
|
|
4,420 |
|
|
|
204,710 |
|
|
|
7,171 |
|
Residential mortgage-backed
securities |
|
|
190,525 |
|
|
|
58,026 |
|
|
|
213,310 |
|
|
|
39,794 |
|
|
|
403,835 |
|
|
|
97,820 |
|
Foreign corporate securities |
|
|
508,102 |
|
|
|
82,490 |
|
|
|
140,073 |
|
|
|
59,816 |
|
|
|
648,175 |
|
|
|
142,306 |
|
Asset-backed securities |
|
|
118,608 |
|
|
|
40,139 |
|
|
|
173,505 |
|
|
|
99,147 |
|
|
|
292,113 |
|
|
|
139,286 |
|
Commercial mortgage-backed
securities |
|
|
523,475 |
|
|
|
200,567 |
|
|
|
188,638 |
|
|
|
126,163 |
|
|
|
712,113 |
|
|
|
326,730 |
|
State and political subdivisions |
|
|
20,403 |
|
|
|
1,947 |
|
|
|
18,250 |
|
|
|
5,936 |
|
|
|
38,653 |
|
|
|
7,883 |
|
Other foreign government securities |
|
|
16,419 |
|
|
|
33 |
|
|
|
4,125 |
|
|
|
117 |
|
|
|
20,544 |
|
|
|
150 |
|
|
|
|
|
|
|
|
Investment grade securities |
|
|
2,899,833 |
|
|
|
626,252 |
|
|
|
1,637,972 |
|
|
|
617,340 |
|
|
|
4,537,805 |
|
|
|
1,243,592 |
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continued |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Equal to or greater than |
|
|
|
|
Less than 12 months |
|
12 months |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
Estimated |
|
Unrealized |
(dollars in thousands) |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
|
140,426 |
|
|
|
36,615 |
|
|
|
60,378 |
|
|
|
39,884 |
|
|
|
200,804 |
|
|
|
76,499 |
|
Asset-backed securities |
|
|
3,465 |
|
|
|
2,060 |
|
|
|
11,156 |
|
|
|
5,951 |
|
|
|
14,621 |
|
|
|
8,011 |
|
Foreign corporate securities |
|
|
24,637 |
|
|
|
7,227 |
|
|
|
2,032 |
|
|
|
3,387 |
|
|
|
26,669 |
|
|
|
10,614 |
|
Residential mortgage-backed
securities |
|
|
8,089 |
|
|
|
5,944 |
|
|
|
4,496 |
|
|
|
3,012 |
|
|
|
12,585 |
|
|
|
8,956 |
|
|
|
|
Non-investment grade securities |
|
|
176,617 |
|
|
|
51,846 |
|
|
|
78,062 |
|
|
|
52,234 |
|
|
|
254,679 |
|
|
|
104,080 |
|
|
|
|
Total fixed maturity securities |
|
$ |
3,076,450 |
|
|
$ |
678,098 |
|
|
$ |
1,716,034 |
|
|
$ |
669,574 |
|
|
$ |
4,792,484 |
|
|
$ |
1,347,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
49,376 |
|
|
$ |
22,316 |
|
|
$ |
61,249 |
|
|
$ |
41,844 |
|
|
$ |
110,625 |
|
|
$ |
64,160 |
|
Other equity securities |
|
|
11,804 |
|
|
|
4,607 |
|
|
|
|
|
|
|
|
|
|
|
11,804 |
|
|
|
4,607 |
|
|
|
|
Total equity securities |
|
$ |
61,180 |
|
|
$ |
26,923 |
|
|
$ |
61,249 |
|
|
$ |
41,844 |
|
|
$ |
122,429 |
|
|
$ |
68,767 |
|
|
|
|
Total number of securities in
an unrealized loss position |
|
|
1,039 |
|
|
|
|
|
|
|
677 |
|
|
|
|
|
|
|
1,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company does not intend to sell these fixed maturity securities
and does not believe it is more likely than not that it will be required to sell these fixed
maturity securities before the recovery of the fair value up to the current amortized cost of the
investment, which may be maturity. However, as facts and circumstances change, the Company may
sell fixed maturity securities in the ordinary course of managing its portfolio to meet
diversification, credit quality, asset-liability management and liquidity profile. As of December
31, 2009, the Company has the ability and intent to hold the equity securities until the recovery
of the fair value up to the current cost of the investment. However, from time to time if facts
and circumstances change, the Company may sell equity securities in the ordinary course of managing
its portfolio to meet diversification, credit quality and liquidity profile.
Mortgage Loans
Mortgage loans represented approximately 4.0% and 4.7% of the Companys cash and invested assets as
of December 31, 2009 and 2008, respectively. The Company makes mortgage loans on income producing
properties, such as apartments, retail and office buildings, light warehouses and light industrial
facilities. Loan to value ratios at the time of loan approval are 75% or less for domestic
mortgages. The distribution of mortgage loans by property type is as follows as of December 31,
2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
Carrying |
|
Percentage |
|
Carrying |
|
Percentage |
|
|
Value |
|
of Total |
|
Value |
|
of Total |
Property type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Apartment |
|
$ |
72,041 |
|
|
|
9 |
% |
|
$ |
65,362 |
|
|
|
9 |
% |
Retail |
|
|
224,915 |
|
|
|
29 |
|
|
|
207,328 |
|
|
|
27 |
|
Office building |
|
|
229,126 |
|
|
|
29 |
|
|
|
227,836 |
|
|
|
29 |
|
Industrial |
|
|
231,567 |
|
|
|
29 |
|
|
|
242,424 |
|
|
|
31 |
|
Other commercial |
|
|
34,019 |
|
|
|
4 |
|
|
|
32,100 |
|
|
|
4 |
|
|
|
|
Total |
|
$ |
791,668 |
|
|
|
100 |
% |
|
$ |
775,050 |
|
|
|
100 |
% |
|
|
|
All of the Companys mortgage loans are amortizing loans. As of December 31, 2009 and 2008,
the Companys mortgage loans were distributed throughout the United States as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
Carrying |
|
Percentage |
|
Carrying |
|
Percentage |
|
|
Value |
|
of Total |
|
Value |
|
of Total |
South Atlantic |
|
$ |
221,355 |
|
|
|
28 |
% |
|
$ |
240,750 |
|
|
|
31 |
% |
Pacific |
|
|
197,327 |
|
|
|
25 |
|
|
|
164,397 |
|
|
|
21 |
|
East North Central |
|
|
73,084 |
|
|
|
9 |
|
|
|
80,778 |
|
|
|
11 |
|
Mountain |
|
|
89,995 |
|
|
|
11 |
|
|
|
80,092 |
|
|
|
10 |
|
West North Central |
|
|
65,628 |
|
|
|
8 |
|
|
|
64,260 |
|
|
|
8 |
|
Middle Atlantic |
|
|
57,615 |
|
|
|
7 |
|
|
|
62,336 |
|
|
|
8 |
|
New England |
|
|
36,982 |
|
|
|
5 |
|
|
|
34,055 |
|
|
|
4 |
|
West South Central |
|
|
28,926 |
|
|
|
4 |
|
|
|
27,145 |
|
|
|
4 |
|
East South Central |
|
|
20,756 |
|
|
|
3 |
|
|
|
21,237 |
|
|
|
3 |
|
|
|
|
Total |
|
$ |
791,668 |
|
|
|
100 |
% |
|
$ |
775,050 |
|
|
|
100 |
% |
|
|
|
106
The maturities of the mortgage loans as of December 31, 2009 and 2008 are as follows (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
Due one year through five years |
|
$ |
309,690 |
|
|
$ |
238,945 |
|
Due after five years |
|
|
433,744 |
|
|
|
416,220 |
|
Due after ten years |
|
|
48,234 |
|
|
|
119,885 |
|
|
|
|
Total |
|
$ |
791,668 |
|
|
$ |
775,050 |
|
|
|
|
Information regarding the Companys loan valuation allowances for mortgage loans as of
December 31, 2009 and 2008 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
Balance at January 1, |
|
$ |
526 |
|
|
$ |
|
|
Additions |
|
|
8,327 |
|
|
|
526 |
|
Deductions |
|
|
(3,069 |
) |
|
|
|
|
|
|
|
Balance at December 31, |
|
$ |
5,784 |
|
|
$ |
526 |
|
|
|
|
Information regarding the portion of the Companys mortgage loans that were impaired as of
December 31, 2009 and 2008 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
Impaired loans with valuation allowances |
|
$ |
14,967 |
|
|
$ |
3,853 |
|
Impaired loans without valuation allowances |
|
|
14,317 |
|
|
|
18,125 |
|
|
|
|
Subtotal |
|
|
29,284 |
|
|
|
21,978 |
|
Less: Valuation allowances on impaired loans |
|
|
5,784 |
|
|
|
526 |
|
|
|
|
Impaired loans |
|
$ |
23,500 |
|
|
$ |
21,452 |
|
|
|
|
The Companys average investment in impaired loans was $3.3 million and $3.7 million as of
December 31, 2009 and 2008, respectively. Interest income on impaired loans was $0.8 million and
$1.3 million for the years ended December 31, 2009 and 2008, respectively.
Policy Loans
Policy loans comprised approximately 5.8% and 6.7% of the Companys cash and invested assets as of
December 31, 2009 and 2008, respectively, substantially all of which are associated with one
client. These policy loans present no credit risk because the amount of the loan cannot exceed the
obligation due to the ceding company upon the death of the insured or surrender of the underlying
policy. The provisions of the treaties in force and the underlying policies determine the policy
loan interest rates. Because policy loans represent premature distributions of policy liabilities,
they have the effect of reducing future disintermediation risk. In addition, the Company earns a
spread between the interest rate earned on policy loans and the interest rate credited to
corresponding liabilities.
Funds Withheld at Interest
Funds withheld at interest comprised approximately 24.8% and 27.4% of the Companys cash and
invested assets as of December 31, 2009 and 2008, respectively. Of the $4.9 billion funds withheld
at interest balance as of December 31, 2009, $3.4 billion of the balance is associated with one
client. For reinsurance agreements written on a modified coinsurance basis and certain agreements
written on a coinsurance funds withheld basis, assets equal to the net statutory reserves are
withheld and legally owned and managed by the ceding company and are reflected as funds withheld at
interest on the Companys consolidated balance sheets. In the event of a ceding companys
insolvency, the Company would need to assert a claim on the assets supporting its reserve
liabilities. However, the risk of loss to the Company is mitigated by its ability to offset
amounts it owes the ceding company for claims or allowances with amounts owed to the Company from
the ceding company. Interest accrues to these assets at rates defined by the treaty terms and the
Company estimates the yield was approximately 7.69%, 3.54% and 6.42% for the years ended December
31, 2009, 2008 and 2007, respectively. Changes in these estimated yields are affected by equity
options held in the funds withheld portfolio associated with equity-indexed annuity treaties. The
Company is subject to the investment performance on the withheld assets, although it does not
directly control them. These assets are primarily fixed maturity investment securities and pose
risks similar to the fixed maturity securities the Company owns. To mitigate this risk, the
Company helps set the investment guidelines followed by the ceding company and monitors compliance.
107
Other Invested Assets
Other invested assets include equity securities, non-redeemable preferred stocks, limited
partnership interests, structured loans and derivative contracts. Other invested assets
represented approximately 2.6% and 3.8% of the Companys cash and invested assets as of December
31, 2009 and 2008, respectively. Carrying values of these assets as of December 31, 2009 and 2008
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Equity securities |
|
$ |
58,359 |
|
|
$ |
35,975 |
|
Non-redeemable preferred stock |
|
|
113,198 |
|
|
|
123,399 |
|
Limited partnerships |
|
|
156,573 |
|
|
|
140,077 |
|
Structured loans |
|
|
150,677 |
|
|
|
101,380 |
|
Derivatives |
|
|
24,156 |
|
|
|
206,341 |
|
Other |
|
|
13,123 |
|
|
|
21,477 |
|
|
|
|
Total other invested assets |
|
$ |
516,086 |
|
|
$ |
628,649 |
|
|
|
|
Note 5 DERIVATIVE INSTRUMENTS
The following table presents the notional amounts and fair value of derivative instruments as of
December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Carrying Value/ |
|
|
|
|
|
|
Carrying Value/ |
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
Fair Value |
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
|
|
Amount |
|
|
Assets |
|
|
Liabilities |
|
|
Amount |
|
|
Assets |
|
|
Liabilities |
|
Derivatives not designated as hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps(1) |
|
$ |
1,388,570 |
|
|
$ |
17,962 |
|
|
$ |
47,061 |
|
|
$ |
672,716 |
|
|
$ |
155,189 |
|
|
$ |
241 |
|
Financial futures(1) |
|
|
200,436 |
|
|
|
|
|
|
|
|
|
|
|
260,568 |
|
|
|
|
|
|
|
|
|
Foreign currency forwards(1) |
|
|
40,500 |
|
|
|
2,200 |
|
|
|
|
|
|
|
31,300 |
|
|
|
2,209 |
|
|
|
|
|
Consumer price index (CPI)
swaps(1) |
|
|
124,034 |
|
|
|
1,631 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit default swaps(1) |
|
|
367,500 |
|
|
|
2,363 |
|
|
|
249 |
|
|
|
290,000 |
|
|
|
|
|
|
|
7,705 |
|
Embedded derivatives in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified coinsurance or funds
withheld arrangements(2) |
|
|
|
|
|
|
|
|
|
|
434,494 |
|
|
|
|
|
|
|
|
|
|
|
512,888 |
|
Indexed annuity products(3) |
|
|
|
|
|
|
68,873 |
|
|
|
584,906 |
|
|
|
|
|
|
|
66,716 |
|
|
|
530,986 |
|
Variable annuity
products(3) |
|
|
|
|
|
|
|
|
|
|
23,748 |
|
|
|
|
|
|
|
|
|
|
|
276,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-hedging derivatives |
|
|
2,121,040 |
|
|
|
93,029 |
|
|
|
1,090,458 |
|
|
|
1,254,584 |
|
|
|
224,114 |
|
|
|
1,328,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging
instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps(1) |
|
|
21,783 |
|
|
|
|
|
|
|
677 |
|
|
|
21,783 |
|
|
|
|
|
|
|
2,243 |
|
Foreign currency swaps(1) |
|
|
226,715 |
|
|
|
|
|
|
|
9,008 |
|
|
|
296,497 |
|
|
|
48,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging derivatives |
|
|
248,498 |
|
|
|
|
|
|
|
9,685 |
|
|
|
318,280 |
|
|
|
48,943 |
|
|
|
2,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
2,369,538 |
|
|
$ |
93,029 |
|
|
$ |
1,100,143 |
|
|
$ |
1,572,864 |
|
|
$ |
273,057 |
|
|
$ |
1,330,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Carried on the Companys consolidated balance sheets in other invested assets or other
liabilities, at fair value. |
|
(2) |
|
Embedded liability is included on the consolidated balance sheets with the host
contract in funds withheld at interest, at fair value. |
|
(3) |
|
Embedded liability is included on the consolidated balance sheets with the host
contract in interest-sensitive contract liabilities, at fair value. Embedded asset is
included on the consolidated balance sheets in reinsurance ceded receivables. |
108
Accounting for Derivative Instruments and Hedging Activities
As of December 31, 2009 and 2008, the Company held interest rate swaps that were designated and
qualified as fair value hedges of interest rate risk. As of December 31, 2009, the Company held
foreign currency swaps that were designated and qualified as fair value hedges of a portion of its
net investment in its net investments in its Canada and Australia operations. As of December 31,
2008, the Company held foreign currency swaps that were designated and qualified as fair value
hedges of a portion of its net investment in its Canada operation. The foreign currency swaps held
as of December 31, 2008 were terminated in 2009 and the related unrealized gains of $50.0 million
continue to be reflected in AOCI. As of December 31, 2009 and 2008, the Company also had
derivative instruments that were not designated as hedging instruments. See Note 2 Summary of
Significant Accounting Policies for a detailed discussion of the accounting treatment for
derivative instruments, including embedded derivatives. The Company does not enter into derivative
instruments for speculative purposes. Derivative instruments are carried at fair value and
generally require an insignificant amount of cash at inception of the contract.
Fair Value Hedges
The Company designates and accounts for certain interest rate swaps that convert fixed rate
investments to floating rate investments as fair value hedges when they meet the requirements of
the general accounting principles for Derivatives and Hedging. The gain or loss on the hedged item
attributable to the hedged benchmark interest rate and the offsetting gain or loss on the related
interest rate swaps for the year ended December 31, 2009 were (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Type of Fair |
|
Derivative Gain |
|
Hedge Gain (Loss) |
|
|
|
Hedged Item Gain |
|
Hedged Item Gain(Loss) |
Value Hedge |
|
(Loss) Location |
|
Recognized |
|
Hedged Item |
|
(Loss) Location |
|
Recognized |
|
Interest rate swaps
|
|
Investment related
gains (losses), net
|
|
$1,566
|
|
Fixed rate fixed
maturity securities
|
|
Investment related
gains (losses), net
|
|
$(1,350) |
The Companys investment related gains (losses), net representing the ineffective portion of
all fair value hedges, was $0.2 million and $0.3 million for the years ended December 31, 2009 and
2008, respectively.
All components of each derivatives gain or loss were included in the assessment of hedge
effectiveness. There were no instances in which the Company discontinued fair value hedge
accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
Hedges of Net Investments in Foreign Operations
The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign
operations against adverse movements in exchange rates. The following tables illustrate the
Companys net investments in foreign operations (NIFO) hedges for the year ended December 31,
2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion |
|
Ineffective Portion |
|
|
|
|
|
|
Location of Gain |
|
|
|
Income |
|
|
Type of |
|
|
|
|
|
(Loss) |
|
Gain (Loss) |
|
Statement |
|
|
NIFO |
|
Derivative Gain (Loss) in |
|
Reclassified From |
|
Reclassified from |
|
Location of Gain |
|
Ineffective Gain |
Hedge |
|
OCI |
|
AOCI |
|
AOCI into income |
|
(Loss) |
|
(Loss) in Income |
|
Foreign currency
swaps
|
|
$ |
(8,102 |
) |
|
None
|
|
$
|
|
Investment income
|
|
$ |
The Company measures ineffectiveness on the foreign currency swaps based upon the change in
forward rates. There was no ineffectiveness recorded in the periods presented herein.
The Companys other comprehensive income for the years ended December 31, 2009 and 2008, included
gains (losses) of $(8.1) million and $53.7 million, respectively, related to foreign currency swaps
used to hedge its net investment in its foreign operations. The cumulative foreign currency
translation gain recorded in accumulated other comprehensive income related to these hedges was
$40.5 million and $48.6 million at December 31, 2009 and 2008, respectively. When net investments
in foreign operations are sold or substantially liquidated, the amounts in accumulated other
comprehensive income are reclassified to the consolidated statements of income. A pro rata portion
will be reclassified upon partial sale of the net investments in foreign operations.
109
Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company uses various other derivative instruments for risk management purposes that either do
not qualify for hedge accounting treatment or have not currently been qualified by the Company for
hedge accounting treatment, including derivatives used to economically hedge changes in the fair
value of liabilities associated with the reinsurance of variable annuities with guaranteed living
benefits. The gain or loss related to the change in fair value for these derivative instruments is
recognized in investment related gains (losses), in the consolidated statements of income, except
where otherwise noted. For the years ended December 31, 2009 and 2008, the Company recognized
investment related gains (losses) of $(217.5) million and $165.5 million, respectively, related to
derivatives that do not qualify or have not been qualified for hedge accounting.
Interest Rate Swaps
Interest rate swaps are used by the Company primarily to reduce market risks from changes in
interest rates and to alter interest rate exposure arising from mismatches between assets and
liabilities (duration mismatches). With an interest rate swap, the Company agrees with another
party to exchange, at specified intervals, the difference between fixed rate and floating rate
interest amounts as calculated by reference to an agreed notional principal amount. These
transactions are executed pursuant to master agreements that provide for a single net payment or
individual gross payments to be made by the counterparty at each due date.
Financial Futures
Exchange-traded equity futures are used primarily to economically hedge liabilities embedded in
certain variable annuity products assumed by the Company. With exchange-traded equity futures
transactions, the Company agrees to purchase or sell a specified number of contracts, the value of
which is determined by the relevant stock indices, and to post variation margin on a daily basis in
an amount equal to the difference between the daily estimated fair values of those contracts. The
Company enters into exchange-traded equity futures with regulated futures commission merchants that
are members of the exchange.
Foreign Currency Swaps
Foreign currency swaps are used by the Company to reduce the risk from fluctuations in foreign
currency exchange rates associated with its assets and liabilities denominated in foreign
currencies. With a foreign currency swap transaction, the Company agrees with another party to
exchange, at specified intervals, the difference between one currency and another at a forward
exchange rate calculated by reference to an agreed upon principal amount. The principal amount of
each currency is exchanged at the inception and termination of the currency swap by each party. The
Company also uses foreign currency swaps to economically hedge the foreign currency risk associated
with certain of its net investments in foreign operations.
Foreign Currency Forwards
Foreign currency forwards are used by the Company to reduce the risk from fluctuations in foreign
currency exchange rates associated with its assets and liabilities denominated in foreign
currencies. With a foreign currency forward transaction, the Company agrees with another party to
deliver a specified amount of an identified currency at a specified future date. The price is
agreed upon at the time of the contract and payment for such a contract is made in a different
currency at the specified future date.
CPI Swaps
CPI swaps are used by the Company primarily to economically hedge liabilities embedded in certain
insurance products assumed by the Company whose value is directly affected by changes in a
designated benchmark consumer price index. With a CPI swap transaction, the Company agrees with
another party to exchange the actual amount of inflation realized over a specified period of time
for a fixed amount of inflation determined at inception. These transactions are executed pursuant
to master agreements that provide for a single net payment or individual gross payments to be made
by the counterparty at each due date. Most of these swaps will require a single payment to be made
by one counterparty at the maturity date of the swap.
Credit Default Swaps
The Company invests in credit default swaps to diversify its credit risk exposure in certain
portfolios. These credit default swaps are over-the-counter instruments in which the Company
receives payments at specified intervals to insure credit risk on a portfolio of 125 U.S.
investment-grade securities. Generally, if a credit event, as defined by the contract, occurs, the
contract will require the swap to be settled gross by the delivery of par quantities or value of
the referenced investment
110
securities equal to the specified swap notional amount in exchange for the payment of cash amounts
by the Company equal to the par value of the investment security surrendered.
The Company also purchases credit default swaps to reduce its risk against a drop in bond prices
due to credit concerns of certain bond issuers. If a credit event, as defined by the contract,
occurs, the Company is able to put the bond back to the counterparty at par.
Embedded Derivatives
The Company has certain embedded derivatives which are required to be separated from their host
contracts and reported as derivatives. Host contracts include reinsurance treaties structured on a
modified coinsurance or funds withheld basis. Additionally, the Company reinsures equity-indexed
annuity and variable annuity contracts with benefits that are considered embedded derivatives,
including GMWB, GMAB, and GMIB. The related gains (losses) for the years ended December 31, 2009,
2008 and 2007 are reflected in the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Embedded derivatives in modified
coinsurance or funds withheld
arrangements and variable
annuity contracts included in
investment related gains
(losses) |
|
$ |
331,091 |
|
|
$ |
(695,280 |
) |
|
$ |
(150,869 |
) |
After the associated
amortization of DAC and taxes,
the related amounts included in
net income |
|
|
(15,659 |
) |
|
|
(124,449 |
) |
|
|
(30,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to embedded
derivatives in equity-indexed
annuities included in benefits
and expenses |
|
|
(71,222 |
) |
|
|
80 |
|
|
|
(66,308 |
) |
After the associated
amortization of DAC and taxes,
the related amounts included in
net income |
|
|
(51,806 |
) |
|
|
24,709 |
|
|
|
(43,100 |
) |
Non-hedging Derivatives
A summary of the effect of non-hedging derivatives, including embedded derivatives, on the
Companys income statement for the year ended December 31, 2009 is as follows (dollars in
thousands):
|
|
|
|
|
|
|
Type of Non-hedging Derivative |
|
Income Statement Location of Gain (Loss) |
|
Gain (Loss) |
Interest rate swaps |
|
Investment related gains (losses), net |
|
$ |
(160,716 |
) |
Financial futures |
|
Investment related gains (losses), net |
|
|
(72,641 |
) |
Foreign currency forwards |
|
Investment related gains (losses), net |
|
|
2 |
|
CPI swaps |
|
Investment related gains (losses), net |
|
|
2,234 |
|
Credit default swaps |
|
Investment related gains (losses), net |
|
|
13,654 |
|
Embedded derivatives in: |
|
|
|
|
|
|
Modified coinsurance or funds
withheld
arrangements |
|
Investment related gains (losses), net |
|
|
78,394 |
|
Indexed annuity products |
|
Policy acquisition costs and other |
|
|
|
|
|
|
insurance expenses |
|
|
7,137 |
|
Indexed annuity products |
|
Interest credited |
|
|
(78,359 |
) |
Variable annuity products |
|
Investment related gains (losses), net |
|
|
252,697 |
|
|
|
|
|
|
|
|
Total non-hedging derivatives |
|
|
|
$ |
42,402 |
|
|
|
|
|
|
|
|
Credit Risk
The Company may be exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments. Generally, the current credit exposure of the
Companys derivative contracts is limited to the fair value at the reporting date. The credit
exposure of the Companys derivative transactions is represented by the fair value of contracts
after consideration of any collateral received with a net positive fair value at the reporting
date.
The Company manages its credit risk related to over-the-counter derivatives by entering into
transactions with creditworthy counterparties, maintaining collateral arrangements and through the
use of master agreements that provide for a single net payment to be made by one counterparty to
another at each due date and upon termination. Because exchange-traded futures are affected
through regulated exchanges, and positions are marked to market on a daily basis, the Company has
minimal exposure to credit-related losses in the event of nonperformance by counterparties to such
derivative instruments.
The Company enters into various collateral arrangements, which require both the posting and
accepting of collateral in connection with its derivative instruments. Collateral agreements
contain attachment thresholds that vary depending on the posting partys financial strength
ratings. Additionally, a decrease in the Companys financial strength rating to a specified level
results in potential settlement of the derivative positions under the Companys agreements with its
counterparties. As of
111
December 31, 2009, the Company had pledged collateral of $16.0 million to
counterparties on swaps. As of December 31, 2008, the Company held unrestricted cash collateral of $159.8 million. The receivable or payable
related to cash collateral is included in other assets or other liabilities, net, in the
consolidated balance sheets. From time to time, the Company has accepted collateral consisting of
various securities; however, there were no securities held as collateral as of December 31, 2009
and 2008. In addition, the Company has exchange-traded futures, which require the maintenance of a
margin account. As of December 31, 2009 and 2008, the Company pledged collateral of $17.1 million
and $25.9 million, respectively, which is included in cash and cash equivalents.
NOTE 6 FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of the Companys
financial instruments at December 31, 2009 and 2008. Fair values have been determined by using
available market information and the valuation techniques described below. Considerable judgment
is often required in interpreting market data to develop estimates of fair value. Accordingly, the
estimates presented herein may not necessarily be indicative of amounts that could be realized in a
current market exchange. The use of different assumptions or valuation techniques may have a
material effect on the estimated fair value amounts (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
|
|
|
Estimated Fair |
|
|
|
|
|
Estimated Fair |
|
|
Carrying Value |
|
Value |
|
Carrying Value |
|
Value |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
$ |
11,763,358 |
|
|
$ |
11,763,358 |
|
|
$ |
8,531,804 |
|
|
$ |
8,531,804 |
|
Mortgage loans on real estate |
|
|
791,668 |
|
|
|
792,331 |
|
|
|
775,050 |
|
|
|
755,383 |
|
Policy loans |
|
|
1,136,564 |
|
|
|
1,136,564 |
|
|
|
1,096,713 |
|
|
|
1,096,713 |
|
Funds withheld at interest |
|
|
4,895,356 |
|
|
|
5,201,569 |
|
|
|
4,520,398 |
|
|
|
4,494,716 |
|
Short-term investments |
|
|
121,060 |
|
|
|
121,060 |
|
|
|
58,123 |
|
|
|
58,123 |
|
Other invested assets |
|
|
516,086 |
|
|
|
509,618 |
|
|
|
628,649 |
|
|
|
638,087 |
|
Cash and cash equivalents |
|
|
512,027 |
|
|
|
512,027 |
|
|
|
875,403 |
|
|
|
875,403 |
|
Accrued investment income |
|
|
107,447 |
|
|
|
107,447 |
|
|
|
87,424 |
|
|
|
87,424 |
|
Reinsurance ceded receivables |
|
|
106,396 |
|
|
|
173,309 |
|
|
|
115,445 |
|
|
|
187,465 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-sensitive contract liabilities |
|
|
5,929,134 |
|
|
|
6,196,420 |
|
|
|
5,664,488 |
|
|
|
4,890,669 |
|
Long-term and short-term debt |
|
|
1,216,052 |
|
|
|
1,180,712 |
|
|
|
918,246 |
|
|
|
606,890 |
|
Collateral finance facility |
|
|
850,037 |
|
|
|
510,000 |
|
|
|
850,035 |
|
|
|
493,000 |
|
Company-obligated mandatorily
redeemable preferred securities |
|
|
159,217 |
|
|
|
205,655 |
|
|
|
159,035 |
|
|
|
186,082 |
|
Publicly traded fixed maturity securities are valued based upon quoted market prices or estimates
from independent pricing services, independent broker quotes and pricing matrices. Private
placement fixed maturity securities are valued based on the credit quality and duration of
marketable securities deemed comparable by the Companys investment advisor, which may be of
another issuer. The fair value of mortgage loans on real estate is estimated using discounted cash
flows. Policy loans typically carry an interest rate that is adjusted annually based on a market
index and therefore carrying value approximates fair value. The carrying value of funds withheld
at interest approximates fair value except where the funds withheld are specifically identified in
the agreement. When funds withheld are specifically identified in the agreement, the fair value is
based on the fair value of the underlying assets which are held by the ceding company. The
carrying values of cash and cash equivalents and short-term investments approximates fair values
due to the short-term maturities of these instruments. Common and preferred equity investments and
derivative financial instruments included in other invested assets are reflected at fair value on
the consolidated balance sheets based primarily on quoted market prices, while limited partnership
interests are carried at cost. The fair value of limited partnerships is based on net asset
values. The carrying value for accrued investment income approximates fair value.
The carrying and fair values of interest-sensitive contract liabilities reflected in the table
above exclude contracts with significant mortality risk. The fair value of the Companys
interest-sensitive contract liabilities and related reinsurance ceded receivables is based on the
cash surrender value of the liabilities, adjusted for recapture fees. The fair value of the
Companys long-term debt is estimated based on either quoted market prices or quoted market prices
for the debt of corporations with similar credit quality. The fair values of the Companys
collateral finance facility and company-obligated mandatorily redeemable preferred securities are
estimated using discounted cash flows.
General accounting principles for Fair Value Measurements and Disclosures define fair value as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for
112
the asset or liability in an orderly transaction
between market participants on the measurement date. In accordance with these principles, valuation techniques utilized by management for invested assets and embedded
derivatives reported at fair value are generally categorized into three types:
Market Approach. Market approach valuation techniques use prices and other relevant information
from market transactions involving identical or comparable assets or liabilities. Valuation
techniques consistent with the market approach include comparables and matrix pricing. Comparables
use market multiples, which might lie in ranges with a different multiple for each comparable. The
selection of where within the range the appropriate multiple falls requires judgment, considering
both quantitative and qualitative factors specific to the measurement. Matrix pricing is a
mathematical technique used principally to value certain securities without relying exclusively on
quoted prices for the specific securities but comparing the securities to benchmark or comparable
securities.
Income Approach. Income approach valuation techniques convert future amounts, such as cash flows
or earnings, to a single present amount, or a discounted amount. These techniques rely on current
expectations of future amounts. Examples of income approach valuation techniques include present
value techniques, option-pricing models and binomial or lattice models that incorporate present
value techniques.
Cost Approach. Cost approach valuation techniques are based upon the amount that, at present,
would be required to replace the service capacity of an asset, or the current replacement cost.
That is, from the perspective of a market participant (seller), the price that would be received
for the asset is determined based on the cost to a market participant (buyer) to acquire or
construct a substitute asset of comparable utility.
The three approaches described above are consistent with generally accepted valuation techniques.
While all three approaches are not applicable to all assets or liabilities reported at fair value,
where appropriate and possible, one or more valuation techniques may be used. The selection of the
valuation technique(s) to apply considers the definition of an exit price and the nature of the
asset or liability being valued, and significant expertise and judgment is required. The Company
performs regular analysis and review of the various techniques utilized in determining fair value
to ensure that the valuation approaches utilized are appropriate and consistently applied, and that
the various assumptions are reasonable. The Company also utilizes information from third parties,
such as pricing services and brokers, to assist in determining fair values for certain assets and
liabilities; however, management is ultimately responsible for all fair values presented in the
Companys financial statements. The Company performs analysis and review of the information and
prices received from third parties to ensure that the prices represent a reasonable estimate of the
fair value. This process involves quantitative and qualitative analysis and is overseen by the
Companys investment and accounting personnel. Examples of procedures performed include, but are
not limited to, initial and ongoing review of third party pricing services and techniques, review
of pricing trends and monitoring of recent trade information. In addition, the Company utilizes
both internal and external cash flow models to analyze the reasonableness of fair values utilizing
credit spread and other market assumptions, where appropriate. As a result of the analysis, if the
Company determines there is a more appropriate fair value based upon the available market data, the
price received from the third party is adjusted accordingly.
For invested assets reported at fair value, when available, fair values are based on quoted prices
in active markets that are regularly and readily obtainable. Generally, these are very liquid
investments and the valuation does not require management judgment. When quoted prices in active
markets are not available, fair value is based on the market valuation techniques described above,
primarily a combination of the market approach, including matrix pricing and the income approach.
The assumptions and inputs used by management in applying these techniques include, but are not
limited to: interest rates, credit standing of the issuer or counterparty, industry sector of the
issuer, coupon rate, call provisions, sinking fund requirements, maturity, estimated duration and
assumptions regarding liquidity and future cash flows.
The significant inputs to the market standard valuation techniques for certain types of securities
with reasonable levels of price transparency are inputs that are observable in the market or can be
derived principally from or corroborated by observable market data. Such observable inputs include
benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are
not active and observable yields and spreads in the market.
When observable inputs are not available, the market standard valuation techniques for determining
the estimated fair value of certain types of securities that trade infrequently, and therefore have
little or no price transparency, rely on inputs that are significant to the estimated fair value
that are not observable in the market or cannot be derived principally from or corroborated by
observable market data. These unobservable inputs can be based in large part on management
judgment or estimation, and cannot be supported by reference to market activity. Even though
unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and
are consistent with what other market participants would use when pricing such securities.
113
The use of different techniques, assumptions and inputs may have a material effect on the estimated
fair values of the Companys securities holdings.
For embedded derivative liabilities associated with the underlying products in reinsurance
treaties, primarily equity-indexed and variable annuity treaties, the Company utilizes a market
standard technique, which includes an estimate of future equity option purchases and an adjustment
for the Companys own credit risk that takes into consideration the Companys financial strength
rating, also commonly referred to as a claims paying rating. The capital market inputs to the
model, such as equity indexes, equity volatility, interest rates and the Companys credit
adjustment, are generally observable. However, the valuation models also use inputs requiring
certain actuarial assumptions such as future interest margins, policyholder behavior, including
future equity participation rates, and explicit risk margins related to non-capital market inputs,
that are generally not observable and may require use of significant management judgment. Changes
in interest rates, equity indices, equity volatility, the Companys own credit risk, and actuarial
assumptions regarding policyholder behavior may result in significant fluctuations in the value of
embedded derivatives liabilities associated with equity-indexed annuity reinsurance treaties.
The fair value of embedded derivatives associated with funds withheld reinsurance treaties is
determined based upon a total return swap technique with reference to the fair value of the
investments held by the ceding company that support the Companys funds withheld at interest asset.
The fair value of the underlying assets is generally based on market observable inputs using
market standard valuation techniques. However, the valuation also requires certain significant
inputs based on actuarial assumptions about policyholder behavior, which are generally not
observable.
For the years ended December 31, 2009 and 2008, the application of valuation techniques applied to
similar assets and liabilities has been consistent.
General accounting principles for Fair Value Measurements and Disclosures also establish a fair
value hierarchy which requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
Level 1 |
|
Quoted prices in active markets for identical assets or
liabilities. The Companys Level 1 assets and liabilities include
investment securities and derivative contracts that are traded in
exchange markets. |
|
Level 2 |
|
Observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or market standard valuation techniques and
assumptions with significant inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities. Such observable inputs include
benchmarking prices for similar assets in active, liquid markets,
quoted prices in markets that are not active and observable yields
and spreads in the market. The Companys Level 2 assets and
liabilities include investment securities with quoted prices that
are traded less frequently than exchange-traded instruments and
derivative contracts whose values are determined using market
standard valuation techniques. This category primarily includes
U.S. and foreign corporate securities, Canadian and Canadian
provincial government securities, and residential and commercial
mortgage-backed securities, among others. Management values most
of these securities using inputs that are market observable. |
|
Level 3 |
|
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the related
assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using market
standard valuation techniques described above. When observable
inputs are not available, the market standard techniques for
determining the estimated fair value of certain securities that
trade infrequently, and therefore have little transparency, rely
on inputs that are significant to the estimated fair value and
that are not observable in the market or cannot be derived
principally from or corroborated by observable market data. These
unobservable inputs can be based in large part on management
judgment or estimation and cannot be supported by reference to
market activity. Even though unobservable, management believes
these inputs are based on assumptions deemed appropriate given the
circumstances and consistent with what other market participants
would use when pricing similar assets and liabilities. For the
Companys invested assets, this category generally includes U.S.
and foreign corporate securities (primarily private placements),
asset-backed securities (including those with exposure to
sub-prime mortgages), and to a lesser extent, certain residential
and commercial mortgage-backed securities, among others.
Additionally, the Companys embedded derivatives, all of which are
associated with reinsurance treaties, are classified in Level 3
since their values include significant unobservable inputs
associated with actuarial assumptions regarding policyholder
behavior. Embedded derivatives are reported with the host
instruments on the consolidated balance sheet. |
114
When inputs used to measure fair value fall within different levels of the hierarchy, the
level within which the fair value measurement is categorized is based on the lowest priority level
input that is significant to the fair value measurement in its entirety. For example, a Level 3
fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable
(Level 3). Therefore, gains and losses for such assets and liabilities categorized within Level 3
may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2)
and unobservable inputs (Level 3).
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008
are summarized below (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
3,723,048 |
|
|
$ |
|
|
|
$ |
2,901,535 |
|
|
$ |
821,513 |
|
Canadian and Canadian provincial governments |
|
|
2,353,227 |
|
|
|
|
|
|
|
2,353,227 |
|
|
|
|
|
Residential mortgage-backed securities |
|
|
1,456,544 |
|
|
|
|
|
|
|
1,312,087 |
|
|
|
144,457 |
|
Foreign corporate securities |
|
|
1,671,748 |
|
|
|
5,447 |
|
|
|
1,450,923 |
|
|
|
215,378 |
|
Asset-backed securities |
|
|
451,936 |
|
|
|
|
|
|
|
189,169 |
|
|
|
262,767 |
|
Commercial mortgage-backed securities |
|
|
1,028,864 |
|
|
|
|
|
|
|
699,304 |
|
|
|
329,560 |
|
U.S. government and agencies securities |
|
|
526,059 |
|
|
|
517,929 |
|
|
|
8,130 |
|
|
|
|
|
State and political subdivision securities |
|
|
89,762 |
|
|
|
6,251 |
|
|
|
71,431 |
|
|
|
12,080 |
|
Other foreign government securities |
|
|
462,170 |
|
|
|
1,079 |
|
|
|
443,788 |
|
|
|
17,303 |
|
|
|
|
Total fixed maturity securities available-for-sale |
|
|
11,763,358 |
|
|
|
530,706 |
|
|
|
9,429,594 |
|
|
|
1,803,058 |
|
Funds withheld at interest embedded derivatives |
|
|
(434,494 |
) |
|
|
|
|
|
|
|
|
|
|
(434,494 |
) |
Short-term investments |
|
|
12,937 |
|
|
|
2,714 |
|
|
|
9,780 |
|
|
|
443 |
|
Other invested assets non-redeemable preferred stock |
|
|
113,198 |
|
|
|
85,016 |
|
|
|
21,407 |
|
|
|
6,775 |
|
Other invested assets other equity securities |
|
|
58,359 |
|
|
|
17,523 |
|
|
|
30,400 |
|
|
|
10,436 |
|
Other invested assets derivatives |
|
|
24,156 |
|
|
|
|
|
|
|
24,156 |
|
|
|
|
|
Reinsurance ceded receivable embedded derivatives |
|
|
68,873 |
|
|
|
|
|
|
|
|
|
|
|
68,873 |
|
|
|
|
Total |
|
$ |
11,606,387 |
|
|
$ |
635,959 |
|
|
$ |
9,515,337 |
|
|
$ |
1,455,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities embedded derivatives |
|
$ |
(608,654 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(608,654 |
) |
Other liabilities derivatives |
|
|
(56,995 |
) |
|
|
|
|
|
|
(56,995 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(665,649 |
) |
|
$ |
|
|
|
$ |
(56,995 |
) |
|
$ |
(608,654 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
3,012,633 |
|
|
$ |
|
|
|
$ |
2,196,348 |
|
|
$ |
816,285 |
|
Canadian and Canadian provincial governments |
|
|
1,891,239 |
|
|
|
|
|
|
|
1,881,274 |
|
|
|
9,965 |
|
Residential mortgage-backed securities |
|
|
1,149,185 |
|
|
|
|
|
|
|
1,118,761 |
|
|
|
30,424 |
|
Foreign corporate securities |
|
|
973,433 |
|
|
|
1,714 |
|
|
|
795,111 |
|
|
|
176,608 |
|
Asset-backed securities |
|
|
339,378 |
|
|
|
|
|
|
|
107,509 |
|
|
|
231,869 |
|
Commercial mortgage-backed securities |
|
|
760,590 |
|
|
|
|
|
|
|
701,549 |
|
|
|
59,041 |
|
U.S. government and agencies securities |
|
|
8,431 |
|
|
|
3,072 |
|
|
|
5,359 |
|
|
|
|
|
State and political subdivision securities |
|
|
38,654 |
|
|
|
6,167 |
|
|
|
|
|
|
|
32,487 |
|
Other foreign government securities |
|
|
358,261 |
|
|
|
85,606 |
|
|
|
167,216 |
|
|
|
105,439 |
|
|
|
|
Total fixed maturity securities available-for-sale |
|
|
8,531,804 |
|
|
|
96,559 |
|
|
|
6,973,127 |
|
|
|
1,462,118 |
|
115
Continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
Funds withheld at interest embedded derivatives |
|
|
(512,888 |
) |
|
|
|
|
|
|
|
|
|
|
(512,888 |
) |
Short-term investments |
|
|
570 |
|
|
|
|
|
|
|
218 |
|
|
|
352 |
|
Other invested assets non-redeemable preferred stock |
|
|
123,399 |
|
|
|
99,527 |
|
|
|
18,479 |
|
|
|
5,393 |
|
Other invested assets other equity securities |
|
|
35,975 |
|
|
|
4,999 |
|
|
|
18,920 |
|
|
|
12,056 |
|
Other invested assets derivatives |
|
|
206,341 |
|
|
|
|
|
|
|
206,341 |
|
|
|
|
|
Reinsurance ceded receivable embedded derivatives |
|
|
66,716 |
|
|
|
|
|
|
|
|
|
|
|
66,716 |
|
|
|
|
Total |
|
$ |
8,451,917 |
|
|
$ |
201,085 |
|
|
$ |
7,217,085 |
|
|
$ |
1,033,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities embedded derivatives |
|
$ |
(807,431 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(807,431 |
) |
Other liabilities derivatives |
|
|
(10,189 |
) |
|
|
|
|
|
|
(10,189 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(817,620 |
) |
|
$ |
|
|
|
$ |
(10,189 |
) |
|
$ |
(807,431 |
) |
|
|
|
As of
December 31, 2009 and 2008, respectively, the Company classified approximately 15.3% and
17.1% of its fixed maturity securities in the Level 3 category. These securities primarily consist
of private placement corporate securities with an inactive trading market. Additionally, the
Company has included asset-backed securities with sub-prime exposure and mortgage backed securities
that are below investment grade in the Level 3 category due to the current market uncertainty
associated with these securities and the Companys utilization of information from third parties
for the valuation of these securities.
The tables below present reconciliations for all assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the years ended December 31,
2009 and 2008 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Measurements for the year ended December 31, 2009 |
|
|
|
|
|
|
Total gains/losses |
|
|
|
|
|
|
|
|
|
|
|
|
(realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
Balance |
|
|
|
|
|
Other |
|
issuances |
|
Transfers in |
|
Balance |
|
|
January 1, |
|
Earnings, |
|
comprehensive |
|
and |
|
and/or out of |
|
December |
|
|
2009 |
|
net |
|
income |
|
disposals |
|
Level 3 |
|
31, 2009 |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
816,285 |
|
|
$ |
(30,301 |
) |
|
$ |
157,574 |
|
|
$ |
(32,743 |
) |
|
$ |
(89,302 |
) |
|
$ |
821,513 |
|
Canadian and Canadian provincial governments |
|
|
9,965 |
|
|
|
419 |
|
|
|
(332 |
) |
|
|
(5,632 |
) |
|
|
(4,420 |
) |
|
|
|
|
Residential mortgage-backed securities |
|
|
30,424 |
|
|
|
(16,317 |
) |
|
|
26,996 |
|
|
|
24,611 |
|
|
|
78,743 |
|
|
|
144,457 |
|
Foreign corporate securities |
|
|
176,608 |
|
|
|
(4,246 |
) |
|
|
15,914 |
|
|
|
234,268 |
|
|
|
(207,166 |
) |
|
|
215,378 |
|
Asset-backed securities |
|
|
231,869 |
|
|
|
(24,674 |
) |
|
|
31,031 |
|
|
|
25,901 |
|
|
|
(1,360 |
) |
|
|
262,767 |
|
Commercial mortgage-backed securities |
|
|
59,041 |
|
|
|
(1,953 |
) |
|
|
57,458 |
|
|
|
12,485 |
|
|
|
202,529 |
|
|
|
329,560 |
|
State and political subdivision securities |
|
|
32,487 |
|
|
|
35 |
|
|
|
15,406 |
|
|
|
3,246 |
|
|
|
(39,094 |
) |
|
|
12,080 |
|
Other foreign government securities |
|
|
105,439 |
|
|
|
1,509 |
|
|
|
(4,275 |
) |
|
|
38,583 |
|
|
|
(123,953 |
) |
|
|
17,303 |
|
|
|
|
Sub-total |
|
|
1,462,118 |
|
|
|
(75,528 |
) |
|
|
299,772 |
|
|
|
300,719 |
|
|
|
(184,023 |
) |
|
|
1,803,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds withheld at interest embedded
derivatives |
|
|
(512,888 |
) |
|
|
78,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(434,494 |
) |
Short-term investments |
|
|
352 |
|
|
|
(471 |
) |
|
|
708 |
|
|
|
(146 |
) |
|
|
|
|
|
|
443 |
|
Other invested assets non-redeemable
preferred stock |
|
|
5,393 |
|
|
|
(11,741 |
) |
|
|
14,870 |
|
|
|
(4,893 |
) |
|
|
3,146 |
|
|
|
6,775 |
|
Other invested assets other equity securities |
|
|
12,056 |
|
|
|
(564 |
) |
|
|
745 |
|
|
|
2,901 |
|
|
|
(4,702 |
) |
|
|
10,436 |
|
Reinsurance ceded receivable embedded
derivatives |
|
|
66,716 |
|
|
|
11,296 |
|
|
|
|
|
|
|
(9,139 |
) |
|
|
|
|
|
|
68,873 |
|
|
|
|
Total |
|
$ |
1,033,747 |
|
|
$ |
1,386 |
|
|
$ |
316,095 |
|
|
$ |
289,442 |
|
|
$ |
(185,579 |
) |
|
$ |
1,455,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities -
embedded derivatives |
|
$ |
(807,431 |
) |
|
$ |
167,207 |
|
|
$ |
|
|
|
$ |
31,570 |
|
|
$ |
|
|
|
$ |
(608,654 |
) |
|
|
|
Total |
|
$ |
(807,431 |
) |
|
$ |
167,207 |
|
|
$ |
|
|
|
$ |
31,570 |
|
|
$ |
|
|
|
$ |
(608,654 |
) |
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Measurements for the year ended December 31, 2008 |
|
|
|
|
|
|
Total gains/losses |
|
|
|
|
|
|
|
|
|
|
|
|
(realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
Balance |
|
|
|
|
|
Other |
|
issuances |
|
Transfers in |
|
Balance |
|
|
January 1, |
|
|
|
|
|
comprehensive |
|
and |
|
and/or out |
|
December |
|
|
2008 |
|
Earnings, net |
|
loss |
|
disposals |
|
of Level 3 |
|
31, 2008 |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale |
|
$ |
1,500,054 |
|
|
$ |
(60,300 |
) |
|
$ |
(285,202 |
) |
|
$ |
200,919 |
|
|
$ |
106,647 |
|
|
$ |
1,462,118 |
|
Funds withheld at interest embedded
derivatives |
|
|
(85,090 |
) |
|
|
(427,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(512,888 |
) |
Short-term investments |
|
|
|
|
|
|
(36 |
) |
|
|
(568 |
) |
|
|
(20 |
) |
|
|
976 |
|
|
|
352 |
|
Other invested assets equity securities |
|
|
13,950 |
|
|
|
(63 |
) |
|
|
(6,498 |
) |
|
|
26,107 |
|
|
|
(16,047 |
) |
|
|
17,449 |
|
Reinsurance ceded receivable embedded
derivatives |
|
|
68,298 |
|
|
|
(1,919 |
) |
|
|
|
|
|
|
337 |
|
|
|
|
|
|
|
66,716 |
|
|
|
|
Total |
|
$ |
1,497,212 |
|
|
$ |
(490,116 |
) |
|
$ |
(292,268 |
) |
|
$ |
227,343 |
|
|
$ |
91,576 |
|
|
$ |
1,033,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities -
embedded derivatives |
|
$ |
(531,160 |
) |
|
$ |
(280,758 |
) |
|
$ |
|
|
|
$ |
4,487 |
|
|
$ |
|
|
|
$ |
(807,431 |
) |
|
|
|
Total |
|
$ |
(531,160 |
) |
|
$ |
(280,758 |
) |
|
$ |
|
|
|
$ |
4,487 |
|
|
$ |
|
|
|
$ |
(807,431 |
) |
|
|
|
The tables below summarize gains and losses due to changes in fair value, including both
realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities
for years ended December 31, 2009 and 2008 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and Losses |
|
|
Classification of gains/losses (realized/unrealized) included in earnings for the year ended |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition |
|
|
|
|
Investment |
|
|
|
|
|
Claims |
|
|
|
|
|
costs and |
|
|
|
|
income, net of |
|
Investment |
|
& other |
|
|
|
|
|
other |
|
|
|
|
related |
|
related gains |
|
policy |
|
Interest |
|
insurance |
|
|
|
|
expenses |
|
(losses), net |
|
benefits |
|
credited |
|
expenses |
|
Total |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
1,678 |
|
|
$ |
(31,979 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(30,301 |
) |
Canadian and Canadian provincial governments |
|
|
(4 |
) |
|
|
423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
419 |
|
Residential mortgage-backed securities |
|
|
1,498 |
|
|
|
(17,815 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,317 |
) |
Foreign corporate securities |
|
|
318 |
|
|
|
(4,564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,246 |
) |
Asset-backed securities |
|
|
5,660 |
|
|
|
(30,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,674 |
) |
Commercial mortgage-backed securities |
|
|
2,114 |
|
|
|
(4,067 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,953 |
) |
State and political subdivision securities |
|
|
43 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
Other foreign government securities |
|
|
(738 |
) |
|
|
2,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,509 |
|
|
|
|
Sub-total |
|
|
10,569 |
|
|
|
(86,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,528 |
) |
Funds withheld at interest embedded derivatives |
|
|
|
|
|
|
78,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,394 |
|
Short-term investments |
|
|
153 |
|
|
|
(624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(471 |
) |
Other invested assets non-redeemable preferred
stock |
|
|
(64 |
) |
|
|
(11,677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,741 |
) |
Other invested assets other equity securities |
|
|
(49 |
) |
|
|
(515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(564 |
) |
Reinsurance ceded receivable embedded
derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,296 |
|
|
|
11,296 |
|
|
|
|
Total |
|
$ |
10,609 |
|
|
$ |
(20,519 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
11,296 |
|
|
$ |
1,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities -
embedded derivatives |
|
$ |
|
|
|
$ |
252,697 |
|
|
$ |
(3,905 |
) |
|
$ |
(81,585 |
) |
|
$ |
|
|
|
$ |
167,207 |
|
|
|
|
Total |
|
$ |
|
|
|
$ |
252,697 |
|
|
$ |
(3,905 |
) |
|
$ |
(81,585 |
) |
|
$ |
|
|
|
$ |
167,207 |
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and Losses |
|
|
Classification of gains/losses (realized/unrealized) included in earnings for the year ended December 31, |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy |
|
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition costs |
|
|
|
|
income, net |
|
Investment |
|
Claims and |
|
|
|
|
|
and other |
|
|
|
|
of related |
|
related gains |
|
other policy |
|
Interest |
|
insurance |
|
|
|
|
expenses |
|
(losses), net |
|
benefits |
|
credited |
|
expenses |
|
Total |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities -
available-for-sale |
|
$ |
1,197 |
|
|
$ |
(61,497 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(60,300 |
) |
Funds withheld at interest embedded
derivatives |
|
|
|
|
|
|
(427,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(427,798 |
) |
Short-term investments |
|
|
(1 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36 |
) |
Other invested assets equity securities |
|
|
2 |
|
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
Reinsurance ceded receivable embedded
derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,919 |
) |
|
|
(1,919 |
) |
|
|
|
Total |
|
$ |
1,198 |
|
|
$ |
(489,395 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(1,919 |
) |
|
$ |
(490,116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
- embedded derivatives |
|
$ |
|
|
|
$ |
(267,482 |
) |
|
$ |
(176 |
) |
|
$ |
(13,100 |
) |
|
$ |
|
|
|
$ |
(280,758 |
) |
|
|
|
Total |
|
$ |
|
|
|
$ |
(267,482 |
) |
|
$ |
(176 |
) |
|
$ |
(13,100 |
) |
|
$ |
|
|
|
$ |
(280,758 |
) |
|
|
|
The tables below summarize changes in unrealized gains or losses recorded in earnings for the
year ended December 31, 2009 and 2008 for Level 3 assets and liabilities that are still held at
December 31, 2009 and 2008 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized Gains and Losses |
|
|
Changes in unrealized gains/losses relating to assets and liabilities still held at the reporting |
|
|
date for the year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisitio |
|
|
|
|
Investment |
|
|
|
|
|
Claims & |
|
|
|
|
|
n costs |
|
|
|
|
income, net of |
|
Investment |
|
other |
|
|
|
|
|
and other |
|
|
|
|
related |
|
related gains |
|
policy |
|
Interest |
|
insurance |
|
|
|
|
expenses |
|
(losses), net |
|
benefits |
|
credited |
|
expenses |
|
Total |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
1,541 |
|
|
$ |
(29,104 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(27,563 |
) |
Canadian and Canadian provincial governments |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
Residential mortgage-backed securities |
|
|
1,473 |
|
|
|
(18,928 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,455 |
) |
Foreign corporate securities |
|
|
318 |
|
|
|
(3,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,874 |
) |
Asset-backed securities |
|
|
4,253 |
|
|
|
(45,097 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,844 |
) |
Commercial mortgage-backed securities |
|
|
2,125 |
|
|
|
(7,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,640 |
) |
State and political subdivision securities |
|
|
43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43 |
|
Other foreign government securities |
|
|
(585 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(585 |
) |
|
|
|
Sub-total |
|
|
9,165 |
|
|
|
(104,086 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(94,921 |
) |
Funds withheld at interest embedded derivatives |
|
|
|
|
|
|
78,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,394 |
|
Short-term investments |
|
|
244 |
|
|
|
(409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165 |
) |
Other invested assets non-redeemable preferred
stock |
|
|
(64 |
) |
|
|
(9,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,470 |
) |
Other invested assets other equity securities |
|
|
(142 |
) |
|
|
(426 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(568 |
) |
Reinsurance ceded receivable embedded
derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,021 |
|
|
|
21,021 |
|
|
|
|
Total |
|
$ |
9,203 |
|
|
$ |
(35,933 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
21,021 |
|
|
$ |
(5,709 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities -
embedded derivatives |
|
$ |
|
|
|
$ |
252,697 |
|
|
$ |
(11,037 |
) |
|
$ |
(122,311 |
) |
|
$ |
|
|
|
$ |
119,349 |
|
|
|
|
Total |
|
$ |
|
|
|
$ |
252,697 |
|
|
$ |
(11,037 |
) |
|
$ |
(122,311 |
) |
|
$ |
|
|
|
$ |
119,349 |
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized Gains and Losses |
|
|
Changes in unrealized gains/losses relating to assets and liabilities still held at the reporting date for the |
|
|
year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy |
|
|
|
|
Investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition costs |
|
|
|
|
income, net of |
|
Investment |
|
Claims and |
|
|
|
|
|
and other |
|
|
|
|
related |
|
related gains |
|
other policy |
|
Interest |
|
insurance |
|
|
|
|
expenses |
|
(losses), net |
|
benefits |
|
credited |
|
expenses |
|
Total |
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities -
available-for-sale |
|
$ |
1,020 |
|
|
$ |
(63,561 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(62,541 |
) |
Funds withheld at interest embedded
derivatives |
|
|
|
|
|
|
(427,798 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(427,798 |
) |
Short-term investments |
|
|
(1 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36 |
) |
Other invested assets equity securities |
|
|
2 |
|
|
|
(65 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63 |
) |
Reinsurance ceded receivable embedded
derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,538 |
|
|
|
2,538 |
|
|
|
|
Total |
|
$ |
1,021 |
|
|
$ |
(491,459 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,538 |
|
|
$ |
(487,900 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
- embedded derivatives |
|
$ |
|
|
|
$ |
(267,482 |
) |
|
$ |
3,885 |
|
|
$ |
(70,710 |
) |
|
$ |
|
|
|
$ |
(334,307 |
) |
|
|
|
Total |
|
$ |
|
|
|
$ |
(267,482 |
) |
|
$ |
3,885 |
|
|
$ |
(70,710 |
) |
|
$ |
|
|
|
$ |
(334,307 |
) |
|
|
|
Note 7 REINSURANCE
Retrocession reinsurance treaties do not relieve the Company from its obligations to direct writing
companies. Failure of retrocessionaires to honor their obligations could result in losses to the
Company. Consequently, allowances would be established for amounts deemed uncollectible. At
December 31, 2009 and 2008, no allowances were deemed necessary. The Company regularly evaluates
the financial condition of its reinsurers and retrocessionaires.
The effect of reinsurance on net premiums is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Direct |
|
$ |
2,259 |
|
|
$ |
2,433 |
|
|
$ |
2,539 |
|
Reinsurance assumed |
|
|
6,241,952 |
|
|
|
5,836,556 |
|
|
|
5,370,970 |
|
Reinsurance ceded |
|
|
(519,050 |
) |
|
|
(489,688 |
) |
|
|
(464,483 |
) |
|
|
|
Net premiums |
|
$ |
5,725,161 |
|
|
$ |
5,349,301 |
|
|
$ |
4,909,026 |
|
|
|
|
The effect of reinsurance on claims and other policy benefits is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Direct |
|
$ |
4,098 |
|
|
$ |
4,075 |
|
|
$ |
3,705 |
|
Reinsurance assumed |
|
|
5,025,383 |
|
|
|
4,753,401 |
|
|
|
4,231,436 |
|
Reinsurance ceded |
|
|
(210,055 |
) |
|
|
(295,544 |
) |
|
|
(251,145 |
) |
|
|
|
Net claims and other policy benefits |
|
$ |
4,819,426 |
|
|
$ |
4,461,932 |
|
|
$ |
3,983,996 |
|
|
|
|
At December 31, 2009 and 2008, there were no reinsurance ceded receivables associated with a single
reinsurer with a carrying value in excess of 5% of total assets.
119
The effect of reinsurance on life insurance in force is shown in the following schedule (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance In Force: |
|
Direct |
|
Assumed |
|
Ceded |
|
Net |
|
Assumed/Net % |
|
|
|
December 31, 2009 |
|
$ |
72 |
|
|
$ |
2,325,041 |
|
|
$ |
46,897 |
|
|
$ |
2,278,216 |
|
|
|
102.06 |
% |
December 31, 2008 |
|
|
70 |
|
|
|
2,108,130 |
|
|
|
46,267 |
|
|
|
2,061,933 |
|
|
|
102.24 |
% |
December 31, 2007 |
|
|
79 |
|
|
|
2,119,890 |
|
|
|
48,108 |
|
|
|
2,071,861 |
|
|
|
102.32 |
% |
At December 31, 2009 and 2008, respectively, the Companys U.S. and Asia Pacific segments provided
approximately $1.8 billion and $1.1 billion of statutory financial reinsurance, as measured by
pre-tax statutory surplus, to other insurance companies under financial reinsurance transactions to
assist ceding companies in meeting applicable regulatory requirements. Generally, such financial
reinsurance is provided by the Company committing cash or assuming insurance liabilities, which are
collateralized by future profits on the reinsured business. The Company earns a fee based on the
amount of net outstanding financial reinsurance.
Reinsurance agreements, whether facultative or automatic, may provide for recapture rights on the
part of the ceding company. Recapture rights permit the ceding company to reassume all or a
portion of the risk formerly ceded to the reinsurer after an agreed-upon period of time, generally
10 years, or in some cases due to changes in the financial condition or ratings of the reinsurer.
Recapture of business previously ceded does not affect premiums ceded prior to the recapture of
such business, but would reduce premiums in subsequent periods. Additionally, some treaties give
the ceding company the right to request the Company to place assets in trust for their benefit to
support their reserve credits, in the event of a downgrade of the Companys ratings to specified
levels, generally non-investment grade levels, or if minimum levels of financial condition are not
maintained. As of December 31, 2009, these treaties had approximately $1,059.3 million in
statutory reserves. Assets placed in trust continue to be owned by the Company, but their use is
restricted based on the terms of the trust agreement. Securities with an amortized cost of
$1,022.4 million were held in trust to satisfy collateral requirements for reinsurance business for
the benefit of certain subsidiaries of the Company at December 31, 2009. In addition, the
Companys collateral finance facility has asset in trust requirements. See Note 16 Collateral
Finance Facility for additional information. Securities with an amortized cost of $1,755.6
million, as of December 31, 2009, were held in trust to satisfy collateral requirements under
certain third-party reinsurance treaties. Additionally, under certain conditions, RGA may be
obligated to move reinsurance from one RGA subsidiary company to another or make payments under the
treaty. These conditions include change in control or ratings of the subsidiary, insolvency,
nonperformance under a treaty, or loss of reinsurance license of such subsidiary. See Note 16 -
Collateral Finance Facility for additional information on assets in trust.
Note 8 DEFERRED POLICY ACQUISITION COSTS
The following reflects the amounts of policy acquisition costs deferred and amortized (dollars in
thousands):
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
2008 |
|
|
|
Deferred policy acquisition costs: |
|
|
|
|
|
|
|
|
Assumed |
|
$ |
3,759,882 |
|
|
$ |
3,679,002 |
|
Retroceded |
|
|
(60,910 |
) |
|
|
(68,668 |
) |
|
|
|
Net |
|
$ |
3,698,972 |
|
|
$ |
3,610,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Beginning of year |
|
$ |
3,610,334 |
|
|
$ |
3,161,951 |
|
|
$ |
2,808,053 |
|
Capitalized: |
|
|
|
|
|
|
|
|
|
|
|
|
Assumed |
|
|
870,526 |
|
|
|
961,847 |
|
|
|
849,139 |
|
Retroceded |
|
|
(9,192 |
) |
|
|
(4,851 |
) |
|
|
(6,433 |
) |
Amortized (including interest): |
|
|
|
|
|
|
|
|
|
|
|
|
Assumed |
|
|
(640,734 |
) |
|
|
(823,897 |
) |
|
|
(676,538 |
) |
Allocated to change in value
of embedded derivatives |
|
|
(287,164 |
) |
|
|
541,752 |
|
|
|
104,381 |
|
Retroceded |
|
|
16,951 |
|
|
|
22,133 |
|
|
|
12,611 |
|
Foreign currency changes |
|
|
138,251 |
|
|
|
(248,601 |
) |
|
|
70,738 |
|
|
|
|
End of year |
|
$ |
3,698,972 |
|
|
$ |
3,610,334 |
|
|
$ |
3,161,951 |
|
|
|
|
120
Some reinsurance agreements involve reimbursing the ceding company for allowances and commissions
in excess of first-year premiums. These amounts represent acquisition costs and are capitalized to
the extent deemed recoverable from the future premiums and amortized against future profits of the
business. This type of agreement presents a risk to the extent that the business lapses faster
than originally anticipated, resulting in future profits being insufficient to recover the
Companys investment.
Note 9 INCOME TAX
Pre-tax income from continuing operations consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Pre-tax income from continuing operations U.S. |
|
$ |
331,922 |
|
|
$ |
66,618 |
|
|
$ |
349,725 |
|
Pre-tax income from continuing operations foreign |
|
|
260,423 |
|
|
|
213,774 |
|
|
|
125,193 |
|
|
|
|
Total pre-tax income from continuing operations |
|
$ |
592,345 |
|
|
$ |
280,392 |
|
|
$ |
474,918 |
|
|
|
|
The provision for income tax expense attributable to income from continuing operations consists of
the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Current income tax expense |
|
$ |
203,758 |
|
|
$ |
18,876 |
|
|
$ |
45,157 |
|
Deferred income tax expense (benefit) |
|
|
(92,634 |
) |
|
|
20,281 |
|
|
|
83,057 |
|
Foreign current tax expense |
|
|
62,696 |
|
|
|
26,085 |
|
|
|
16,947 |
|
Foreign deferred tax expense |
|
|
11,439 |
|
|
|
27,335 |
|
|
|
21,484 |
|
|
|
|
Provision for income taxes |
|
$ |
185,259 |
|
|
$ |
92,577 |
|
|
$ |
166,645 |
|
|
|
|
Provision for income tax expense differed from the amounts computed by applying the U.S. federal
income tax statutory rate of 35% to pre-tax income as a result of the following (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Tax provision at U.S. statutory rate |
|
$ |
207,321 |
|
|
$ |
98,137 |
|
|
$ |
166,221 |
|
Increase (decrease) in income taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign tax rate differing from U.S. tax rate |
|
|
(7,636 |
) |
|
|
(7,289 |
) |
|
|
(3,824 |
) |
Differences in tax basis in foreign jurisdictions |
|
|
(4,222 |
) |
|
|
|
|
|
|
|
|
Travel and entertainment |
|
|
281 |
|
|
|
335 |
|
|
|
248 |
|
Deferred tax valuation allowance |
|
|
(4,450 |
) |
|
|
230 |
|
|
|
2,664 |
|
Amounts related to tax audit contingencies |
|
|
(10,774 |
) |
|
|
(241 |
) |
|
|
1,230 |
|
Change in cash surrender value of insurance policies |
|
|
800 |
|
|
|
1,750 |
|
|
|
(573 |
) |
Prior year tax adjustment |
|
|
4,552 |
|
|
|
|
|
|
|
-- |
|
Other, net |
|
|
(613 |
) |
|
|
(345 |
) |
|
|
679 |
|
|
|
|
Total provision for income taxes |
|
$ |
185,259 |
|
|
$ |
92,577 |
|
|
$ |
166,645 |
|
|
|
|
Total income taxes were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Income taxes from continuing operations |
|
$ |
185,259 |
|
|
$ |
92,577 |
|
|
$ |
166,645 |
|
Tax benefit on discontinued operations |
|
|
-- |
|
|
|
(5,933 |
) |
|
|
(7,775 |
) |
Income tax from stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gain (loss) on
debt and equity securities
recognized for financial reporting
purposes |
|
|
355,088 |
|
|
|
(468,719 |
) |
|
|
(20,768 |
) |
Exercise of stock options |
|
|
(2,605 |
) |
|
|
(3,785 |
) |
|
|
(4,476 |
) |
Foreign currency translation
|
|
|
6,286 |
|
|
|
5,861 |
|
|
|
6,557 |
|
Unrealized pension and post retirement |
|
|
(754 |
) |
|
|
(3,418 |
) |
|
|
1,642 |
|
|
|
|
Total income taxes provided |
|
$ |
543,274 |
|
|
$ |
(383,417 |
) |
|
$ |
141,825 |
|
|
|
|
121
The tax effects of temporary differences that give rise to significant portions of the deferred
income tax assets and liabilities at December 31, 2009 and 2008, are presented in the following
tables (dollars in thousands):
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
2008 |
|
|
|
Deferred income tax assets: |
|
|
|
|
|
|
|
|
Nondeductible accruals |
|
$ |
43,518 |
|
|
$ |
43,072 |
|
Differences between tax and financial reporting amounts
concerning certain reinsurance transactions |
|
|
273,625 |
|
|
|
269,897 |
|
Differences in the tax basis of cash and invested assets |
|
|
31,650 |
|
|
|
302,949 |
|
Deferred acquisition costs capitalized for tax |
|
|
58,704 |
|
|
|
59,625 |
|
Net operating loss carryforward |
|
|
332,944 |
|
|
|
259,137 |
|
Capital loss and foreign tax credit carryforwards |
|
|
47,551 |
|
|
|
37,530 |
|
Deferred acquisition costs capitalized for financial
reporting |
|
|
10,745 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
798,737 |
|
|
|
972,210 |
|
Valuation allowance |
|
|
(3,445 |
) |
|
|
(7,895 |
) |
|
|
|
Total deferred income tax assets |
|
|
795,292 |
|
|
|
964,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities: |
|
|
|
|
|
|
|
|
Deferred acquisition costs capitalized for financial
reporting |
|
|
1,126,942 |
|
|
|
1,032,347 |
|
Differences between tax and financial reporting amounts
concerning certain reinsurance transactions |
|
|
61,419 |
|
|
|
74,730 |
|
Reserve for policies and investment income differences |
|
|
152,070 |
|
|
|
134,978 |
|
Differences in foreign currency translation |
|
|
68,083 |
|
|
|
32,620 |
|
|
|
|
Total deferred income tax liabilities |
|
|
1,408,514 |
|
|
|
1,274,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liabilities |
|
$ |
613,222 |
|
|
$ |
310,360 |
|
|
|
|
As of December 31, 2009 and 2008, a valuation allowance for deferred tax assets of approximately
$3.4 million and $7.9 million, respectively, was provided on the foreign tax credits, net operating
and capital losses of RGA South Africa Holdings, RGA Financial Products Limited, RGA UK Services
Limited, and RGA Reinsurance. The Company utilizes valuation allowances when it believes, based on
the weight of the available evidence, that it is more likely than not that the deferred income
taxes will not be realized.
The earnings of substantially all of the Companys foreign subsidiaries have been indefinitely
reinvested in foreign operations. Therefore, no provision has been made for any U.S. taxes or
foreign withholding taxes that may be applicable upon any actual or deemed repatriation, or sale.
The determination of any unrecognized deferred tax liability for temporary differences related to
investments in the Companys foreign subsidiaries is not practicable. At December 31, 2009 and
2008, the financial reporting basis in excess of the tax basis for which no deferred taxes have
been recognized was approximately $415.4 million and $159.9 million, respectively.
During 2009, 2008, and 2007, the Company received federal and foreign income tax refunds of
approximately $0.3 million, $31.0 million and $1.9 million, respectively. The Company made cash
income tax payments of approximately $25.9 million, $54.2 million and $26.1 million in 2009, 2008
and 2007, respectively. At December 31, 2009 and 2008, the Company recognized gross deferred tax
assets associated with net operating losses of approximately $957.0 million and $743.5 million,
respectively, that will expire between 2023 and 2024. However, these net operating losses are
expected to be utilized in the normal course of business during the period allowed for
carryforwards and in any event, will not be lost, due to the application of tax planning strategies
that management would utilize.
The Company files income tax returns with the U.S. federal government and various state and foreign
jurisdictions. The Company is under continuous examination by the Internal Revenue Service and is
subject to audit by taxing authorities in other foreign jurisdictions in which the Company has
significant business operations. The income tax years under examination vary by jurisdiction.
With a few exceptions, the Company is no longer subject to U.S. federal, state and foreign tax
examinations by tax authorities for years prior to 2006.
As of December 31, 2009, the Companys total amount of unrecognized tax benefits was $221.0 million
and the total amount
122
of unrecognized tax benefits that would affect the effective tax rate, if recognized, was $17.3
million. It is not anticipated that the Companys liability for unrecognized tax benefits will
change significantly over the next 12 months due to the fact that most of the Companys
unrecognized tax benefits are timing in nature and even if recognized, would be offset by the
addition of uncertain tax benefits that the Company does not consider effectively settled.
Management believes there will be no material impact to the Companys effective tax rate related to
unrecognized tax benefits over the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years
ended December 31, 2009, 2008 and 2007, is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrecognized Tax Benefits |
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
Beginning Balance, January 1 |
|
$ |
206,665 |
|
|
$ |
198,240 |
|
|
$ |
196,317 |
|
Additions for tax positions of prior years |
|
|
25,148 |
|
|
|
7,996 |
|
|
|
|
|
Reductions for tax positions of prior years |
|
|
(14,711 |
) |
|
|
(3,984 |
) |
|
|
(5,795 |
) |
Additions for tax positions of current year |
|
|
3,938 |
|
|
|
4,413 |
|
|
|
7,718 |
|
Reductions for tax positions of current year |
|
|
|
|
|
|
|
|
|
|
|
|
Settlements with tax authorities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance, December 31 |
|
$ |
221,040 |
|
|
$ |
206,665 |
|
|
$ |
198,240 |
|
|
|
|
The Company recognized a benefit in interest expense of $2.1 million in 2009 and interest
expense of $2.5 million and $3.9 million in 2008 and 2007, respectively. As of December 31, 2009
and 2008, the Company had $34.1 million and $36.2 million, respectively, of accrued interest
related to unrecognized tax benefits. The net decrease of $2.1 million from December 31, 2008 was
related to accrued interest on effectively settled positions offset by reductions in accrued
interest on uncertain tax positions.
Note 10 EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Company are sponsors or administrators of both qualified and
non-qualified defined benefit pension plans (Pension Plans). The largest of these plans is a
non-contributory qualified defined benefit pension plan sponsored by RGA Reinsurance that covers
U.S. employees. The benefits under the Pension Plans are generally based on years of service and
compensation levels.
The Company also provides certain health care and life insurance benefits for retired employees.
The health care benefits are provided through a self-insured welfare benefit plan. Employees
become eligible for these benefits if they meet minimum age and service requirements. The
retirees cost for health care benefits varies depending upon the credited years of service. The
Company recorded benefits expense of approximately $1.3 million, $1.4 million, and $1.4 million in
2009, 2008 and 2007, respectively that are related to these postretirement plans. Virtually all
retirees, or their beneficiaries, contribute a portion of the total cost of postretirement health
benefits.
A December 31 measurement date is used for all of the defined benefit and postretirement plans.
Obligations, Funded Status and Net Periodic Benefit Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Pension Benefits |
|
Other Benefits |
(dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
49,872 |
|
|
$ |
44,685 |
|
|
$ |
11,138 |
|
|
$ |
10,754 |
|
Service cost |
|
|
3,821 |
|
|
|
3,459 |
|
|
|
597 |
|
|
|
631 |
|
Interest cost |
|
|
3,443 |
|
|
|
2,836 |
|
|
|
674 |
|
|
|
638 |
|
Participant contributions |
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
26 |
|
Plan amendments |
|
|
|
|
|
|
320 |
|
|
|
|
|
|
|
|
|
Actuarial losses |
|
|
6,959 |
|
|
|
626 |
|
|
|
2,095 |
|
|
|
(670 |
) |
Benefits paid |
|
|
(1,275 |
) |
|
|
(621 |
) |
|
|
(218 |
) |
|
|
(241 |
) |
Foreign currency rate change effect |
|
|
1,178 |
|
|
|
(1,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
63,998 |
|
|
$ |
49,872 |
|
|
$ |
14,321 |
|
|
$ |
11,138 |
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Pension Benefits |
|
Other Benefits |
(dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
21,044 |
|
|
$ |
24,184 |
|
|
$ |
|
|
|
$ |
|
|
Actual return on plan assets |
|
|
6,895 |
|
|
|
(8,728 |
) |
|
|
|
|
|
|
|
|
Employer contributions |
|
|
4,259 |
|
|
|
6,227 |
|
|
|
182 |
|
|
|
215 |
|
Participant contributions |
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
26 |
|
Benefits paid and expenses |
|
|
(1,275 |
) |
|
|
(621 |
) |
|
|
(217 |
) |
|
|
(241 |
) |
Administrative expense |
|
|
|
|
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
30,923 |
|
|
$ |
21,044 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year (1) |
|
$ |
(33,075 |
) |
|
$ |
(28,828 |
) |
|
$ |
(14,321 |
) |
|
$ |
(11,138 |
) |
|
|
|
|
|
|
(1) |
|
Funded status includes the impact of obligations associated with various non-qualified
executive deferred savings plans for which there are no required funding levels. The
Companys qualified defined benefit pension plan was under-funded by $4.9 million and $8.9
million, respectively, as of December 31, 2009 and 2008. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Pension Benefits |
|
Other Benefits |
(dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Amounts recognized in balance sheets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Current liabilities |
|
|
(738 |
) |
|
|
(599 |
) |
|
|
(214 |
) |
|
|
(197 |
) |
Non-current liabilities |
|
|
(32,337 |
) |
|
|
(28,229 |
) |
|
|
(14,107 |
) |
|
|
(10,941 |
) |
|
|
|
Net amount recognized |
|
$ |
(33,075 |
) |
|
$ |
(28,828 |
) |
|
$ |
(14,321 |
) |
|
$ |
(11,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Pension Benefits |
|
Other Benefits |
(dollars in thousands) |
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Amounts recognized in
accumulated other
comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
$ |
18,006 |
|
|
$ |
17,265 |
|
|
$ |
3,790 |
|
|
$ |
1,715 |
|
Net prior service cost |
|
|
2,943 |
|
|
|
3,536 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
20,949 |
|
|
$ |
20,801 |
|
|
$ |
3,790 |
|
|
$ |
1,715 |
|
|
|
|
The following table presents additional year-end information for pension plans based on the excess
or shortfall of plan assets as compared to the accumulated benefit obligation (ABO) as of
December 31, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
ABO in Excess |
|
Plan Assets in |
|
ABO in Excess |
|
Plan Assets in |
|
|
of Plan Assets |
|
Excess of ABO |
|
of Plan Assets |
|
Excess of ABO |
Aggregate projected benefit
obligation |
|
$ |
63,998 |
|
|
$ |
|
|
|
$ |
49,872 |
|
|
$ |
|
|
Aggregate fair value of plan
assets |
|
|
30,923 |
|
|
|
|
|
|
|
21,044 |
|
|
|
|
|
Accumulated benefit obligation |
|
|
58,744 |
|
|
|
|
|
|
|
45,715 |
|
|
|
|
|
124
The components of net periodic benefit cost and other changes in plan assets and benefit
obligations recognized in other comprehensive income were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
Other Benefits |
Net periodic benefit cost: |
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
Service cost |
|
$ |
3,821 |
|
|
$ |
3,459 |
|
|
$ |
3,082 |
|
|
$ |
597 |
|
|
$ |
631 |
|
|
$ |
630 |
|
Interest cost |
|
|
3,443 |
|
|
|
2,836 |
|
|
|
2,303 |
|
|
|
674 |
|
|
|
638 |
|
|
|
582 |
|
Expected return on plan assets |
|
|
(1,945 |
) |
|
|
(2,190 |
) |
|
|
(1,876 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior actuarial losses |
|
|
1,593 |
|
|
|
512 |
|
|
|
341 |
|
|
|
20 |
|
|
|
92 |
|
|
|
141 |
|
Amortization of prior service cost |
|
|
558 |
|
|
|
366 |
|
|
|
363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
|
7,470 |
|
|
|
4,983 |
|
|
$ |
4,213 |
|
|
|
1,291 |
|
|
|
1,361 |
|
|
$ |
1,353 |
|
|
|
|
Other changes in plan assets and
benefit obligations recognized in other
comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (gains) losses |
|
|
2,009 |
|
|
|
11,544 |
|
|
|
|
|
|
|
2,094 |
|
|
|
(670 |
) |
|
|
|
|
Prior service cost |
|
|
|
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial (gains) losses |
|
|
(1,593 |
) |
|
|
(512 |
) |
|
|
|
|
|
|
(20 |
) |
|
|
(92 |
) |
|
|
|
|
Amortization of prior service cost
(credit) |
|
|
(558 |
) |
|
|
(366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange translations and other
adjustments |
|
|
290 |
|
|
|
(498 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other
comprehensive income |
|
|
148 |
|
|
|
10,488 |
|
|
|
|
|
|
|
2,074 |
|
|
|
(764 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic
benefit cost and other comprehensive
income |
|
$ |
7,618 |
|
|
$ |
15,471 |
|
|
|
|
|
|
$ |
3,365 |
|
|
$ |
597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to contribute to the plans $3.6 million in pension benefits and $0.2 million in
other benefits during 2010.
The following benefit payments, which reflect expected future service as appropriate, are expected
to be paid (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
Other |
|
|
Benefits |
|
Benefits |
|
|
|
2010 |
|
|
3,630 |
|
|
|
221 |
|
2011 |
|
|
4,430 |
|
|
|
251 |
|
2012 |
|
|
5,384 |
|
|
|
284 |
|
2013 |
|
|
5,861 |
|
|
|
332 |
|
2014 |
|
|
6,091 |
|
|
|
389 |
|
2015 -2019 |
|
|
38,418 |
|
|
|
2,910 |
|
The estimated net loss and prior service cost for the defined benefit pension plans and
post-retirement plans that will be amortized from accumulated other comprehensive income into net
periodic benefit cost over the next fiscal year are $1.2 million and $0.3 million, respectively.
Assumptions
Weighted average assumptions used to determine the accumulated benefit obligation and net benefit
cost or income for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
Other Benefits |
|
|
2009 |
|
2008 |
|
2007 |
|
2009 |
|
2008 |
|
2007 |
Discount rate used to
determine benefit
obligations |
|
|
6.01 |
% |
|
|
6.20 |
% |
|
|
5.81 |
% |
|
|
5.50 |
% |
|
|
6.30 |
% |
|
|
6.00 |
% |
Discount rate used to
determine net benefit cost
or income |
|
|
6.37 |
% |
|
|
6.19 |
% |
|
|
5.70 |
% |
|
|
6.30 |
% |
|
|
6.00 |
% |
|
|
5.75 |
% |
Expected long-term rate of
return on plan assets |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
8.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase |
|
|
4.21 |
% |
|
|
4.22 |
% |
|
|
4.20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
125
The expected rate of return on plan assets is based on anticipated performance of the various asset
sectors in which the plan invests, weighted by target allocation percentages. Anticipated future
performance is based on long-term historical returns of the plan assets by sector, adjusted for the
long-term expectations on the performance of the markets. While the precise expected return
derived using this approach may fluctuate from year to year, the policy is to hold this long-term
assumption constant as long as it remains within reasonable tolerance from the derived rate. This
process is consistent for all plan assets as all the assets are invested in mutual funds.
The assumed health care cost trend rates used in measuring the accumulated non-pension
post-retirement benefit obligation were as follows:
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
Pre-Medicare eligible claims |
|
8% down to 5% in 2013 |
|
8% down to 5% in 2012 |
Medicare eligible claims |
|
8% down to 5% in 2012 |
|
8% down to 5% in 2012 |
Assumed health care cost trend rates may have a significant effect on the amounts reported for
health care plans. A one-percentage point change in assumed health care cost trend rates would
have the following effects (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
One Percent Increase |
|
One Percent Decrease |
Effect on total of service and interest cost components |
|
$ |
319 |
|
|
$ |
(240 |
) |
Effect on accumulated postretirement benefit obligation |
|
$ |
3,108 |
|
|
$ |
(2,391 |
) |
Results for the Pension and Other Benefits Plans are measured at December 31 for each year
presented.
Plan Assets
Target allocations of assets are determined with the objective of maximizing returns and minimizing
volatility of net assets through adequate asset diversification and partial liability immunization.
Adjustments are made to target allocations based on the Companys assessment of the effect of
economic factors and market conditions. The target allocations for plan assets are 60% equity
securities and 40% debt securities as of December 31, 2009 and 2010. The Companys plan assets are
primarily invested in mutual funds. The mutual funds include holdings of S&P 500 securities,
large-cap securities, mid-cap securities, small-cap securities, international securities, corporate
debt securities, U.S. and other government securities, mortgage-related securities and cash.
Equity and debt securities are exposed to various risks, such as interest rate risk, credit risk,
and overall market volatility. Due to the level of risk associated with certain investment
securities, it is reasonably possible that changes in the values of investment securities will
occur and that such change could affect the amounts reported in the financial statements.
The fair values of the Companys pension plan assets are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
|
Mutual Funds (1) |
|
$ |
30,887 |
|
|
$ |
30,887 |
|
|
$ |
|
|
|
$ |
|
|
Cash |
|
|
36 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
30,923 |
|
|
$ |
30,923 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
(1) |
|
Mutual funds are invested 38% in bond index funds, 31% in S&P 500 index funds, 16% in
mid-cap stock funds, 10% in foreign large blend funds and 5% in small-cap stock funds. |
As of December 31, 2009, the Company classified all of its pension plan assets in the Level 1
category as quoted prices in active markets are available for these assets. Therefore, a
reconciliation for pension plan assets measured at fair value using significant unobservable inputs
(Level 3) for the year ended December 31, 2009 is not required. See Note 6 Fair Value of
Financial Instruments for additional detail on the fair value hierarchy.
Savings and Investment Plans
Certain subsidiaries of the Company also sponsor saving and investment plans under which a portion
of employee contributions are matched. Subsidiary contributions to these plans, which are
partially tied to RGAs financial results, were $2.7 million, $3.4 million and $2.8 million in
2009, 2008 and 2007, respectively.
126
Note 11 RELATED PARTY TRANSACTIONS
On September 12, 2008 (the Divestiture Date), the Companys majority shareholder, General
American Life Insurance Company (General American), disposed of its majority ownership in the
Company. General American is a wholly-owned subsidiary of MetLife, Inc. (MetLife), a New
York-based insurance and financial services holding company. Prior to the Divestiture Date,
General American and MetLife provided certain administrative services to RGA and RGA Reinsurance.
Such services included risk management and corporate travel. The cost of these services for the
years ended December 31, 2008 and 2007 was approximately $1.8 million (through the Divestiture
Date) and $2.8 million, respectively, included in other expenses. Management does not believe that
the various amounts charged for these services would have been materially different if they had
been incurred from an unrelated third party.
RGA Reinsurance also has a product license and service agreement with MetLife. Under this
agreement, RGA has licensed the use of its electronic underwriting product to MetLife and provides
internet hosting services, installation and modification services for the product. The Company
recorded revenue under the agreement for the years ended December 31, 2008 and 2007 of
approximately $0.6 million (through the Divestiture Date) and $0.6 million, respectively.
The Company also had arms-length direct policies and reinsurance agreements with MetLife and
certain of its subsidiaries. These direct policies and reinsurance agreements with MetLife and
certain of its subsidiaries continue to be in place after the Divestiture Date. The Company
reflected net premiums from these agreements of approximately $163.5 million (through the
Divestiture Date) and $250.9 million in 2008 and 2007, respectively. The premiums reflect the net
of business assumed from and ceded to MetLife and its subsidiaries. The pre-tax income, excluding
investment income allocated to support the business, was approximately $15.8 million (through the
Divestiture Date) and $16.0 million in 2008 and 2007, respectively.
Note 12 LEASE COMMITMENTS
The Company leases office space and furniture and equipment under non-cancelable operating lease
agreements, which expire at various dates. Future minimum office space annual rentals under
non-cancelable operating leases at December 31, 2009 are as follows:
|
|
|
|
|
2010 |
|
$9.3 million |
2011 |
|
6.7 million |
2012 |
|
6.0 million |
2013 |
|
5.9 million |
2014 |
|
5.2 million |
Thereafter |
|
4.7 million |
The amounts above are net of expected sublease income of approximately $0.4 million annually
through 2010. Rent expenses amounted to approximately $13.9 million, $12.5 million and $11.8
million for the years ended December 31, 2009, 2008 and 2007, respectively.
Note 13 FINANCIAL CONDITION AND NET INCOME ON A STATUTORY BASIS SIGNIFICANT SUBSIDIARIES
The following table presents selected statutory financial information for the Companys primary
life reinsurance legal entities, as of or for the years ended December 31, 2009, 2008, and 2007
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory |
|
Statutory |
|
|
Capital & Surplus |
|
Net Income (Loss) |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
2007 |
RCM |
|
$ |
1,412,945 |
|
|
$ |
1,107,899 |
|
|
$ |
(16,800 |
) |
|
$ |
(2,276 |
) |
|
$ |
5,167 |
|
RGA Reinsurance |
|
|
1,416,550 |
|
|
|
1,103,753 |
|
|
|
63,188 |
|
|
|
(41,750 |
) |
|
|
(41,535 |
) |
RGA Canada |
|
|
430,738 |
|
|
|
372,441 |
|
|
|
(2,620 |
) |
|
|
9,915 |
|
|
|
12,244 |
|
RGA Barbados |
|
|
303,598 |
|
|
|
226,572 |
|
|
|
37,344 |
|
|
|
31,006 |
|
|
|
54,293 |
|
RGA Australia |
|
|
271,755 |
|
|
|
180,969 |
|
|
|
37,515 |
|
|
|
57,250 |
|
|
|
43,526 |
|
RGA Atlantic |
|
|
199,989 |
|
|
|
126,363 |
|
|
|
47,422 |
|
|
|
58,200 |
|
|
|
(57 |
) |
RGA Americas |
|
|
159,132 |
|
|
|
133,903 |
|
|
|
16,752 |
|
|
|
(49,532 |
) |
|
|
31,804 |
|
Other reinsurance
subsidiaries |
|
|
297,463 |
|
|
|
346,313 |
|
|
|
(313,415 |
) |
|
|
(104,708 |
) |
|
|
(201,613 |
) |
127
The total capital and surplus positions of RCM, RGA Reinsurance and RGA Canada exceed the
risk-based capital requirements of the applicable regulatory bodies. RCM and RGA Reinsurance are
subject to Missouri statutory provisions that restrict the payment of dividends. They may not pay
dividends in any 12-month period in excess of the greater of the prior years statutory operating
income or 10% of capital and surplus at the preceding year-end, without regulatory approval. The
applicable statutory provisions only permit an insurer to pay a shareholder dividend from
unassigned surplus. Any dividends paid by RGA Reinsurance would be paid to RCM, its parent
company, which in turn has restrictions related to its ability to pay dividends to RGA. The assets
of RCM consist primarily of its investment in RGA Reinsurance. As of January 1, 2010, RCM and RGA
Reinsurance could pay maximum dividends, without prior approval, of approximately $141.3 million
and $146.6 million, respectively. The Missouri Department of Insurance, Financial Institution and
Professional Registration, allows RCM to pay a dividend to RGA to the extent RCM received the
dividend from RGA Reinsurance, without limitation related to the level of unassigned surplus.
Dividend payments by other subsidiaries are subject to regulations in the jurisdiction of domicile.
Note 14 COMMITMENTS AND CONTINGENT LIABILITIES
The Company had commitments to fund investments in limited partnerships, commercial mortgage loans
and private placement investments in the amount of $86.6 million, $12.6 million and $7.0 million,
respectively, at December 31, 2009. The Company anticipates that the majority of its current
commitments will be invested over the next five years, however, contractually, these commitments
could become due at the request of the counterparties. Investments in limited partnerships are
carried at cost and included in other invested assets in the consolidated balance sheets.
The Company is subject to litigation in the normal course of its business. The Company currently
has no material litigation. A legal reserve is established when the Company is notified of an
arbitration demand or litigation or is notified that an arbitration demand or litigation is
imminent, it is probable that the Company will incur a loss as a result and the amount of the
probable loss is reasonably capable of being estimated. However, if such material litigation did
arise, it is possible that an adverse outcome on any particular arbitration or litigation situation
could have a material adverse effect on the Companys consolidated financial position and/or net
income in a particular reporting period.
The Company has obtained letters of credit, issued by banks, in favor of various affiliated and
unaffiliated insurance companies from which the Company assumes business. These letters of credit
represent guarantees of performance under the reinsurance agreements and allow ceding companies to
take statutory reserve credits. Certain of these letters of credit contain financial covenant
restrictions. At December 31, 2009 and 2008, there were approximately $21.4 million and $26.6
million, respectively, of outstanding bank letters of credit in favor of third parties.
Additionally, the Company utilizes letters of credit to secure reserve credits when it retrocedes
business to its subsidiaries, including Parkway Re, RGA Americas, RGA Barbados and RGA Atlantic.
The Company cedes business to its affiliates to help reduce the amount of regulatory capital
required in certain jurisdictions such as the U.S. and the United Kingdom. The capital required to
support the business in the affiliates reflects more realistic expectations than the original
jurisdiction of the business, where capital requirements are often considered to be quite
conservative. As of December 31, 2009 and 2008, $617.5 million and $428.8 million, respectively,
in letters of credit from various banks were outstanding, backing reinsurance between the various
subsidiaries of the Company. The Company maintains a syndicated revolving credit facility with an
overall capacity of $750.0 million, which is scheduled to mature in September 2012. The Company
may borrow cash and may obtain letters of credit in multiple currencies under this facility. At
December 31, 2009, the Company had $373.9 million in issued, but undrawn, letters of credit under
this facility, which is included in the total above. Applicable letter of credit fees and fees
payable for the credit facility depend upon the Companys senior unsecured long-term debt rating.
In September 2009, the Company entered into a ten-year, $200.0 million letter of credit facility
agreement. This letter of credit is expected to be fully utilized though 2016 and then amortize to
zero by 2019. As of December 31, 2009, the Company had $200.0 million in issued, but undrawn,
letters of credit under this new facility, which is included in the total above. Letter of credit
fees for this facility are fixed for the term of the facility. Fees associated with the Companys
other letters of credit are not fixed for periods in excess of one year and are based on the
Companys ratings and the general availability of these instruments in the marketplace.
RGA has issued guarantees to third parties on behalf of its subsidiaries for the payment of amounts
due under certain credit facilities, reinsurance treaties and office lease obligations, whereby if
a subsidiary fails to meet an obligation, RGA or one of its other subsidiaries will make a payment
to fulfill the obligation. In limited circumstances, treaty guarantees are granted to ceding
companies in order to provide them additional security, particularly in cases where RGAs
subsidiary is relatively new, unrated, or not of a significant size, relative to the ceding
company. Liabilities supported by the treaty guarantees, before consideration for any legally
offsetting amounts due from the guaranteed party, totaled $330.3 million and $273.6 million as of
December 31, 2009 and 2008, respectively, and are reflected on the Companys consolidated balance
sheets in
128
future policy benefits. Potential guaranteed amounts of future payments will vary depending on
production levels and underwriting results. Guarantees related to trust preferred securities and
credit facilities provide additional security to third parties should a subsidiary fail to make
principal and/or interest payments when due. As of December 31, 2009, RGAs exposure related to
these guarantees was $159.2 million. RGA has issued payment guarantees on behalf of two of its
subsidiaries in the event the subsidiaries fail to make payment under their office lease
obligations, the exposure of which was $4.3 million as of December 31, 2009.
In addition, the Company indemnifies its directors and officers as provided in its charters and
by-laws. Since this indemnity generally is not subject to limitation with respect to duration or
amount, the Company does not believe that it is possible to determine the maximum potential amount
due under this indemnity in the future.
Note 15 DEBT AND TRUST PREFERRED SECURITIES
The Companys debt and trust preferred securities consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
$400 million 6.75% Junior Subordinated Debentures due 2065 |
|
$ |
318,722 |
|
|
$ |
398,646 |
|
$400 million 6.45% Senior Notes due 2019 |
|
|
399,330 |
|
|
|
|
|
$300 million 5.625% Senior Notes due 2017 |
|
|
298,031 |
|
|
|
297,757 |
|
$200 million 6.75% Senior Notes due 2011 |
|
|
199,969 |
|
|
|
199,954 |
|
Revolving Credit Facilities |
|
|
|
|
|
|
21,889 |
|
|
|
|
Long-term Debt |
|
$ |
1,216,052 |
|
|
$ |
918,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$225.0 million 5.75% Preferred Securities due 2051 |
|
$ |
159,217 |
|
|
$ |
159,035 |
|
|
|
|
In November 2009, RGA issued 6.45% Senior Notes due November 15, 2019 with a face amount of
$400.0 million. These senior notes were registered with the Securities and Exchange Commission.
The net proceeds from the offering were approximately $396.3 million and were designated for
general corporate purposes. Capitalized issue costs were approximately $3.0 million.
During 2009, the Company repurchased $80.2 million face amount of its 6.75% junior subordinated
debentures for $39.2 million. The debt was purchased by RGA Reinsurance. As a result, the Company
recorded a pre-tax gain of $38.9 million, after fees and unamortized discount, in other revenues in
2009.
In March 2007, RGA issued 5.625% Senior Notes due March 15, 2017 with a face amount of $300.0
million. These senior notes were registered with the Securities and Exchange Commission. The net
proceeds from the offering were approximately $295.3 million, a portion of which were used to pay
down $50.0 million of indebtedness under a U.S. bank credit facility. The remaining net proceeds
were designated for general corporate purposes. Capitalized issue costs were approximately $2.4
million.
The Company has three revolving credit facilities under which it may borrow up to approximately
$819.2 million in cash. As of December 31, 2009, the Company had no cash borrowings under these
facilities and as of December 31, 2008, the Company had drawn approximately $21.9 million in cash
under these facilities. The interest rates on borrowings from the Companys revolving credit
facilities ranged from 1.52% to 3.11% during 2009 and 3.11% to 6.13% during 2008. The Company may
borrow up to $750.0 million in cash and obtain letters of credit in multiple currencies on its
revolving credit facility that expires in September 2012. As of December 31, 2009 and 2008,
respectively, the Company had no cash borrowings outstanding and $373.9 million and $389.7 million
in issued, but undrawn, letters of credit under this facility. The Companys other credit
facilities consist of a £15.0 million credit facility that expires in May 2010 and an A$50.0
million Australian credit facility that expires in March 2011, both with no outstanding balances as
of December 31, 2009 and a combined outstanding balance of $21.9 million at December 31, 2008.
Repayments of debt over the next five years total $200.0 million, due in 2011.
Certain of the Companys debt agreements contain financial covenant restrictions related to, among
others, liens, the issuance and disposition of stock of restricted subsidiaries, minimum
requirements of consolidated net worth, maximum ratios of debt to capitalization and change of
control provisions. A material ongoing covenant default could require immediate payment of the
amount due, including principal, under the various agreements. Additionally, the Companys debt
agreements contain cross-default covenants, which would make outstanding borrowings immediately
payable in the event of a material uncured covenant default under any of the agreements, including,
but not limited to, non-payment of indebtedness when due for an amount in excess of $100.0 million,
bankruptcy proceedings, or any other event which results in the acceleration of the
129
maturity of indebtedness. As of December 31, 2009, the Company had $1,216.1 million in outstanding
borrowings under its debt agreements and was in compliance with all covenants under those
agreements. The ability of the Company to make debt principal and interest payments depends on the
earnings and surplus of subsidiaries, investment earnings on undeployed capital proceeds, and the
Companys ability to raise additional funds.
RGA guarantees the payment of amounts outstanding under the credit facility maintained by its
subsidiary operation in Australia. At December 31, 2009 there was no debt outstanding under this
credit facility.
In December 2001, RGA, through its wholly-owned trust, RGA Capital Trust I, issued $225.0 million
face amount in Preferred Securities due 2051 at a discounted value of $158.1 million. RGA fully
and unconditionally guarantees, on a subordinated basis, the obligations of the Trust under the
Preferred Securities.
Note 16 COLLATERAL FINANCE FACILITY
In June 2006, RGAs subsidiary, Timberlake Financial, issued $850.0 million of Series A
Floating Rate Insured Notes due June 2036 in a private placement. The notes were issued to fund
the collateral requirements for statutory reserves required by the U.S. Valuation of Life Policies
Model Regulation (commonly referred to as Regulation XXX) on specified term life insurance policies
reinsured by RGA Reinsurance. Proceeds from the notes, along with a $112.8 million direct
investment by the Company, were deposited into a series of accounts that collateralize the notes
and are not available to satisfy the general obligations of the Company. As of December 31, 2009
and 2008, respectively, the Company held assets in trust and in custody of $876.7 million and
$885.4 million for this purpose. Interest on the notes will accrue at an annual rate of 1-month
LIBOR plus a base rate margin, payable monthly and totaled $8.3 million and $28.7 million in 2009
and 2008, respectively. The payment of interest and principal on the notes is insured by a
monoline insurance company through a financial guaranty insurance policy. The notes represent
senior, secured indebtedness of Timberlake Financial without legal recourse to RGA or its other
subsidiaries. Timberlake Financial will rely primarily upon the receipt of interest and principal
payments on a surplus note and dividend payments from its wholly-owned subsidiary, Timberlake Re, a
South Carolina captive insurance company, to make payments of interest and principal on the notes.
The ability of Timberlake Re to make interest and principal payments on the surplus note and
dividend payments to Timberlake Financial is contingent upon South Carolina regulatory approval,
the return on Timberlake Res investment assets and the performance of specified term life
insurance policies with guaranteed level premiums retroceded by RGAs subsidiary, RGA Reinsurance,
to Timberlake Re.
In accordance with the general accounting principles for Consolidation, Timberlake Financial is
considered to be a variable interest entity and the Company is deemed to hold the primary
beneficial interest. As a result, Timberlake Financial has been consolidated in the Companys
financial statements. The Companys consolidated balance sheets include the assets of Timberlake
Financial recorded as fixed maturity investments and other invested assets, which consists of
restricted cash and cash equivalents, with the liability for the notes recorded as collateral
finance facility. The Companys consolidated statements of income include the investment return of
Timberlake Financial as investment income and the cost of the facility is reflected in collateral
finance facility expense.
Note 17 SEGMENT INFORMATION
The Company has five main geographic-based operational segments, each of which is a distinct
reportable segment: U.S., Canada, Europe & South Africa, Asia Pacific and Corporate and Other. The
U.S. operations market traditional life reinsurance, reinsurance of asset-intensive products and
financial reinsurance, primarily to large U.S. market life insurance companies. Asset-intensive
products primarily include reinsurance of corporate-owned life insurance and annuities. The Canada
operations provide insurers with reinsurance of traditional individual life products as well as
creditor reinsurance, group life and health reinsurance and non-guaranteed critical illness
products. Europe & South Africa operations include traditional life reinsurance and critical
illness business from Europe & South Africa, in addition to other markets being developed by the
Company. Asia Pacific operations provide primarily traditional life reinsurance, critical illness
and, to a lesser extent, financial reinsurance through RGA Australia and RGA Reinsurance.
Corporate and Other includes results from, among others, RGA Technology Partners, Inc., a
wholly-owned subsidiary that develops and markets technology solutions for the insurance industry
and the investment income and expense associated with the Companys collateral finance facility.
Effective January 1, 2009, due to immateriality, the discontinued accident and health operations
were included in the results of the Corporate and Other segment. The consolidated statements of
income for 2008 and 2007 reflect this line of business as a discontinued operation. The Company
measures segment performance based on income or loss before income taxes.
The accounting policies of the segments are the same as those described in Note 2 Summary of
Significant Accounting Policies. The Company measures segment performance primarily based on
profit or loss from operations before income taxes. There are no intersegment reinsurance
transactions and the Company does not have any material long-lived assets.
130
The Company allocates capital to its segments based on an internally developed economic capital
model, the purpose of which is to measure the risk in the business and to provide a basis upon
which capital is deployed. The economic capital model considers the unique and specific nature of
the risks inherent in RGAs businesses. As a result of the economic capital allocation process, a
portion of investment income and investment related gains and losses are credited to the segments
based on the level of allocated equity. In addition, the segments are charged for excess capital
utilized above the allocated economic capital basis. This charge is included in policy acquisition
costs and other insurance expenses.
The Companys reportable segments are strategic business units that are primarily segregated by
geographic region. Information related to revenues, income (loss) before income taxes, interest
expense, depreciation and amortization, and assets of the Companys continuing operations are
summarized below (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
4,255,534 |
|
|
$ |
3,148,124 |
|
|
$ |
3,391,007 |
|
Canada |
|
|
777,235 |
|
|
|
691,948 |
|
|
|
619,405 |
|
Europe & South Africa |
|
|
826,880 |
|
|
|
732,475 |
|
|
|
702,391 |
|
Asia Pacific |
|
|
1,085,088 |
|
|
|
1,057,873 |
|
|
|
908,606 |
|
Corporate and Other |
|
|
122,085 |
|
|
|
50,783 |
|
|
|
96,952 |
|
|
|
|
Total from continuing operations |
|
$ |
7,066,822 |
|
|
$ |
5,681,203 |
|
|
$ |
5,718,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Income (loss) from continuing operations before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
308,718 |
|
|
$ |
66,088 |
|
|
$ |
327,928 |
|
Canada |
|
|
106,335 |
|
|
|
102,266 |
|
|
|
81,543 |
|
Europe & South Africa |
|
|
52,341 |
|
|
|
65,686 |
|
|
|
47,467 |
|
Asia Pacific |
|
|
83,546 |
|
|
|
85,509 |
|
|
|
60,090 |
|
Corporate and Other |
|
|
41,405 |
|
|
|
(39,157 |
) |
|
|
(42,110 |
) |
|
|
|
Total from continuing operations |
|
$ |
592,345 |
|
|
$ |
280,392 |
|
|
$ |
474,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other |
|
$ |
69,940 |
|
|
$ |
76,161 |
|
|
$ |
76,906 |
|
|
|
|
Total from continuing operations |
|
$ |
69,940 |
|
|
$ |
76,161 |
|
|
$ |
76,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
2009 |
|
2008 |
|
2007 |
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
733,345 |
|
|
$ |
162,944 |
|
|
$ |
426,713 |
|
Canada |
|
|
145,330 |
|
|
|
109,826 |
|
|
|
86,800 |
|
Europe & South Africa |
|
|
58,297 |
|
|
|
97,791 |
|
|
|
120,772 |
|
Asia Pacific |
|
|
114,300 |
|
|
|
122,031 |
|
|
|
113,108 |
|
Corporate and Other |
|
|
7,446 |
|
|
|
7,423 |
|
|
|
6,990 |
|
|
|
|
Total from continuing operations |
|
$ |
1,058,718 |
|
|
$ |
500,015 |
|
|
$ |
754,383 |
|
|
|
|
The table above includes amortization of deferred acquisition costs, including the effect from
investment related gains and losses.
131
|
|
|
|
|
|
|
|
|
As of December 31, |
|
2009 |
|
2008 |
Assets: |
|
|
|
|
|
|
|
|
U.S. |
|
$ |
15,569,263 |
|
|
$ |
15,061,753 |
|
Canada |
|
|
3,026,515 |
|
|
|
2,710,187 |
|
Europe & South Africa |
|
|
1,400,580 |
|
|
|
1,134,990 |
|
Asia Pacific |
|
|
2,060,425 |
|
|
|
1,413,611 |
|
Corporate and Other and discontinued operations |
|
|
3,192,718 |
|
|
|
1,338,277 |
|
|
|
|
Total assets |
|
$ |
25,249,501 |
|
|
$ |
21,658,818 |
|
|
|
|
Companies in which RGA has an ownership position greater than twenty percent, but less than or
equal to fifty percent, are reported on the equity basis of accounting. The equity in the net
income of such subsidiaries is not material to the results of operations or financial position of
individual segments or the Company taken as a whole. Capital expenditures of each reporting
segment were immaterial in the periods noted.
During 2009, three clients generated $334.5 million or 37.9% of gross premiums for the Canada
operations. Five clients of the Companys United Kingdom operations generated approximately $400.8
million, or 49.4% of the total gross premiums for the Europe & South Africa operations. Ten
clients, six in Australia, two in Korea and two in Japan, generated approximately $582.4 million,
or 56.7% of the total gross premiums for the Asia Pacific operations. The U.S. reinsurance
operations largest client generated approximately $573.0 million or 16.3% of U.S. operations gross
premiums.
Note 18 EQUITY BASED COMPENSATION
The Company adopted the RGA Flexible Stock Plan (the Plan) in February 1993, as amended, and the
Flexible Stock Plan for Directors (the Directors Plan) in January 1997, as amended,
(collectively, the Stock Plans). The Stock Plans provide for the award of benefits (collectively
Benefits) of various types, including stock options, stock appreciation rights (SARs),
restricted stock, performance shares, cash awards, and other stock-based awards, to key employees,
officers, directors and others performing significant services for the benefit of the Company or
its subsidiaries. As of December 31, 2009, shares authorized for the granting of Benefits under
the Plan and the Directors Plan totaled 9,260,077 and 212,500 respectively. The Company generally
uses treasury shares to support the future exercise of options or settlement of awards granted
under its stock plans.
Equity-based compensation expense of $10.7 million, $10.7 million, and $18.3 million related to
grants or awards under the Stock Plans was recognized in 2009, 2008 and 2007, respectively.
Equity-based compensation expense is principally related to the issuance of stock options,
performance contingent restricted units, and restricted stock.
In general, options granted under the Plan become exercisable over vesting periods ranging from one
to five years while options granted under the Directors Plan become exercisable after one year.
Options are generally granted with an exercise price equal to the stocks fair value at the date of
grant and expire 10 years after the date of grant. Information with respect to grants under the
Stock Plans follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Intrinsic Value |
|
|
Performance |
|
|
|
Options |
|
|
Exercise Price |
|
|
(in millions) |
|
|
Contingent Units |
|
Outstanding January 1, 2007 |
|
|
2,799,551 |
|
|
$ |
34.39 |
|
|
|
|
|
|
|
392,180 |
|
Granted |
|
|
319,487 |
|
|
$ |
59.63 |
|
|
|
|
|
|
|
105,453 |
|
Exercised / Lapsed |
|
|
(455,901 |
) |
|
$ |
29.97 |
|
|
|
|
|
|
|
(121,307 |
) |
Forfeited |
|
|
(67,884 |
) |
|
$ |
45.81 |
|
|
|
|
|
|
|
(22,177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2007 |
|
|
2,595,253 |
|
|
$ |
37.98 |
|
|
|
|
|
|
|
354,149 |
|
Granted |
|
|
434,622 |
|
|
$ |
56.03 |
|
|
|
|
|
|
|
160,968 |
|
Exercised / Lapsed |
|
|
(189,229 |
) |
|
$ |
33.60 |
|
|
|
|
|
|
|
(113,667 |
) |
Forfeited |
|
|
(53,462 |
) |
|
$ |
51.01 |
|
|
|
|
|
|
|
(18,331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008 |
|
|
2,787,184 |
|
|
$ |
40.84 |
|
|
|
|
|
|
|
383,119 |
|
Granted |
|
|
743,145 |
|
|
$ |
32.20 |
|
|
|
|
|
|
|
309,063 |
|
Exercised / Lapsed |
|
|
(226,264 |
) |
|
$ |
26.77 |
|
|
|
|
|
|
|
(123,782 |
) |
Forfeited |
|
|
(103,426 |
) |
|
$ |
36.71 |
|
|
|
|
|
|
|
(12,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009 |
|
|
3,200,639 |
|
|
$ |
39.96 |
|
|
$ |
24.6 |
|
|
|
556,216 |
|
|
|
|
Options exercisable |
|
|
1,933,701 |
|
|
$ |
38.65 |
|
|
$ |
17.4 |
|
|
|
|
|
|
|
|
|
|
|
|
132
The intrinsic value of options exercised was $4.7 million, $1.7 million, and $10.3 million for
2009, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted- |
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
Outstanding |
|
Average |
|
Average |
|
Exercisable |
|
Average |
Range of |
|
as of |
|
Remaining |
|
Exercise |
|
as of |
|
Exercise |
Exercise Prices |
|
12/31/2009 |
|
Contractual Life |
|
Price |
|
12/31/2009 |
|
Price |
$25.00 - $34.99 |
|
|
1,202,963 |
|
|
|
6.7 |
|
|
$ |
30.35 |
|
|
|
459,818 |
|
|
$ |
27.36 |
|
$35.00 - $44.99 |
|
|
763,124 |
|
|
|
2.4 |
|
|
$ |
33.82 |
|
|
|
763,124 |
|
|
$ |
33.82 |
|
$45.00 - $54.99 |
|
|
538,726 |
|
|
|
5.5 |
|
|
$ |
47.47 |
|
|
|
466,128 |
|
|
$ |
47.46 |
|
$55.00 + |
|
|
695,826 |
|
|
|
7.6 |
|
|
$ |
57.49 |
|
|
|
244,631 |
|
|
$ |
58.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
3,200,639 |
|
|
|
5.7 |
|
|
$ |
39.96 |
|
|
|
1,933,701 |
|
|
$ |
38.65 |
|
|
|
|
|
|
The Black-Scholes model was used to determine the fair value of stock options granted and
recognized in the financial statements. The Company used daily historical volatility when
calculating stock option values. The risk-free rate is based on observed interest rates for
instruments with maturities similar to the expected term of the stock options. Dividend yield is
determined based on historical dividend distributions compared to the price of the underlying
common stock as of the valuation date and held constant over the life of the stock options. The
Company estimated expected life using the historical average years to exercise or cancellation.
The per share weighted-average fair value of stock options granted during 2009, 2008 and 2007 was
$8.99, $14.02 and $18.72 on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: 2009-expected dividend yield of 1.12%, risk-free interest
rate of 2.03%, expected life of 6.0 years, and an expected rate of volatility of the stock of 29.1%
over the expected life of the options; 2008-expected dividend yield of 0.6%, risk-free interest
rate of 3.23%, expected life of 6.0 years, and an expected rate of volatility of the stock of 20.0%
over the expected life of the options; and 2007-expected dividend yield of 0.6%, risk-free interest
rate of 4.67%, expected life of 6.0 years, and an expected rate of volatility of the stock of 23.4%
over the expected life of the options.
In general, restrictions lapse on restricted stock awards at the end of a three- or ten-year
vesting period. Restricted stock awarded under the plan generally has no strike price and is
included in the Companys shares outstanding. As of December 31, 2009, no shares of restricted
stock were outstanding.
During 2009, 2008 and 2007 the Company also issued 309,063, 160,968 and 105,453 performance
contingent units (PCUs) to key employees at a weighted average fair value per unit of $32.20,
$56.03 and $59.63, respectively. As of December 31, 2009, 309,063, 153,107 and 94,046 PCUs were
outstanding from the 2009, 2008 and 2007 grants, respectively. Each PCU represents the right to
receive up to two shares of Company common stock, depending on the results of certain performance
measures over a three-year period. The compensation expense related to the PCUs is recognized
ratably over the requisite performance period. In February 2010, 2009 and 2008, the board approved
a 0.68, 1.33 and 1.92 share payout for each PCU granted in 2007, 2006 and 2005, resulting in the
issuance of 63,409, 164,630 and 218,240 shares of common stock from treasury, respectively.
As of December 31, 2009, there was $15.9 million of unrecognized compensation costs related to
equity-based grants or awards. It is estimated that these costs will vest over a weighted average
period of 2.3 years.
In
February 2010, the board approved an incentive compensation package including 531,804 incentive
stock options at $47.10 per share and 251,328 PCUs under the Plan. In addition, non-employee
directors received 10,600 shares of common stock under the Directors Plan.
133
Note 19 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share from
continuing operations (in thousands, except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
|
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations (numerator for
basic and diluted calculations) |
|
$ |
407,086 |
|
|
$ |
187,815 |
|
|
$ |
308,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares
(denominator for basic calculation) |
|
|
72,790 |
|
|
|
63,918 |
|
|
|
61,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalent shares from outstanding stock options and warrants |
|
|
537 |
|
|
|
1,353 |
|
|
|
2,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares (denominator for diluted calculation) |
|
|
73,327 |
|
|
|
65,271 |
|
|
|
64,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
5.59 |
|
|
$ |
2.94 |
|
|
$ |
4.98 |
|
Diluted |
|
$ |
5.55 |
|
|
$ |
2.88 |
|
|
$ |
4.80 |
|
|
|
|
The calculation of equivalent shares from outstanding stock options does not include the
effect of options having a strike price that exceeds the average stock price for the earnings
period, as the result would be antidilutive. The calculation of common equivalent shares also
excludes the impact of outstanding performance contingent shares, as the conditions necessary for
their issuance have not been satisfied as of the end of the reporting period. Approximately 1.2
million, 1.6 million and 0.3 million outstanding stock options were not included in the calculation
of common equivalent shares during 2009, 2008 and 2007, respectively. Approximately 0.6 million,
0.4 million and 0.4 million performance contingent shares were excluded from the calculation of
common equivalent shares during 2009, 2008 and 2007, respectively.
Note 20 COMPREHENSIVE INCOME
The following table presents the components of the Companys other comprehensive income (loss) for
the years ended December 31, 2009, 2008 and 2007 (dollars in thousands):
For the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax (Expense) |
|
|
|
|
Before-Tax Amount |
|
Benefit |
|
After-Tax Amount |
Foreign currency translation adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Change arising during year |
|
$ |
205,472 |
|
|
$ |
(9,122 |
) |
|
$ |
196,350 |
|
Foreign currency swap |
|
|
(8,102 |
) |
|
|
2,836 |
|
|
|
(5,266 |
) |
|
|
|
Net foreign currency translation adjustments |
|
|
197,370 |
|
|
|
(6,286 |
) |
|
|
191,084 |
|
|
|
|
Unrealized gains (losses) on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding gains arising during the year |
|
|
949,091 |
|
|
|
(331,182 |
) |
|
|
617,909 |
|
Less: Reclassification adjustment for net losses
realized in net income |
|
|
(84,348 |
) |
|
|
29,522 |
|
|
|
(54,826 |
) |
|
|
|
Net unrealized gains |
|
|
1,033,439 |
|
|
|
(360,704 |
) |
|
|
672,735 |
|
|
|
|
Reclassification adjustment for other-than-temporary
impairments |
|
|
(16,045 |
) |
|
|
5,616 |
|
|
|
(10,429 |
) |
Unrealized pension and postretirement benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost arising during the year |
|
|
(422 |
) |
|
|
141 |
|
|
|
(281 |
) |
Net loss arising during the period |
|
|
(1,800 |
) |
|
|
613 |
|
|
|
(1,187 |
) |
|
|
|
Unrealized pension and postretirement benefits, net |
|
|
(2,222 |
) |
|
|
754 |
|
|
|
(1,468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
1,212,542 |
|
|
$ |
(360,620 |
) |
|
$ |
851,922 |
|
|
|
|
134
For the year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax (Expense) |
|
|
|
|
Before-Tax Amount |
|
Benefit |
|
After-Tax Amount |
Foreign currency translation adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Change arising during year |
|
$ |
(250,052 |
) |
|
$ |
12,941 |
|
|
$ |
(237,111 |
) |
Foreign currency swap |
|
|
53,720 |
|
|
|
(18,802 |
) |
|
|
34,918 |
|
|
|
|
Net foreign currency translation adjustments |
|
|
(196,332 |
) |
|
|
(5,861 |
) |
|
|
(202,193 |
) |
|
|
|
Unrealized losses on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding losses arising during the year |
|
|
(1,458,293 |
) |
|
|
511,768 |
|
|
|
(946,525 |
) |
Less: Reclassification adjustment for net losses
realized in net income |
|
|
(122,997 |
) |
|
|
43,049 |
|
|
|
(79,948 |
) |
|
|
|
Net unrealized losses |
|
|
(1,335,296 |
) |
|
|
468,719 |
|
|
|
(866,577 |
) |
|
|
|
Unrealized pension and postretirement benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost arising during the year |
|
|
799 |
|
|
|
(284 |
) |
|
|
515 |
|
Net gain arising during the period |
|
|
(10,523 |
) |
|
|
3,701 |
|
|
|
(6,822 |
) |
|
|
|
Unrealized pension and postretirement benefits, net |
|
|
(9,724 |
) |
|
|
3,417 |
|
|
|
(6,307 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
$ |
(1,541,352 |
) |
|
$ |
466,275 |
|
|
$ |
(1,075,077 |
) |
|
|
|
For the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax (Expense) |
|
|
|
|
Before-Tax Amount |
|
Benefit |
|
After-Tax Amount |
|
|
|
Foreign currency translation adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Change arising during year |
|
$ |
124,581 |
|
|
$ |
(8,343 |
) |
|
$ |
116,238 |
|
Foreign currency swap |
|
|
(5,104 |
) |
|
|
1,786 |
|
|
|
(3,318 |
) |
|
|
|
Net foreign currency translation adjustments |
|
|
119,477 |
|
|
|
(6,557 |
) |
|
|
112,920 |
|
|
|
|
Unrealized losses on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized net holding losses arising during the year |
|
|
(79,990 |
) |
|
|
33,608 |
|
|
|
(46,382 |
) |
Less: Reclassification adjustment for net losses
realized in net income |
|
|
(36,811 |
) |
|
|
12,840 |
|
|
|
(23,971 |
) |
|
|
|
Net unrealized losses |
|
|
(43,179 |
) |
|
|
20,768 |
|
|
|
(22,411 |
) |
|
|
|
Unrealized pension and postretirement benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
Net prior service cost arising during the year |
|
|
(265 |
) |
|
|
70 |
|
|
|
(195 |
) |
Net gain arising during the period |
|
|
4,853 |
|
|
|
(1,712 |
) |
|
|
3,141 |
|
|
|
|
Unrealized pension and postretirement benefits, net |
|
|
4,588 |
|
|
|
(1,642 |
) |
|
|
2,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
80,886 |
|
|
$ |
12,569 |
|
|
$ |
93,455 |
|
|
|
|
A summary of the components of net unrealized appreciation (depreciation) of balances carried
at fair value is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2009 |
|
2008 |
|
|
|
Change in net unrealized appreciation (depreciation) on: |
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale |
|
$ |
1,004,303 |
|
|
$ |
(1,332,268 |
) |
Other investments |
|
|
58,930 |
|
|
|
(50,229 |
) |
Effect of unrealized appreciation on: |
|
|
|
|
|
|
|
|
Deferred policy acquisition costs |
|
|
(45,839 |
) |
|
|
47,201 |
|
|
|
|
Net unrealized appreciation (depreciation) |
|
$ |
1,017,394 |
|
|
$ |
(1,335,296 |
) |
|
|
|
Note 21 DISCONTINUED OPERATIONS
Effective January 1, 2009, due to immateriality, the discontinued accident and health operations
were included in the results of the Corporate and Other segment. The consolidated statements of
income for 2008 and 2007 reflect this line of business as a discontinued operation. The
calculation of the claim reserve liability for the entire portfolio of accident and health business
requires management to make estimates and assumptions that affect the reported claim reserve
levels. Revenues associated with discontinued operations, which were not reported on a gross basis
in the Companys consolidated statements of income in 2008 and 2007, totaled $2.1 million and $2.0
million, respectively. As of December 31, 2009, there are no arbitrations or claims disputes
associated with the Companys discontinued accident and health operations, and the remaining runoff
activity of this business is not expected to be significant.
135
Note 22 SUBSEQUENT EVENT
Effective January 1, 2010, the Company completed its acquisition of ReliaStar Life Insurance
Companys U.S. and Canadian group life, accident and health reinsurance business. ReliaStar is a
subsidiary of ING Groep N.V. The acquisition was structured as an indemnity coinsurance agreement
and the Company expects this business to generate returns of between 15 and 19 percent, beginning
in 2010. The acquisition is expected to enhance the Companys expertise and product offerings in
the North American market, but is expected to contribute less than five percent to the Companys
consolidated assets, liabilities and income in 2010.
136
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Reinsurance Group of America, Incorporated
St. Louis, Missouri
We have audited the accompanying consolidated balance sheets of Reinsurance Group of America,
Incorporated and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related
consolidated statements of income, stockholders equity, and cash flows for each of the three years
in the period ended December 31, 2009. Our audits also included the financial statement schedules
listed in the Index at Item 15. These consolidated financial statements and financial statement
schedules are the responsibility of the Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Reinsurance Group of America, Incorporated and subsidiaries as of
December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note 2, the Company changed its method of accounting for other-than-temporary
impairments, as required by accounting guidance adopted on April 1, 2009.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the Companys internal control over financial reporting as of December 31,
2009, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26,
2010 expressed an unqualified opinion on the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 26, 2010
137
Quarterly Data (Unaudited)
Years Ended December 31,
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations |
|
$ |
1,530,840 |
|
|
$ |
1,813,166 |
|
|
$ |
1,778,981 |
|
|
$ |
1,943,835 |
|
Revenues from discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Income from continuing operations before income taxes |
|
$ |
34,206 |
|
|
$ |
215,423 |
|
|
$ |
182,551 |
|
|
$ |
160,165 |
|
|
Income from continuing operations |
|
$ |
23,290 |
|
|
$ |
153,179 |
|
|
$ |
118,208 |
|
|
$ |
112,409 |
|
Loss from discontinued accident and health
operations, net of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,290 |
|
|
$ |
153,179 |
|
|
$ |
118,208 |
|
|
$ |
112,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding common shares end of period |
|
|
72,763 |
|
|
|
72,775 |
|
|
|
72,790 |
|
|
|
72,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.32 |
|
|
$ |
2.11 |
|
|
$ |
1.62 |
|
|
$ |
1.54 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.32 |
|
|
$ |
2.11 |
|
|
$ |
1.62 |
|
|
$ |
1.54 |
|
Diluted Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.32 |
|
|
$ |
2.10 |
|
|
$ |
1.61 |
|
|
$ |
1.52 |
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.32 |
|
|
$ |
2.10 |
|
|
$ |
1.61 |
|
|
$ |
1.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter end |
|
$ |
32.39 |
|
|
$ |
34.91 |
|
|
$ |
44.60 |
|
|
$ |
47.65 |
|
Common stock price, high |
|
|
43.07 |
|
|
|
38.51 |
|
|
|
45.79 |
|
|
|
49.85 |
|
Common stock price, low |
|
|
21.27 |
|
|
|
27.93 |
|
|
|
31.86 |
|
|
|
42.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First |
|
|
Second |
|
|
Third |
|
|
Fourth |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations |
|
$ |
1,360,267 |
|
|
$ |
1,642,606 |
|
|
$ |
1,310,295 |
|
|
$ |
1,368,035 |
|
Revenues from discontinued operations |
|
$ |
111 |
|
|
$ |
316 |
|
|
$ |
935 |
|
|
$ |
705 |
|
|
Income from continuing operations before income taxes |
|
$ |
56,688 |
|
|
$ |
170,964 |
|
|
$ |
32,546 |
|
|
$ |
20,194 |
|
|
Income from continuing operations |
|
$ |
36,589 |
|
|
$ |
110,806 |
|
|
$ |
25,250 |
|
|
$ |
15,170 |
|
Loss from discontinued accident and health
operations, net of income taxes |
|
|
(5,084 |
) |
|
|
(104 |
) |
|
|
(22 |
) |
|
|
(5,809 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
31,505 |
|
|
$ |
110,702 |
|
|
$ |
25,228 |
|
|
$ |
9,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding common shares end of period |
|
|
62,235 |
|
|
|
62,316 |
|
|
|
62,325 |
|
|
|
72,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.59 |
|
|
$ |
1.78 |
|
|
$ |
0.41 |
|
|
$ |
0.22 |
|
Discontinued operations |
|
|
(0.08 |
) |
|
|
|
|
|
|
(0.01 |
) |
|
|
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.51 |
|
|
$ |
1.78 |
|
|
$ |
0.40 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.57 |
|
|
$ |
1.73 |
|
|
$ |
0.40 |
|
|
$ |
0.22 |
|
Discontinued operations |
|
|
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
(0.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.49 |
|
|
$ |
1.73 |
|
|
$ |
0.40 |
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends per share on common stock |
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price of common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter end |
|
$ |
54.44 |
|
|
$ |
43.52 |
|
|
$ |
54.00 |
|
|
$ |
42.82 |
|
Common stock price, high |
|
|
59.31 |
|
|
|
57.81 |
|
|
|
64.10 |
|
|
|
53.59 |
|
Common stock price, low |
|
|
47.45 |
|
|
|
43.19 |
|
|
|
40.95 |
|
|
|
26.15 |
|
Reinsurance Group of America, Incorporated common stock is traded on the New York Stock Exchange (NYSE) under the symbol RGA.
There were 92,436 stockholders of record of RGAs common stock on January 29, 2010.
See Shareholder Dividends and Debt and Trust Preferred Securities in Managements Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources.
138
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer have evaluated the
effectiveness of the design and operation of the Companys disclosure controls and procedures as
defined in Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that
these disclosure controls and procedures were effective.
There was no change in the Companys internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f) during the quarter ended December 31, 2009, that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting.
Managements Annual Report on Internal Control Over Financial Reporting
Management of Reinsurance Group of America, Incorporated and subsidiaries (collectively, the
Company) is responsible for establishing and maintaining adequate internal control over financial
reporting. In fulfilling this responsibility, estimates and judgments by management are required
to assess the expected benefits and related costs of control procedures. The objectives of
internal control include providing management with reasonable, but not absolute, assurance that
assets are safeguarded against loss from unauthorized use or disposition, and that transactions are
executed in accordance with managements authorization and recorded properly to permit the
preparation of consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America.
Financial management has documented and evaluated the effectiveness of the internal control of
the Company as of December 31, 2009 pertaining to financial reporting in accordance with the
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
In the opinion of management, the Company maintained effective internal control over financial
reporting as of December 31, 2009.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued an
attestation report on the effectiveness of the Companys internal control over financial reporting.
139
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Reinsurance Group of America, Incorporated
St. Louis, Missouri
We have audited the internal control over financial reporting of Reinsurance Group of America,
Incorporated and subsidiaries (the Company) as of December 31, 2009, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on the criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedules as
of and for the year ended December 31, 2009 of the Company and our report dated February 26, 2010
expressed an unqualified opinion which includes an explanatory paragraph related to a change in
accounting for other-than-temporary impairments, as required by accounting guidance adopted on
April 1, 2009.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
February 26, 2010
140
Item 9B. OTHER INFORMATION
None.
Part III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information with respect to Directors of the Company is incorporated by reference to the
Proxy Statement under the captions Nominees and Continuing Directors and Section 16(a)
Beneficial Ownership Reporting Compliance. The Proxy Statement will be filed pursuant to
Regulation 14A within 120 days of the end of the Companys fiscal year.
Executive Officers
The following is certain additional information concerning each executive officer of the
Company.
Todd C. Larson, 46, is Executive Vice President, Corporate Finance and Treasurer. Prior to
joining the Company in 1995, Mr. Larson was Assistant Controller at Northwestern Mutual Life
Insurance Company from 1994 through 1995 and prior to that position was an accountant for KPMG.
Mr. Larson also serves as a director and officer of several RGA subsidiaries.
Jack B. Lay, 55, is Senior Executive Vice President and Chief Financial Officer. Prior to
joining the Company in 1994, Mr. Lay served as Second Vice President and Associate Controller at
General American. In that position, he was responsible for all external financial reporting as
well as merger and acquisition support. Before joining General American in 1991, Mr. Lay was a
partner in the financial services practice with the St. Louis office of KPMG. Mr. Lay also serves
as a director and officer of several RGA subsidiaries.
Alain Néemeh, 42, is President and Chief Executive Officer of RGA Life Reinsurance Company of
Canada. He served as Executive Vice President, Operations and Chief Financial Officer from 2001
until he attained his current position in 2006. He joined the finance area of RGA in 1997 from
KPMG, where he last served as Senior Manager. In June 2009, Mr. Néemeh joined the Board of
Directors of the Canadian Life and Health Insurance Association (CLHIA) and became
Chairman-Elect. Mr. Néemeh is Chairman of the CLHIAs Standing Committee on Government Relations
and also sits on the CLHIAs Standing Committee on Resources, the CLHIAs Standing Committee on
Québec Affairs, the CLHIAs Nominating Committee and on the CLHIAs Committee on Reinsurance, where
he is a past Chairman.
Paul Nitsou, 48, is Executive Vice President, International Operations and President of RGA
International Corporation. He served as Executive Vice President prior to attaining his current
position in June 2004. He joined RGA in 1996 and began his life insurance career in 1985 at
Manulife Financial where he held various positions of increasing responsibility. Mr. Nitsou also
serves as a director and officer of several RGA subsidiaries.
Paul A. Schuster, 55, is Senior Executive Vice President, U.S. Division and became Chairman
President and Chief Executive Officer of RGA Reinsurance Company, effective May 1, 2008. He served
as Senior Vice President, U.S. Division from January 1997 to December 1998. Mr. Schuster was
Reinsurance Actuarial Vice President in 1995 and Senior Vice President & Chief Actuary of the
Company in 1996. Prior to the formation of RGA, Mr. Schuster served as Second Vice President and
Reinsurance Actuary of General American. Prior to joining General American in 1991, he served as
Vice President and Assistant Director of Reinsurance Operations of the ITT Lyndon Insurance Group
from 1988 to 1991 and in a variety of actuarial positions with General Reassurance Corporation from
1976 to 1988. Mr. Schuster also serves as a director and officer of several RGA subsidiaries.
James E. Sherman, 56, is Executive Vice President, General Counsel and Secretary of the
Company. Prior to joining the Company in 2001, Mr. Sherman served as Associate General Counsel of
General American Life Insurance Company from 1995 until 2000. Mr. Sherman also serves as an
officer of several RGA subsidiaries.
Graham S. Watson, 60, is Senior Executive Vice President, International and Chief Marketing
Officer of RGA, and Chief Executive Officer of RGA International Corporation. Upon joining RGA in
1996, Mr. Watson was President and CEO of RGA Australia. Prior to joining RGA in 1996, Mr. Watson
was the President and CEO of Intercedent Limited in Canada and has held various positions of
increasing responsibility for other life insurance companies. Mr. Watson also serves as a director
and officer of several RGA subsidiaries.
141
A. Greig Woodring, 58, is President and Chief Executive Officer of the Company. Mr. Woodring
also headed the reinsurance business of General American Life Insurance Company from 1986 until the
Companys formation in December 1992. He also serves as a director and officer of a number of
subsidiaries of the Company.
Corporate Governance
The Company has adopted an Employee Code of Business Conduct and Ethics (the Employee Code),
a Directors Code of Conduct (the Directors Code), and a Financial Management Code of
Professional Conduct (the Financial Management Code). The Employee Code applies to all employees
and officers of the Company and its subsidiaries. The Directors Code applies to directors of the
Company and its subsidiaries. The Financial Management Code applies to the Companys chief
executive offer, chief financial officer, corporate controller, chief financial officers in each
business unit, and all professionals in finance and finance-related departments. The Company
intends to satisfy its disclosure obligations under Item 10 of Form 8-K by posting on its website
information about amendments to, or waivers from a provision of the Financial Management Code that
applies to the Companys chief executive officer, chief financial officer, and corporate
controller. Each of the three Codes described above is available on the Companys website at
www.rgare.com.
Also available on the Companys website are the following other items: Corporate Governance
Guidelines, Audit Committee Charter, Compensation Committee Charter, and Nominating and Corporate
Governance Committee Charter (collectively Governance Documents).
The Company will provide without charge upon written or oral request, a copy of any of the
Codes of Conduct or Governance Documents. Requests should be directed to Investor Relations,
Reinsurance Group of America, Incorporated, 1370 Timberlake Manor Parkway, Chesterfield, MO 63017,
by electronic mail (investrelations@rgare.com) or by telephone (636-736-7243).
In accordance with the Securities Exchange Act of 1934, the Companys board of directors has
established a standing audit committee. The board of directors has determined, in its judgment,
that all of the members of the audit committee are independent within the meaning of SEC
regulations and the listing standards of the New York Stock Exchange (NYSE). The board of
directors has determined, in its judgment, that Messrs. Bartlett, Boot, Danahy and Ms. Lomax are
qualified as audit committee financial experts within the meaning of SEC regulations and the board
has determined that each of them has accounting and related financial management expertise within
the meaning of the listing standards of the NYSE. The audit committee charter provides that
members of the audit committee may not simultaneously serve on the audit committee of more than two
other public companies unless a committee member demonstrates that he or she has the ability to
devote the time and attention that are required to serve on multiple audit committees.
Additional information with respect to Directors and Executive Officers of the Company is
incorporated by reference to the Proxy Statement under the captions Nominees and Continuing
Directors, Board of Directors and Committees, and Section 16(a) Beneficial Ownership Reporting
Compliance. The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the
end of the Companys fiscal year.
Item 11. EXECUTIVE COMPENSATION
Information on this subject is found in the Proxy Statement under the captions
Compensation Discussion and Analysis, Executive Compensation and Director Compensation and is
incorporated herein by reference. The Proxy Statement will be filed pursuant to Regulation 14A
within 120 days of the end of the Companys fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
Information of this subject is found in the Proxy Statement under the captions
Securities Ownership of Directors, Management and Certain Beneficial Owners, Nominees and
Continuing Directors, and Equity Compensation Plan Information and is incorporated herein by
reference. The Proxy Statement will be filed pursuant to Regulations 14A within 120 days of the
end of the Companys fiscal year.
142
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information on this subject is found in the Proxy Statement under the captions Certain
Relationships and Related Person Transactions and Director Independence and incorporated herein
by reference. The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the
end of the Companys fiscal year.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information on this subject is found in the Proxy Statement under the caption
Independent Auditor and incorporated herein by reference. The Proxy Statement will be filed
pursuant to Regulation 14A within 120 days of the end of the Companys fiscal year.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)1. Financial Statements
The following consolidated statements are included within Item 8 under the following captions:
|
|
|
|
|
Index |
|
Page |
|
|
|
82 |
|
|
|
|
83 |
|
|
|
|
84 |
|
|
|
|
85 |
|
|
|
|
86-136 |
|
|
|
|
137 |
|
|
|
|
138 |
|
2. Schedules, Reinsurance Group of America, Incorporated and Subsidiaries
|
|
|
|
|
Schedule |
|
Page |
|
|
|
144 |
|
|
|
|
145 |
|
|
|
|
146-147 |
|
|
|
|
148 |
|
|
|
|
149 |
|
All other schedules specified in Regulation S-X are omitted for the reason that they are not
required, are not applicable, or that equivalent information has been included in the consolidated
financial statements, and notes thereto, appearing in Item 8.
3. Exhibits
See the Index to Exhibits on page 151.
143
REINSURANCE
GROUP OF AMERICA, INCORPORATED
SCHEDULE ISUMMARY OF INVESTMENTSOTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 2009
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount at |
|
|
|
|
|
|
|
|
|
|
Which |
|
|
|
|
|
|
|
|
|
|
Shown in |
|
|
|
|
|
|
Fair |
|
the Balance |
Type of Investment |
|
Cost |
|
Value (3) |
|
Sheets (1)(3) |
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
United States government and government
agencies and authorities |
|
$ |
540.0 |
|
|
$ |
526.1 |
|
|
$ |
526.1 |
|
State and political subdivisions |
|
|
107.2 |
|
|
|
89.8 |
|
|
|
89.8 |
|
Foreign governments (2) |
|
|
2,457.7 |
|
|
|
2,815.4 |
|
|
|
2,815.4 |
|
Public utilities (2) |
|
|
783.2 |
|
|
|
812.3 |
|
|
|
812.3 |
|
Mortgage-backed and asset-backed securities |
|
|
3,194.4 |
|
|
|
2,937.3 |
|
|
|
2,937.3 |
|
All other corporate bonds (2) |
|
|
4,534.5 |
|
|
|
4,582.5 |
|
|
|
4,582.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities |
|
|
11,617.0 |
|
|
|
11,763.4 |
|
|
|
11,763.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
58.0 |
|
|
|
58.3 |
|
|
|
58.3 |
|
Non-redeemable preferred stock |
|
|
123.6 |
|
|
|
113.2 |
|
|
|
113.2 |
|
Mortgage loans on real estate |
|
|
791.7 |
|
|
XXXX |
|
|
|
791.7 |
|
Policy loans |
|
|
1,136.6 |
|
|
XXXX |
|
|
|
1,136.6 |
|
Funds withheld at interest |
|
|
4,895.4 |
|
|
XXXX |
|
|
|
4,895.4 |
|
Short-term investments |
|
|
121.1 |
|
|
XXXX |
|
|
|
121.1 |
|
Other invested assets |
|
|
344.4 |
|
|
XXXX |
|
|
|
344.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments |
|
$ |
19,087.8 |
|
|
XXXX |
|
|
$ |
19,224.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fixed maturities are classified as available-for-sale and carried at fair value. |
|
(2) |
|
The following exchange rates have been used to convert foreign securities to U.S. dollars: |
|
|
|
|
|
Canadian dollar |
|
$ |
0.953834/C$1.00 |
|
Australian dollar |
|
$ |
0.900100/A$1.00 |
|
UK pound sterling |
|
$ |
1.615300/£1.00 |
|
Euro |
|
$ |
1.440399/1.00 |
|
South African rand |
|
$0.135117/1.0 rand |
Japanese yen |
|
$0.010825/1.0 yen |
|
|
|
(3) |
|
Fair value represents the closing sales prices of marketable securities. Estimated fair
values for private placement securities, included in all other corporate bonds, are based on
the credit quality and duration of marketable securities deemed comparable by the Company,
which may be of another issuer. |
144
REINSURANCE
GROUP OF AMERICA, INCORPORATED
SCHEDULE IICONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
December 31,
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
CONDENSED BALANCE SHEETS |
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale, at fair value |
|
$ |
411,102 |
|
|
$ |
151,160 |
|
|
|
|
|
Short-term and other investments |
|
|
26,334 |
|
|
|
66,487 |
|
|
|
|
|
Cash and cash equivalents |
|
|
24,913 |
|
|
|
245,737 |
|
|
|
|
|
Investment in subsidiaries |
|
|
4,532,578 |
|
|
|
3,187,636 |
|
|
|
|
|
Other assets |
|
|
569,848 |
|
|
|
315,188 |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,564,775 |
|
|
$ |
3,966,208 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (1) |
|
$ |
1,460,897 |
|
|
$ |
1,083,173 |
|
|
|
|
|
Other liabilities |
|
|
235,951 |
|
|
|
266,227 |
|
|
|
|
|
Stockholders equity |
|
|
3,867,927 |
|
|
|
2,616,808 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
5,564,775 |
|
|
$ |
3,966,208 |
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
Interest / dividend income (2) |
|
$ |
44,588 |
|
|
$ |
136,995 |
|
|
$ |
28,111 |
|
Investment related losses, net |
|
|
(3,417 |
) |
|
|
(2,940 |
) |
|
|
(10,767 |
) |
Operating expenses |
|
|
(17,965 |
) |
|
|
(9,541 |
) |
|
|
(25,766 |
) |
Interest expense |
|
|
(73,673 |
) |
|
|
(76,007 |
) |
|
|
(75,586 |
) |
|
|
|
Income before income tax and undistributed earnings of subsidiaries |
|
|
(50,467 |
) |
|
|
48,507 |
|
|
|
(84,008 |
) |
Income tax benefit |
|
|
(24,228 |
) |
|
|
(14,591 |
) |
|
|
(23,740 |
) |
|
|
|
Net loss before undistributed earnings of subsidiaries |
|
|
(26,239 |
) |
|
|
63,098 |
|
|
|
(60,268 |
) |
Equity in undistributed earnings of subsidiaries |
|
|
433,325 |
|
|
|
113,698 |
|
|
|
354,102 |
|
|
|
|
Net income |
|
$ |
407,086 |
|
|
$ |
176,796 |
|
|
$ |
293,834 |
|
|
|
|
CONDENSED STATEMENTS OF CASH FLOWS |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
407,086 |
|
|
$ |
176,796 |
|
|
$ |
293,834 |
|
Equity in earnings of subsidiaries |
|
|
(433,325 |
) |
|
|
(113,698 |
) |
|
|
(354,102 |
) |
Foreign currency gain on repayment of debt |
|
|
(4,826 |
) |
|
|
|
|
|
|
|
|
Other, net |
|
|
31,975 |
|
|
|
78,001 |
|
|
|
132,242 |
|
|
|
|
Net cash provided by operating activities |
|
|
910 |
|
|
|
141,099 |
|
|
|
71,974 |
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of fixed maturity securities available-for-sale |
|
|
217,141 |
|
|
|
119,681 |
|
|
|
38,474 |
|
Purchases of fixed maturity securities available-for-sale |
|
|
(454,504 |
) |
|
|
(85,307 |
) |
|
|
(203,650 |
) |
Purchases of subsidiary debt securities |
|
|
(226,550 |
) |
|
|
(50,000 |
) |
|
|
|
|
Change in short-term and other investments |
|
|
(7,526 |
) |
|
|
(4,579 |
) |
|
|
(6,478 |
) |
Capital contributions to subsidiaries |
|
|
(91,000 |
) |
|
|
(175,719 |
) |
|
|
(160,250 |
) |
|
|
|
Net cash used in investing activities |
|
|
(562,439 |
) |
|
|
(195,924 |
) |
|
|
(331,904 |
) |
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to stockholders |
|
|
(26,212 |
) |
|
|
(23,329 |
) |
|
|
(22,256 |
) |
Acquisition of treasury stock |
|
|
(1,607 |
) |
|
|
(3,104 |
) |
|
|
(4,502 |
) |
Excess tax benefits from share-based payment arrangement |
|
|
2,605 |
|
|
|
3,815 |
|
|
|
4,476 |
|
Reissuance of treasury stock, net |
|
|
6,301 |
|
|
|
6,601 |
|
|
|
13,058 |
|
Net change in securities sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
and cash collateral for derivative positions |
|
|
(14,189 |
) |
|
|
(22,664 |
) |
|
|
30,094 |
|
Principal payments on debt |
|
|
(22,539 |
) |
|
|
|
|
|
|
(50,000 |
) |
Proceeds from long-term debt borrowings, net |
|
|
396,344 |
|
|
|
|
|
|
|
295,311 |
|
Proceeds from offering of common stock, net and warrant conversion |
|
|
2 |
|
|
|
331,878 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
340,705 |
|
|
|
293,197 |
|
|
|
266,181 |
|
|
|
|
Net change in cash and cash equivalents |
|
|
(220,824 |
) |
|
|
238,372 |
|
|
|
6,251 |
|
Cash and cash equivalents at beginning of year |
|
|
245,737 |
|
|
|
7,365 |
|
|
|
1,114 |
|
|
|
|
Cash and cash equivalents at end of year |
|
$ |
24,913 |
|
|
$ |
245,737 |
|
|
$ |
7,365 |
|
|
|
|
|
|
|
(1) |
|
Includes $398,648 of subordinated debt, $897,330 of Senior Debt and $164,919 of
intercompany subordinated debt at December 31, 2009. |
|
(2) |
|
Includes $100,000 of cash dividends received from consolidated subsidiaries in 2008. No cash
dividends from consolidated subsidiaries are included in 2009 and 2007. |
145
REINSURANCE
GROUP OF AMERICA, INCORPORATED
SCHEDULE IIISUPPLEMENTARY INSURANCE INFORMATION
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
|
|
|
|
|
|
|
|
Future Policy Benefits and |
|
|
|
|
Deferred Policy |
|
Interest-Sensitive Contract |
|
Other Policy Claims and |
|
|
Acquisition Costs |
|
Liabilities |
|
Benefits Payable |
|
|
Assumed |
|
Ceded |
|
Assumed |
|
Ceded |
|
Assumed |
|
Ceded |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations |
|
$ |
2,638,586 |
|
|
$ |
(30,612 |
) |
|
$ |
11,152,805 |
|
|
$ |
(157,920 |
) |
|
$ |
951,412 |
|
|
$ |
(85,652 |
) |
Canada operations |
|
|
260,196 |
|
|
|
(672 |
) |
|
|
1,915,544 |
|
|
|
(194,601 |
) |
|
|
99,191 |
|
|
|
(15,945 |
) |
Europe & South Africa operations |
|
|
443,865 |
|
|
|
(29,156 |
) |
|
|
423,313 |
|
|
|
(37,599 |
) |
|
|
331,433 |
|
|
|
(30,656 |
) |
Asia Pacific operations |
|
|
334,639 |
|
|
|
(8,228 |
) |
|
|
618,912 |
|
|
|
(35,850 |
) |
|
|
501,170 |
|
|
|
(25,131 |
) |
Corporate and Other |
|
|
1,716 |
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
4,457 |
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
11,852 |
|
|
|
|
|
|
|
35,355 |
|
|
|
(546 |
) |
|
|
|
Total |
|
$ |
3,679,002 |
|
|
$ |
(68,668 |
) |
|
$ |
14,122,472 |
|
|
$ |
(425,970 |
) |
|
$ |
1,923,018 |
|
|
$ |
(157,930 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations |
|
$ |
2,550,751 |
|
|
$ |
(32,606 |
) |
|
$ |
11,275,706 |
|
|
$ |
(163,713 |
) |
|
$ |
878,347 |
|
|
$ |
(48,315 |
) |
Canada operations |
|
|
317,822 |
|
|
|
(696 |
) |
|
|
2,363,564 |
|
|
|
(237,007 |
) |
|
|
174,693 |
|
|
|
(28,030 |
) |
Europe & South Africa operations |
|
|
473,228 |
|
|
|
(15,040 |
) |
|
|
544,060 |
|
|
|
(26,928 |
) |
|
|
439,070 |
|
|
|
(36,603 |
) |
Asia Pacific operations |
|
|
417,128 |
|
|
|
(12,568 |
) |
|
|
1,020,361 |
|
|
|
(51,469 |
) |
|
|
714,088 |
|
|
|
(31,460 |
) |
Corporate and Other |
|
|
953 |
|
|
|
|
|
|
|
210,791 |
|
|
|
|
|
|
|
22,885 |
|
|
|
(509 |
) |
|
|
|
Total |
|
$ |
3,759,882 |
|
|
$ |
(60,910 |
) |
|
$ |
15,414,482 |
|
|
$ |
(479,117 |
) |
|
$ |
2,229,083 |
|
|
$ |
(144,917 |
) |
|
|
|
146
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE IIISUPPLEMENTARY INSURANCE INFORMATION (continued)
(dollars in thousands)
|
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|
|
|
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|
|
|
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|
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|
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Year ended December 31, |
|
|
|
|
|
|
|
|
|
|
Policyholder |
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
Benefits and |
|
|
|
|
|
Other |
|
|
Premium |
|
Investment |
|
Interest |
|
Amortization |
|
Operating |
|
|
Income |
|
Income |
|
Credited |
|
of DAC |
|
Expenses |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations |
|
$ |
2,874,759 |
|
|
$ |
624,138 |
|
|
$ |
(2,594,257 |
) |
|
$ |
(315,096 |
) |
|
$ |
(153,726 |
) |
Canada operations |
|
|
487,136 |
|
|
|
124,634 |
|
|
|
(426,224 |
) |
|
|
(71,122 |
) |
|
|
(40,516 |
) |
Europe & South Africa operations |
|
|
678,551 |
|
|
|
26,167 |
|
|
|
(516,679 |
) |
|
|
(84,007 |
) |
|
|
(54,238 |
) |
Asia Pacific operations |
|
|
864,550 |
|
|
|
36,388 |
|
|
|
(692,859 |
) |
|
|
(92,810 |
) |
|
|
(62,847 |
) |
Corporate and Other |
|
|
4,030 |
|
|
|
96,577 |
|
|
|
(43 |
) |
|
|
(62 |
) |
|
|
(138,957 |
) |
|
|
|
Total |
|
$ |
4,909,026 |
|
|
$ |
907,904 |
|
|
$ |
(4,230,062 |
) |
|
$ |
(563,097 |
) |
|
$ |
(450,284 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations |
|
$ |
3,099,632 |
|
|
$ |
571,611 |
|
|
$ |
(2,906,018 |
) |
|
$ |
(48,897 |
) |
|
$ |
(127,121 |
) |
Canada operations |
|
|
534,271 |
|
|
|
140,434 |
|
|
|
(456,437 |
) |
|
|
(93,162 |
) |
|
|
(40,083 |
) |
Europe & South Africa operations |
|
|
707,768 |
|
|
|
32,993 |
|
|
|
(532,292 |
) |
|
|
(64,691 |
) |
|
|
(69,806 |
) |
Asia Pacific operations |
|
|
1,000,814 |
|
|
|
47,400 |
|
|
|
(799,376 |
) |
|
|
(99,637 |
) |
|
|
(73,351 |
) |
Corporate and Other |
|
|
6,816 |
|
|
|
78,838 |
|
|
|
(988 |
) |
|
|
(826 |
) |
|
|
(88,126 |
) |
|
|
|
Total |
|
$ |
5,349,301 |
|
|
$ |
871,276 |
|
|
$ |
(4,695,111 |
) |
|
$ |
(307,213 |
) |
|
$ |
(398,487 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations |
|
$ |
3,320,723 |
|
|
$ |
814,897 |
|
|
$ |
(3,168,321 |
) |
|
$ |
(606,005 |
) |
|
$ |
(172,490 |
) |
Canada operations |
|
|
614,831 |
|
|
|
137,750 |
|
|
|
(501,136 |
) |
|
|
(128,791 |
) |
|
|
(40,973 |
) |
Europe & South Africa operations |
|
|
781,952 |
|
|
|
32,240 |
|
|
|
(656,485 |
) |
|
|
(35,631 |
) |
|
|
(82,423 |
) |
Asia Pacific operations |
|
|
998,927 |
|
|
|
61,335 |
|
|
|
(817,052 |
) |
|
|
(93,823 |
) |
|
|
(90,667 |
) |
Corporate and Other |
|
|
8,728 |
|
|
|
76,240 |
|
|
|
(170 |
) |
|
|
(858 |
) |
|
|
(79,652 |
) |
|
|
|
Total |
|
$ |
5,725,161 |
|
|
$ |
1,122,462 |
|
|
$ |
(5,143,164 |
) |
|
$ |
(865,108 |
) |
|
$ |
(466,205 |
) |
|
|
|
147
REINSURANCE
GROUP OF AMERICA, INCORPORATED
SCHEDULE IV REINSURANCE
(in millions)
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|
As of or for the Year ended December 31, |
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Percentage |
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Ceded to |
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Assumed |
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|
|
|
of Amount |
|
|
Gross |
|
Other |
|
from Other |
|
Net |
|
Assumed to |
|
|
Amount |
|
Companies |
|
Companies |
|
Amount |
|
Net |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force |
|
$ |
79 |
|
|
$ |
48,108 |
|
|
$ |
2,119,890 |
|
|
$ |
2,071,861 |
|
|
|
102.32 |
% |
Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations |
|
$ |
2.2 |
|
|
$ |
201.2 |
|
|
$ |
3,073.8 |
|
|
$ |
2,874.8 |
|
|
|
106.92 |
% |
Canada operations |
|
|
|
|
|
|
188.6 |
|
|
|
675.7 |
|
|
|
487.1 |
|
|
|
138.72 |
% |
Europe & South Africa operations |
|
|
|
|
|
|
41.0 |
|
|
|
719.6 |
|
|
|
678.6 |
|
|
|
106.04 |
% |
Asia Pacific operations |
|
|
|
|
|
|
33.7 |
|
|
|
898.2 |
|
|
|
864.5 |
|
|
|
103.90 |
% |
Corporate and Other |
|
|
0.3 |
|
|
|
|
|
|
|
3.7 |
|
|
|
4.0 |
|
|
|
92.50 |
% |
|
|
|
Total |
|
$ |
2.5 |
|
|
$ |
464.5 |
|
|
$ |
5,371.0 |
|
|
$ |
4,909.0 |
|
|
|
109.41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force |
|
$ |
70 |
|
|
$ |
46,267 |
|
|
$ |
2,108,130 |
|
|
$ |
2,061,933 |
|
|
|
102.24 |
% |
Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations |
|
$ |
2.2 |
|
|
$ |
205.6 |
|
|
$ |
3,303.0 |
|
|
$ |
3,099.6 |
|
|
|
106.56 |
% |
Canada operations |
|
|
|
|
|
|
216.9 |
|
|
|
751.2 |
|
|
|
534.3 |
|
|
|
140.60 |
% |
Europe & South Africa operations |
|
|
|
|
|
|
40.1 |
|
|
|
747.9 |
|
|
|
707.8 |
|
|
|
105.67 |
% |
Asia Pacific operations |
|
|
|
|
|
|
27.1 |
|
|
|
1,027.9 |
|
|
|
1,000.8 |
|
|
|
102.71 |
% |
Corporate and Other |
|
|
0.2 |
|
|
|
|
|
|
|
6.6 |
|
|
|
6.8 |
|
|
|
97.06 |
% |
|
|
|
Total |
|
$ |
2.4 |
|
|
$ |
489.7 |
|
|
$ |
5,836.6 |
|
|
$ |
5,349.3 |
|
|
|
109.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force |
|
$ |
72 |
|
|
$ |
46,897 |
|
|
$ |
2,325,041 |
|
|
$ |
2,278,216 |
|
|
|
102.06 |
% |
Premiums |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations |
|
$ |
2.3 |
|
|
$ |
193.2 |
|
|
$ |
3,511.6 |
|
|
$ |
3,320.7 |
|
|
|
105.75 |
% |
Canada operations |
|
|
|
|
|
|
268.0 |
|
|
|
882.9 |
|
|
|
614.9 |
|
|
|
143.58 |
% |
Europe & South Africa operations |
|
|
|
|
|
|
28.9 |
|
|
|
810.9 |
|
|
|
782.0 |
|
|
|
103.70 |
% |
Asia Pacific operations |
|
|
|
|
|
|
28.9 |
|
|
|
1,027.8 |
|
|
|
998.9 |
|
|
|
102.89 |
% |
Corporate and Other |
|
|
|
|
|
|
|
|
|
|
8.7 |
|
|
|
8.7 |
|
|
|
100.00 |
% |
|
|
|
Total |
|
$ |
2.3 |
|
|
$ |
519.0 |
|
|
$ |
6,241.9 |
|
|
$ |
5,725.2 |
|
|
|
109.03 |
% |
|
|
|
148
REINSURANCE
GROUP OF AMERICA, INCORPORATED
SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS
December 31,
(in millions)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
Charges to |
|
|
|
|
|
|
|
|
|
|
Beginning of |
|
Costs and |
|
Charged to Other |
|
|
|
|
|
Balance at End |
Description |
|
Period |
|
Expenses |
|
Accounts |
|
Deductions |
|
of Period |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance on income taxes |
|
$ |
5.0 |
|
|
$ |
2.8 |
|
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance on income taxes |
|
|
7.7 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
7.9 |
|
Valuation allowance for
mortgage loans |
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance on income taxes |
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
4.5 |
|
|
|
3.4 |
|
Valuation allowance for
mortgage loans |
|
|
0.5 |
|
|
|
8.4 |
|
|
|
|
|
|
|
3.1 |
|
|
|
5.8 |
|
149
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
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Reinsurance Group of America, Incorporated.
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By: |
/s/ A. Greig Woodring
|
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|
A. Greig Woodring |
|
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|
President and Chief Executive Officer |
|
|
Date: February 26, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities indicated on
February 26, 2010.
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Signatures |
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Title |
|
|
|
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|
|
/s/ J. Cliff Eason
|
|
February 26, 2010 *
|
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|
|
Chairman of the Board and Director |
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|
|
J. Cliff Eason |
|
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|
/s/ A. Greig Woodring
|
|
February 26, 2010
|
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|
|
President, Chief Executive Officer, |
|
|
|
|
|
A. Greig Woodring and Director
|
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|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ William J. Bartlett
|
|
February 26, 2010*
|
|
|
|
Director |
|
|
|
|
|
William J. Bartlett |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Arnoud W.A. Boot
|
|
February 26, 2010*
|
|
|
|
Director |
|
|
|
|
|
Arnoud W.A. Boot |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ John F. Danahy
|
|
February 26, 2010*
|
|
|
|
Director |
|
|
|
|
|
John F. Danahy |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Stuart I. Greenbaum
|
|
February 26, 2010*
|
|
|
|
Director |
|
|
|
|
|
Stuart I. Greenbaum |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Alan C. Henderson
|
|
February 26, 2010*
|
|
|
|
Director |
|
|
|
|
|
Alan C. Henderson |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Janis Rachel Lomax
|
|
February 26, 2010*
|
|
|
|
Director |
|
|
|
|
|
Janis Rachel Lomax |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Frederick J. Sievert
|
|
February 26, 2010*
|
|
|
|
Director |
|
|
|
|
|
Frederick J. Sievert |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Jack B. Lay
|
|
February 26, 2010
|
|
|
|
Senior Executive Vice President and Chief |
|
|
|
|
|
Jack B. Lay
|
|
|
|
|
|
Financial Officer (Principal Financial
and Accounting Officer) |
|
|
|
|
|
|
|
* By: /s/ Jack B. Lay
|
|
February 26, 2010 |
|
|
|
|
|
|
|
|
|
Jack B. Lay Attorney-in-fact |
|
|
|
|
|
|
150
Index to Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
2.1
|
|
Reinsurance Agreement dated as of December 31, 1992 between General American Life
Insurance Company (General American) and General American Life Reinsurance Company of
Canada (RGA Canada), incorporated by reference to Exhibit 2.1 to Amendment No. 1 to
Registration Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993 |
|
|
|
2.2
|
|
Retrocession Agreement dated as of July 1, 1990 between General American and The
National Reinsurance Company of Canada, as amended between RGA Canada and General
American on December 31, 1992, incorporated by reference to Exhibit 2.2 Amendment No. 1
to Registration Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993 |
|
|
|
2.3
|
|
Reinsurance Agreement dated as of January 1, 1993 between RGA Reinsurance Company
(formerly Saint Louis Reinsurance Company) and General American, incorporated by
reference to Exhibit 2.3 to Amendment No. 1 to Registration Statement on Form S-1 (File
No. 33-58960), filed on April 14, 1993 |
|
|
|
2.4
|
|
Recapitalization and Distribution Agreement, dated as of June 1, 2008 (the R&D
Agreement), by and between Reinsurance Group of America, Incorporated (RGA) and
MetLife, Inc. (the schedules of which have been omitted pursuant to Item 601(b)(2) of
Regulation S-K and will be furnished supplementally to the SEC upon request),
incorporated by reference to Exhibit 2.1 of Current Report on Form 8-K filed on June 5,
2008 |
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation, incorporated by reference to
Exhibit 3.1 of Current Report on Form 8-K filed on November 25, 2008 |
|
|
|
3.2
|
|
Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 of Current
Report on Form 8-K filed on November 25, 2008 |
|
|
|
4.1
|
|
Form of stock certificate for RGAs common stock, incorporated by reference to
Exhibit 4 to RGAs registration statement on Form 8-A filed on November 17, 2008 |
|
|
|
4.2
|
|
Form of Unit Agreement among the Company and the Trust, as Issuers and The Bank of
New York, as Agent, Warrant Agent and Property Trustee (which includes the form of Global
Unit Certificate as Exhibit A), incorporated by reference to Exhibit 4.1 to Registration
Statement on Form 8-A12B (File No. 1-11848) filed on December 18, 2001 |
|
|
|
4.3
|
|
First Supplement to Unit Agreement, dated as of September 12, 2008, between RGA and
The Bank of New York Mellon Trust Company, N.A., as successor agent to The Bank of New
York, incorporated by reference to Exhibit 4.3 of Current Report on Form 8-K filed on
September 12, 2008 |
|
|
|
4.4
|
|
Form of Warrant Agreement between the Company and the Bank of New York, as Warrant
Agent, incorporated by reference to Exhibit 4.3 to Registration Statement on Form 8-A12B
(File No. 1-11848), filed on December 18, 2001 |
|
|
|
4.5
|
|
First Amendment to Warrant Agreement, dated as of September 12, 2008, between RGA
and The Bank of New York Mellon Trust Company, N.A., as successor warrant agent to The
Bank of New York (which includes the form of Warrant Certificate as Exhibit A),
incorporated by reference to Exhibit 4.2 of Current Report on Form 8-K filed September
12, 2008 |
151
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
4.6
|
|
Trust Agreement of RGA Capital Trust I (which includes the form of Preferred
Security Certificate as Exhibit A), incorporated by reference to Exhibit 4.11 to the
Registration Statements on Form S-3 (File Nos. 333-55304, 333-55304-01 and 333-55304-02),
filed on February 9, 2001, as amended (the Original S-3) |
|
|
|
4.7
|
|
Form of Amended and Restated Trust Agreement of RGA Capital Trust I, incorporated
by reference to Exhibit 4.7 to Registration Statement on Form 8-A12B (File No. 1-11848),
filed on December 18, 2001 |
|
|
|
4.8
|
|
Form of Preferred Security Certificate for the Trust, included as Exhibit A to
Exhibit 4.11 to this Report |
|
|
|
4.9
|
|
Form of Remarketing Agreement between the Company, as Guarantor, and The Bank of
New York, as Guarantee Trustee, incorporated by reference to Exhibit 4.12 to Registration
Statement on Form 8-A12B (File No. 1-11848), filed on December 18, 2001 |
|
|
|
4.10
|
|
Form of Junior Subordinated Indenture, incorporated by reference to Exhibit 4.3 of
the Original S-3 |
|
|
|
4.11
|
|
Form of First Supplemental Junior Subordinated Indenture between the Company and
The Bank of New York, as Trustee, incorporated by reference to Exhibit 4.10 to
Registration Statement on Form 8-A12B (File No. 1-11848), filed on December 18, 2001 |
|
|
|
4.12
|
|
Form of Guarantee Agreement between the Company, as Guarantor, and The Bank of New
York, as Guarantee Trustee, incorporated by reference to Exhibit 4.11 to Registration
Statement on Form 8-A12B (File No. 1-11848), filed on December 18, 2001 |
|
|
|
4.13
|
|
Form of Senior Indenture between RGA and The Bank of New York, as Trustee,
incorporated by reference to Exhibit 4.1 to the Original S-3 |
|
|
|
4.14
|
|
Form of First Supplemental Indenture between RGA and The Bank of New York, as
Trustee, relating to the 6 3/4 Senior Notes Due 2011, incorporated by reference to
Exhibit 4.8 to Form 8-K dated December 12, 2001 (File No. 1-11848), filed December 18,
2001 |
|
|
|
4.15
|
|
Form of Second Supplemental Junior Subordinated Indenture between RGA and The Bank
of New York, as Trustee, relating to the 6 3/4 Junior Subordinated Debentures Due 2065,
incorporated by reference to Exhibit 4.2 to Form 8-K dated December 5, 2005 (File No.
1-11848), filed on December 9, 2005 |
|
|
|
4.16
|
|
Second Supplemental Senior Indenture, dated as of March 9, 2007, by and between RGA
and The Bank of New York Trust Company, N.A., as successor trustee to The Bank of New
York, incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated March
6, 2007 (File No. 1-11848), filed March 12, 2007 |
|
|
|
4.17
|
|
Third Supplemental Senior Indenture, dated as of November 3, 2009, by and between
RGA and the Bank of New York Mellon Trust Company, N.A., as successor trustee to The Bank
of New York, incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated
November 6, 2009 (File No. 1-11848), filed November 9, 2009 |
|
|
|
4.18
|
|
Second Amended and Restated Section 382 Rights Agreement dated as of November 25,
2008, between RGA and Mellon Investor Services LLC (which includes the form of Second
Amended and Restated Certificate of Designation, Preferences and Rights of Series A-1
Junior Participating Preferred Stock as Exhibit A and the form of Right Certificate as
Exhibit B), incorporated by reference to Exhibit 4.1 to Current Report on Form 8-K filed
November 25, 2008 |
|
|
|
10.1
|
|
Management Agreement dated as of January 1, 1993 between RGA Canada and General
American, incorporated by reference to Exhibit 10.7 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993 * |
|
|
|
10.2
|
|
Standard Form of General American Automatic Agreement, incorporated by reference to
Exhibit 10.11 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-58960), filed on April 14, 1993 |
152
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.3
|
|
Standard Form of General American Facultative Agreement, incorporated by reference
to Exhibit 10.12 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-58960), filed on April 14, 1993 |
|
|
|
10.4
|
|
Standard Form of General American Automatic and Facultative YRT Agreement,
incorporated by reference to Exhibit 10.13 to Amendment No. 1 to Registration Statement
on Form S-1 (File No. 33-58960), filed on April 14, 1993 |
|
|
|
10.5
|
|
RGA 2008 Management Incentive Plan, effective May 21, 2008, incorporated by
reference to Exhibit 10.1 of Current Report on Form 8-K filed on July 21, 2008* |
|
|
|
10.6
|
|
RGA Reinsurance Company Management Deferred Compensation Plan (ended January 1,
1995), incorporated by reference to Exhibit 10.18 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993 * |
|
|
|
10.7
|
|
RGA Reinsurance Company Executive Deferred Compensation Plan (ended January 1,
1995), incorporated by reference to Exhibit 10.19 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993 * |
|
|
|
10.8
|
|
RGA Reinsurance Company Executive Supplemental Retirement Plan (ended January 1,
1995), incorporated by reference to Exhibit 10.20 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993 * |
|
|
|
10.9
|
|
RGA Reinsurance Company Augmented Benefit Plan (ended January 1, 1995),
incorporated by reference to Exhibit 10.21 to Amendment No. 1 to Registration Statement
on Form S-1 (File No. 33-58960), filed on April 14, 1993 * |
|
|
|
10.10
|
|
RGA Flexible Stock Plan as amended and restated effective July 1, 1998,
incorporated by reference to Form 10-K for the period ended December 31, 2003 (File No.
1-11848), filed on March 12, 2004, at the corresponding exhibit* |
|
|
|
10.11
|
|
Amendment effective as of May 24, 2000 to the RGA Flexible Stock Plan, as amended
and restated July 1, 1998, incorporated by reference to Exhibit 10.13 to Form 10-K for
the period ended December 31, 2003 (File No. 1-11848), filed on March 12, 2004 * |
|
|
|
10.12
|
|
Second Amendment effective as of May 28, 2003 to the RGA Flexible Stock Plan, as
amended and restated July 1, 1998, incorporated by reference to Exhibit 10.14 to Form
10-K for the period ended December 31, 2003 (File No. 1-11848), filed on March 12, 2004 * |
|
|
|
10.13
|
|
Third Amendment effective as of May 26, 2004 to the RGA Flexible Stock Plan as
amended and restated July 1, 1998, incorporated by reference to Exhibit 10.1 to Form 10-Q
for the period ended June 30, 2004 (File No. 1-11848), filed on August 6, 2004* |
|
|
|
10.14
|
|
Fourth Amendment, effective as of May 23, 2007 to the RGA Flexible Stock Plan, as
amended and restated July 1, 1998, incorporated by reference to Exhibit 10.6 of Current
Report on Form 8-K filed on July 21, 2008* |
|
|
|
10.15
|
|
Fifth Amendment, effective as of May 21, 2008 to the RGA Flexible Stock Plan, as
amended and restated July 1, 1998, incorporated by reference to Exhibit 10.7 of Current
Report on Form 8-K filed on July 21, 2008* |
|
|
|
10.16
|
|
Form of RGA Flexible Stock Plan Non-Qualified Stock Option Agreement, incorporated
by reference to Exhibit 10.1 to Current Report on Form 8-K dated September 10, 2004 (File
No. 1-11848), filed on September 10, 2004* |
|
|
|
10.17
|
|
Form of RGA Flexible Stock Plan Performance Contingent Restricted Stock Agreement,
incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K dated September
10, 2004 (File No. 1-11848), filed on September 10, 2004* |
153
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.18
|
|
RGA Flexible Stock Plan for Directors, as amended and restated effective May 28,
2003, incorporated by reference to Proxy Statement on Schedule 14A for the annual meeting
of shareholders on May 28, 2003, filed on April 10, 2003* |
|
|
|
10.19
|
|
RGA Phantom Stock Plan for Directors, as amended effective January 1, 2003,
incorporated by reference to Proxy Statement on Schedule 14A for the annual meeting of
shareholders on May 28, 2003, filed on April 10, 2003* |
|
|
|
10.20
|
|
Directors Compensation Summary Sheet, incorporated by reference to Exhibit 10.1
to Current Report on Form 8-K dated April 22, 2005 (File No. 1-11848), filed on April 25,
2005* |
|
|
|
10.21
|
|
Credit Agreement, dated as of September 24, 2007, by and among RGA and certain of
its subsidiaries, the lenders named therein, Bank of America, N.A., as administrative
agent, swing line lender and L/C Issuer, Wachovia Bank, National Association, as
syndication agent, ABN Amro Bank, N.V., The Bank of New York, The Bank of Tokyo
Mitsubishi UFJ Ltd. New York Branch and KeyBank National Association, as co-documentation
agents, and Banc of America Securities LLC and Wachovia Capital Markets, LLC, as co-lead
arrangers and joint book managers, incorporated by reference to Exhibit 10.1 to Current
Report on Form 8-K dated September 24, 2007 (File No. 1-11848), filed on September 27,
2007 |
|
|
|
10.22
|
|
First Amendment dated as of December 20, 2007 to Credit Agreement, dated as of
September 24, 2007, by and among RGA and certain of its subsidiaries, the lenders named
therein, Bank of America, N.A., as administrative agent, swing line lender and L/C
Issuer, Wachovia Bank, National Association, as syndication agent, ABN Amro Bank, N.V.,
The Bank of New York, The Bank of Tokyo Mitsubishi UFJ Ltd. New York Branch and
KeyBank National Association, as co-documentation agents, and Banc of America Securities
LLC and Wachovia Capital Markets, LLC, as co-lead arrangers and joint book managers,
incorporated by reference to Exhibit 10.21 to Form 10-K for the period ended December 31,
2007 (File No. 1-11848), filed on February 28, 2008 |
|
|
|
10.23
|
|
Form of Directors Indemnification Agreement, incorporated by reference to Exhibit
10.23 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-58960), filed
on April 14, 1993 * |
|
|
|
21.1
|
|
Subsidiaries of RGA |
|
|
|
23.1
|
|
Consent of Deloitte & Touche LLP |
|
|
|
24.1
|
|
Powers of Attorney for Messrs. Bartlett, Boot, Danahy, Eason, Greenbaum, Henderson,
Sievert and Ms. Lomax |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Represents a management contract or compensatory plan or arrangement required to be filed as
an exhibit to this form pursuant to Item 15 of this Report. |
154