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 space was approximately $184,000 during 2001. Three of the Buenos Aires leases expire in 2002, and one expires in 2003.
RGA Canada moved to a new location during 2001 and leased approximately 20,000 square feet of office space located in Montreal, Canada. This lease expires in 2016. The lease at the previous location expires in 2010. The Company has subleased the majority of the 13,000 square feet of office space at the previous location and accrued a negligible charge for the remaining space. Rental expenses paid by RGA Canada during 2001 were approximately $243,000. RGA Canada also leases approximately 5,900 square feet of space in Toronto, Canada. This lease expires in 2005. The rental expenses paid by RGA Canada under the Toronto lease during 2001 were approximately $142,000. RGA International conducts operations from approximately 9,800 square feet of office space located in Toronto, Canada. The lease with respect to such space expires in 2007. The rental expenses paid by RGA International under the lease during 2001 were approximately $302,000.
RGA Spain conducts business from approximately 2,400 square feet of office space in Madrid, Spain. Rental expense paid for the office was approximately $27,000 during 2001. The lease expires in March 2003.
This Annual Report on Form 10-K 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 earnings, revenues, income or loss, future financial performance, and growth potential of Reinsurance Group of America, incorporated (which we refer to in the following paragraphs as "we," "us," or "our"). 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) material changes in mortality and claims experience, (2) market or economic that adversely affect our ability to make timely sales of investment securities, (3) competitive factors and competitors' responses to our initiatives, (4) general economic conditions affecting the demand for insurance and reinsurance in our current and planned markets, (5) changes in our financial strength and credit ratings or those of Metropolitan Life Insurance Company ("MetLife") or General American Life Insurance Company ("General American"), and their respective affiliates, and the effect of such changes on our future results of operations and financial condition, (6) fluctuations in U.S. or foreign currency exchange rates, interest rates, or securities and real estate markets, (7) changes in investment portfolio yields due to interest rate or credit quality changes, (8) the stability of governments and economies in the markets in which we operate, (9) adverse litigation or arbitration results, (10) the success of our clients, (11) successful execution of our entry into new markets, (12) successful development and introduction of new products, (13) regulatory action that may be taken by state Departments of Insurance with respect to us, MetLife, or General American, (14) changes in laws, regulations, and accounting standards applicable to us, our subsidiaries, or our business, and (15) other risks and uncertainties described in this Annual Report and in our other filings with the Securities and Exchange Commission ("SEC").
You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date on which they are made. We do not undertake any obligations to update these forward-looking statements, even though our situation may change in the future. We qualify all of our forward-looking statements by these cautionary statements.
and became a subsidiary of MetLife, Inc., a publicly traded company. As a result of MetLife's ownership of GenAmerica and its own direct investment in RGA, MetLife beneficially owns 58.4% of the outstanding shares of common stock of RGA at December 31, 2001.
Additionally, for each of its reinsurance contracts, the Company must determine if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. The Company must review all contractual features, particularly those that may limit the amount of insurance risk to which the Company is subject to or features that delay the timely reimbursement of claims. If the Company determines that a contract does not expose it to a reasonable possibility of a significant loss from insurance risk, the Company records the contract on a deposit method of accounting with the net amount payable / receivable reflected in other reinsurance assets or liabilities on the consolidated balance sheet. Fees earned on the contracts are reflected as other revenues, as opposed to premiums, on the consolidated statements of income.
The Company monitors its fixed maturity securities to determine impairments in value. In conjunction with its external investments manager, the Company evaluates factors such as the financial condition of the issuer, payment performance, market value, compliance with covenants, general market conditions, various other subjective factors, and the intent and ability to hold securities.
The Company's primary business is life reinsurance, which involves reinsuring life insurance policies that are often in force for the remaining lifetime of the underlying individual insureds, 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 underlying insureds, and the exercise of recapture options by the ceding companies.
As is customary in the reinsurance business, life insurance clients continually update, refine, and revise reinsurance information provided to the Company. Such revised information is used by the Company in the preparation of its financial statements and the financial effects resulting from the incorporation of revised data are reflected currently.
The Company's profitability primarily depends on the volume and amount of death claims incurred. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and are subject to fluctuation from quarter to quarter and year to year. The Company has catastrophe insurance coverage issued by 2 insurers rated "A" or higher by A.M. Best as of December 31, 2001, that provides benefits of up to $100 million per occurrence for claims involving three or more deaths in a single accident. The Company pays a deductible of $1.5 million per occurrence and 20% of the first $30 million of claims reported per occurrence. As a result of the September 11, 2001 terrorist attacks on the United States, the Company had received in excess of 300 claims totaling approximately $33 million as of December 31, 2001. The Company expects to recover amounts in excess of its deductible and retention under its catastrophe insurance coverages. As of December 31, 2001, the amount recoverable is expected to be approximately $22 million. However, the Company believes it will take several more months before all claims are reported. This coverage is terminable annually in August with 90 days prior notice. The Company believes such catastrophe insurance coverage adequately protects it from risks associated with multiple deaths in a single accident of reinsured lives. Due to the events of September 11, many catastrophe insurance carriers have indicated that they will not renew coverage or will significantly change the level and type of coverage they will provide. It is also expected that the cost for catastrophe coverage will significantly increase. The Company can give no assurances that it will be able to obtain cost effective catastrophe coverage when its current policy expires in August 2002. Through December 31, 2000, the Company retained a maximum of $2.5 million of coverage per individual life. Effective January 1, 2001, the Company increased its retention to $4.0 million of coverage per individual life.
In January 2002, the Argentine government announced its intent to create a dual currency system with an official exchange rate of 1.4 Argentine pesos to one U.S. dollar for import and export transactions and a free floating rate for other
transactions. On January 11, 2002, the Argentine peso began free floating against the U.S. dollar and closed at rates ranging from 1.6 to 1.7 Argentine pesos to one U.S. dollar. Since that time, the Argentine economy has remained volatile and the government has periodically suspended the free-floating exchange rates.
The business generated from the Asia Pacific region is primarily denominated in U.S. dollars, Australian dollars, and Japanese yen. Additionally, the Company reinsures business in other international currencies including the Great British pound sterling and South African rand.
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.
The consolidated provision for income taxes for continuing operations represented approximately 39.7%, 39.6%, and 42.4% of pre-tax income for 2001, 2000, and 1999, respectively. The effective tax rate for 2001 and 2000 was affected by realized capital losses domestically and operating losses from foreign subsidiaries for which deferred tax assets cannot be fully established. The Company calculated a tax benefit of $3.7 million, $15.1 million, and $6.9 million related to the discontinued operations in 2001, 2000, and 1999, respectively. The effective tax rate on the discontinued operations was 35.0% in 2001 and 2000, and 36.0% in 1999.
During 2001, the U.S. operations segment was negatively impacted by the events of September 11th and higher than expected claims in its traditional business. Income before income taxes totaled $125.7 million, compared with $167.2 million in 2000 and $70.5 million in 1999. The decrease in income for 2001 can primarily be attributed to lower investment yields, poor claim experience incurred in the first and fourth quarters, and the claims arising from the terrorist attacks of September 11, 2001. Management does not believe the claim results experienced in 2001 indicate a systemic pricing or profitability problem on our underlying business. The Company recorded a $16.1 million pre-tax loss resulting from September 11th claims at the end of the third quarter, 2001. The Company believes its reinsurance programs, including its catastrophe coverage will limit its net losses to the amount reflected. However, the Company believes it will take several more months before all claims are reported. Results for 1999 include $52.9 million in pre-tax investment losses associated with the recaptured funding agreement business. Net premium growth continued for the U.S. operations with premium increases of 17.7% and 9.3% in 2001 and 2000, respectively.
Net premiums for U.S. traditional reinsurance rose 17.7% and 9.2% in 2001 and 2000, respectively. New premiums from facultative and automatic treaties and renewal premiums on existing blocks of business all contributed to continued
growth. 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 7.6% and 11.1% in 2001 and 2000, respectively. This increase in both years was due to the continued growth of business in this sub-segment from facultative and automatic treaties, which resulted in an increase in the underlying invested asset base. The growth in investment income was somewhat offset by lower returns in its investment portfolio due to declining interest rates and the write-off of accrued interest on impaired investment securities.
Realized investment losses of approximately $29.9 million were reported for 2001 compared to $12.2 million in 2000 and $17.0 million in 1999. Included in the net realized losses are write-downs of fixed income securities along with capital losses associated with the sale of investments.
Claims and other policy benefits, as a percentage of net premiums, were 80.1%, 76.5%, and 78.0% in 2001, 2000, and 1999, respectively. The 2001 loss ratio, when adjusted for the claims of $16.1 million related to the events of September 11, 2001, is reduced to 78.8%. Mortality results (death claims) during the first and fourth quarters of 2001 exceeded management expectations, primarily related to traditional business that has been on the books for many years. Analysis of claims activity does not indicate any particular pricing or profitability issues. The lower percentage in 2000 compared to 1999 is the result of generally positive mortality experience. Mortality is expected to fluctuate somewhat from period to period, but remains fairly constant over the long term.
The amount of policy acquisition costs and other insurance expenses, as a percentage of net premiums, were 14.9%, 14.5%, and 15.3% in 2001, 2000, and 1999, respectively. These percentages fluctuate slightly due to variations in the mixture of business being written.
Other operating expenses, as a percentage of net premiums, were 2.5%, 2.4%, and 2.4% in 2001, 2000, and 1999, respectively. The increase was primarily due to increases in costs associated with the growth of the business.
Total revenues, which is comprised primarily of investment income and realized investment gains (losses), increased 10.2% and 24.6% in 2001 and 2000, respectively. The increase in 2001 can be attributed to the new annuity coinsurance
Interest credited increased 5.6% in 2001 and decreased 49.8% in 2000. Interest credited is primarily driven by investment income. The increase in 2001 is a result of growth in the asset base driven by new business. The decrease for 2000 can be attributed to the termination of the funding agreement business during 1999. Policy acquisition costs and other insurance expenses relate primarily to the commission payments and premium taxes (if applicable) on deposits received.
Income before income taxes increased 29.2% in 2001 and 5.2% in 2000. Excluding net realized investment gains (losses), income before taxes increased by 3.0% in 2001 and 28.8% in 2000. In local currency, excluding net realized investment gains (losses), the increase was 12.1% and 31.1%. The increase in 2001 is driven by an increase in investment income of 4.9% and generally favorable mortality experience. 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.
Net premiums decreased by 1.7% to $173.3 million in 2001 and increased 8.5% to $176.3 million in 2000. In original currency, net premiums increased by 2.4% in 2001 and 9.1% in 2000. The decline in the strength of the Canadian dollar had an adverse effect of $7.6 million or 4.2% on the amount of net premiums reported for 2001. The original currency premium growth in 2001 and 2000 resulted primarily from increasing renewal premiums and new business premiums. Business premium levels are significantly influenced by large transactions, mix of business, and reporting practices of ceding companies and therefore can fluctuate from period to period.
Net investment income increased by 4.9% and 17.4% during 2001 and 2000, respectively. Investment income is 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. The increase in investment income was mainly the result of an increase in the invested asset base offset by the effects of the change in the foreign exchange rate. For 2001 and 2000, the invested asset base growth was due to operating cash flows on traditional reinsurance, proceeds from capital contributions and interest on an increasing amount of funds withheld at interest related to an inforce block added in 1998. In 2001, the increase in the invested asset base was partially offset by a decline in interest rates. The average book yield on the Canadian investment portfolio decreased slightly to 6.97% for 2001 from 7.02% in 2000 and 6.97% in 1999.
Claims and other policy benefits, as a percentage of net premiums, were 99.7% of total 2001 net premiums compared to 97.2% in 2000 and 94.9% in 1999. The increased percentages experienced are primarily the result of several large inforce blocks assumed in 1998 and 1997. These blocks are mature blocks of level premium business in which mortality as a percentage of premiums is expected to be higher than the historical ratios and improve over time. The nature of level premium policies requires that the Company invest the amounts received in excess of mortality costs to fund claims in the later years. Claims and other policy benefits as a percentage of net premiums and investment income were 72.5% of total 2001 net premiums compared to 71.9% in 2000 and 71.6% in 1999. The Company expects mortality to fluctuate somewhat from period to period but believes it is fairly constant over longer periods of time. In addition, RGA Canada continues to monitor mortality trends to determine the appropriateness of reserve levels.
OTHER INTERNATIONAL OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 (in thousands)
During 2001, the Other International reportable segment generated business from reinsurance operations in the Asia Pacific and Latin American regions as well as Europe and South Africa. The Company conducts reinsurance business in the Asia Pacific region through branch operations in Hong Kong and representative offices in Japan and 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.
The Company's Latin American operations include reinsurance and direct business written in the Latin American region. Historically, business for the segment has been generated from reinsurance through RGA Reinsurance and also through direct operations in Argentina and Chile. The Latin America reinsurance operations have derived revenue primarily from the reinsurance of privatized pension products in Argentina. Privatized pension reinsurance covers the life insurance as well as the total and permanent disability components of the pension program. The claims under that program are initially established as units of the underlying pension fund at the time at which they are filed. As such, the ultimate amounts of claims paid by the reinsurer under the program vary with the underlying fund performance of the related pension fund over the period in which the claims were adjudicated. In addition, the reinsurer is subject to the mortality and morbidity risks associated with the underlying plan participants. Effective in 2001, the Company ceased writing these types of treaties and is more actively marketing traditional individual life, credit, and group life reinsurance in the region. It is anticipated that the mix of business will continue to evolve in the upcoming years.
RGA formed General American Argentina Seguros de Vida S.A. ("GA Argentina") in 1994 to develop markets in Argentina. GA Argentina writes direct individual and group life products, and life insurance primarily related to group life and disability insurance for the Argentine privatized pension system. Effective July 1998, GA Argentina no longer entered into new contracts related to the privatized pension system, but continues to market individual universal life and group life products. Premiums for GA Argentina totaled $7.8 million in 2001 and the Company's net investment was $12.5 million as of December 31, 2001. During 2001, with the unstable economic conditions in Argentina, opportunities for growth have been limited, and the Company does not expect growth to be meaningful in the foreseeable future.
The Europe & South Africa sub-segment primarily includes business received from reinsurance clients located in Europe and South Africa. The principal type of reinsurance provided through this segment has been life reinsurance for a variety of life products through yearly renewable term and coinsurance agreements and reinsurance of critical illness coverage. These agreements may be either facultative or automatic agreements covering primarily individual risks and in some markets group risks.
Loss before income taxes for the Other International segment totaled $77.1 million for 2001, compared to losses of $7.7 million and $8.3 million for 2000 and 1999, respectively. The increase in losses for 2001 was primarily attributable to poor performance in Argentina relating to higher than expected claims for privatized pension reinsurance, an increase of reserves by $35.0 million on a pre-tax basis related to this business during the fourth quarter, and realized losses of $27.0 million related to investment security sales in the Argentine portfolio. A majority of those losses occurred in the third quarter of 2001 when the Company liquidated all remaining Argentine investment securities supporting the reinsurance operations and invested in U.S. dollar-denominated securities due to its concern over the stability of the Argentine peso, which is the functional currency of this sub-segment.
Since 1991, the Argentine peso has been pegged to the U.S. dollar at a rate of one Argentine peso to one U.S. dollar. In early December 2001, restrictions were put in place that prohibited cash withdrawals above a certain amount and foreign money transfers with certain limited exceptions. While the legal exchange rate remained at one Argentine peso to one U.S. dollar, financial institutions were allowed to conduct only limited activity due to these restrictions, and currency exchange was effectively halted. In January 2002, the Argentine government announced its intent to create a dual currency system with an official exchange rate of 1.4 Argentine pesos to one U.S. dollar for import and export transactions and a free floating rate for other transactions. On January 11, 2002, the Argentine peso began free floating against the U.S. dollar and closed at rates ranging from 1.6 to 1.7 Argentine pesos to one U.S. dollar. Since that time, the Argentine economy has remained volatile and the government has periodically suspended the free-floating exchange rates.
Net investment income decreased $6.3 million or 23.8% in 2001 and was relatively flat for 2000 and 1999. The decrease was primarily attributable to a smaller invested asset base resulting from the sale of the Chilean operations. However, the decrease was partially offset with an increase related to higher yields on the underlying Argentine investment portfolio. These Argentine based bond investments supporting the Latin America reinsurance business were sold during 2001 to reduce the Company's exposure to the volatile Argentine economy and the proceeds were reinvested in U.S. based securities which have lower yields. In addition, investment income and realized investment 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 revenue during 2001 and 2000 predominantly represented profit and risk fees associated with financial reinsurance transactions in Taiwan and Japan. The Taiwanese treaty was commenced in late 1999, with a full year in 2001 and 2000 versus a partial year in 1999. A Japanese financial reinsurance treaty was discontinued in early 1999, reducing the fees earned for 1999. Fees paid to retrocessionaires that were included in policy acquisition costs and other insurance expenses partially offset these fees earned for these years.
Claims and other policy benefits as a percentage of net premiums totaled 83.8%, 73.5% and 84.6% for 2001, 2000 and 1999, respectively. The increase in 2001 is primarily related to an increase in reserves for the privatized pension business in Argentina during the fourth quarter of 2001. The decrease in 2000 was due, in part, to adverse experience on Japanese business during 1999 in the Asia Pacific sub-segment. Mortality may fluctuate somewhat from period to period, but is expected to be fairly constant over longer periods of time. The Company monitors mortality trends to evaluate the appropriateness of reserve levels and adjusts the reserve levels on a periodic basis. During 2001, the Company ceased renewal of reinsurance treaties associated with privatized pension contracts in Argentina because of adverse experience on this business, as several aspects of the pension fund claims flow did not develop as was contemplated when the reinsurance programs were initially priced, and to focus on other traditional opportunities in the region. Although premiums will continue to decline, it is estimated that claims for the privatized pension business will continue to be paid over the next several years. The Company regularly evaluates the reserve adequacy on these treaties, and increased reserves by pre-tax $35.0 million during the fourth quarter of 2001. It is expected that these reserves are necessary to absorb additional claims development associated with the run-off of the treaties. As the underlying reserves for the privatized pension business are in Argentine pesos, the functional currency of this sub-segment, the devaluation of the peso during 2002 is not expected to have an immediate impact to earnings until actual claims settlement or adjustments to the underlying peso reserves occur. The impact of fluctuating exchange rates will continue to be closely monitored by the Company's management and is expected to be volatile over the near term. Interest credited represents amounts credited on Mexican and Argentine universal life products.
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. The nature of the underlying risks is such that the claims may take several years to reach the reinsurers involved. Thus, the Company expects to pay claims out of existing reserves over a number of years as the level of business diminishes.
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 Company's primary businesses, dividends paid by RGA to its shareholders, interest payments on its senior indebtedness and junior subordinated notes (See Notes 16, "Long-Term Debt," and 17, "Issuance of Trust Piers Units," of the Notes to Consolidated Financial Statements), and repurchases of RGA common stock under a board of director approved plan. The primary sources of RGA's liquidity include proceeds from its capital raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes with RGA Reinsurance and RCM, and dividends from operating subsidiaries. As the Company continues its expansion efforts, RGA will continue to be dependent on these sources of liquidity.
Historically, RGA has paid quarterly dividends ranging from $0.027 per share in 1993 to $0.06 per share in 2001. All future payments of dividends are at the discretion of the Company's Board of Directors and will depend on the Company's earnings, capital requirements, insurance regulatory conditions, operating conditions, and such other factors as the Board of Directors may deem relevant. The amount of dividends that the Company can pay will depend in part on the operations of its reinsurance subsidiaries.
In December 2001, RGA, through its wholly owned subsidiary trust, issued $225.0 million in Preferred Income Redeemable Securities ("PIERS") Units. See Notes 2, "Summary of Significant Accounting Policies," and 17, "Issuance of Trust Piers Units," of the Notes to Consolidated Financial Statements for additional information on the terms of the PIERS units. Each PIERS unit consists of a preferred security with a face value of $50 and a stated maturity of March 18, 2051 and a warrant to purchase 1.2508 shares of RGA stock at an exercise price of $50. The warrant expires on December 15, 2050. The holders of the PIERS units have the ability to exercise their warrant for stock at any time and require RGA to payoff the preferred security. Because the exercise price of the warrant to be received from the holder is equal to the amount to be paid for the preferred security, there is no net cash required on RGA's part.
The Company expects consolidated interest expense to increase significantly in 2002 due to the addition of the $225.0 million face amount, 5.75% trust preferred securities issued by RGA Capital Trust I and the interest expense associated with its $200.0 million 6.75% Senior Notes due 2011, the proceeds of which were used to pay down a balance of $120 million on its U.S. revolving credit facility and to prepay and terminate the $75 million term loan with MetLife Credit Corp. Interest rates on the U.S. revolving credit facility and $75 million term loan ranged from 2.6% to 7.1% in 2001. As of December 31, 2001, the average interest rate on long-term debt outstanding was 6.75%.
The Company's principal cash inflows from its reinsurance operations are life insurance premiums and deposit funds received from ceding companies. The primary liquidity concerns with respect to these cash flows is early recapture of the reinsurance contract by the ceding company. Reinsurance agreements, whether facultative or automatic, may provide for recapture rights on the part of the ceding company. Recapture rights permit the ceding company to reassume all or a portion of the risk formerly ceded to the reinsurer after an agreed-upon period of time (generally 10 years) or in some cases due to changes in the financial condition or ratings of the reinsurer. Recapture of business previously ceded does not affect
The Company's principal cash outflows primarily relate to the payment of claims liabilities, operating expenses, income taxes, principal and interest under debt obligations. The Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts (See Note 2, "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements). The Company also retrocedes most of its financial reinsurance business to other insurance companies to alleviate capital requirements created by this business. The Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance. The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires or as to recoverability of any such claims. The Company's management believes its current sources of liquidity are adequate to meet its current cash requirements.
The Company has obtained letters of credit in favor of various affiliated and unaffiliated insurance companies from which the Company assumes business. This allows the ceding company to take statutory reserve credits. The letters of credit
issued by banks represent a guarantee of performance under the reinsurance agreements. At December 31, 2001, there were approximately $33.8 million of outstanding bank letters of credit in favor of unaffiliated entities and $4.0 million in favor of entities affiliated with the Company. Additionally, the Company utilizes letters of credit to secure reserve credits when it retrocedes business to its offshore subsidiaries, including RGA Americas, RGA Barbados, and Triad Re, Ltd. As of December 31, 2001, $338.1 million in letters of credit from various banks were outstanding between the various subsidiaries of the Company. Fees associated with letters of credit are not fixed and are based on the Company's ratings and the general availability of these instruments in the marketplace. The Company has direct policies and reinsurance agreements in addition to certain investment, advisory, and administrative services contracts with affiliated entities (See Note 12, "Related Party Transactions," of the Notes to Consolidated Financial Statements).
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 invested assets was 6.79% in 2001, compared with 7.30% in 2000, and 7.10% in 1999.
Within the fixed maturity security portfolio, the Company holds approximately $244.7 million in asset-backed securities at December 31, 2001, which include credit card and automobile receivables, home equity loans and collateralized bond obligations. The Company's asset-backed securities are primarily floating rate securities and are diversified by issuer. Approximately 50.4%, or $123.3 million are collateralized bond obligations. 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 issuer's 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 market place. These factors were the primary driver behind other than temporary write-downs of $43.4 million, $10.1 million, and $15.4 million in 2001, 2000, and 1999, respectively.
As a result of the evaluation, securities deemed to be impaired, either on a temporary or other than temporary basis, are placed on the Company's watch list. As of December 31, 2001, the Company had approximately $71.5 million in market value of securities on its watch list. Securities, based on management's judgment, with an other than temporary impairment in value are written down to management's estimate of net realizable value.
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 RGA's balance sheet. In the event of a ceding company's insolvency, RGA would need to assert a claim on the assets supporting its reserve liabilities. However, the risk of loss to RGA is mitigated by its ability to offset amounts it owes the ceding company for claims or allowances with amounts owed to RGA 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 control them. To mitigate this risk, the Company helps set the investment guidelines followed by the ceding company and monitors compliance. Funds withheld at interest comprised approximately 22.5% and 20.6% of the Company's investments as of December 31, 2001 and 2000, respectively.
Policy loans comprised approximately 15.2% and 15.5% of the Company's investments as of December 31, 2001 and 2000, respectively. These policy loans present no credit risk because the amount of the loan cannot exceed the obligation due the ceding company upon the death of the insured or surrender of the underlying policy. The provisions of the treaties in force and the underlying policies determine the policy loan interest rates. Because policy loans represent premature distributions of policy liabilities, they have the effect of reducing future disintermediation risk. In addition, the Company earns a spread between the interest rate earned on policy loans and the interest rate credited to corresponding liabilities.
Mortgage loans represented approximately 3.2% and 2.8% of the Company's investments as of December 31, 2001 and 2000, respectively. As of December 31, 2001, all mortgages are U.S.-based. The Company invests primarily in mortgages on commercial offices and retail locations. The Company's mortgage loans generally range in size from $0.3 million to $10.3 million, with the average mortgage loan investment as of December 31, 2001, totaling approximately $3.4 million. The mortgage loan portfolio was diversified by geographic region and property type as discussed further in Note 6 of the Notes to Consolidated Financial Statements.
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 in fair value, net interest income, and cash flows are not within the limits established, management may adjust its asset and liability mix to bring interest rate risk within Board-approved limits.
market interest rates. The Company does not have fixed-rate instruments classified as trading securities. The Company's projected loss in fair value of financial instruments in the event of a 10% change (increase or decrease) in market interest rates at its fiscal years ended December 31, 2001 and 2000 was $61.0 million and $86.7 million, respectively.
At December 31, 2001, the Company's estimated changes in fair value were within the targets outlined in the Company's investment policy.
Interest rate sensitivity analysis is also used to measure the Company's interest rate cash flow risk by computing estimated changes in the cash flows expected in the near term attributable to floating rate assets and liabilities in the event of a range of assumed changes in market interest rates. This analysis assesses the risk of loss in cash flows in the near term in market risk sensitive floating rate instruments in the event of a hypothetical 10% change (increase or decrease) in market interest rates. The Company does not have variable-rate instruments classified as trading securities. The Company's projected decrease in cash flows in the near term associated with floating-rate instruments in the event of a 10% change (increase or decrease) in market interest rates at its fiscal years ended December 31, 2001 and 2000 was $6.0 million and $1.3 million, respectively.
The primary, direct effect on the Company of inflation is the increase in operating expenses. A large portion of the Company's operating expenses consists of salaries, which are subject to wage increases at least partly affected by the rate of inflation. The rate of inflation also has an indirect effect on the Company. To the extent that a government's policies to control the level of inflation result in changes in interest rates, the Company's investment income is affected.
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding company formed December 31, 1992. On December 31, 2001, Equity Intermediary Company, a Missouri holding company, directly owned approximately 48.7% 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 58.4% of the outstanding shares of common stock of RGA as of December 31, 2001.
On January 30, 2002, MetLife announced its intention to purchase up to an aggregate of $125 million of additional common shares of RGA. The purchases are intended to offset potential future dilution of MetLife's holding of RGA stock arising from the issuance of convertible securities by RGA in December 2001.
The consolidated financial statements include the assets, liabilities, and results of operations of RGA; Reinsurance Company of Missouri, Incorporated ("RCM"), RGA Reinsurance Company (Barbados) Ltd. ("RGA Barbados"), RGA Life Reinsurance Company of Canada ("RGA Canada") and RGA Americas Reinsurance Company, Ltd. ("RGA Americas"), as well as several other subsidiaries and a joint venture, subject to an ownership position greater than fifty percent (collectively, the "Company").
For each of its reinsurance contracts, the Company must determine if the contract provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. The Company must review all contractual features, particularly those that may limit the amount of insurance risk to which the Company is subject to or features that delay the timely reimbursement of claims. If the Company determines that a contract does not expose it to a reasonable possibility of a significant loss from insurance risk, the Company records the contract on a deposit method of accounting with the net amount payable / receivable reflected in other reinsurance assets or liabilities on the consolidated balance sheet. Fees earned on the contracts are reflected as other revenues, as opposed to premiums, on the consolidated statements of income.
The accompanying financial statements consolidate the accounts of RGA and its subsidiaries, both direct and indirect, subject to an ownership position greater than fifty percent. Entities in which the Company has an ownership position greater than
Funds withheld represent amounts contractually withheld by ceding companies in accordance with reinsurance agreements. 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 by the ceding company and are reflected as funds withheld at interest on the balance sheet. Interest accrues to these assets at rates defined by the treaty terms.
Other invested assets, including derivative contracts, common stocks and preferred stocks, are carried at fair value. Changes in fair value are recorded through other comprehensive income. Other invested assets are periodically reviewed for impairment.
Investment income is recognized as it accrues or is legally due. Realized gains and losses on sales of investments are included in net income, as are write-downs of securities where declines in value are deemed to be other than temporary in nature. The cost of investment securities sold is determined based upon the specific identification method. Unrealized gains and losses on marketable equity securities and fixed maturity securities, less applicable deferred income taxes as well as related adjustments to deferred acquisition costs, if applicable, are reflected as a direct charge or credit to accumulated other comprehensive income (loss) in stockholders' equity on the consolidated balance sheet.
Additional Information Regarding Statements of Cash Flows. Cash and cash equivalents include cash on deposit and highly liquid debt instruments purchased with an original maturity of three months or less. The consolidated statements of cash flows includes the results of discontinued operations in net cash from operations for all years presented, as the impact of the discontinued operations on cash flows is not considered material.
Deferred costs related to traditional life insurance contracts, substantially all of which relate to long-duration contracts, are amortized over the premium-paying period of the related policies in proportion to the ratio of individual period premium revenues to total anticipated premium revenues over the life of the policy. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits.
Deferred costs related to interest-sensitive life and investment-type policies are amortized over the lives of the policies, in relation to the present value of estimated gross profits from mortality, investment income, and expense margins.
Other Assets. In addition to the goodwill and value of business acquired previously discussed, other assets include separate accounts, unamortized debt issuance costs, and other capitalized assets.
Future Policy Benefits and Interest-Sensitive Contract Liabilities. Liabilities for future benefits on life policies are established in an amount adequate to meet the estimated future obligations on policies in force. Liabilities for future policy benefits under long-term life insurance policies have been computed based upon expected investment yields, mortality and withdrawal rates, and other assumptions. These assumptions include a margin for adverse deviation and vary with the
The Company reinsures asset-intensive products, including annuities, corporate-owned life insurance and, prior to September 1999, funding agreement products, on a coinsurance basis. The investment portfolios for these products are segregated within the general account of RGA Reinsurance Company ("RGA Reinsurance"). During 1999, the assets and liabilities of two major asset-intensive blocks of business were recaptured by the ceding companies. The results of these recaptures are included in the 1999 consolidated statement of income. The liabilities for the remaining asset-intensive reinsurance contracts are included in interest sensitive contract liabilities on the consolidated balance sheet.
Other Policy Claims and Benefits. Claims payable for incurred but not reported losses are determined using case basis estimates and lag studies of past experience. These estimates are periodically reviewed and required adjustments to such estimates are reflected in current operations. The Company has no material policy claims liability balances that would require fair value disclosure.
Income Taxes. RGA and its eligible U.S. subsidiaries file a consolidated federal income tax return. The U.S. consolidated tax return includes RGA, RGA Reinsurance, RGA Barbados, RCM and Fairfield Management Group, Incorporated ("Fairfield"). Due to rules which affect the ability of an entity to join in a consolidated tax return, RGA Americas Reinsurance Company, Ltd., and Triad Re Ltd. file separate tax returns even though these entities are considered to be U.S. taxpayers. The Company's Argentine, Australian, Bermudan, Canadian, Malaysian, South African and United Kingdom subsidiaries are taxed under applicable local statutes.
Warrants. During December 2001, RGA Capital Trust I (the "Trust"), a wholly owned subsidiary of RGA, sold Preferred Income Equity Redeemable Securities (PIERS) Units. Each unit consists of a preferred security issued by the Trust with a detachable warrant to purchase 1.2508 shares of RGA common stock. The Trust sold 4.5 million PIERS Units. The market value of the detachable warrants on the date issued is recorded in stockholders' equity on the consolidated balance sheet under the caption "Warrants."
Foreign Currency Translation. The functional currency is the Argentine peso for the Company's Argentine operations, the Australian dollar for the Company's Australian operations, the Canadian dollar for the Company's Canada operations, the South African Rand for the Company's South African operations and the British Pound Sterling for the Company's United Kingdom operations. The translation of the foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during each year. Gains or losses, net of deferred income taxes, resulting from such translation are included in accumulated currency translation adjustments, net of income taxes, in accumulated other comprehensive income (loss) on the consolidated balance sheet. See Note 24, "Subsequent Events" for a discussion of the Argentine peso devaluation.
Retrocession Arrangements and Reinsurance Ceded Receivables. The Company generally reports retrocession activity on a gross basis. Amounts paid or deemed to have been paid for reinsurance are reflected in reinsurance ceded receivables. The cost of reinsurance related to long-duration contracts is recognized over the terms of the reinsured policies on a basis consistent with the reporting of those policies.
Generally, RGA's insurance subsidiaries retrocede amounts in excess of their retention to RGA Reinsurance and RGA Americas. Retrocessions are arranged through RGA Reinsurance's retrocession pools for amounts in excess of its retention. As of December 31, 2001, 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.
New Accounting Pronouncements. In July 2001, the SEC issued Staff Accounting Bulletin No. 102 - Selected Loan Loss Allowance Methodology and Documentation Issues ("SAB 102"), expressing certain of the staff's views on the development, documentation, and application of a systematic methodology as required by Financial Reporting Release No. 28 for determining allowances for loan and lease losses in accordance with generally accepted accounting principles. In particular, the guidance focuses on the documentation the staff normally would expect registrants to prepare and maintain in support of their allowances for loan losses. The Company believes its current policies and procedures are in compliance with SAB 102.
The Company prepares its statutory financial statements in conformity with accounting practices prescribed or permitted by the State of Missouri. Beginning in 2001, the State of Missouri required that insurance companies domiciled in the State of Missouri prepare their statutory basis financial statements in accordance with the National Association of Insurance Commissioners ("NAIC") Accounting Practices and Procedures manual - Version effective March 2001 subject to any deviations prescribed or permitted by the State of Missouri insurance commissioner. Accounting changes adopted to conform to the provisions of the NAIC Accounting Practices and Procedures manual - Version effective March 2001 are reported as changes in accounting principles. The cumulative effect of changes in accounting principles is reported as an
adjustment to unassigned funds (surplus) in the period of the change in accounting principle. The Company recorded an immaterial positive adjustment to statutory surplus in 2001 as a result of implementing the new standards.
Reclassification. The Company has reclassified the presentation of certain prior period information to conform to the 2001 presentation.
RGA paid cash dividends on common shares of $0.24 per share in 2001, $0.24 per share in 2000, and $0.22 per share in 1999.
During 2001, the Company entered into a new agreement reinsuring a single-premium deferred annuity product on a coinsurance basis with funds withheld. Pursuant to the terms of the reinsurance agreement, the funds supporting the liabilities are withheld by the ceding company. To reflect the Company's obligations under the agreement, the amounts withheld have been included in "Funds withheld at interest" on the balance sheet. As of December 31, 2001, approximately $203.1 million and $201.2 million related to this agreement were included in funds withheld at interest and interest sensitive contract liabilities, respectively.
approximately $89.9 million and $15.4 million, respectively. The cost basis of the derivative financial instruments at December 31, 2001 and 2000 was approximately $4.4 million.
The amortized cost and estimated fair value of fixed maturity investments at December 31, 2001 are shown by contractual maturity for all securities except certain U.S. government agencies securities, which are distributed to maturity year based on the Company's estimate of the rate of future prepayments of principal over the remaining lives of the securities. These estimates are developed using prepayment rates provided in broker consensus data. Such estimates are derived from prepayment rates experienced at the interest rate levels projected for the applicable underlying collateral and can be expected to vary from actual experience. Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Net realized investment gains or losses, consist of the following (in thousands):
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2001 and 2000. SFAS No. 107, "Disclosures about the Fair Value of Financial Instruments," defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties (in thousands):
Publicly traded fixed maturity securities are valued based upon quoted market prices. Private placement securities are valued based on the credit quality and duration of marketable securities deemed comparable by the Company's investment advisor, which may be of another issuer. The fair value of mortgage loans on real estate is estimated using discounted cash flows. Policy loans typically carry an interest rate that is tied to the crediting rate applied to the related policy and contract reserves. The carrying value of funds withheld at interest generally equals fair value except were the funds withheld are specifically identified in the agreement. The carrying value of short-term investments at December 31, 2001 and 2000 approximates fair value. Common and preferred equity investments and derivative financial instruments included in other invested assets are reflected at fair value on the consolidated balance sheet.
The fair value of the Company's interest sensitive contract liabilities is based on the cash surrender value of the liabilities, adjusted for recapture fees. The fair value of the Company's long-term debt and the company-obligated mandatorily redeemable preferred securities are estimated based on quoted market prices for corporations with similar credit quality.
Retrocession 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, 2001 and 2000, no allowances were deemed necessary. The Company regularly evaluates the financial condition of its reinsurers/retrocessionaires.
At December 31, 2001 and 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, 2001, RGA Reinsurance has provided approximately $547.8 million of statutory financial reinsurance, as measured by pre-tax statutory surplus, to other insurance companies under financial reinsurance transactions to assist ceding companies in meeting applicable regulatory requirements 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 $23.2 million to MetLife and its subsidiaries. The Company earns a fee based on the amount of net outstanding financial reinsurance.
During 2001 and 2000, the Company received federal income tax refunds of approximately $5.0 million and $44.8 million, respectively. The Company did not receive a federal income tax refund in 1999. The Company made federal income tax payments of approximately $26.4 million, $6.5 million, and $18.4 million during 2001, 2000 and 1999, respectively. At December 31, 2001 and 2000, the Company recognized deferred tax assets associated with net operating losses of approximately $313.9 million and $247.7 million, respectively, that will expire between 2011 and 2016. However, these net operating losses are 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.
The Internal Revenue Service has audited the Company for the years through and including 1997. The Company is being audited for the years 1998, 1999 and 2000. The Company believes that any adjustments that might be required for open years will not have a material effect on the Company's consolidated financial statements.
Prior to September 1, 2000, Conning Asset Management Company ("Conning"), a majority-owned subsidiary of General American, until its sale in April 2001, provided investment management and advisory services to RGA, RGA Reinsurance, RGA Barbados, Australian Holdings and RGA Life Reinsurance Company of Canada ("RGA Canada"). These services were provided pursuant to agreements at the rate of 0.09% of fixed maturity assets managed and 0.22% of mortgage loans managed, payable quarterly, based on the average book value of the portfolios managed during each calendar quarter. On September 1, 2000, the Company contracted with a third party to provide the majority of investment management and advisory services for these portfolios. Conning, however, continues to provide accounting services for such portfolios, and certain accounting, management, and advisory services related to the Company's mortgage loan and collateralized mortgage-backed securitization portfolios. The cost for Conning's services for the years ended December 31, 2001, 2000, and 1999, was approximately $0.3 million, $1.7 million, and $2.8 million, respectively. Management does not believe that the various amounts charged by Conning to the Company would have been materially different if they had been incurred from an unrelated third party.
Subject to written agreements with RGA and RGA Reinsurance, General American has historically provided certain administrative services to RGA and RGA Reinsurance. Such services have included legal, treasury, employee benefit, payroll, and personnel. The cost for the years ended December 31, 2001, 2000, and 1999, was approximately $1.1 million, $2.6 million, and $2.2 million, respectively. Management does not believe that the various amounts charged by General American to the Company would be materially different if they had been incurred from an unrelated third party. During 2001, the Company began performing certain of these services in-house.
Rent expenses amounted to approximately $5.3 million, $4.7 million, and $4.3 million for the years ended December 31, 2001, 2000, and 1999, respectively.
The statutory basis financial condition of RCM, RGA Reinsurance and RGA Canada, as of December 31, 2001 and 2000 was as follows (in thousands):
The statutory basis net income (loss) of RCM, RGA Reinsurance and RGA Canada for the periods indicated was as follows (in thousands):
The total capital and surplus positions of RCM, RGA Reinsurance and RGA Canada exceed the risk based capital requirements of the applicable regulatory bodies. RCM and RGA Reinsurance are subject to statutory provisions that restrict the payment of dividends. They may not pay dividends in any 12-month period in excess of the greater of the prior year's statutory operating income or 10% of capital and surplus at the preceding year-end, without regulatory approval. Pursuant to this calculation, RGA Reinsurance's allowable dividend without prior approval for 2002 would be $54.1 million. However, the applicable statutory provisions only permit an insurer to pay a shareholder dividend from unassigned surplus. As of December 31, 2001, RGA Reinsurance had unassigned surplus of $51.7 million. Any dividends paid by RGA Reinsurance would be paid to RCM, its parent company, which in turn has restrictions related to its ability to pay dividends to RGA. The assets of RCM consist primarily of its investment in RGA Reinsurance. As of January 1, 2002, RCM could pay a maximum dividend, without prior approval, to RGA equal to its unassigned surplus, approximately $19.3 million. The maximum amount available for dividends by RGA Canada to RGA under the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR") is $50.6 million. Dividend payments from other subsidiaries and joint ventures are subject to regulations in the country of domicile.
The Company is currently a party to arbitrations that involve four separate medical reinsurance arrangements, two arbitrations relative to the Company's portfolio of personal accident business, and one recent lawsuit involving aviation bodily injury carve-out reinsurance coverage. As of January 31, 2002, the ceding companies involved in these disputes have raised claims that are $35.4 million in excess of the amounts held in reserve by the Company. The Company believes it has substantial defenses upon which to contest these claims, including but not limited to misrepresentation and breach of contract by direct and indirect ceding companies. See Note 22, "Discontinued Operations" for more information. From time to time, the Company is subject to litigation and arbitration related to its reinsurance business and to employment-related matters in the normal course of its business. While it is not feasible to predict or determine the ultimate outcome of the pending arbitration or legal proceedings or provide reasonable ranges of potential losses, it is the opinion of Management that their outcomes after consideration of the provisions made in the Company's consolidated financial statements would not have a material adverse effect on its consolidated financial position.
On March 1, 2001, RGA entered into a term loan agreement and note whereby it borrowed $75.0 million from MetLife Credit Corp., an affiliate of MetLife, at an interest rate of 75.5 basis points over the 30-day AA financial discount rate on commercial paper. RGA used the proceeds to prepay and terminate a $75.0 million term loan note with General American, also an affiliate of MetLife.
The Company has five main operational segments segregated primarily by geographic region: U.S., Canada, Latin America, Asia Pacific, and Europe & South Africa. The Asia Pacific, Latin America, and Europe & South Africa operational segments are presented herein as one reportable segment, Other International. The U.S. operations provide traditional life, asset-intensive, and financial reinsurance to domestic clients. Asset-intensive products primarily include reinsurance of corporate-owned life insurance and annuities. The Canada operations provide insurers with traditional reinsurance as well as creditor and critical illness products. Other International operations primarily provide traditional life reinsurance, privatized pension plan reinsurance, which the Company ceased renewing during 2001, and reinsurance of critical illness risks primarily in Asia Pacific, Latin America, and Europe. 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.
The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2. The Company measures segment performance based on profit or loss from operations before income taxes. There are no intersegment transactions and the Company does not have any material long-lived assets. 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's reportable segments are strategic business units that are segregated by geographic region. Information related to revenues, income (loss) before income taxes, and assets of the Company's continuing operations are summarized below.
Diluted earnings per share exclude the antidilutive effect of 5.6 million shares that would be issued upon exercise of the outstanding Warrants, as the Company could repurchase more shares than it issues with the exercise proceeds.
A summary of the components of net unrealized appreciation (depreciation) of balances carried at fair value is as follows (in thousands):
The reinsurance markets for several accident and health risks, most notably involving workers' compensation carve-out and personal accident business, have been quite volatile over the past several years. In particular, certain programs are alleged to have been inappropriately underwritten by third party managers, and some of the reinsurers and retrocessionaires involved have alleged material misrepresentation and non-disclosures by the underwriting managers. As a result, there have been a significant number of claims for rescission, arbitration, and litigation among a number of the parties involved. This has had the effect of significantly slowing the reporting of claims between parties, as the various outcomes of a series of arbitrations and similar actions affects the extent to which higher level reinsurers and retrocessionaires may ultimately have exposure to claims.
Since April of 2000, RGA Reinsurance has been involved in a dispute with a ceding company involving certain quota share reinsurance agreements covering first dollar medical insurance policies. The dispute was subsequently referred to an arbitration panel pursuant to the terms of these reinsurance agreements. In the fourth quarter of 2001, the arbitration panel issued its final award, which required RGA Reinsurance to make a payment to the ceding company. RGA Reinsurance incurred a charge, after utilization of existing reserves, of approximately $10.0 million on a pre-tax basis in the fourth quarter of 2001.
January 31, 2002, the ceding companies involved in these disputes have raised claims which are $35.4 million in excess of the amounts held in reserve by the Company. The Company believes it has substantial defenses upon which to contest these claims, including but not limited to misrepresentation and breach of contract by direct and indirect ceding companies.
The calculation of the claim reserve liability for the entire portfolio of accident and health business requires management to make estimates and assumptions that affect the reported claim reserve levels. The reserve balance as of December 31, 2001 and 2000 was $55.3 million and $89.1 million, respectively. Management must make estimates and assumptions based on historical loss experience, changes in the nature of the business, anticipated outcomes of claim disputes and claims for rescission, anticipated outcomes of arbitrations, and projected future premium run-off, all of which may affect the level of the claim reserve liability. Due to the significant uncertainty associated with the run-off of this business, net income in future periods could be affected positively or negatively. The consolidated statements of income for all periods presented reflect this line of business as a discontinued operation. Revenues associated with discontinued operations, which are not reported on a gross basis in the Company's consolidated statements of income, totaled $3.0 million, $23.7 million, and $113.6 million for 2001, 2000, and 1999.
As a result of the September 11, 2001 terrorist attacks on the United States, the Company has received in excess of 300 claims totaling approximately $33 million as of December 31, 2001. The Company has catastrophe insurance coverage issued by 2 insurers rated "A" or higher by A.M. Best as of December 31, 2001, that provides benefits of up to $100 million per occurrence for claims involving three or more deaths in a single accident. The Company pays a deductible of $1.5 million per occurrence and 20% of the first $30 million of claims reported per occurrence. The Company expects to recover amounts in excess of its deductible and retention under its catastrophe insurance coverages. As of December 31, 2001, the amount recoverable is expected to be approximately $22 million. This coverage is terminable annually in August with 90 days prior notice.
Devaluation of the Argentine Peso. Since 1991, the Argentine peso has been pegged to the U.S. dollar at a rate of one Argentine peso to one U.S. dollar. In early December 2001, restrictions were put in place that prohibited cash withdrawals above a certain amount and foreign money transfers with certain limited exceptions. While the legal exchange rate remained at one Argentine peso to one U.S. dollar, financial institutions were allowed to conduct only limited activity due to these restrictions, and currency exchange was effectively halted.
In January 2002, the Argentine government announced its intent to create a dual currency system with an official exchange rate of 1.4 Argentine pesos to one U.S. dollar for import and export transactions and a free floating rate for other transactions. On January 11, 2002, the Argentine peso began free floating against the U.S. dollar and closed at rates ranging from 1.6 to 1.7 Argentine pesos to one U.S. dollar. Since that time, the Argentine economy has remained volatile and the government has periodically suspended the free-floating exchange rates.
We conducted our audit 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 audit provides a reasonable basis for our opinion.