RGA Reinsurance also conducts business from approximately 1,500 square feet of office space in Mexico City, Mexico. The rental expenses paid by RGA Reinsurance under the lease during 2000 were approximately $22,000. The lease expires in December 2001.
General American Argentina conducts business from approximately 11,000 square feet of office space in Buenos Aires, Argentina, pursuant to several leases. Rental expense paid for the office was approximately $179,000 during 2000. Two of the Buenos Aires leases expire in 2001, and three in 2002.
RGA Argentina conducts business from approximately 800 square feet of office space in Buenos Aires, Argentina. The rental expenses paid by RGA Argentina under the lease during 2000 were approximately $28,000. The lease expires in December 2001.
RGA South Africa conducts business from approximately 5,300 square feet of office space in Cape Town and 3,600 square feet of office space located in Johannesburg, South Africa. The rental expenses paid by RGA South Africa under the leases during 2000 were approximately $20,000 and $24,000 for Cape Town and Johannesburg respectively. The leases expire in September 2003 and May 2004 for Cape Town and Johannesburg respectively.
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS ABOVE. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS, WHICH SPEAK ONLY AS OF MARCH 1, 2001.
The consolidated financial statements include the assets, liabilities, and results of operations of RGA; Reinsurance Company of Missouri, Incorporated ("RCM"); RGA Australian Holdings PTY, Limited ("Australian Holdings"); RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"); RGA International, Ltd. ("RGA International"), a New Brunswick company that serves as a
The Company has foreign currency risk on business conducted in foreign currencies to the extent that the exchange rates of the foreign currencies are subject to adverse change over time. The Company's operations in Canada transact business in Canadian dollars. The exchange rate from Canadian to U.S. currency was 0.6676, 0.6876, and 0.6535 at December 31, 2000, 1999, and 1998, respectively. The Company's Latin America operations primarily conduct business in Argentine pesos and, prior to the sale of RGA Sudamerica, S.A., Chilean pesos. The exchange rate from these currencies to the U.S. currency remained relatively stable during 2000, 1999, and 1998. The business generated from the Asia Pacific region is primarily denominated in U.S. dollars, Australian dollars, and Japanese yen. Additionally, the Company processes business in other international currencies including the Great British Pound Sterling and South African Rand. The Company was not materially affected by the decline in the foreign exchange rates during 2000 and 1999.
Since December 31, 1998, the Company has formally reported its accident and health division as a discontinued operation. The accident and health business was placed into run-off, and all treaties were terminated at the earliest possible date. Notice was given to all cedants and retrocessionaires that all treaties were being cancelled at the expiration of their terms. If a treaty was continuous, a written Preliminary Notice of Cancellation was given, followed by a final notice within 90 days of the expiration date. The nature of the underlying risks is such that the claims may take several years to reach the reinsurers involved. Thus, the Company expects
The Company has five main operational segments segregated primarily by geographic region: U.S., Canada, Latin America, Asia Pacific, and other international operations. The U.S. operations provide traditional life reinsurance and non-traditional reinsurance to domestic clients. Non-traditional business includes asset-intensive and financial reinsurance. Asset-intensive products primarily include reinsurance of corporate-owned life insurance and annuities. The Canada operations provide insurers with traditional reinsurance as well as assistance with capital management activity. The Latin America operations include traditional reinsurance, reinsurance of privatized pension products primarily in Argentina, and direct life insurance through a joint venture and subsidiaries in Chile and Argentina. The Company sold its Chilean interests during 2000. Asia Pacific operations provide primarily traditional life reinsurance through RGA Reinsurance Company of Australia, Limited ("RGA Australia") and RGA Reinsurance Company ("RGA Reinsurance"). Other international operations include traditional business from Europe and South Africa, in addition to other markets being developed by the Company. The operational segment results do not include the corporate investment activity, general corporate expenses, interest expense of RGA, and the provision for income tax expense (benefit). In addition, the Company's discontinued accident and health operations are not reflected in the continuing operations of the Company. The Company measures segment performance based on profit or loss from operations before income taxes and minority interest.
Prior to September 29, 1999, the U.S. Operations reinsured funding agreements, an asset intensive product from General American. Effective September 29, 1999, General American completed the recapture of the entire block of General American's funding agreement business reinsured by the Company. Prior to the recapture, the Company reinsured approximately 25% of General American's funding agreement business. Pursuant to the recapture transaction, the Company transferred all remaining liabilities related to the funding agreement business and an equivalent amount of assets to General American. In the third quarter of 1999, the Company transferred to General American approximately $1.8 billion in market value of assets. Those assets, consisting primarily of investments in fixed maturity securities and cash, were transferred in satisfaction of $1.8 billion in funding agreement liabilities. The Company incurred an after tax net capital loss of approximately $33.2 million associated with the liquidation of investment securities and the transfer of assets to General American during the third quarter of 1999.
Consolidated income from continuing operations increased 99.4% in 2000 to $105.8 million and decreased 40.9% in 1999 to $53.0 million. Diluted earnings per share from continuing operations were $2.12 for 2000 compared to $1.15 for 1999 and $2.08 for 1998. Earnings during these years were attributed primarily to the strong performance of traditional reinsurance in the U.S. and Canada. Earnings during 1999 were affected by the investment losses incurred in connection with the recapture of the funding agreement business. Further discussion and analysis of the results for 2000 compared to 1999 and 1998 are presented by segment. Certain prior year amounts have been reclassified to conform to the current year presentation.
The U.S. operations segment continued to grow at a strong pace in 2000. Income before income taxes and minority interest totaled $167.2 million, up from $70.5 million in 1999 and $126.0 million in 1998. Income was down in 1999 due to realized losses primarily from liquidating securities in connection with the recapture of the General American funding agreement business. Excluding the realized gains (losses) from investments for the comparable years, income before taxes and minority interest rose 17.6% and 24.1% in 2000 and 1999, respectively . These increases are primarily the result of favorable mortality experience on the core traditional block of business, emerging profits from reinsurance of the large in-force blocks and growth in non-traditional reinsurance. Investment income is allocated to the various operating segments on the basis of net capital, and investment performance varies with the composition of investments.
The amount of claims and other policy benefits increased 7.2% and 37.4% in 2000 and 1999, respectively. The increases are primarily due to the increased size of the business in force. Claims and other policy benefits, as a percentage of net premiums, were 76.5%, 78.0%, and 75.4% in 2000, 1999, and 1998, respectively. The lower percentage in 2000 compared to 1999 is the result of good mortality experience. The slightly higher percentage in 1999 is partially the result of large claims reported in the fourth quarter of 1999. Large claims are defined as claims over one million dollars. Mortality is expected to fluctuate somewhat from period to period, but remains fairly constant over the long term. Analysis of the claims activity suggests no significant variances by cause of death, client company, issue year, or automatic versus facultative which would indicate any pricing or profitability problems.
Interest credited relates to amounts credited on the Company's cash value products in this segment, which have a significant mortality component. This amount fluctuates with the changes in cash surrender value and changes in interest crediting rates.
The U.S. asset-intensive reinsurance subsegment includes the reinsurance of annuities and corporate-owned life insurance. Most of these agreements are coinsurance or modified coinsurance of non-mortality risks such that the Company recognizes profits or losses primarily from the spread between the investment earnings and the interest credited on the underlying deposit liabilities.
Policy acquisition costs and other insurance expenses relate primarily to the commission payments and premium taxes (if applicable) on deposits received. The increase in these expenses for 2000 primarily relates to the increase in net acquisition costs of two annuity blocks.
The U.S. financial reinsurance subsegment includes net fees earned on financial reinsurance agreements and the Company's investment in RGA/Swiss Financial Group, L.L.C. ("RGA/Swiss"). Effective July 1, 2000, the Company increased its ownership of RGA/Swiss from 40% to 80%. For 1998, 1999 and the first six months of 2000, the Company included its equity in the earnings of RGA/Swiss in other income due to the 40% ownership. For the third quarter 2000, results were consolidated and minority interest
Income before income taxes and minority interest increased 104.9% and decreased 21.5% in 2000 and 1999, respectively. The results in 2000 can be primarily attributed to the increased ownership interest in RGA Financial Group coupled with higher amounts of financial reinsurance placed in 2000. The decrease in 1999 was primarily attributable to the decrease in earnings from RGA Financial Group and the net fees earned on financial reinsurance agreements. A decrease in outstanding statutory financial reinsurance contributed to the decrease in 1999. At December 31, 2000, 1999, and 1998, the amount of outstanding statutory financial reinsurance provided to client companies was $498.4 million, $310.0 million, and $512.9 million, respectively.
The Company conducts reinsurance business in Canada through RGA Life Reinsurance Company of Canada ("RGA Canada"). RGA Canada is primarily engaged in traditional individual life reinsurance, including preferred underwriting products. The Canadian operation is one of the leading life reinsurers in Canada. Canadian reinsurance in-force has more than tripled over a five-year period, to approximately $54.3 billion in 2000 from approximately $17.3 billion in 1995. At December 31, 2000, RGA Canada included most of the life insurance companies in Canada as clients.
Income before income taxes and minority interest increased 5.2% in 2000 and 66.5% in 1999. Excluding net realized investment gains, income before taxes and minority interest increased by 28.8% in 2000 and 44.4% in 1999. The increase in 2000 was driven by a growth in premiums of 8.5%, an increase in investment income of 17.4% and favorable mortality experience. The increase during 1999 was driven by a growth in premiums of 12.2%, an increase in investment income of 35.8%, and favorable mortality experience. The effects of changes in the foreign exchange rates during 2000 and 1999 were not material.
Policy acquisition costs and other insurance expenses as a percentage of net premiums totaled 9.4% in 2000, 12.3% in 1999, and 18.1% in 1998. The decrease in this ratio is primarily due to the changing mix of business to yearly renewable term from coinsurance agreements. These yearly renewable term agreements tend to have lower commission costs compared to coinsurance agreements.
The claims and other policy benefits for the segment decreased $49.3 million during 2000 and increased $17.0 million during 1999. Claims and other policy benefits as a percentage of net premiums totaled 95.8%, 107.0%, and 95.7% for 2000, 1999, and 1998, respectively. The Company expects mortality to fluctuate somewhat from period to period, but expects it to be fairly constant over longer periods of time. The Company continues to monitor mortality trends to determine the appropriateness of reserve levels. Interest credited represents amounts credited on reinsurance of new and existing Mexican and Argentine universal life products.
Policy acquisition costs and other insurance expenses increased $5.4 million and decreased $4.5 million for 2000 and 1999, respectively. Policy acquisition costs and other insurance expenses as a percentage of net premiums represented 12.0%, 2.2%, and 7.0% for 2000, 1999, and 1998, respectively. The percentages fluctuate due to variations in the mixture of business being written in Argentina, Mexico, and Chile with an increased amount of new business in 2000 with higher allowances.
The Company conducts reinsurance business in the Asia Pacific region through branch operations in Hong Kong and Japan and a liaison office in Taiwan. Business is also conducted through RGA Australia, a wholly owned subsidiary in Australia, and Malaysian Life Reinsurance Group Berhad ("MLRe"), a joint venture in Malaysia. The principal types of reinsurance provided in the region are life, critical care, 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.
Policy acquisition costs and other insurance expenses increased 8.8% in 2000 and 37.1% in 1999. Policy acquisition costs and other insurance expenses as a percentage of net premiums was 34.5%, 40.4%, and 41.0% for 2000, 1999, and 1998, respectively. These percentages fluctuate due to the timing of client company reporting and variations in the mixture of business being written in Asia Pacific. Other operating expenses increased 42.3% in 2000 and decreased 8.8% in 1999. As a percentage of premiums, other operating expenses increased to 10.5% in 2000 and decreased to 9.5% in 1999 from 14.4% in 1998. The Company believes that sustained growth in premiums should lessen the burden of start-up expenses and expansion costs.
Claims and other policy benefits increased as a percentage of premiums to 67.9% in 2000 from 53.9% in 1999. Policy acquisition costs and other insurance expenses decreased as a percent of premiums to 25.2% in 2000 from 34.0% in 1999. These amounts will fluctuate based upon claim levels and the mix of business being reinsured. Year to year comparisons of premiums and claims and other policy benefits are not considered meaningful due to the start-up nature of this segment. Other operating expenses increased $1.7 million during 2000 compared to 1999 and $1.3 million during 1999 compared to 1998. The overall increase in operating expenses was attributed to increases in costs associated with the expansion efforts within the segment. The interest expense in 2000 relates to a debt facility within the United Kingdom.
Consolidated investment income decreased 4.0% during 2000 and decreased 12.8% during 1999. The decrease during 2000 was affected by the reduction in invested assets related to the recapture of the funding agreement business by General American on September 29, 1999. The cost basis of invested assets increased by $0.6 billion, or 14.9% in 2000 and decreased $1.0 billion, or 20.2% in 1999. The increase in invested assets during 2000 was primarily a result of positive operating cash flows and new reinsurance transactions involving asset-intensive products. The decrease in the invested assets during 1999 was primarily a result of the funding agreement recapture. The 1999 decrease was offset, in part, by positive operating cash flows, new reinsurance transactions involving asset-intensive products, proceeds from the GA Note, and proceeds from a private placement of 4,784,689 shares of the Company's common stock to MetLife. The aggregate value of the private placement was approximately $125 million. The average yield earned on investments was 7.30% in 2000 compared with 7.10% in 1999 and 6.84% in 1998. The average yield will vary from year to year depending on a number of variables, including prevailing interest rate fluctuations, changes in the mix of asset intensive products, and yields related to funds withheld at interest. Investment income has been allocated to the operational segments on the basis of average capital per segment.
While RGA did not underwrite workers' compensation carve-out business directly, it did offer certain high level common account coverages to other reinsurers and retrocessionaires. The Company continues to investigate to determine if any material indirect claims exposures arise from workers' compensation carve-out or personal accident plans through pool participations or high level common account retrocessional coverage. To date, no such material exposures have been identified. If any material exposure is identified at some point in the future, based upon the experience of others involved in these markets, any exposures will potentially be subject to claims for recission, arbitration, or litigation. Thus, resolution of any disputes will likely take several years. In any event, it is management's opinion that future developments, if any, will not materially adversely affect the Company's financial position, results of operations, or cash flows.
The only arbitrations currently underway to which the Company is a party involve three separate group medical reinsurance coverages. The Company expects those arbitrations to be completed during 2001 and 2002. Reserves are established on those treaties based upon estimates of the expected findings of the related arbitration panels. There are no arbitrations underway currently relative to the Company's portfolio of personal accident business, although such arbitrations could commence at some point in the future.
RGA is a holding company that has as its principal asset interests in RGA Reinsurance, RGA Canada, RGA Barbados, RGA Americas, Australian Holdings, RGA UK, and GA Argentina.
entered into a term-loan agreement with General American, whereby it borrowed $75.0 million. Interest on the term loan is payable quarterly at 100 basis points over the British Bankers' Association three-month LIBOR rate. The term loan matures on June 30, 2004. On March 19, 1996, RGA issued 7 1/4% Senior Notes with a face value of $100.0 million in accordance with Rule 144A of the Securities Act of 1933. Interest is payable semiannually on April 1 and October 1 with the principal amount due on April 1, 2006. Australian Holdings had a line of credit with an outstanding balance at December 31, 2000 and 1999, of $9.5 million, which was amended and restated in January 2001 and now expires December 2005. The ability of RGA, Australian Holdings, and RGA UK to make principal and interest payments is ultimately dependent on the earnings and surplus of RGA's subsidiaries, the investment earnings on the undeployed funds at RGA, and the Company's ability to raise additional capital.
RGA has repurchased shares in the open market in the past primarily to satisfy obligations under its stock option program. RGA purchased approximately 0.7 million shares of treasury stock in 2000 at an aggregate cost of $20.0 million. No shares were repurchased in 1999 or 1998.
The Company's asset-intensive products are primarily supported by investments in fixed maturity securities. Investment guidelines are established to structure the investment portfolio based upon the type, duration and behavior of products in the liability portfolio so as to achieve targeted levels of profitability. The Company manages the asset-intensive business to provide a targeted spread between the interest rate earned on investments and the interest rate credited to the underlying interest sensitive contract liabilities. The Company periodically reviews models projecting different interest rate scenarios and their impact on profitability. One of the Company's asset intensive agreements reinsures a market value adjusted annuity product on a modified coinsurance basis. Pursuant to the terms of this reinsurance agreement, the ceding company withholds the annuity liabilities and funds supporting the liabilities. The underlying product reinsured provides the contract holder with a minimum return guarantee over the life of the product. The Company shares in this guarantee pursuant to the reinsurance agreement. The ceding company manages the underlying investment portfolio. The risk to RGA is that the return on the investment portfolio is not sufficient to satisfy the minimum guarantee. This investment risk is mitigated through the Company's participation in establishing investment guidelines and through management's regular monitoring of the underlying investment performance.
All investments made by RGA and its subsidiaries conform to the qualitative and quantitative limits prescribed by the applicable jurisdiction's insurance laws and regulations. In addition, their respective Boards of Directors regularly review the investment portfolios of the international subsidiaries. The RGA Board of Directors also reviews all material investment portfolios. The Company's 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 Company's asset/liability duration matching differs between the U.S. and Canada operating segments. The target duration for U.S. portfolios, which are segmented along product lines, range between four and seven years. 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 Company's earned yield on fixed maturity securities was 7.30% in 2000, compared with 7.10% in 1999, and 6.84% in 1998.
As of December 31, 2000, the invested assets of RGA, RCM, RGA Reinsurance, RGA Barbados, Australian Holdings, and RGA Canada are primarily managed by a third-party.
The Company's exposure to interest rate price risk and interest rate cash flow risk is reviewed on a quarterly basis. Interest rate price risk exposure is measured using interest rate sensitivity analysis to determine the change in fair value of the Company's financial instruments in the event of a hypothetical change in interest rates. Interest rate cash flow risk exposure is measured using interest rate sensitivity analysis to determine the Company's variability in cash flows in the event of a hypothetical change in interest rates. If estimated changes of fair value, net interest income, and cash flows are not within the limits established by the Board, the Board may direct management to adjust its asset and liability mix to bring interest rate risk within Board-approved limits.
The calculation of fair value is based on the net present value of estimated discounted cash flows expected over the life of the market risk sensitive instruments, using market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources as of December 31, 2000, with adjustments made to reflect the shift in the Treasury yield curve as appropriate.
At December 31, 2000, the Company's estimated changes in fair value were within the targets outlined in the Company's investment policy.
The Company is subject to foreign currency translation, transaction, and net income exposure. The Company generally does not hedge the foreign currency translation exposure related to its investment in foreign subsidiaries as it views these investments to be long-term. Translation differences resulting from translating foreign subsidiary balances to U.S. dollars are reflected in equity. The Company generally does not hedge the foreign currency exposure of its subsidiaries transacting business in currencies other than their functional currency (transaction exposure). Currently, the Company believes its foreign currency transaction exposure is not material to the consolidated results of operations. Net income exposure that may result from the strengthening of the U.S. dollar to foreign currencies will adversely affect results of operations since the income earned in the foreign currencies is worth less in U.S. dollars. When evaluating investments in foreign countries, the Company considers the stability of the political and currency environment. Devaluation of the currency after an investment decision has been made will affect the value of the investment when translated to U.S. dollars for financial reporting purposes.
In June 2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an Amendment to FASB Statement No. 133". This Statement addresses a limited number of issues causing implementation difficulties for numerous entities that apply Statement 133. Statement 138 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. It also requires that gains or losses resulting from changes in the values of those derivatives be reported depending on the use of the derivative and whether it qualifies for hedge accounting. Initial application for the Company will be January 1, 2001. The Company has determined that initial application of the accounting provisions of SFAS Nos. 138 and 133 will not have a material impact on the Company's financial condition or results of operations.
In March 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles ("Codification"). The purpose of Codification is to establish a uniform set of accounting rules and regulations ("SSAP") for use by insurance companies in financial report preparation in connection with financial reporting to regulatory authorities. The proposed effective date of the uniform statutory accounting principles is January 1, 2001. As of December 31, 2000, the State of
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding company formed December 31, 1992. On December 31, 2000, Equity Intermediary Company, a Missouri holding company, directly owned approximately 49.0% of the outstanding shares of common stock of RGA. Equity Intermediary Company is a wholly owned subsidiary of General American Life Insurance Company ("General American"), a Missouri life insurance company, which in turn is a wholly owned subsidiary of GenAmerica Financial Corporation ("GenAmerica"), a Missouri corporation. GenAmerica was acquired and became a wholly owned subsidiary of Metropolitan Life Insurance Company ("MetLife"), a New York life insurance company on January 6, 2000. As a result of MetLife's ownership of GenAmerica and its own direct investment in RGA, MetLife beneficially owns 58.7% of the outstanding shares of common stock of RGA at December 31, 2000 (See Note 3).
are being established after management considers, among other things, the value of underlying collateral and payment capabilities of debtors.
For reinsurance transactions executed prior to December 31, 1994, assets and liabilities related to treaties written on a modified coinsurance basis with funds withheld are reported on a gross basis. For reinsurance transactions executed on or after December 31, 1994, assets and liabilities from reinsurance agreements written on a modified coinsurance basis with funds withheld have generally been reported on a net basis and included in other reinsurance balances on the consolidated balance sheet because a right of offset exists.
The Company is exposed to credit-related risk in the event of nonperformance by reinsurance counterparties to financial instruments but does not expect any counterparties to fail to meet their obligations. Where appropriate, master netting agreements are arranged and collateral is obtained in the form of rights to securities to lower the Company's exposure to credit risk. It is the Company's policy to deal primarily with highly rated companies. There are no significant concentrations with counterparties. The Company has established minimum credit quality standards for counterparties and seeks to obtain collateral or other credit support where considered appropriate.
Deferred costs related to traditional life insurance contracts, substantially all of which relate to long-duration contracts, are amortized over the premium paying period of the related policies in proportion to the ratio of individual period premium revenues to total anticipated premium revenues over the life of the policy. Such anticipated premium revenues are estimated using the same
Goodwill and Value of Business Acquired. Goodwill representing the excess of purchase price over the fair value of net assets acquired is amortized on a straight-line basis over ten to twenty years. The value of business acquired is amortized in proportion to the ratio of annual premium revenues to total anticipated premium revenues or in relation to the present value of estimated profits. Anticipated premium revenues have been estimated using assumptions consistent with those used in estimating reserves for future policy benefits. The carrying value is reviewed periodically for indicators of impairment in value. Goodwill and the value of business acquired were approximately $22.1 million and $2.8 million as of December 31, 2000 and 1999, respectively. Accumulated amortization amounted to $5.2 million and $3.5 million at December 31, 2000 and 1999, respectively, and related amortization expense for the years ended December 31, 2000, 1999 and 1998 was $2.2 million, $1.7 million, and $1.7 million, respectively. These amortized balances are included in other assets on the consolidated balance sheet.
The Company periodically reviews actual and anticipated experience compared to the assumptions used to establish policy benefits. The Company establishes Premium deficiency reserves if actual and anticipated experience indicates that existing policy liabilities together with the present value of future gross premiums will not be sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. The premium deficiency reserve is established by a charge to income, as well as a reduction in unamoritzed acquisition costs and, to the extent there are no unamortized acquisition costs, an increase in future policy benefits.
The reserving process includes normal periodic reviews of assumptions used and adjustments of reserves to incorporate the refinement of the assumptions. Any such adjustments relate only to policies assumed in recent periods and the adjustments are reflected by a cumulative charge or credit to current operations. During the fourth quarter of 2000, the Company reflected a cumulative pretax credit to current operations of approximately $6.9 million as a result of its periodic review of reserves.
Generally, RGA's insurance subsidiaries retrocede amounts in excess of their retention to RGA Reinsurance. Retrocessions are arranged through RGA Reinsurance's retrocession pools for amounts in excess of its retention. As of December 31, 2000, substantially all retrocession pool participants followed by the A.M. Best Company were rated A- or better. For a majority of the retrocessionaires that were not rated, security in the form of letters of credit or trust assets has been given as additional security in favor of RGA Reinsurance. In addition, the Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance.
Net Earnings Per Share. Basic earnings per share exclude any dilutive effects of options. Diluted earnings per share include the dilutive effects assuming outstanding stock options were exercised. All share and earnings per share information has been adjusted to reflect the three-for-two stock split paid in the form of a dividend on February 26, 1999.
Reclassification. The Company has reclassified the presentation of certain prior period information to conform to the 2000 presentation.
On November 23, 1999, RGA completed a private placement of securities in which it sold 4,784,689 shares of the Company's common stock, $0.01 par value per share (the "Shares"), to MetLife. The price per share was $26.125, and the aggregate value of the transaction was approximately $125 million.
In June 1998, RGA completed a public offering in which it sold 7,417,500 shares of non-voting common stock traded on the New York Stock Exchange under the symbol RGA.A. The offering was priced to the public at $31.33 per share and provided net proceeds of approximately $221.8 million. On September 14, 1999, the Company held a special shareholders' meeting at which an
amendment to the Company's restated articles of incorporation, as amended, was approved which converted 7,417,500 shares of non-voting common stock into 7,194,971 shares of voting common stock, with cash paid in lieu of any fractional shares. The conversion ratio of one share of non-voting common stock to .97 share of voting common stock was determined after weighing the economic interests of both securities then outstanding. The conversion price was subject to a review of fairness by a third-party financial advisor.
RGA paid cash dividends on common shares of $0.24 per share in 2000, $0.22 per share in 1999, and $0.17 per share in 1998.
The Company subsequently retrocedes approximately 5/12ths of this business to a GenAmerica subsidiary and 2/12ths to a subsidiary of MetLife. The Company reports the effect of the retrocessions by reflecting a net receivable or payable from/to the retrocessionaires in other reinsurance balances. The underlying product reinsured by the Company provides the contract holder with a minimum return guarantee over the life of the product. The Company shares in this guarantee pursuant to the reinsurance agreement. The guarantee is mitigated by applicable surrender charges over the first ten years of the contract. Also, the Company mitigates the investment risk through participation in establishing investment guidelines and through management's regular monitoring of the underlying investment performance.
Effective September 29, 1999, General American completed the recapture of the entire block of General American's funding agreement business reinsured by the Company. Prior to the recapture, the Company reinsured approximately 25% of General American's funding agreement business. Pursuant to the recapture transaction, the Company transferred all remaining liabilities related to the funding agreement business and an equivalent amount of assets to General American. Over the course of the third quarter of 1999, the Company transferred to General American approximately $1.8 billion in market value of assets, including $1.5 billion in connection with the recapture. Those assets, consisting primarily of investments in fixed maturity securities and cash, were transferred in satisfaction of $1.8 billion in funding agreement liabilities. Associated with the liquidation of investment securities and the transfer of assets to General American during the third quarter of 1999, the Company incurred an after tax net capital loss of approximately $33.2 million, including $26.0 million associated with the recapture transaction.
Equity investments and derivative financial instruments are included in other invested assets in the Company's consolidated balance sheet. The cost basis of equity investments at December 31, 2000 and 1999 was approximately $15.4 million and $12.0 million, respectively. The cost basis of the derivative financial instruments at December 31, 2000 and 1999 was approximately $4.4 million.
At December 31, 2000, fixed maturities held by the Company that were below investment grade or not rated by an independent rating agency had an estimated fair value of approximately $66.4 million. At December 31, 2000, the Company owned non-income producing securites with an amortized cost of $7.2 million.
Reinsurance contracts do not relieve the Company from its obligations to direct writing companies. Failure of retrocessionaires to honor their obligations could result in losses to the Company; consequently, allowances would be established for amounts deemed uncollectible. At December 31, 2000 and 1999, no allowances were deemed necessary. The Company regularly evaluates the financial condition of its reinsurers/retrocessionaires.
At December 31, 2000, there were no reinsurance receivables associated with a single reinsurer with a carrying value in excess of 5% of total assets.
At December 31, 2000, RGA Reinsurance has provided approximately $498.4 million of statutory financial reinsurance to other insurance companies under financial reinsurance transactions to assist ceding companies in meeting applicable regulatory requirements and to enhance ceding companies' financial strength. Generally, such financial reinsurance is provided by the Company committing cash or assuming insurance liabilities, which are collateralized by future profits on the reinsured business. The Company retrocedes the majority of the assumed financial reinsurance, including approximately $42.9 million to MetLife and its subsidiaries. The Company earns a fee based on the amount of net outstanding financial reinsurance.
Provision for income taxes attributable to income from operations consists of the following (in thousands):
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities at December 31, 2000 and 1999, are presented in the following tables (in thousands):
The Company received federal income tax refunds of approximately $44.8 million during 2000. The Company made federal income tax payments of approximately $6.5 million, $18.4 million, and $22.9 million during 2000, 1999 and 1998, respectively. At December 31, 2000, the Company recognized deferred tax assets associated with net operating losses of approximately $247.7 million. This net operating loss is expected to be utilized in the normal course of business during the period allowed for carry forwards and in any event, will not be lost due to the application of tax planning strategies that management would utilize.
Also, certain management individuals participate in several nonqualified defined benefit and contribution plans sponsored by GenAmerica and RGA Reinsurance. Those plans are unfunded and are deductible for federal income tax purposes when the benefits are paid. Additionally, full-time salaried employees with at least one year of service participate in a profit-sharing plan sponsored by RGA Reinsurance. The Company's contributions are tied to RGA's operating results. Contributions to that plan have been determined annually by the RGA Board of Directors and are based upon the salaries of eligible employees. Full vesting occurs after five years of continuous service.
The Company also provides certain health care and life insurance benefits for retired employees through a self-insured, unfunded plan. Employees become eligible for these benefits if they meet minimum age and service requirements. The retiree's cost for health care benefits varies depending upon the credited years of service.
The Company also has direct policies and reinsurance agreements with MetLife and certain of its subsidiaries. As of December 31, 2000, the Company had assets and liabilities related to these agreements totaling $103.3 million and $114.1 million, respectively. Additionally, the Company reflected net assumed premiums of approximately $144.0 million, $130.3 million, and $111.5 million in 2000, 1999, and 1998, respectively. The premiums reflect the net of business assumed from and ceded to MetLife and its subsidiaries. The pre-tax gain (loss) on this business was approximately $17.8 million, $(31.0) million, and $17.7 million in 2000, 1999, and 1998, respectively. This includes realized gains (losses) on the disposal of investment securities of ($70.4) million and $0.6 million for 1999 and 1998, respectively.
Note 14 FINANCIAL CONDITION AND NET INCOME ON A STATUTORY BASIS-SUBSIDIARIES
The statutory basis net income of RGA Reinsurance and RGA Canada for the periods indicated was as follows (in thousands):
On May 8, 2000, RGA Holdings Limited, a wholly-owned subsidiary of the Company, entered into a revolving credit facility (the "U.K. Credit Agreement"), whereby it may borrow up to (pound)15.0 million (approximately $22.0 million) for expansion of the Company's business in the United Kingdom. Interest on borrowings is payable quarterly at LIBOR rates plus a base rate margin (6.67% as of December 31, 2000) defined in the U.K. Credit Agreement. As of December 31, 2000, the Company had borrowed (pound)6.0 million (approximately $8.8 million) under the U.K. Credit Agreement. The termination date of the U.K. Credit Agreement is May 8, 2003, extendable for two, one-year terms.
On January 8, 1996, Australian Holdings established a $15.9 million unsecured, three month, revolving line of credit. The debt is guaranteed by the Company and is utilized to provide operating capital to RGA Australia. The outstanding balance as of December 31, 2000 and 1999 was approximately $9.5 million. Interest is paid every three months at a variable rate with a rate of 6.54% and 5.80% as of December 31, 2000 and 1999, respectively. Subsequent to December 31, 2000, Australian Holdings amended and restated its credit agreement. With the new agreement, Australian Holdings rolled over all outstanding borrowings into a new AUS$35.0 million facility (approximately $19.6 million). The outstanding balance as of December 31, 2000 is included in long-term debt on the face of the consolidated balance sheet.
The ability of the Company to make debt principal and interest payments as well as make dividend payments to shareholders is ultimately dependent on the earnings and surplus of subsidiaries, investment earnings on the undeployed debt proceeds, and the ability of the Company to raise additional funds. The transfer of funds from the insurance subsidiaries to RGA is subject to applicable insurance laws and regulations. In addition, the debt agreements contain certain financial covenant restrictions related to, among others, liens, the issuance and disposition of stock of restricted subsidiaries, minimum requirements of net worth, and minimum rating requirements. The Company must also comply with specific reporting requirements with notices given to the respective fiscal agents at prescribed dates. As of December 31, 2000, the Company was in compliance with all covenants under its debt agreements.
Unconsolidated subsidiaries with an ownership position less than fifty percent are recorded on the equity basis of accounting. The equity in the net income of unconsolidated subsidiaries is not material to the results of operations or financial position of individual segments or the Company taken as a whole.
In January 1998 and 1999, the Board approved restricted stock awards of 15,000 voting shares and 13,500 non-voting shares, respectively, under the Company's Flexible Stock Plan. During 1999, the 13,500 shares of non-voting restricted stock were converted into 13,096 shares of voting restricted stock. Compensation expense related to restricted stock awards is being amortized over the individual agreements vesting periods. In January 2001, the Board approved an additional 474,168 incentive stock options at $29.81 per share under the Company's Flexible Stock Plan.
The following table sets forth the computation of basic and diluted earnings per share (in thousands except per share information):
The only arbitrations currently underway to which the Company is a party involve three separate group medical reinsurance coverages. The Company expects those arbitrations to be completed during 2001 and 2002. Reserves are established on those treaties based upon estimates of the expected findings of the related arbitration panels. There are no arbitrations underway as of December 31, 2000, relative to the Company's portfolio of personal accident business, although such arbitrations could commence at some point in the future.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Reinsurance Group of America, Incorporated and subsidiaries as of December 31, 2000 and the results of their operations and their cash flows for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We have audited the accompanying consolidated balance sheet of Reinsurance Group of America, Incorporated and subsidiaries (the Company) as of December 31, 1999 and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statement referred to above present fairly, in all material respects, the financial position of Reinsurance Group of America, Incorporated and subsidiaries as of December 31, 1999 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America.
The consolidated balance sheets of Reinsurance Group of America, Incorporated and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, cash flows and stockholders' equity for the years ended December 31, 2000, 1999, and 1998, have been prepared by management, which is responsible for their integrity and objectivity. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include some amounts that are based upon management's best estimates and judgments. The financial information contained elsewhere in this annual report is consistent with that contained in the financial statements.
Management is responsible for establishing and maintaining a system of internal control designed to provide reasonable assurance as to the integrity and reliability of financial reporting. The concept of reasonable assurance is based on the recognition that there are inherent limitations in all systems of internal control, and that the cost of such systems should not exceed the benefits derived therefrom. A professional staff of internal auditors reviews, on an ongoing basis, the related internal control system design, the accounting policies and procedures supporting this system, and compliance therewith. Management believes this system of internal control effectively meets its objective of reliable financial reporting.
/s/ Jack B. Lay /s/ Todd C. Larson Jack B. Lay Todd C. Larson Executive Vice President and Senior Vice President, Controller and Chief Financial Officer Treasurer
Reinsurance Group of America, Incorporated common stock is traded on the New York Stock Exchange (NYSE) under the symbol "RGA". There were 116 stockholders of record of RGA's common stock on March 1, 2001.