e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
OR
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o |
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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
(State or other jurisdiction
of incorporation or organization)
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43-1627032
(IRS employer
identification number) |
1370 Timberlake Manor Parkway
Chesterfield, Missouri 63017
(Address of principal executive offices)
(636) 736-7000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ 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
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Accelerated filer
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Non-accelerated filer o
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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 (as defined in Rule 12b-2 of the
Exchange Act). Yes o No
þ
Common stock outstanding ($.01 par value)
as of April 30, 2008: 62,281,408 shares.
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31, |
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December 31, |
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2008 |
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2007 |
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(Dollars in thousands) |
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Assets |
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Fixed maturity securities: |
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Available-for-sale at fair value (amortized cost of $9,139,814 and
$8,916,692 at March 31, 2008 and December 31, 2007, respectively) |
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$ |
9,387,094 |
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$ |
9,397,916 |
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Mortgage loans on real estate |
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812,539 |
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831,557 |
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Policy loans |
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1,039,464 |
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1,059,439 |
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Funds withheld at interest |
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4,650,948 |
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4,749,496 |
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Short-term investments |
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46,336 |
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75,062 |
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Other invested assets |
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389,437 |
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284,220 |
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Total investments |
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16,325,818 |
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16,397,690 |
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Cash and cash equivalents |
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304,083 |
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404,351 |
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Accrued investment income |
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103,755 |
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77,537 |
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Premiums receivable and other reinsurance balances |
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766,970 |
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717,228 |
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Reinsurance ceded receivables |
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758,977 |
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722,313 |
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Deferred policy acquisition costs |
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3,369,316 |
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3,161,951 |
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Other assets |
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183,589 |
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116,939 |
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Total assets |
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$ |
21,812,508 |
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$ |
21,598,009 |
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Liabilities and Stockholders Equity |
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Future policy benefits |
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$ |
6,449,039 |
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$ |
6,333,177 |
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Interest-sensitive contract liabilities |
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6,657,546 |
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6,657,061 |
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Other policy claims and benefits |
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2,196,089 |
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2,055,274 |
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Other reinsurance balances |
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240,137 |
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201,614 |
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Deferred income taxes |
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707,963 |
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760,633 |
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Other liabilities |
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567,854 |
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465,358 |
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Short-term debt |
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29,773 |
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Long-term debt |
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925,893 |
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896,065 |
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Collateral finance facility |
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850,210 |
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850,361 |
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Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company |
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158,904 |
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158,861 |
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Total liabilities |
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18,753,635 |
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18,408,177 |
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Commitments and contingent liabilities (See Note 7) |
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Stockholders Equity: |
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Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) |
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Common stock (par value $.01 per share; 140,000,000 shares authorized;
63,128,273 shares issued at March 31, 2008 and December 31, 2007) |
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631 |
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631 |
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Warrants |
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66,915 |
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66,915 |
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Additional paid-in-capital |
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1,112,977 |
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1,103,956 |
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Retained earnings |
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1,556,127 |
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1,540,122 |
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Accumulated other comprehensive income: |
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Accumulated currency translation adjustment, net of income taxes |
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203,662 |
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221,987 |
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Unrealized appreciation of securities, net of income taxes |
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167,174 |
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313,170 |
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Pension and postretirement benefits, net of income taxes |
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(8,199 |
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(8,351 |
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Total stockholders equity before treasury stock |
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3,099,287 |
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3,238,430 |
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Less treasury shares held of 893,575 and 1,096,775 at cost at
March 31, 2008 and December 31, 2007, respectively |
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(40,414 |
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(48,598 |
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Total stockholders equity |
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3,058,873 |
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3,189,832 |
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Total liabilities and stockholders equity |
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$ |
21,812,508 |
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$ |
21,598,009 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three months ended March 31, |
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2008 |
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2007 |
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(Dollars in thousands, except per share data) |
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Revenues: |
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Net premiums |
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$ |
1,298,065 |
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$ |
1,125,450 |
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Investment income, net of related expenses |
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199,526 |
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215,743 |
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Investment related losses, net |
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(155,260 |
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(5,646 |
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Other revenues |
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17,936 |
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19,102 |
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Total revenues |
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1,360,267 |
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1,354,649 |
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Benefits and Expenses: |
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Claims and other policy benefits |
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1,119,512 |
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902,810 |
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Interest credited |
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73,897 |
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61,066 |
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Policy acquisition costs and other insurance expenses |
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16,262 |
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182,981 |
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Other operating expenses |
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63,340 |
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55,422 |
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Interest expense |
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23,094 |
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20,453 |
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Collateral finance facility expense |
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7,474 |
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12,687 |
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Total benefits and expenses |
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1,303,579 |
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1,235,419 |
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Income from continuing operations before
income taxes |
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56,688 |
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119,230 |
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Provision for income taxes |
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20,099 |
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42,293 |
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Income from continuing operations |
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36,589 |
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76,937 |
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Discontinued operations: |
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Loss from discontinued accident and health
operations, net of income taxes |
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(5,084 |
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(685 |
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Net income |
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$ |
31,505 |
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$ |
76,252 |
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Basic earnings per share: |
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Income from continuing operations |
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$ |
0.59 |
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$ |
1.25 |
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Discontinued operations |
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(0.08 |
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(0.01 |
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Net income |
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$ |
0.51 |
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$ |
1.24 |
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Diluted earnings per share: |
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Income from continuing operations |
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$ |
0.57 |
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$ |
1.20 |
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Discontinued operations |
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(0.08 |
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(0.01 |
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Net income |
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$ |
0.49 |
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$ |
1.19 |
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Dividends declared per share |
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$ |
0.09 |
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$ |
0.09 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Three months ended March 31, |
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2008 |
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2007 |
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(Dollars in thousands) |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
31,505 |
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$ |
76,252 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Change in: |
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Accrued investment income |
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(26,493 |
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(23,467 |
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Premiums receivable and other reinsurance balances |
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(49,386 |
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38,673 |
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Deferred policy acquisition costs |
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(204,731 |
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(30,186 |
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Reinsurance ceded balances |
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(36,664 |
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(16,657 |
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Future policy benefits, other policy claims and benefits, and
other reinsurance balances |
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330,732 |
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183,149 |
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Deferred income taxes |
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43,762 |
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37,264 |
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Other assets and other liabilities, net |
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(48,290 |
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17,056 |
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Amortization of net investment premiums, discounts and other |
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(23,199 |
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(9,551 |
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Investment related losses, net |
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155,260 |
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5,646 |
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Loss on
reinsurance embedded derivative |
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14,347 |
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Excess tax benefits from share-based payment arrangement |
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(3,547 |
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(1,387 |
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Other, net |
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5,219 |
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8,306 |
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Net cash provided by operating activities |
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188,515 |
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285,098 |
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Cash Flows from Investing Activities: |
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Sales of fixed maturity securities available-for-sale |
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575,587 |
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465,349 |
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Maturities of fixed maturity securities available-for-sale |
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53,521 |
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37,556 |
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Purchases of fixed maturity securities available-for-sale |
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(832,146 |
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(795,437 |
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Cash invested in mortgage loans on real estate |
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(27,023 |
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Cash invested in funds withheld at interest |
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(26,946 |
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(23,114 |
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Net increase on securitized lending activities |
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21,267 |
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47,548 |
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Principal payments on mortgage loans on real estate |
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18,799 |
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11,147 |
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Principal payments on policy loans |
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19,975 |
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47 |
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Change in short-term investments and other invested assets |
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(76,318 |
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(98,434 |
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Net cash used in investing activities |
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(246,261 |
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(382,361 |
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Cash Flows from Financing Activities: |
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Dividends to stockholders |
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(5,585 |
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(5,530 |
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Proceeds from long-term debt issuance |
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295,311 |
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Net repayments under credit agreements |
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(30,000 |
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Purchases of treasury stock |
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(3,093 |
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(3,611 |
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Excess tax benefits from share-based payment arrangement |
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3,547 |
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1,387 |
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Exercise of stock options, net |
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1,489 |
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4,093 |
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Net change in payables for securities sold under agreements to repurchase |
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31,912 |
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Excess payments on universal life and
other investment type policies and contracts |
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(70,750 |
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(10,363 |
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Net cash provided by (used in) financing activities |
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(42,480 |
) |
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251,287 |
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Effect of exchange rate changes on cash |
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(42 |
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770 |
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Change in cash and cash equivalents |
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(100,268 |
) |
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154,794 |
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Cash and cash equivalents, beginning of period |
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404,351 |
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160,428 |
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Cash and cash equivalents, end of period |
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$ |
304,083 |
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$ |
315,222 |
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Supplementary information: |
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Cash paid for interest |
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$ |
20,824 |
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$ |
16,902 |
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Cash paid for income taxes, net of refunds |
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$ |
12,095 |
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$ |
2,107 |
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See accompanying notes to condensed consolidated financial statements (unaudited).
5
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Reinsurance Group of
America, Incorporated (RGA) and its subsidiaries (collectively, the Company) have been prepared
in conformity with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete financial statements.
In the opinion of management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the three-month period
ended March 31, 2008 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2008. These unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes thereto included in the
Companys 2007 Annual Report on Form 10-K (2007 Annual Report) filed with the Securities and
Exchange Commission on February 28, 2008.
The accompanying unaudited condensed consolidated financial statements include the accounts of
Reinsurance Group of America, Incorporated and its subsidiaries. All intercompany accounts and
transactions have been eliminated. The Company has reclassified the presentation of certain
prior-period information to conform to the 2008 presentation.
2. Summary of Significant Accounting Policies
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standard (SFAS)
No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a
framework for measuring fair value, establishes a fair value hierarchy based on the quality of
inputs used to measure fair value and enhances disclosure requirements for fair value measurements.
In compliance with SFAS No. 157, 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 SFAS 157, assets and liabilities recorded at fair value on the condensed
consolidated balance sheets are categorized as follows:
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Level 1. |
Unadjusted quoted prices in active markets for identical assets or liabilities. |
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Level 2. |
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 assts or
liabilities. |
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Level 3. |
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 5 Fair Value Disclosures for further details on the Companys assets and liabilities
recorded at fair value as of March 31, 2008.
6
3. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share on income
from continuing operations (in thousands, except per share information):
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Three months ended |
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March 31, 2008 |
|
March 31, 2007 |
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Earnings: |
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Income from continuing operations (numerator
for basic and diluted calculations) |
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$ |
36,589 |
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$ |
76,937 |
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Shares: |
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Weighted average outstanding shares
(denominator for basic calculation) |
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62,146 |
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|
61,520 |
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Equivalent shares from outstanding stock options |
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2,084 |
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|
2,375 |
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|
Denominator for diluted calculation |
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64,230 |
|
|
|
63,895 |
|
Earnings per share: |
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|
|
|
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Basic |
|
$ |
0.59 |
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$ |
1.25 |
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Diluted |
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$ |
0.57 |
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$ |
1.20 |
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|
The calculation of common equivalent shares does not include the impact of options or warrants
having a strike or conversion 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. For the three months ended March
31, 2008, approximately 0.7 million stock options and 0.4 million performance contingent shares
were excluded from the calculation. For the three months ended March 31, 2007, approximately 0.3
million stock options and 0.4 million performance contingent shares were excluded from the
calculation.
4. Comprehensive Income
The following schedule reflects the change in accumulated other comprehensive income (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, 2008 |
|
March 31, 2007 |
|
|
|
Net income |
|
$ |
31,505 |
|
|
$ |
76,252 |
|
Accumulated other comprehensive
income (loss), net of income tax: |
|
|
|
|
|
|
|
|
Unrealized gains (losses), net of reclassification
adjustment for gains (losses) included in net income |
|
|
(145,996 |
) |
|
|
4,643 |
|
Currency translation adjustments |
|
|
(18,325 |
) |
|
|
14,057 |
|
Unrealized pension and postretirement benefit adjustment |
|
|
152 |
|
|
|
(30 |
) |
|
|
|
Comprehensive income (loss) |
|
$ |
(132,664 |
) |
|
$ |
94,922 |
|
|
|
|
7
5. Fair Value Disclosures
Effective January 1, 2008, the Company adopted SFAS 157, which defines fair value, establishes a
consistent framework for measuring fair value and expands disclosure requirements about fair value
measurements. SFAS 157, among other things, requires the Company to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The Companys
adoption of SFAS 157 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 liability embedded derivatives
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.
SFAS 157 defines 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 the asset or
liability in an orderly transaction between market participants on the measurement date. SFAS 157
also establishes 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. 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 other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities. Level 2 assets and liabilities
include investment securities with quoted prices that are traded
less frequently than exchange-traded instruments and derivative
contracts whose value is determined using a pricing model with
inputs that are observable in the market or can be derived
principally from or corroborated by observable market data. 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. Most of these securities are valued based on prices
provided by third party pricing services with 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 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. For
invested assets, this category generally includes U.S. and foreign
corporate securities (primarily private placements), asset-backed
securities (including those with exposure to subprime mortgages),
and to a lesser extent, certain residential and commercial
mortgage-backed securities, among others. Certain investment
securities are priced via independent, non-binding, broker quotes
which utilize inputs that may be difficult to corroborate with
observable market data. Such securities are classified in Level
3. 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 condensed consolidated balance sheet. |
As required by SFAS 157, 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
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).
8
Assets and liabilities measured at fair value on a recurring basis are summarized below (dollars in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
Fair Value Measurements Using: |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
3,313,092 |
|
|
$ |
|
|
|
$ |
2,487,590 |
|
|
$ |
825,502 |
|
Canadian and Canadian provincial governments |
|
|
2,113,830 |
|
|
|
|
|
|
|
2,087,069 |
|
|
|
26,761 |
|
Residential mortgage-backed securities |
|
|
1,325,631 |
|
|
|
|
|
|
|
1,235,210 |
|
|
|
90,421 |
|
Foreign corporate securities |
|
|
1,081,715 |
|
|
|
1,895 |
|
|
|
985,762 |
|
|
|
94,058 |
|
Asset-backed securities |
|
|
446,031 |
|
|
|
|
|
|
|
114,375 |
|
|
|
331,656 |
|
Commercial mortgage-backed securities |
|
|
686,678 |
|
|
|
|
|
|
|
628,144 |
|
|
|
58,534 |
|
U.S. government and agencies securities |
|
|
3,656 |
|
|
|
3,497 |
|
|
|
159 |
|
|
|
|
|
State and political subdivision securities |
|
|
64,074 |
|
|
|
7,692 |
|
|
|
|
|
|
|
56,382 |
|
Other foreign government securities |
|
|
352,387 |
|
|
|
117,128 |
|
|
|
209,407 |
|
|
|
25,852 |
|
|
|
|
Total fixed maturity securities available-for-sale |
|
|
9,387,094 |
|
|
|
130,212 |
|
|
|
7,747,716 |
|
|
|
1,509,166 |
|
Funds withheld at interest embedded derivatives |
|
|
(233,618 |
) |
|
|
|
|
|
|
|
|
|
|
(233,618 |
) |
Other invested assets equity securities |
|
|
163,721 |
|
|
|
113,748 |
|
|
|
29,771 |
|
|
|
20,202 |
|
Other invested assets derivatives |
|
|
10,243 |
|
|
|
|
|
|
|
10,243 |
|
|
|
|
|
Reinsurance ceded receivable embedded derivatives |
|
|
78,216 |
|
|
|
|
|
|
|
|
|
|
|
78,216 |
|
|
|
|
Total |
|
$ |
9,405,656 |
|
|
$ |
243,960 |
|
|
$ |
7,787,730 |
|
|
$ |
1,373,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities embedded derivatives |
|
$ |
(585,572 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(585,572 |
) |
Other liabilities derivatives |
|
|
(301 |
) |
|
|
|
|
|
|
(301 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(585,873 |
) |
|
$ |
|
|
|
$ |
(301 |
) |
|
$ |
(585,572 |
) |
|
|
|
The table below presents a reconciliation for all assets and liabilities measured at fair value on
a recurring basis using significant unobservable inputs (Level 3) for the three months ended March
31, 2008 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Measurements for the three months ended March 31, 2008 |
|
|
|
|
|
|
|
Total gains/losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(realized/unrealized) included in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, |
|
|
|
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
Other |
|
|
issuances |
|
|
Transfers |
|
|
Balance |
|
|
|
January 1, |
|
|
|
|
|
|
comprehensive |
|
|
and |
|
|
in and/or |
|
|
March 31, |
|
|
|
2008 |
|
|
Earnings |
|
|
income |
|
|
disposals |
|
|
out of Level 3 |
|
|
2008 |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale |
|
$ |
1,500,054 |
|
|
$ |
(7,110 |
) |
|
$ |
(36,121 |
) |
|
$ |
71,283 |
|
|
$ |
(18,940 |
) |
|
$ |
1,509,166 |
|
Funds withheld at interest embedded derivatives |
|
|
(85,090 |
) |
|
|
(148,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(233,618 |
) |
Other invested assets equity securities |
|
|
13,950 |
|
|
|
1 |
|
|
|
(479 |
) |
|
|
6,730 |
|
|
|
|
|
|
|
20,202 |
|
Reinsurance ceded receivable embedded
derivatives |
|
|
68,298 |
|
|
|
6,045 |
|
|
|
|
|
|
|
3,873 |
|
|
|
|
|
|
|
78,216 |
|
|
|
|
Total |
|
$ |
1,497,212 |
|
|
$ |
(149,592 |
) |
|
$ |
(36,600 |
) |
|
$ |
81,886 |
|
|
$ |
(18,940 |
) |
|
$ |
1,373,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
embedded derivatives |
|
$ |
(531,160 |
) |
|
$ |
(43,678 |
) |
|
$ |
|
|
|
$ |
(10,734 |
) |
|
$ |
|
|
|
$ |
(585,572 |
) |
|
|
|
Total |
|
$ |
(531,160 |
) |
|
$ |
(43,678 |
) |
|
$ |
|
|
|
$ |
(10,734 |
) |
|
$ |
|
|
|
$ |
(585,572 |
) |
|
|
|
9
The table below summarizes 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 the
three months ended March 31, 2008 (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gains and Losses |
|
|
|
Classification of gains/losses (realized/unrealized) included in earnings for the three months |
|
|
|
ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition |
|
|
|
|
|
|
Investment |
|
|
Investment |
|
|
|
|
|
|
Claims |
|
|
|
|
|
|
costs and |
|
|
|
|
|
|
income, net |
|
|
related |
|
|
|
|
|
|
& other |
|
|
|
|
|
|
other |
|
|
|
|
|
|
of related |
|
|
gains |
|
|
Other |
|
|
policy |
|
|
|
|
|
|
insurance |
|
|
|
|
|
|
expenses |
|
|
(losses), net |
|
|
revenues |
|
|
benefits |
|
|
Interest credited |
|
|
expenses |
|
|
Total |
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities
available-for-sale |
|
$ |
(188 |
) |
|
$ |
(6,922 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(7,110 |
) |
Funds withheld at interest embedded
derivatives |
|
|
|
|
|
|
(148,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(148,528 |
) |
Other invested assets equity securities |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Reinsurance ceded receivable embedded
derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,045 |
|
|
|
6,045 |
|
|
|
|
Total |
|
$ |
(187 |
) |
|
$ |
(155,450 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,045 |
|
|
$ |
(149,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
embedded derivatives |
|
$ |
|
|
|
$ |
(6,487 |
) |
|
$ |
|
|
|
$ |
451 |
|
|
$ |
(37,642 |
) |
|
$ |
|
|
|
$ |
(43,678 |
) |
|
|
|
Total |
|
$ |
|
|
|
$ |
(6,487 |
) |
|
$ |
|
|
|
$ |
451 |
|
|
$ |
(37,642 |
) |
|
$ |
|
|
|
$ |
(43,678 |
) |
|
|
|
|
The table below summarizes changes in unrealized gains or losses recorded in earnings for the three
months ended March 31, 2008 for Level 3 assets and liabilities that are still held at March 31,
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 three months ended March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition |
|
|
|
|
|
|
Investment |
|
|
Investment |
|
|
|
|
|
|
Claims |
|
|
|
|
|
|
costs |
|
|
|
|
|
|
income, net |
|
|
related |
|
|
|
|
|
|
& other |
|
|
|
|
|
|
and other |
|
|
|
|
|
|
of related |
|
|
gains |
|
|
Other |
|
|
policy |
|
|
Interest |
|
|
insurance |
|
|
|
|
|
|
expenses |
|
|
(losses), net |
|
|
revenues |
|
|
benefits |
|
|
credited |
|
|
expenses |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale |
|
$ |
(198 |
) |
|
$ |
(1,979 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(2,177 |
) |
Funds withheld at interest embedded
derivatives |
|
|
|
|
|
|
(148,528 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(148,528 |
) |
Other invested assets equity securities |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Reinsurance ceded receivable embedded
derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,811 |
|
|
|
7,811 |
|
|
|
|
Total |
|
$ |
(197 |
) |
|
$ |
(150,507 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7,811 |
|
|
$ |
(142,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities
embedded derivatives |
|
$ |
|
|
|
$ |
(6,487 |
) |
|
$ |
|
|
|
$ |
71 |
|
|
$ |
(53,245 |
) |
|
$ |
|
|
|
$ |
(59,661 |
) |
|
|
|
Total |
|
$ |
|
|
|
$ |
(6,487 |
) |
|
$ |
|
|
|
$ |
71 |
|
|
$ |
(53,245 |
) |
|
$ |
|
|
|
$ |
(59,661 |
) |
|
|
|
10
6. Segment Information
The accounting policies of the segments are the same as those described in the Summary of
Significant Accounting Policies in Note 2 of the consolidated financial statements accompanying the
2007 Annual Report. 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 other than internally developed software.
Investment income is allocated to the segments based upon average assets and related capital levels
deemed appropriate to support the segment business volumes.
The Company allocates capital to its segments based on an internally developed risk 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 the Companys 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.
Information related to total revenues, income (loss) from continuing operations before income
taxes, and total assets of the Company for each reportable segment are summarized below (dollars in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing |
|
|
|
Total revenues |
|
|
operations before income taxes |
|
|
|
Three months ended March 31, |
|
|
Three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
U.S. |
|
$ |
711,794 |
|
|
$ |
839,081 |
|
|
$ |
15,285 |
|
|
$ |
93,177 |
|
Canada |
|
|
170,953 |
|
|
|
128,794 |
|
|
|
23,671 |
|
|
|
15,034 |
|
Europe & South Africa |
|
|
197,552 |
|
|
|
173,477 |
|
|
|
6,043 |
|
|
|
21,124 |
|
Asia Pacific |
|
|
255,415 |
|
|
|
197,257 |
|
|
|
18,563 |
|
|
|
10,332 |
|
Corporate and Other |
|
|
24,553 |
|
|
|
16,040 |
|
|
|
(6,874 |
) |
|
|
(20,437 |
) |
|
|
|
|
|
Total |
|
$ |
1,360,267 |
|
|
$ |
1,354,649 |
|
|
$ |
56,688 |
|
|
$ |
119,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
U.S. |
|
$ |
13,922,798 |
|
|
$ |
13,779,284 |
|
Canada |
|
|
2,820,033 |
|
|
|
2,738,005 |
|
Europe & South Africa |
|
|
1,328,742 |
|
|
|
1,345,900 |
|
Asia Pacific |
|
|
1,485,924 |
|
|
|
1,355,111 |
|
Corporate and Other |
|
|
2,255,011 |
|
|
|
2,379,709 |
|
|
|
|
Total |
|
$ |
21,812,508 |
|
|
$ |
21,598,009 |
|
|
|
|
7. Commitments and Contingent Liabilities
The Company has commitments to fund investments in limited partnerships in the amount of $121.9
million at March 31, 2008. The Company anticipates that the majority of these amounts 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 less any
other-than-temporary impairments and are included in other invested assets in the condensed
consolidated balance sheets.
The Company is currently a party to a threatened arbitration related to its life reinsurance
business. As of March 31, 2008, the party involved in this action has raised a claim in the amount
of $4.9 million, which is $4.9 million in excess of the amount held in reserve by the Company. The
Company believes it has substantial defenses upon which to contest this claim, including but not
limited to misrepresentation and breach of contract by direct and indirect ceding companies.
Additionally, from time to time, the Company is subject to litigation related to employment-related
matters in the normal course of its business. The Company cannot predict or determine the ultimate
outcome of the pending litigation or arbitrations or provide
11
useful ranges of potential losses. It
is the opinion of management, after consultation with counsel, that their outcomes, after
consideration of the provisions made in the Companys condensed consolidated financial statements,
would not have a material adverse effect on its consolidated financial position. However, it is
possible that an adverse outcome could, from time to time, have a material adverse effect on the
Companys consolidated 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. At March 31, 2008 and December 31, 2007, there were approximately
$24.0 million and $22.6 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 offshore subsidiaries, including RGA Americas Reinsurance Company,
Ltd., RGA Reinsurance Company (Barbados) Ltd. and RGA Worldwide Reinsurance Company, Ltd. The
Company cedes business to its offshore 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 offshore affiliates reflects more realistic expectations than the
original jurisdiction of the business, where capital requirements are often considered to be quite
conservative. As of March 31, 2008 and December 31, 2007, $411.6 million and $459.6 million,
respectively, in letters of credit from various banks were outstanding 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. As of
March 31, 2008, the Company had $358.0 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. 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 performance for the
payment of amounts due under certain credit facilities, reinsurance treaties and an office lease
obligation, 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. Liabilities supported by the
treaty guarantees, before consideration for any legally offsetting amounts due from the guaranteed
party, totaled $324.9 million and $325.1 million as of March 31, 2008 and December 31, 2007,
respectively, and are reflected on the Companys condensed consolidated balance sheets in 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 March 31, 2008, RGAs exposure related to these
guarantees was $158.9 million.
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.
8. Employee Benefit Plans
The components of net periodic benefit costs were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
Determination of net periodic benefit
cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
819 |
|
|
$ |
799 |
|
|
$ |
158 |
|
|
$ |
206 |
|
Interest cost |
|
|
586 |
|
|
|
592 |
|
|
|
145 |
|
|
|
190 |
|
Expected
rate of return on plan assets |
|
|
(469 |
) |
|
|
(455 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
7 |
|
|
|
95 |
|
|
|
|
|
|
|
|
|
Amortization of prior actuarial loss |
|
|
72 |
|
|
|
113 |
|
|
|
35 |
|
|
|
84 |
|
|
|
|
Net periodic benefit cost |
|
$ |
1,015 |
|
|
$ |
1,144 |
|
|
$ |
338 |
|
|
$ |
480 |
|
|
|
|
The Company made no pension contributions during the first quarter of 2008 and expects to make total contributions of
approximately $2.0 million in 2008.
12
9. Equity Based Compensation
Equity compensation expense was $5.4 million and $6.6 million in the first quarter of 2008 and
2007, respectively. In the first quarter of 2008, the Company granted 0.4 million incentive stock
options at $56.03 weighted average per share and 0.2 million performance contingent units (PCUs)
to employees. Additionally, non-employee directors were granted a total of 4,800 shares of common
stock. As of March 31, 2008, 1.8 million share options at
$32.41 weighted average per share were
vested and exercisable with a remaining weighted average exercise
period of 4.1 years. As of March
31, 2008, the total compensation cost of non-vested awards not yet recognized in the financial
statements was $23.9 million. It is estimated that these costs will vest over a weighted average
period of 2.1 years.
10. New Accounting Standards
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities An Amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 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. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS
161 on its condensed consolidated financial statements.
In February 2008, the FASB issued Staff Position (FSP) No. FAS 140-3, Accounting for Transfers
of Financial Assets and Repurchase Financing Transactions (FSP 140-3). FSP 140-3 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. FSP 140-3 is effective
prospectively for financial statements issued for fiscal years beginning after November 15, 2008.
The Company is currently evaluating the impact of FSP 140-3 on its condensed consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations A
Replacement of FASB Statement No. 141 (SFAS 141(r)) and SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements An Amendment of ARB No. 51 (SFAS 160). SFAS 141(r)
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. SFAS 160 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 pronouncements 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 Company is currently evaluating the impact of SFAS 141(r) on its
accounting for future acquisitions and the impact of SFAS 160 on its condensed consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits all entities the option to measure most
financial instruments and certain other items at fair value at specified election dates and to
report related unrealized gains and losses in earnings. The fair value option will generally be
applied on an instrument-by-instrument basis and is generally an irrevocable election. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company did not elect to apply
the fair value option available under SFAS 159 for any of its eligible financial instruments.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
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 surrenders of
underlying policies, deaths of policyholders, and the exercise of recapture options by ceding
companies.
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 Company believes that industry trends
have not changed materially from those discussed in its 2007 Annual Report.
The Companys profitability primarily depends on the volume and amount of death claims incurred and
its ability to adequately price the risks it assumes. While death claims are reasonably
predictable over a period of years, claims become less predictable over shorter periods and are
subject to significant fluctuation from quarter to quarter and year to year. The maximum amount of
coverage the Company retains per life is $8.0 million. 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 Company believes its sources of liquidity
are sufficient to cover potential claims payments on both a short-term and long-term basis.
The Company measures performance based on income or loss from continuing operations before income
taxes for each of its five segments. The Companys U.S., Canada, Europe & South Africa and Asia
Pacific operations provide traditional life reinsurance to clients. The Companys U.S. operations
also provide asset-intensive and financial reinsurance products. The Company also provides
insurers with critical illness reinsurance in its Canada, Europe & South Africa and Asia Pacific
operations. Asia Pacific operations also provide financial reinsurance. The Corporate and Other
segment results include the corporate investment activity, general corporate expenses, interest
expense of RGA, operations of RGA Technology Partners, Inc., a wholly-owned subsidiary that
develops and markets technology solutions for the insurance industry, Argentine privatized pension
business in run-off, investment income and expense associated with the Companys collateral finance
facility and the provision for income taxes. The Companys discontinued accident and health
operations are not reflected in its results from continuing operations.
The Company allocates capital to its segments based on an internally developed risk 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.
Results of Operations
Consolidated income from continuing operations before income taxes decreased $62.5 million, or
52.5%, in the first quarter of 2008, as compared to the same period in 2007. This decrease in
income can be largely attributed to unfavorable mortality experience in the U.S. and Europe & South
Africa
segments and unrealized loss due to an unfavorable change in the value of embedded derivatives
within the U.S. segment due to the impact of widening credit spreads in the U.S. debt markets.
The unrealized loss due to an unfavorable change in value of embedded derivatives is primarily
related to reinsurance treaties written on a modified coinsurance or funds withheld basis and
subject to the provisions of Statement of Financial Accounting Standards (SFAS) No. 133
Implementation Issue No. B36, Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to
the Creditworthiness of the Obligor under Those Instruments (Issue B36). Additionally, changes
in risk free rates used in the present value calculations of embedded derivatives associated with
equity-indexed annuity treaties (EIAs) negatively affected income before income taxes.
Unfavorable changes in these two types of embedded derivatives, after adjustment for deferred
acquisition costs and retrocession, resulted in a decrease in consolidated income from continuing
operations before income taxes of approximately $47.5 million in the first quarter of 2008, as
compared to the same period in 2007. These fluctuations do not affect current cash flows,
crediting rates or spread performance on the underlying treaties. Therefore, Company management
believes it is helpful to distinguish between the effects of changes in these embedded derivatives
and
14
the primary factors that drive profitability of the underlying treaties, namely investment
income, fee income, and interest credited. Additionally, over the expected life of the underlying
treaties, management expects the cumulative effect of the embedded derivatives to be immaterial.
Offsetting these negative income items in the first quarter was an increase in premium levels in
all segments and favorable mortality experience in the Canada and Asia Pacific segments. Favorable
foreign currency exchange fluctuations resulted in an increase to income from continuing operations
before income taxes totaling approximately $7.1 million for the first quarter of 2008.
Consolidated net premiums increased $172.6 million, or 15.3%, in the first quarter of 2008, as
compared to the same period in 2007, due to growth in life reinsurance in force. Consolidated
assumed insurance in force increased to $2.2 trillion for the quarter ended March 31, 2008 from
$2.0 trillion for quarter ended March 31, 2007. Assumed new business production for the first
quarter of 2008 totaled $76.4 billion compared to $61.8 billion in the same period in 2007.
Foreign currency fluctuations favorably affected net premiums by approximately $46.5 million in the
first quarter of 2008.
Consolidated investment income, net of related expenses, decreased $16.2 million, or 7.5% during
the first quarter of 2008 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 resulting in a negligible effect on net income. Also offsetting the
decrease in investment income was a larger invested asset base and a higher effective investment
portfolio yield. Invested assets as of March 31, 2008 totaled $16.3 billion, a 7.3% increase over
March 31, 2007. The average yield earned on investments, excluding funds withheld, increased to
6.06% in the first quarter of 2008 from 5.93% for the first quarter of 2007. The average yield
will vary from quarter to quarter and 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.
Investment related losses, net increased $149.6 million in the first quarter of 2008, as compared
to the
same period in 2007. This increase is primarily due to a $148.5 million loss in the aforementioned
embedded derivatives related to Issue B36. 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 effective tax rate on a consolidated basis was 35.5% for the first quarter of 2008 and 2007.
These effective tax rates were affected by the ongoing application of FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No.
109.
Critical Accounting Policies
The Companys accounting policies are described in Note 2 in the 2007 Annual Report. 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
investments, derivatives and investment impairments, if any; accounting for income taxes; and the
establishment of arbitration or litigation reserves. The balances of these accounts are
significant to the Companys financial position and require extensive use of assumptions and
estimates, particularly related to the future performance of the underlying business.
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
condensed consolidated balance sheets. Fees earned on the contracts are reflected as other
revenues, as opposed to net premiums, on the condensed consolidated statements of income.
Costs of acquiring new business, which vary with and are primarily related to the production of new
business, have been deferred to the extent that such costs are deemed recoverable from future
premiums or gross profits. Deferred policy acquisition costs 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
15
the carrying value of DAC include mortality assumptions, interest spreads and policy lapse rates.
The Company performs periodic tests to determine that DAC remains recoverable, and the cumulative
amortization is re-estimated and, if necessary, adjusted by a cumulative charge or credit to
current operations.
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 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 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.
The Company primarily invests in fixed maturity securities and monitors these fixed maturity
securities to determine potential impairments in value. With the Companys external investment
managers, it evaluates its intent and ability to hold 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.
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.
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.
16
Valuation allowances are established 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 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 condensed consolidated financial statements
in the period these changes occur.
In accordance with SFAS No. 157, Fair Value Measurements (SFAS 157), valuation techniques used
for assets and embedded derivative liabilities accounted for 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 within SFAS 157 are consistent with generally accepted valuation
methodologies. While all three approaches are not applicable to all assets or liabilities
accounted for at fair value, where appropriate and possible, one or more valuation techniques may
be used. The selection of the valuation method(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. For assets and liabilities accounted for at fair value, valuation techniques are
generally a combination of the market and income approaches. For the quarter ended March 31, 2008,
the application of valuation techniques applied to similar assets and liabilities has been
consistent. Changes in interest rates, including credit spreads and the Companys own credit risk,
can have a significant impact on the fair value calculations. Additionally, changes in the
actuarial assumptions regarding policyholder behavior may result in significant fluctuations in
embedded derivative liabilities associated with equity-indexed annuity reinsurance treaties.
Level 3 assets were 14.6% of total assets measured at fair value and Level 3 liabilities were 99.9%
of total liabilities measured at fair value as of March 31, 2008. Transfers in and out of Level 3
for the period ended March 31, 2008 were not significant. Please refer to Note 5 Fair Value
Disclosures in the Notes to Condensed Consolidated Financial Statements for additional information
on the Companys assets and liabilities recorded at fair value as of March 31, 2008.
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. It is the opinion of management, after consultation with counsel, that
the outcomes of such litigation and arbitrations, after consideration of the
17
provisions made in the Companys condensed consolidated financial statements, would not have a
material adverse effect on its consolidated financial position. However, it is possible that an
adverse outcome could, from time to time, have a material adverse effect on the Companys
consolidated net income in a particular reporting period.
Further discussion and analysis of the results for 2008 compared to 2007 are presented by segment.
References to income before income taxes exclude the effects of discontinued operations.
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 three months ended March 31, 2008 (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Traditional |
|
Total |
|
|
|
|
|
|
Asset- |
|
Financial |
|
U.S. |
|
|
Traditional |
|
Intensive |
|
Reinsurance |
|
Operations |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
725,393 |
|
|
$ |
1,663 |
|
|
$ |
|
|
|
$ |
727,056 |
|
Investment income, net of related expenses |
|
|
97,431 |
|
|
|
25,031 |
|
|
|
40 |
|
|
|
122,502 |
|
Investment related losses, net |
|
|
(2,508 |
) |
|
|
(149,554 |
) |
|
|
(1 |
) |
|
|
(152,063 |
) |
Other revenues |
|
|
60 |
|
|
|
11,495 |
|
|
|
2,744 |
|
|
|
14,299 |
|
|
|
|
Total revenues |
|
|
820,376 |
|
|
|
(111,365 |
) |
|
|
2,783 |
|
|
|
711,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
651,850 |
|
|
|
185 |
|
|
|
|
|
|
|
652,035 |
|
Interest credited |
|
|
14,790 |
|
|
|
58,968 |
|
|
|
|
|
|
|
73,758 |
|
Policy acquisition costs and other insurance expenses |
|
|
86,050 |
|
|
|
(131,750 |
) |
|
|
198 |
|
|
|
(45,502 |
) |
Other operating expenses |
|
|
13,238 |
|
|
|
2,334 |
|
|
|
646 |
|
|
|
16,218 |
|
|
|
|
Total benefits and expenses |
|
|
765,928 |
|
|
|
(70,263 |
) |
|
|
844 |
|
|
|
696,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
$ |
54,448 |
|
|
$ |
(41,102 |
) |
|
$ |
1,939 |
|
|
$ |
15,285 |
|
|
|
|
For the three months ended March 31, 2007 (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Traditional |
|
Total |
|
|
|
|
|
|
Asset- |
|
Financial |
|
U.S. |
|
|
Traditional |
|
Intensive |
|
Reinsurance |
|
Operations |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
669,419 |
|
|
$ |
1,626 |
|
|
$ |
|
|
|
$ |
671,045 |
|
Investment income, net of related expenses |
|
|
84,928 |
|
|
|
67,952 |
|
|
|
20 |
|
|
|
152,900 |
|
Investment related gains (losses), net |
|
|
(338 |
) |
|
|
2,055 |
|
|
|
|
|
|
|
1,717 |
|
Other revenues |
|
|
106 |
|
|
|
7,424 |
|
|
|
5,889 |
|
|
|
13,419 |
|
|
|
|
Total revenues |
|
|
754,115 |
|
|
|
79,057 |
|
|
|
5,909 |
|
|
|
839,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
542,586 |
|
|
|
4,523 |
|
|
|
1 |
|
|
|
547,110 |
|
Interest credited |
|
|
14,270 |
|
|
|
46,158 |
|
|
|
|
|
|
|
60,428 |
|
Policy acquisition costs and other
insurance expenses |
|
|
99,380 |
|
|
|
22,293 |
|
|
|
2,194 |
|
|
|
123,867 |
|
Other operating expenses |
|
|
11,868 |
|
|
|
1,621 |
|
|
|
1,010 |
|
|
|
14,499 |
|
|
|
|
Total benefits and expenses |
|
|
668,104 |
|
|
|
74,595 |
|
|
|
3,205 |
|
|
|
745,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
86,011 |
|
|
$ |
4,462 |
|
|
$ |
2,704 |
|
|
$ |
93,177 |
|
|
|
|
Income before income taxes for the U.S. operations segment decreased by $77.9 million, or 83.6%, in
the first quarter of 2008, as compared to the same period in 2007. This decrease in income can be
largely attributed to unfavorable mortality experience, the impact of changes in risk free rates
used in the present value calculations of embedded derivatives associated
18
with EIAs and changes in
credit spreads associated with embedded derivatives subject to Issue
B36. Adverse mortality contributed approximately $50.0 million of the unfavorable variance. The impact of changes in risk
free rates used in the present value calculations of embedded derivatives associated with EIAs and
changes in credit spreads associated with embedded derivatives subject to Issue B36 (described
below in the Asset-Intensive sub-segment) had a significant impact on income, contributing a $46.8
million loss in the current quarter compared to income of $0.7 million for the same period in 2007.
Offsetting these negative income items was overall growth in total business in force as evidenced
by the increase in net premiums quarter over quarter, increased investment income and certain
favorable reserve adjustments recognized in the Traditional sub-segment.
Traditional Reinsurance
The U.S. Traditional sub-segment provides life reinsurance to domestic clients for a variety of
life products through yearly renewable term, coinsurance and modified coinsurance agreements.
These reinsurance arrangements may be either facultative or automatic agreements. During the first
quarter of 2008, this sub-segment added new business production of $34.7 billion, measured by face
amount of insurance in force, compared to $40.2 billion as of the same period in 2007. Management
believes industry consolidation and the established practice of reinsuring mortality risks should
continue to provide opportunities for growth.
Income before income taxes for the U.S. Traditional sub-segment decreased $31.6 million, or 36.7%,
in the first quarter of 2008, as compared to the same period in 2007. This decrease was primarily
due to adverse mortality experience in the first quarter of 2008.
Net premiums for the U.S. Traditional sub-segment increased $56.0 million, or 8.4%, in the first
quarter of 2008, as compared to the same period in 2007. This increase in net premiums was driven
primarily by the growth of total U.S. Traditional business in force, which totaled just over $1.2
trillion of face amount as of March 31, 2008. This represents a 5.9% increase over the amount in
force on March 31, 2007.
Net investment income increased $12.5 million, or 14.7%, in the first quarter of 2008, as compared
to the same period in 2007. This increase can be attributed to growth in the invested asset base
and increased portfolio return. 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 89.9% in the
first quarter of 2008, compared to 81.1% in 2007. The higher loss ratio in 2008 is due to very
unfavorable mortality experience compared to the prior year. Increases in the total claim count
and the level of large claims were major contributors to claims being approximately $50.0 million
higher than expected. Although reasonably predicable over a period of years, death claims are
volatile over shorter periods. Management has completed an extensive review of the level and mix
of claims and views recent experience as normal volatility that is inherent in the business.
Interest credited expense increased $0.5 million, or 3.6%, in the first quarter of 2008, as
compared to the same period in 2007. The increase is the result of one treaty that had a slight
increase in its asset base with a credited loan rate remaining constant at 5.6% for 2007 and 2008.
Interest credited relates to amounts credited on cash value products, which 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 11.9% in
the first quarter of 2008, compared to 14.8% in 2007. 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. Finally, 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 $1.4 million, or 11.5%, in the first quarter of 2008, as
compared to the same period in 2007. Other operating expenses, as a percentage of net premiums,
remained the same at 1.8% for first quarter of 2008 and 2007. The expense ratio can fluctuate
slightly from period to period.
19
Asset-Intensive Reinsurance
The U.S. Asset-Intensive sub-segment assumes investment risk within underlying annuities and
corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance
with funds withheld or modified coinsurance of non-mortality risks 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.
This sub-segment reported a loss before income taxes of $41.1 million for the first quarter of 2008
compared to income of $4.5 million for the first quarter of 2007. The unrealized loss due to an
unfavorable change in the value of embedded derivatives, after adjustment for deferred acquisition
costs under Issue B36; combined with the negative impact of changes in risk free rates used in the
present value calculations of embedded derivatives associated with EIAs, contributed $46.8 million
to the loss in 2008 and $0.7 million to the income in 2007.
In accordance with the provisions of Issue B36, the Company recorded a gross change in value of
embedded derivatives of $(148.5) million for the first quarter of 2008, within investment related
losses, net. The amount represents a non-cash, unrealized change in value and was somewhat offset
by $(115.9) million of related deferred acquisition costs for a total net contribution of $32.6
million to the loss before income taxes. Significant fluctuations may occur as the fair value of
the embedded derivatives is tied primarily to the movements in credit spreads. During the quarter,
management estimates the weighted average asset credit spreads widened by approximately 0.71 %.
This was somewhat offset by a decrease in risk free rate of approximately 0.44 %. Additionally,
the Company uses risk free rates, in accordance with FAS 157, to discount the fair value of
estimated future equity option purchases associated with its reinsurance of EIAs (a component of
the embedded derivative), which increased the fair value of the embedded derivative liability. The
impact from the change in risk free rates is an increase in gross embedded liability of $64.5
million, which was recorded as expense within interest credited. This increase was partially
offset by $(50.4) million of related deferred acquisition costs and retrocession, for a net
contribution of $14.1 million to the loss before income taxes. These fluctuations do not affect
current cash flows, crediting rates or spread performance on the underlying treaties. Therefore,
Company management believes it is helpful to distinguish between the effects of changes in these
embedded derivatives and the primary factors that drive profitability of the underlying treaties,
namely investment income, fee income, and interest credited. Additionally, over the expected life
of the underlying treaties, management expects the cumulative effect of the impact of changes in
risk free rates used in the present value calculations of embedded derivatives associated with EIAs
and Issue B36 to be immaterial.
Excluding the impact of changes in risk free rates and credit spreads used in the present value
calculations of embedded derivatives associated with EIAs and Issue B36, income before income taxes
increased $1.9 million, or 52.4%, in the first quarter of 2008, as compared to the same period in
2007. The increase can be attributed to continued growth in business and improved mortality
experience in a single universal life treaty for the comparable periods. These gains were
partially offset by poor performance in equity markets and the widening of credit spreads.
Total revenues, which are comprised primarily of investment income and investment related losses,
net, decreased $190.4 million in the first quarter of 2008, as compared to the same period in 2007.
The losses associated with embedded derivatives subject to Issue B36, which are included in
investment related losses, net, represented $151.4 million of the decrease. Excluding the losses
associated with embedded derivatives subject to Issue B36, revenue decreased $39.0 million,
primarily due to a drop in investment income related to option income on a funds withheld treaty.
This decrease is partially offset by a corresponding decrease in interest credited.
The average invested asset base supporting this sub-segment grew to $4.8 billion in the first
quarter of 2008 from $4.6 billion in the first quarter of 2007. The growth in the asset base is
primarily driven by new business written on one existing equity indexed annuity treaty. Invested
assets outstanding were $4.7 billion as of March 31, 2008 and 2007. As of March 31, 2008 the
invested asset base is slightly lower than the average as the outstanding balance reflects a drop
in option value since the end of 2007. As of March 31, 2008, $3.4 billion of the invested assets
were funds withheld at interest of which 90.8% is associated with one client. As of March 31,
2007, $3.2 billion of the invested assets were funds withheld balance of which 90.7% of the balance
was associated with one client.
Total benefits and expenses, which are comprised primarily of interest credited and policy
acquisition costs, decreased $144.9 million in the first quarter of 2008, as compared to the same
period in 2007. Contributing to the decrease was a decrease in expenses related to embedded
derivatives subject to Issue B36 of $118.0 million partially offset by an increase in the expenses
related to the impact of changes in risk free rates used in the present value calculations of
embedded derivatives associated with EIAs of $14.1 million. Excluding both the impact of changes
in risk free rates and credit spreads used in the present value calculations of embedded
derivatives associated with EIAs and embedded derivatives subject to Issue B36,
20
expenses decreased
$41.0 million. This decrease is primarily due to a decrease in interest credited. As mentioned
above, a
large part of this decrease relates to market value changes in certain equity indexed annuity
products and is offset in investment income.
Financial Reinsurance
The U.S. Financial Reinsurance sub-segment income consists primarily of net fees earned on
financial reinsurance transactions. The majority of the financial reinsurance risks are assumed by
the Company and retroceded to other insurance companies or brokered business in which the company
assumes little risk. The fees earned from financial reinsurance contracts are reflected in other
revenues, and the fees paid to retrocessionaires are reflected in policy acquisition costs and
other insurance expenses. Fees earned on brokered business are reflected in other revenues.
Income before income taxes decreased $0.8 million, or 28.3%, in the first quarter of 2008, as
compared to the same period in 2007. At March 31, 2008 and 2007, the amount of reinsurance
provided, as measured by pre-tax statutory surplus, was $0.5 billion and $1.1 billion,
respectively. The decrease in reinsurance provided is primarily the result of the recapture of one
treaty which totaled $0.5 billion at the end of first quarter 2007. The pre-tax statutory surplus
amounts indicated 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.
CANADA OPERATIONS
The Company conducts reinsurance business in Canada through RGA Life Reinsurance Company of Canada
(RGA Canada), a wholly-owned subsidiary. RGA Canada assists clients with capital management
activity 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 three months ended March 31, (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
138,992 |
|
|
$ |
99,492 |
|
Investment income, net of related expenses |
|
|
36,033 |
|
|
|
26,432 |
|
Investment related gains (losses), net |
|
|
(4,085 |
) |
|
|
2,784 |
|
Other revenues |
|
|
13 |
|
|
|
86 |
|
|
|
|
Total revenues |
|
|
170,953 |
|
|
|
128,794 |
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
115,271 |
|
|
|
91,148 |
|
Interest credited |
|
|
139 |
|
|
|
186 |
|
Policy acquisition costs and other insurance expenses |
|
|
26,426 |
|
|
|
18,476 |
|
Other operating expenses |
|
|
5,446 |
|
|
|
3,950 |
|
|
|
|
Total benefits and expenses |
|
|
147,282 |
|
|
|
113,760 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
23,671 |
|
|
$ |
15,034 |
|
|
|
|
Income before income taxes increased by $8.6 million, or 57.4%, in the first quarter of 2008, as
compared to the same period in 2007. Strength in the Canadian dollar resulted in an increase to
income before income taxes totaling approximately $4.7 million for the first quarter of 2008. The
remaining increase in 2008 was primarily the result of higher premium volume, favorable mortality
experience in the current period offset by a decrease of $6.9 million in investment related gains
and losses, net.
Net premiums increased by $39.5 million, or 39.7%, in the first quarter of 2008, as compared to the
same period in 2007. A stronger Canadian dollar resulted in an increase in net premiums of
approximately $19.8 million in the first quarter 2008 compared to 2007. The remaining increase is
primarily due to new business from both new and existing treaties. In addition, an increase in
premium from creditor treaties contributed $9.1 million in the first quarter of 2008. Creditor and
group life and health premiums represented 19.5% and 18.2% of net premiums in the first quarter of
2008 and 2007, respectively. Premium levels can be significantly influenced by large transactions,
mix of business and reporting practices of ceding companies and therefore may fluctuate from period
to period.
21
Net investment income increased $9.6 million, or 36.3%, in the first quarter of 2008, as compared
to the same period in 2007. A stronger Canadian dollar resulted in an increase in net investment
income of approximately $5.2 million in the first quarter of 2008. 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 the 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 was mainly the result of an increase in
the allocated asset base due to growth in the underlying business volume.
Loss ratios for this segment were 82.9% in the first quarter of 2008, compared to 91.6% in 2007.
The loss ratios on creditor reinsurance business are normally lower than traditional reinsurance,
while allowances are normally higher as a percentage of premiums. Loss ratios for creditor
business were 40.7% in the first quarter of 2008, compared to 49.7% in 2007. Excluding creditor
business, the loss ratio for this segment was 93.2% in the first quarter of 2008, compared to
100.9% in 2007. The lower loss ratio in 2008 is primarily due to favorable mortality experience
compared to the prior year. 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 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 the later years when premiums, by design,
continue to be level as compared to expected increasing mortality or claim costs. Claims and other
policy benefits, as a percentage of net premiums and investment income was 65.9% in the first
quarter of 2008, compared to 72.4% in 2007.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 19.0% in
the first quarter of 2008, compared to 18.6% in 2007. Policy acquisition costs and other insurance
expenses as a percentage of net premiums for creditor business were 49.3% in the first quarter of
2008, compared to 44.1% in 2007. Excluding creditor business, policy acquisition costs and other
insurance expenses as a percentage of net premiums were 11.6% in the first quarter of 2008,
compared to 12.9% in 2007. 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 increased $1.5 million, or 37.9%, in the first quarter of 2008, as
compared to the same period in 2007. A stronger Canadian dollar resulted in an increase in other
operating expenses of $0.7 million in 2008. Other operating expenses as a percentage of net
premiums were 3.9% in the first quarter of 2008, compared to 4.0% in 2007.
EUROPE & SOUTH AFRICA OPERATIONS
The Europe & South Africa segment has operations in France, Germany, India, Italy, Mexico, Poland,
Spain, South Africa and the United Kingdom (UK). The segment provides life reinsurance for a
variety of products through yearly renewable term and coinsurance agreements, and reinsurance of
critical illness coverage. Reinsurance agreements may be either facultative or automatic
agreements covering primarily individual risks and in some markets, group risks.
For the three months ended March 31, (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
189,196 |
|
|
$ |
167,796 |
|
Investment income, net of related expenses |
|
|
7,551 |
|
|
|
5,774 |
|
Investment related gains (losses), net |
|
|
745 |
|
|
|
(224 |
) |
Other revenues |
|
|
60 |
|
|
|
131 |
|
|
|
|
Total revenues |
|
|
197,552 |
|
|
|
173,477 |
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
158,535 |
|
|
|
114,154 |
|
Interest credited |
|
|
|
|
|
|
452 |
|
Policy acquisition costs and other insurance expenses |
|
|
17,230 |
|
|
|
26,060 |
|
Other operating expenses |
|
|
15,744 |
|
|
|
11,687 |
|
|
|
|
Total benefits and expenses |
|
|
191,509 |
|
|
|
152,353 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
6,043 |
|
|
$ |
21,124 |
|
|
|
|
22
Income before income taxes decreased by $15.1 million, or 71.4%, in the first quarter of 2008, as
compared to the same period in 2007. The decrease was primarily due to adverse claims experience
partially offset by increased net premiums and decreased policy acquisition costs and other
insurance expenses in the first quarter of 2008 compared to the same period in 2007. Favorable
foreign currency exchange fluctuations resulted in an increase to income before income taxes
totaling approximately $0.7 million for the first quarter of 2008.
Net premiums increased $21.4 million, or 12.8%, in the first quarter of 2008, as compared to the
same period in 2007. This increase was primarily the result of new business from both new and
existing treaties. During the first quarter, several foreign currencies, particularly the British
pound and the euro strengthened against the U.S. dollar and increased net premiums by approximately
$4.2 million. 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 $60.4 million for the first quarter of 2008, as compared to $57.0 million for
the first quarter of 2007. Premium levels are significantly influenced by large transactions and
reporting practices of ceding companies and therefore can fluctuate from period to period.
Net investment income increased $1.8 million, or 30.8%, in the first quarter of 2008, as compared
to the same period in 2007. This increase was primarily due to an increase in allocated investment
income. 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 83.8% in the first quarter of 2008, compared to 68.0% in 2007.
The increase in the loss ratio for the first quarter of 2008 was primarily due to unfavorable
claims experience in the UK and South Africa, while the prior period reflected favorable mortality
experience.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 9.1% in
the first quarter of 2008, as compared to 15.5% in 2007. These percentages fluctuate due to timing
of client company reporting, variations in the mixture of business being reinsured 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 $4.1 million, or 34.7%, as compared to the same period in 2007.
Other operating expenses as a percentage of net premiums totaled 8.3% in the first quarter of 2008,
compared to 7.0% in 2007. This increase was 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 has operations in Australia, Hong Kong, Japan, Malaysia, Singapore, New
Zealand, South Korea, Taiwan and mainland China. The principal types of reinsurance for this
segment 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 either facultative or
automatic agreements covering primarily individual risks and in some markets, group risks.
For the three months ended March 31, (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
240,935 |
|
|
$ |
186,838 |
|
Investment income, net of related expenses |
|
|
11,414 |
|
|
|
8,663 |
|
Investment related gains (losses), net |
|
|
514 |
|
|
|
(71 |
) |
Other revenues |
|
|
2,552 |
|
|
|
1,827 |
|
|
|
|
Total revenues |
|
|
255,415 |
|
|
|
197,257 |
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
193,669 |
|
|
|
150,483 |
|
Policy acquisition costs and other insurance expenses |
|
|
28,081 |
|
|
|
24,614 |
|
Other operating expenses |
|
|
15,102 |
|
|
|
11,828 |
|
|
|
|
Total benefits and expenses |
|
|
236,852 |
|
|
|
186,925 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
18,563 |
|
|
$ |
10,332 |
|
|
|
|
23
Income before income taxes increased by $8.2 million, or 79.7%, in the first quarter of 2008, as
compared to the same period in 2007. Favorable results from operations throughout the segment,
primarily due to increased net premiums, contributed to the increase in income before income taxes
for the first quarter of 2008, compared to the same period in 2007. Favorable foreign currency
exchange fluctuations resulted in an increase to income before income taxes totaling approximately
$2.2 million for the first quarter of 2008.
Net premiums grew $54.1 million, or 29.0%, in the first quarter of 2008, as compared to the same
period in 2007. This premium growth was due to increased net premiums in all offices but primarily
the result of increases in the volume of business in Australia, Japan and Korea. Premiums in
Australia increased by $22.8 million in the first quarter of 2008, as compared to the same period
in 2007. Premiums in Japan increased by $13.0 million in the first quarter of 2008, as compared to
the same period in 2007. Premiums in Korea increased by $7.0 million in the first quarter of 2008,
as compared to the same periods in 2007. Premium levels are significantly influenced by large
transactions and reporting practices of ceding companies and can fluctuate from period to period.
Foreign currencies in certain significant markets, particularly the Australian and New Zealand
dollars and the Japanese yen, have strengthened against the U.S. dollar during the first three
months of 2008 compared to 2007. The overall effect of changes in local Asia Pacific segment
currencies was an increase in net premiums of approximately $22.4 million for the first quarter of
2008 when compared to the same quarter in 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 earned from this coverage
totaled $35.5 million for the first quarter of 2008, as compared to $34.3 million for the first
quarter of 2007.
Net investment income increased $2.8 million, or 31.8%, in the first quarter of 2008, as compared
to the same period in 2007. This increase was primarily due to an increase in allocated investment
income. 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 $0.7 million, or 39.7%, in the first quarter of 2008, as compared to
the same period in 2007. The primary source of other revenues are fees from financial reinsurance
treaties in Japan. At March 31, 2008 and 2007, the amount of reinsurance assumed from client
companies, as measured by pre-tax statutory surplus, was $0.7 billion. 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 80.4% in the first quarter of 2008, compared to 80.5% in 2007.
The slight decrease in the loss ratio for the first quarter of 2008 was largely due to more
favorable mortality experience. Loss ratios will fluctuate due to timing of client company
reporting, variations in the mixture of business being reinsured and the relative maturity of the
business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 11.7% in
the first quarter of 2008, as compared to 13.2% in 2007. The ratio of policy acquisition costs and
other insurance expenses as a percentage of net premiums will 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 being reinsured.
Other operating expenses increased $3.3 million, or 27.7%, as compared to the same period on 2007.
Operating expenses as a percentage of net premiums remained stable at 6.3% in the first quarter of
2008 and 2007. 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 the $225.0 million of 5.75% Company-obligated mandatorily redeemable
trust preferred securities. Additionally, Corporate and Other includes results from RGA Technology
Partners, Inc., a wholly-owned subsidiary that
24
develops and markets technology solutions for the insurance industry, the Companys Argentine
privatized pension business, which is currently in run-off, the investment income and expense
associated with the Companys collateral finance facility and an insignificant amount of direct
insurance operations in Argentina.
For the three months ended March 31, (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
1,886 |
|
|
$ |
279 |
|
Investment income, net of related expenses |
|
|
22,026 |
|
|
|
21,974 |
|
Investment related losses, net |
|
|
(371 |
) |
|
|
(9,852 |
) |
Other revenues |
|
|
1,012 |
|
|
|
3,639 |
|
|
|
|
Total revenues |
|
|
24,553 |
|
|
|
16,040 |
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
2 |
|
|
|
(85 |
) |
Policy acquisition costs and other insurance expenses |
|
|
(9,973 |
) |
|
|
(10,036 |
) |
Other operating expenses |
|
|
10,830 |
|
|
|
13,458 |
|
Interest expense |
|
|
23,094 |
|
|
|
20,453 |
|
Collateral finance facility expense |
|
|
7,474 |
|
|
|
12,687 |
|
|
|
|
Total benefits and expenses |
|
|
31,427 |
|
|
|
36,477 |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
$ |
(6,874 |
) |
|
$ |
(20,437 |
) |
|
|
|
Loss before income taxes decreased $13.6 million, or 66.4%, in the first quarter of 2008, as
compared to the same period in 2007. This decrease is primarily due to a $9.5 million decrease in
investment related losses, net, a $5.2 million decrease in collateral finance facility expense and
a $2.6 million decrease in other operating expenses, offset by a $2.6 million decrease in other
income and a $2.6 million increase in interest expense.
Total revenues increased $8.5 million, or 53.1%, in the first quarter of 2008, as compared to the
same period in 2007. This increase was due to a $9.5 million decrease in investment related
losses, net, primarily due to the recognition of a $10.5 million currency translation loss in the
first quarter of 2007 related to the Companys decision to sell its direct insurance operations in
Argentina. This increase was partially offset by a $2.6 million decrease in other income primarily
due to lower returns on company owned life insurance policies.
Total benefits and expenses decreased $5.1 million, or 13.8%, in the first quarter of 2008 compared
to the same period in 2007. This decrease was primarily due to a $5.2 million decrease in
collateral finance facility expense due to substantially reduced variable interest rates in the
current quarter. Other operating expenses decreased $2.6 million in 2008 primarily related to a
decrease in equity based compensation but was offset by a $2.6 million increase in interest expense
due to the issuance of $300.0 million in senior notes in March 2007.
Discontinued Operations
The discontinued accident and health operations reported a loss, net of taxes, of $5.1 million for
the first quarter of 2008 compared to a loss, net of taxes, of $0.7 million for the first quarter
of 2007. The loss in the first quarter of 2008 was due to the settlement of a disputed claim in
which the Company paid $5.8 million in excess of the amount held in reserve. 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. Due to
the uncertainty associated with the remaining run-off of this business, future claims settlements
and other expenses, net income in future periods could be affected positively or negatively.
Liquidity and Capital Resources
The Holding Company
RGA is a holding company whose primary uses of liquidity include, but are not limited to, the
immediate capital needs of its operating companies associated with the Companys primary
businesses, dividends paid by RGA to its shareholders, interest payments on its indebtedness, and
repurchases of RGA common stock under a plan approved by the board of directors. 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 two operating
subsidiaries, and dividends from operating
25
subsidiaries. As the Company continues its expansion efforts, RGA will continue to be dependent on
these sources of liquidity.
The Company believes that it has sufficient liquidity 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 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, capital securities or common equity and, if necessary, the sale of
invested assets.
Cash Flows
The Companys net cash flows provided by operating activities for the periods ended March 31, 2008
and 2007 were $188.5 million and $285.1 million, respectively. Cash flows from operating
activities are affected by the timing of premiums received, claims paid, and working capital
changes. The $96.6 million net decrease in operating cash flows during the three months of 2008
compared to the same period in 2007 was primarily a result of cash outflows related to claims,
acquisition costs, income taxes and other operating expenses increasing more than cash inflows
related to premiums and investment income. Cash from premiums and investment income increased
$84.5 million and decreased $19.2 million, respectively, but was more than offset by higher
operating cash outlays of $161.9 million for the current three month period. The Company believes
the short-term cash requirements 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 that is saleable, if necessary, to meet the Companys short- and long-term
obligations.
Net cash used in investing activities was $246.3 million and $382.4 million in the first three
months of 2008 and the comparable prior-year period, respectively. This decrease is largely
related to the investment in 2007 of $295.3 million of the net proceeds from the Companys issuance
of senior notes in March 2007. The sales and purchases of fixed maturity securities are related to
the management of the Companys investment portfolios and the investment of excess cash generated
by operating and financing activities.
Net cash used in financing activities was $42.5 million in the first three months of 2008 and net
cash provided by financing activities was $251.3 million in the same period of 2007. Changes in
cash provided by (used in) financing activities primarily relate to the issuance of equity or debt
securities, borrowings or payments under the Companys existing credit agreements, treasury stock
activity and excess deposits (payments) under investment-type contracts.
Debt and Preferred Securities
As of March 31, 2008 and December 31, 2007, the Company had $925.9 million and $925.8 million,
respectively, in outstanding borrowings under its debt agreements and was in compliance with all
covenants under those agreements.
The Company maintains three revolving credit facilities. The largest is 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
March 31, 2008, the Company had no cash borrowings outstanding and $358.0 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 2009, with an outstanding balance of $29.8
million as of March 31, 2008, and an A$50.0 million Australian credit facility that expires in
March 2011, with no outstanding balance as of March 31, 2008.
As of March 31, 2008, the average interest rate on all 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
6.37%. Interest is expensed on the face amount, or $225 million, of the Trust Preferred Securities
at a rate of 5.75%.
Collateral Finance Facility
In June 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 Company (RGA Reinsurance). Proceeds
from the notes, along with a $112.8 million direct investment by the Company, have been deposited
into a series of trust accounts that collateralize the notes and are not available to satisfy the
general obligations of the Company. Interest on the
26
notes will accrue at an annual rate of 1-month LIBOR plus a base rate margin, payable monthly. 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 Reinsurance Company II (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
and the performance of specified term life insurance policies with guaranteed level premiums
retroceded by RGAs subsidiary, RGA Reinsurance, to Timberlake Re.
Asset / Liability Management
The Company actively manages its 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 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 $350.4
million and $479.4 million at March 31, 2008 and December 31, 2007, respectively. The decrease in
the Companys liquidity position from December 31, 2007 is primarily due to the timing of first
quarter investment activity. 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 has entered into sales of investment securities under agreements to repurchase the same
securities. These arrangements are used for purposes of short-term financing. At March 31, 2008
and December 31, 2007, respectively, the book value of securities subject to these agreements, and
included in fixed maturity securities was $62.0 million and $30.1 million, while the repurchase
obligations of $62.0 million and $30.1 million were 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 March 31, 2008 and December 31, 2007. Further, the Company often enters
into securities lending agreements whereby certain securities are loaned to third parties,
primarily major brokerage firms, in order to earn additional yield. The Company requires a minimum
of 102% of the fair value of the loaned securities as collateral in the form of either cash or
securities held by the Company or a trust. The cash collateral is reported in cash and the
offsetting collateral re-payment obligation is reported in other liabilities. The Company had
securities lending agreements outstanding of $21.3 million at March 31, 2008. There were no
securities lending agreements outstanding at December 31, 2007.
RGA Reinsurance is a member of the Federal Home Loan Bank of Des Moines (FHLB) and holds $11.8
million of common stock of the FHLB, which is included in other invested assets on the Companys
condensed consolidated balance sheets. RGA Reinsurance occasionally enters into funding agreements
with the FHLB but had no outstanding funding agreements with the FHLB at March 31, 2008 and
December 31, 2007.
Future Liquidity and Capital Needs
Based on the historic cash flows and the current financial results of the Company, subject to any
dividend limitations which may be imposed by various insurance regulations, management believes
RGAs cash flows from operating activities, together with undeployed proceeds from its capital
raising efforts, including interest and investment income on those proceeds, interest income
received on surplus notes with two operating subsidiaries, and its ability to raise funds in the
capital markets, will be sufficient to enable RGA to make dividend payments to its shareholders, to
make interest payments on its senior indebtedness, trust preferred securities and junior
subordinated notes, repurchase RGA common stock under the board of director approved plan and meet
its other obligations.
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 the Company obtains
substantially all of its revenues through reinsurance
27
arrangements that cover a portfolio of life insurance products, as well as annuities, its business
would be harmed if the market for annuities or life insurance were adversely affected.
Investments
The Company had total cash and invested assets of $16.6 billion and $16.8 billion at March 31, 2008
and December 31, 2007, respectively, as illustrated below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
December 31, 2007 |
Fixed maturity securities, available-for-sale |
|
$ |
9,387,094 |
|
|
$ |
9,397,916 |
|
Mortgage loans on real estate |
|
|
812,539 |
|
|
|
831,557 |
|
Policy loans |
|
|
1,039,464 |
|
|
|
1,059,439 |
|
Funds withheld at interest |
|
|
4,650,948 |
|
|
|
4,749,496 |
|
Short-term investments |
|
|
46,336 |
|
|
|
75,062 |
|
Other invested assets |
|
|
389,437 |
|
|
|
284,220 |
|
Cash and cash equivalents |
|
|
304,083 |
|
|
|
404,351 |
|
|
|
|
Total cash and invested assets |
|
$ |
16,629,901 |
|
|
$ |
16,802,041 |
|
|
|
|
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
|
Increase/ |
|
|
2008 |
|
2007 |
|
(Decrease) |
Average invested assets at amortized cost |
|
$ |
11,539,433 |
|
|
$ |
10,252,317 |
|
|
|
12.6 |
% |
Net investment income |
|
|
170,899 |
|
|
|
148,820 |
|
|
|
14.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment yield (ratio of net
investment income to average invested
assets) |
|
|
6.06 |
% |
|
|
5.93 |
% |
|
13 |
bps |
All investments held by RGA and its subsidiaries are monitored for conformance to 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, a portion of the Canadian liabilities is strictly matched with long-duration Canadian
assets, with the remaining assets invested to maximize the total rate of return, given the
characteristics of the corresponding liabilities and Company liquidity needs. The duration of the
Canadian portfolio exceeds twenty years. The duration for all the Companys portfolios when
consolidated range between eight and ten years. See Note 4 Investments in the Notes to
Consolidated Financial Statements of the 2007 Annual Report for additional information regarding
the Companys investments.
The Companys fixed maturity securities are invested primarily in commercial and industrial bonds,
public utilities, U.S. and Canadian government securities, as well as mortgage- and asset-backed
securities. As of March 31, 2008 and December 31, 2007, approximately 97.1% and 97.2%,
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 invested in high-grade money market instruments. The largest
asset class in which fixed maturities were invested was in corporate securities, including
commercial, industrial, finance and utility bonds, which represented approximately 46.8% of fixed
maturity securities as of March 31, 2008, compared to 46.5% at December 31, 2007. Corporate
securities are diversified by sector, with the majority in finance,
28
commercial and industrial bonds. The average Standard & Poors (S&P) rating of the Companys
corporate securities was A- at March 31, 2008 and December 31, 2007.
The fair value of publicly traded fixed maturity securities are based upon quoted market prices or
estimates from independent pricing services with oversight from the Company. Private placement
fixed maturity securities fair values are based on the credit quality and duration of marketable
securities deemed comparable by the Companys investment advisor, which may be of another issuer.
The NAIC assigns securities quality ratings and uniform valuations called NAIC Designations which
are used by insurers when preparing their annual statements. 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).
As of
March 31, 2008, the Company classified approximately 16.1% of its fixed maturity securities
in the Level 3 category in accordance with SFAS 157 (refer to Note 5 Fair Value Disclosures in
the Notes to Condensed Consolidated Financial Statements for additional information). These
securities primarily consist of private placement corporate securities with an inactive trading
market and securities for which the Company relies on broker quotes to determine fair value.
Additionally, the Company has included asset-backed securities with subprime exposure in the Level
3 category due to the current market uncertainty associated with these securities.
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 March
31, 2008 and December 31, 2007 was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
December 31, 2007 |
NAIC |
|
Rating Agency |
|
Amortized |
|
Estimated |
|
% of |
|
Amortized |
|
Estimated |
|
% of |
Designation |
|
Designation |
|
Cost |
|
Fair Value |
|
Total |
|
Cost |
|
Fair Value |
|
Total |
|
1 |
|
|
AAA/AA/A |
|
$ |
7,127,035 |
|
|
$ |
7,436,088 |
|
|
|
79.2 |
% |
|
$ |
7,022,497 |
|
|
$ |
7,521,177 |
|
|
|
80.0 |
% |
|
2 |
|
|
BBB |
|
|
1,725,432 |
|
|
|
1,676,870 |
|
|
|
17.8 |
% |
|
|
1,628,431 |
|
|
|
1,617,983 |
|
|
|
17.2 |
% |
|
3 |
|
|
BB |
|
|
222,209 |
|
|
|
214,105 |
|
|
|
2.3 |
% |
|
|
201,868 |
|
|
|
198,487 |
|
|
|
2.1 |
% |
|
4 |
|
|
B |
|
|
48,225 |
|
|
|
43,989 |
|
|
|
0.5 |
% |
|
|
47,013 |
|
|
|
43,680 |
|
|
|
0.5 |
% |
|
5 |
|
|
CCC and lower |
|
|
16,860 |
|
|
|
15,987 |
|
|
|
0.2 |
% |
|
|
16,800 |
|
|
|
16,502 |
|
|
|
0.2 |
% |
|
6 |
|
|
In or near default |
|
|
53 |
|
|
|
55 |
|
|
|
|
|
|
|
83 |
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,139,814 |
|
|
$ |
9,387,094 |
|
|
|
100.0 |
% |
|
$ |
8,916,692 |
|
|
$ |
9,397,916 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
Within the fixed maturity security portfolio, the Company held approximately $1.3 billion and $1.4
billion in residential mortgage-backed securities at March 31, 2008 and December 31, 2007,
respectively, which include agency-issued pass-through securities, collateralized mortgage
obligations guaranteed or otherwise supported by the Federal Home Loan Mortgage Corporation,
Federal National Mortgage Association, or the Government National Mortgage Association. As of
March 31, 2008 and December 31, 2007, almost all of these securities were investment-grade.
Additionally, the Company held $686.7 million and $645.2 million in investment-grade commercial
mortgage-backed securities at March 31, 2008 and December 31, 2007, respectively. 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.
Within the fixed maturity security portfolio, the Company held approximately $446.0 million and
$464.3 million in asset-backed securities at March 31, 2008 and December 31, 2007, respectively,
which include credit card and automobile receivables, home equity loans, manufactured housing bonds
and collateralized bond obligations. The Companys asset-backed securities are diversified by
issuer and contain both floating and fixed rate securities. The Company owns floating rate
securities that represent approximately 19.8% and 19.2% of the total fixed maturity securities at
March 31, 2008 and December 31, 2007, respectively. These investments have a higher degree of
income variability than the other fixed income
29
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
condensed 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.
As of March 31, 2008 and December 31, 2007, the Company held investments in securities with
subprime mortgage exposure with amortized costs totaling $255.4 million and $267.7 million, and
estimated fair values of $221.6 million and $246.8 million, respectively. Those amounts include
exposure to subprime 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 securities are highly rated with weighted average S&P credit
ratings of approximately AA+ at March 31, 2008 and December 31, 2007. Additionally, the Company
has largely avoided investing in securities originated in the second half of 2005 and beyond, which
management believes was a period of lessened underwriting quality. The majority of the Companys
holdings are originations from 2005 and prior periods. In light of the high credit quality of the
portfolio, the Company does not expect to realize any material losses despite the recent increase
in default rates and market concern over future performance of this asset class. Additionally, the
recent series of rating agency downgrades of securities in this sector did not significantly affect
the Companys exposure as the Company experienced only one downgrade within its portfolio of
securities. The following tables summarize the securities by rating and underwriting year at March
31, 2008 and December 31, 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
AAA |
|
AA |
|
A |
|
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
16,021 |
|
|
$ |
16,258 |
|
|
$ |
1,487 |
|
|
$ |
1,396 |
|
|
$ |
3,684 |
|
|
$ |
3,272 |
|
2004 |
|
|
15,262 |
|
|
|
13,175 |
|
|
|
33,731 |
|
|
|
27,870 |
|
|
|
16,147 |
|
|
|
14,687 |
|
2005 |
|
|
52,295 |
|
|
|
47,580 |
|
|
|
52,680 |
|
|
|
46,487 |
|
|
|
21,595 |
|
|
|
15,846 |
|
2006 |
|
|
13,718 |
|
|
|
11,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
11,436 |
|
|
|
9,885 |
|
|
|
|
|
|
|
|
|
|
|
10,501 |
|
|
|
8,332 |
|
|
|
|
Total |
|
$ |
108,732 |
|
|
$ |
98,269 |
|
|
$ |
87,898 |
|
|
$ |
75,753 |
|
|
$ |
51,927 |
|
|
$ |
42,137 |
|
|
|
|
|
|
|
BBB |
|
Below Investment Grade |
|
Total |
|
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
1,188 |
|
|
$ |
1,052 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
22,380 |
|
|
$ |
21,978 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,140 |
|
|
|
55,732 |
|
2005 |
|
|
2,555 |
|
|
|
1,269 |
|
|
|
|
|
|
|
|
|
|
|
129,125 |
|
|
|
111,182 |
|
2006 |
|
|
3,137 |
|
|
|
3,146 |
|
|
|
|
|
|
|
|
|
|
|
16,855 |
|
|
|
14,517 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,937 |
|
|
|
18,217 |
|
|
|
|
Total |
|
$ |
6,880 |
|
|
$ |
5,467 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
255,437 |
|
|
$ |
221,626 |
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
AAA |
|
AA |
|
A |
|
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
16,520 |
|
|
$ |
16,531 |
|
|
$ |
2,111 |
|
|
$ |
1,910 |
|
|
|
|
|
|
$ |
3,749 |
|
|
$ |
3,246 |
|
2004 |
|
|
26,520 |
|
|
|
26,286 |
|
|
|
33,757 |
|
|
|
31,465 |
|
|
|
|
|
|
|
16,151 |
|
|
|
14,614 |
|
2005 |
|
|
41,638 |
|
|
|
40,190 |
|
|
|
60,233 |
|
|
|
55,041 |
|
|
|
|
|
|
|
21,593 |
|
|
|
18,140 |
|
2006 |
|
|
13,964 |
|
|
|
11,957 |
|
|
|
5,002 |
|
|
|
3,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
20,274 |
|
|
|
18,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
118,916 |
|
|
$ |
113,315 |
|
|
$ |
101,103 |
|
|
$ |
92,179 |
|
|
|
|
|
|
$ |
41,493 |
|
|
$ |
36,000 |
|
|
|
|
|
|
|
BBB |
|
Below Investment Grade |
|
Total |
|
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
|
Amortized Cost |
|
Fair Value |
2003 & Prior |
|
$ |
1,186 |
|
|
$ |
1,046 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
23,566 |
|
|
$ |
22,733 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,428 |
|
|
|
72,365 |
|
2005 |
|
|
5,026 |
|
|
|
4,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,490 |
|
|
|
117,621 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,966 |
|
|
|
15,720 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,274 |
|
|
|
18,351 |
|
|
|
|
Total |
|
$ |
6,212 |
|
|
$ |
5,296 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
267,724 |
|
|
$ |
246,790 |
|
|
|
|
The Companys fixed maturity and funds withheld portfolios include approximately $655.6 million in
amortized cost 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 invests in insured
collateralized debt obligation (CDO) structures backing subprime investments of approximately
$0.7 million at March 31, 2008. The insured securities are primarily investment grade 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 recent financial difficulties
encountered by several of the financial guarantors. In addition to the insured securities, the
Company held investment-grade securities issued by four of the financial guarantors totaling $21.9
million in amortized cost.
The Company monitors its fixed maturity 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. The Company recorded $5.2
million in other-than-temporary write-downs on fixed maturity securities for the three months ended
March 31, 2008. The Company recorded $0.6 million in other-than-temporary write-downs on fixed
maturity securities for the three months ended March 31, 2007. During the three months ended March
31, 2008 and 2007, the Company sold fixed maturity securities and equity securities with fair
values of $141.3 million and $238.8 million at losses of $8.9 million and $6.1 million,
respectively, or at 94.1% and 97.5% of book value, respectively. Generally, such losses are
insignificant in relation to the cost basis of the investment and are largely due to changes in
interest rates from the time the security was purchased. The securities are classified as
available-for-sale in order to meet the Companys operational and other cash flow requirements.
The Company does not engage in short-term buying and selling of securities to generate gains or
losses.
The following table presents the total gross unrealized losses for 1,290 and 1,105 fixed maturity
securities and equity securities as of March 31, 2008 and December 31, 2007, respectively, where
the estimated fair value had declined and remained below amortized cost by the indicated amount
(dollars in thousands):
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
December 31, 2007 |
|
|
|
|
Gross |
|
|
|
|
|
|
|
Gross |
|
|
|
|
Number of |
|
Unrealized |
|
|
|
|
|
Number of |
|
Unrealized |
|
|
|
|
Securities |
|
Loss |
|
% of Total |
|
Securities |
|
Loss |
|
% of Total |
|
|
|
Less than 20% |
|
|
1,143 |
|
|
$ |
230,125 |
|
|
|
62.0 |
% |
|
|
1,039 |
|
|
$ |
159,563 |
|
|
|
80.5 |
% |
20% or more for
less than six
months |
|
|
133 |
|
|
|
130,954 |
|
|
|
35.3 |
|
|
|
59 |
|
|
|
35,671 |
|
|
|
18.0 |
|
20% or more for six
months or greater |
|
|
14 |
|
|
|
10,222 |
|
|
|
2.7 |
|
|
|
7 |
|
|
|
2,981 |
|
|
|
1.5 |
|
|
|
|
Total |
|
|
1,290 |
|
|
$ |
371,301 |
|
|
|
100.0 |
% |
|
|
1,105 |
|
|
$ |
198,215 |
|
|
|
100.0 |
% |
|
|
|
While all of these securities are monitored for potential impairment, the Companys experience
indicates that the first two categories do not present as great a risk of impairment, and often,
fair values recover over time. These securities have generally been adversely affected by overall
economic conditions, primarily an increase in the interest rate environment, including a widening
of credit default spreads.
The following tables present the estimated fair values and gross unrealized losses for the 1,290
and 1,105 fixed maturity securities and equity securities that have estimated fair values below
amortized cost as of March 31, 2008 and December 31, 2007, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Equal to or greater than |
|
|
|
|
Less than 12 months |
|
12 months |
|
Total |
|
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
|
Gross |
|
|
Estimated Fair |
|
Unrealized |
|
Estimated |
|
Unrealized |
|
Estimated Fair |
|
Unrealized |
(dollars in thousands) |
|
Value |
|
Loss |
|
Fair Value |
|
Loss |
|
Value |
|
Loss |
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
1,364,148 |
|
|
$ |
105,669 |
|
|
$ |
506,480 |
|
|
$ |
47,912 |
|
|
$ |
1,870,628 |
|
|
$ |
153,581 |
|
Canadian and Canadian provincial
governments |
|
|
144,448 |
|
|
|
2,924 |
|
|
|
25,089 |
|
|
|
1,258 |
|
|
|
169,537 |
|
|
|
4,182 |
|
Residential mortgage-backed
securities |
|
|
389,755 |
|
|
|
16,616 |
|
|
|
167,342 |
|
|
|
10,276 |
|
|
|
557,097 |
|
|
|
26,892 |
|
Foreign corporate securities |
|
|
396,425 |
|
|
|
34,494 |
|
|
|
171,394 |
|
|
|
11,633 |
|
|
|
567,819 |
|
|
|
46,127 |
|
Asset-backed securities |
|
|
271,240 |
|
|
|
37,976 |
|
|
|
93,824 |
|
|
|
12,040 |
|
|
|
365,064 |
|
|
|
50,016 |
|
Commercial mortgage-backed
securities |
|
|
473,862 |
|
|
|
40,214 |
|
|
|
44,599 |
|
|
|
3,111 |
|
|
|
518,461 |
|
|
|
43,325 |
|
State and political subdivisions |
|
|
25,820 |
|
|
|
2,035 |
|
|
|
11,554 |
|
|
|
3,302 |
|
|
|
37,374 |
|
|
|
5,337 |
|
Other foreign government securities |
|
|
95,418 |
|
|
|
1,321 |
|
|
|
57,301 |
|
|
|
1,765 |
|
|
|
152,719 |
|
|
|
3,086 |
|
|
|
|
|
|
|
|
Investment grade securities |
|
$ |
3,161,116 |
|
|
|
241,249 |
|
|
|
1,077,583 |
|
|
|
91,297 |
|
|
|
4,238,699 |
|
|
|
332,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
|
131,232 |
|
|
|
12,660 |
|
|
|
34,045 |
|
|
|
2,228 |
|
|
|
165,277 |
|
|
|
14,888 |
|
Asset-backed securities |
|
|
1,330 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
1,330 |
|
|
|
2 |
|
Foreign corporate securities |
|
|
10,051 |
|
|
|
1,885 |
|
|
|
3,420 |
|
|
|
237 |
|
|
|
13,471 |
|
|
|
2,122 |
|
|
|
|
|
|
|
|
Non-investment grade securities |
|
|
142,613 |
|
|
|
14,547 |
|
|
|
37,465 |
|
|
|
2,465 |
|
|
|
180,078 |
|
|
|
17,012 |
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
3,303,729 |
|
|
$ |
255,796 |
|
|
$ |
1,115,048 |
|
|
$ |
93,762 |
|
|
$ |
4,418,777 |
|
|
$ |
349,558 |
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
124,771 |
|
|
$ |
20,286 |
|
|
$ |
7,061 |
|
|
$ |
1,457 |
|
|
$ |
131,832 |
|
|
$ |
21,743 |
|
|
|
|
|
|
|
|
Total number of securities in
an unrealized loss position |
|
|
912 |
|
|
|
|
|
|
|
378 |
|
|
|
|
|
|
|
1,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
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 |
|
Loss |
|
Fair Value |
|
Loss |
|
Fair Value |
|
Loss |
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
$ |
1,185,664 |
|
|
$ |
63,368 |
|
|
$ |
487,626 |
|
|
$ |
25,541 |
|
|
$ |
1,673,290 |
|
|
$ |
88,909 |
|
Canadian and Canadian provincial
governments |
|
|
78,045 |
|
|
|
1,077 |
|
|
|
4,313 |
|
|
|
86 |
|
|
|
82,358 |
|
|
|
1,163 |
|
Residential mortgage-backed
securities |
|
|
299,655 |
|
|
|
5,473 |
|
|
|
348,632 |
|
|
|
6,743 |
|
|
|
648,287 |
|
|
|
12,216 |
|
Foreign corporate securities |
|
|
293,783 |
|
|
|
17,880 |
|
|
|
155,445 |
|
|
|
5,995 |
|
|
|
449,228 |
|
|
|
23,875 |
|
Asset-backed securities |
|
|
341,337 |
|
|
|
24,958 |
|
|
|
72,445 |
|
|
|
5,722 |
|
|
|
413,782 |
|
|
|
30,680 |
|
Commercial mortgage-backed
securities |
|
|
110,097 |
|
|
|
4,499 |
|
|
|
46,647 |
|
|
|
588 |
|
|
|
156,744 |
|
|
|
5,087 |
|
U.S. government and agencies |
|
|
700 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
700 |
|
|
|
1 |
|
State and political subdivisions |
|
|
27,265 |
|
|
|
605 |
|
|
|
14,518 |
|
|
|
339 |
|
|
|
41,783 |
|
|
|
944 |
|
Other foreign government securities |
|
|
127,397 |
|
|
|
1,635 |
|
|
|
75,354 |
|
|
|
2,878 |
|
|
|
202,751 |
|
|
|
4,513 |
|
|
|
|
|
|
|
|
Investment grade securities |
|
|
2,463,943 |
|
|
|
119,496 |
|
|
|
1,204,980 |
|
|
|
47,892 |
|
|
|
3,668,923 |
|
|
|
167,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. corporate securities |
|
|
106,842 |
|
|
|
6,044 |
|
|
|
30,105 |
|
|
|
1,727 |
|
|
|
136,947 |
|
|
|
7,771 |
|
Asset-backed securities |
|
|
1,996 |
|
|
|
776 |
|
|
|
|
|
|
|
|
|
|
|
1,996 |
|
|
|
776 |
|
Foreign corporate securities |
|
|
9,692 |
|
|
|
1,930 |
|
|
|
3,524 |
|
|
|
165 |
|
|
|
13,216 |
|
|
|
2,095 |
|
|
|
|
|
|
|
|
Non-investment grade securities |
|
|
118,530 |
|
|
|
8,750 |
|
|
|
33,629 |
|
|
|
1,892 |
|
|
|
152,159 |
|
|
|
10,642 |
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
2,582,473 |
|
|
$ |
128,246 |
|
|
$ |
1,238,609 |
|
|
$ |
49,784 |
|
|
$ |
3,821,082 |
|
|
$ |
178,030 |
|
|
|
|
|
|
|
|
Equity securities |
|
$ |
83,166 |
|
|
$ |
16,764 |
|
|
$ |
19,073 |
|
|
$ |
3,421 |
|
|
$ |
102,239 |
|
|
$ |
20,185 |
|
|
|
|
|
|
|
|
Total number of securities in
an unrealized loss position |
|
|
691 |
|
|
|
|
|
|
|
414 |
|
|
|
|
|
|
|
1,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The investment securities in an unrealized loss position as of March 31, 2008 consisted of 1,290
securities accounting for unrealized losses of $371.3 million. Of these unrealized losses 95.4%
were investment grade and 62.0% were less than 20% below cost. The amount of the unrealized loss on
these securities was primarily attributable to increases in interest rates, including a widening of
credit default spreads.
Of the investment securities in an unrealized loss position for 12 months or more as of March 31,
2008, 38 securities were 20% or more below cost, including 3 securities which were also below
investment grade. These securities accounted for unrealized losses of
approximately $0.7 million.
These securities were all corporate bonds, were current on all terms and the Company currently
expects to collect full principal and interest.
As of March 31, 2008, the Company expects these investments to continue to perform in accordance
with their original contractual terms and the Company has the ability and intent to hold these
investments securities until the recovery of the fair value up to the cost of the investment, which
may by maturity. Accordingly, the Company does not consider these investments to be
other-than-temporary impaired at March 31, 2008. However, from time to time when facts and
circumstances arise, the Company may sell securities in the ordinary course of managing its
portfolio to meet diversification, credit quality, yield enhancement, asset-liability management
and liquidity requirements.
The Companys mortgage loan portfolio consists principally of investments in U.S.-based commercial
offices and retail locations. The mortgage loan portfolio is diversified by geographic region and
property type. Substantially all mortgage loans are performing and no valuation allowance has been
established as of March 31, 2008 or December 31, 2007.
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
33
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 comprised approximately 28.0% and 28.3% of the Companys cash and
invested assets as of March 31, 2008 and December 31, 2007, respectively. For 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 condensed consolidated balance sheet.
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. 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. The
underlying portfolios also include options related to equity indexed annuity products. The market
value changes associated with these investments have caused some volatility in reported investment
income. This is largely offset by a corresponding change in interest credited, with minimal impact
on income before taxes. To mitigate risk, the Company helps set the investment guidelines followed
by the ceding company and monitors compliance. Ceding companies with funds withheld at interest
had an average rating of A+ at March 31, 2008 and December 31, 2007. Certain ceding companies
maintain segregated portfolios for the benefit of the Company.
Other invested assets represented approximately 2.3% and 1.7% of the Companys cash and invested
assets as of March 31, 2008 and December 31, 2007, respectively. Other invested assets include
derivative contracts, equity securities, preferred stocks, structured loans and limited partnership
interests. The Company did not record an other-than-temporary write-down on its investments in
limited partnerships in the first three months of 2008 or 2007.
Contractual Obligations
Since December 31, 2007, the value of the Companys obligation for collateral finance facility,
including interest, decreased by $229.4 million due to substantially reduced variable interest
rates in the current quarter as previously discussed. There were no other material changes in the
Companys contractual obligations from that reported in the 2007 Annual Report.
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 22 such cases of over-retained policies, for
amounts averaging $1.7 million over the Companys normal retention limit. The largest amount
over-retained on any one life is $10.1 million. The Company has mitigated the risk related to the
over-retained policies by entering into one-year agreements with other reinsurers that commenced in
September and October of 2007. 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, 2007, and covers events involving 10 or more
insured deaths from a single occurrence. The Company retains the first $10 million in claims, the
Program covers the next $40 million in claims, and the Company retains all claims in excess of $50
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 losses from earthquakes occurring in California and also excludes losses from
pandemics. The Program is insured by nine insurance companies and Lloyds Syndicates, with no
single entity providing more than $10 million of coverage.
Counterparty Risk
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
34
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, RGA Reinsurance Company (Barbados) Ltd., RGA Americas Reinsurance Company, Ltd., RGA
Worldwide Reinsurance Company, Ltd. or RGA Atlantic Reinsurance Company, Ltd. External
retrocessions are arranged through the Companys retrocession pools for amounts in excess of its
retention. As of March 31, 2008, 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. The Company also retrocedes most of its financial reinsurance
business to other insurance companies to alleviate the strain on statutory surplus created by this
business. For a majority of the retrocessionaires that are 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 fluctuations in interest and currency exchange
rates and equity and commodity prices change the value of a financial instrument. Since both
derivative and nonderivative financial instruments have market risk, the Companys risk management
extends beyond derivatives to encompass all financial instruments held. The Company is primarily
exposed to interest rate risk and foreign currency risk.
Interest rate 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 impact of sudden and
sustained changes in interest rates on fair value, cash flows, and interest income.
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 a net
investment hedge of a portion of its investment in Canada operations. Translation differences
resulting from translating foreign subsidiary balances to U.S. dollars are reflected in
stockholders equity on the condensed 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 Australian dollars, British pounds, Canadian dollars,
Japanese yen, Korean won, the South African rand and euros.
There has been no significant change in the Companys quantitative or qualitative aspects of market
risk during the quarter ended March 31, 2008 from that disclosed in the 2007 Annual Report.
New Accounting Standards
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities An Amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 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. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company is currently evaluating the impact of SFAS
161 on its condensed consolidated financial statements.
In February 2008, the FASB issued Staff Position (FSP) No. FAS 140-3, Accounting for Transfers
of Financial Assets and Repurchase Financing Transactions (FSP 140-3). FSP 140-3 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. FSP 140-3 is
35
effective
prospectively for financial statements issued for fiscal years beginning after November 15, 2008.
The Company is currently evaluating the impact of FSP 140-3 on its condensed consolidated financial
statements.
Effective January 1, 2008, the Company adopted SFAS No. 157. SFAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP and requires enhanced disclosures about
fair value measurements. SFAS 157 does not require any new fair value measurements. The adoption
of SFAS 157 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 liability embedded derivatives
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.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations A
Replacement of FASB Statement No. 141 (SFAS 141(r)) and SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements An Amendment of ARB No. 51 (SFAS 160). SFAS 141(r)
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. SFAS 160 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 pronouncements 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 Company is currently evaluating the impact of SFAS 141(r) on its
accounting for future acquisitions and the impact of SFAS 160 on its condensed consolidated
financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). SFAS 159 permits all entities the option to measure most
financial instruments and certain other items at fair value at specified election dates and to
report related unrealized gains and losses in earnings. The fair value option will generally be
applied on an instrument-by-instrument basis and is generally an irrevocable election. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company did not elect to apply
the fair value option available under SFAS 159 for any of its eligible financial instruments.
Forward-Looking and Cautionary Statements
This Quarterly Report on Form 10-Q 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
changes in mortality, morbidity, lapsation or claims experience, (2) changes in the Companys
financial strength and credit ratings or those of MetLife, Inc. (MetLife), the beneficial owner
of a majority of the Companys common shares, or its subsidiaries, and the effect of such changes
on the Companys future results of operations and financial condition, (3) inadequate risk analysis
and underwriting, (4) general economic conditions or a prolonged economic downturn affecting the
demand for insurance and reinsurance in the Companys current and planned markets, (5) the
availability and cost of collateral necessary for regulatory reserves and capital, (6) market or
economic conditions that adversely affect the Companys ability to make timely sales of investment
securities, (7) risks inherent in the Companys risk management and investment strategy, including
changes in investment portfolio yields due to interest rate or credit quality changes, (8)
fluctuations in U.S. or foreign currency exchange rates, interest rates, or securities and real
estate markets, (9) adverse litigation or arbitration results, (10) the adequacy of reserves,
resources and accurate information relating to settlements, awards and terminated and discontinued
lines of business, (11) the stability of and actions by governments and economies in the markets in
which the Company operates, (12) competitive factors and competitors responses to the Companys
initiatives, (13) the success of the Companys clients, (14) successful execution of the Companys
entry into new markets, (15) successful development and introduction of new products and
distribution opportunities, (16) the Companys ability to successfully integrate and operate
reinsurance business that the Company acquires, (17) regulatory action that may be taken by state
Departments of Insurance with respect to the Company, MetLife, or its subsidiaries, (18) 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, (19) the threat of
36
natural disasters, catastrophes, terrorist attacks, epidemics or pandemics anywhere in the world
where the Company or its clients do business, (20) changes in laws, regulations, and accounting
standards applicable to the Company, its subsidiaries, or its business, (21) 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 (22) 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 of the 2007 Annual Report.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
Market Risk which is included herein.
ITEM 4. 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 March 31, 2008, that has materially affected,
or is reasonably likely to materially affect, the Companys internal control over financial
reporting.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is currently a party to a threatened arbitration related to its life reinsurance
business. As of March 31, 2008, the party involved in this action has raised a claim in the amount
of $4.9 million, which is $4.9 million in excess of the amount held in reserve by the Company. The
Company believes it has substantial defenses upon which to contest this claim, including but not
limited to misrepresentation and breach of contract by direct and indirect ceding companies.
Additionally, from time to time, the Company is subject to litigation related to employment-related
matters in the normal course of its business. The Company cannot predict or determine the ultimate
outcome of the pending litigation or arbitrations or provide useful ranges of potential losses. It
is the opinion of management, after consultation with counsel, that their outcomes, after
consideration of the provisions made in the Companys condensed consolidated financial statements,
would not have a material adverse effect on its consolidated financial position. However, it is
possible that an adverse outcome could, from time to time, have a material adverse effect on the
Companys consolidated net income in a particular reporting period.
ITEM 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Companys
2007 Annual Report.
37
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table summarizes the Companys repurchase activity of its common stock during the
first quarter ended March 31, 2008:
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Total Number of |
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Maximum Number of |
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Average Price |
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Shares Purchased as |
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Shares that May Yet |
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Total Number of |
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Paid |
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Part of Publicly |
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Be Purchased Under |
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Shares Purchased (1) |
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per Share |
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Announced Plans |
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the Plans |
February 1, 2008
February 29, 2008 |
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56,129 |
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$ |
55.10 |
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(1) |
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In February 2008 the Company net settled issuing 217,375 shares from treasury and
repurchasing from recipients 56,129 shares in settlement of income tax withholding
requirements incurred by the recipients of an equity incentive award. |
Under a board of directors approved plan, the Company may purchase at its discretion up to $50
million of its common stock on the open market. As of March 31, 2008, the Company had purchased
225,500 shares of treasury stock under this program at an aggregate price of $6.6 million. All
purchases were made during 2002. The Company generally uses treasury shares to support the future
exercise of options granted under its stock option plans.
ITEM 6. Exhibits
See index to exhibits.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Reinsurance Group of America, Incorporated |
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By:
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/s/ A. Greig Woodring
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May 2, 2008 |
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A. Greig Woodring |
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President & Chief Executive Officer |
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(Principal Executive Officer) |
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By:
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/s/ Jack B. Lay
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May 2, 2008 |
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Jack B. Lay |
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Senior Executive Vice President &
Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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39
INDEX TO EXHIBITS
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Exhibit |
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Number |
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Description |
3.1
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Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 of Current
Report on Form 8-K filed June 30, 2004. |
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3.2
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Bylaws of RGA, as amended, incorporated by reference to Exhibit 3.2 of Quarterly Report on
Form 10-Q filed August 6, 2004. |
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31.1
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Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
40