RGA Reinsurance houses its employees and the majority of RGA's officers in approximately 116,000 square feet of office space at 1370 Timberlake Manor Parkway, Chesterfield, Missouri. These premises are leased through August 31, 2009, at annual rents ranging from approximately $2,000,000 to $2,400,000.
RGA Reinsurance also conducts business from approximately 1,400 square feet in Norwalk, Connecticut, 2,979 square feet of office space located in Hong Kong, approximately 2,900 square feet of office space located in Tokyo, Japan, and 2,800 square feet of office space in Taipei, Taiwan. The rental expenses paid by RGA Reinsurance under these leases during 2001 were approximately $22,000, $136,000, $328,000, and $53,000 for Norwalk, Hong Kong, Tokyo, and Taipei, respectively. RGA Australia conducts business from approximately 6,000 square feet of office space located in Sydney, Australia and paid approximately $85,000 during 2001 for lease expense. The Norwalk, Hong Kong, Tokyo, and Taipei leases expire in December 2002, October 2002, January 2004, and October 2003, respectively. The Sydney lease expires in October 2003.
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 2001 were approximately $23,000. The lease expires in December 2002.
RGA UK conducts business from approximately 3,000 square feet of office space in London, England. The rental expenses paid by RGA UK Reinsurance under the lease during 2001 were approximately $311,000. The lease expires in 2009.
RGA South Africa conducts business from approximately 5,300 square feet of office space in Cape Town and 5,600 square feet of office space located in Johannesburg, South Africa. The rental expenses paid by RGA South Africa under the leases during 2001 were approximately $45,000 and $30,000 for Cape Town and Johannesburg, respectively. The leases expire in September 2003 and May 2004 for Cape Town and Johannesburg, respectively.
RGA Reinsurance conducts business from office space provided by Corporate Offices at the Towers, Inc. in North Palm Beach, Florida. Rental expense paid for the office was approximately $10,000 during 2001. The lease expires in December 2002.
The selected financial data presented for, and as of the end of, each of the years in the five-year period ended December 31, 2001, have been prepared in accordance with accounting principals generally accepted in the United States of America for stock life insurance companies. All amounts shown are in millions, except per share and operating data. The following data should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements appearing in Part II Item 8 and Management's Discussion and Analysis of Financial Condition and Results of Operations appearing in Part II
Forward-looking statements should be evaluated together with the many risks and uncertainties that affect our business, including those mentioned in this document and the cautionary statements described in the periodic reports we file with the SEC. For a discussion of these risks and uncertainties, which could cause actual results to differ materially from those contained in the forward-looking statements, you are advised to consult the sections named "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements" contained in our prospectus dated December 3, 2001, filed with our prospectus supplements, each dated December 12, 2001, and filed with the SEC.
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, 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 MetLife, a New York life insurance company, on January 6, 2000. On April 7, 2000, MetLife completed a demutualization
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 of greater than fifty percent (collectively, the "Company"). During 2000, the Company sold its interest in RGA Sudamerica, S.A., and its subsidiaries, and Benefit Resource Life Insurance Company (Bermuda) Ltd.
The Company's accounting policies are described in Note 2 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. The Company believes its most critical accounting policies include the capitalization and amortization of deferred acquisition costs, the establishment of liabilities for future policy benefits, including incurred but not reported claims, and the valuation of investment impairments. The balances of these accounts are significant to the Company's financial position and require extensive use of assumptions and estimates, particularly related to the future performance of the underlying business.
Costs of acquiring new business, which vary with and are primarily related to the production of new business, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include commissions and allowances as well as certain costs of policy issuance and underwriting. The Company performs periodic tests to determine that the cost of business acquired remains recoverable, and the cumulative amortization is re-estimated and, if necessary, adjusted by a cumulative charge or credit to current operations.
Differences in actual experience compared with the assumptions and estimates utilized in the justification of the recoverability of deferred acquisition costs or in establishing reserves for future policy benefits and claim liabilities can have a material impact on the Company's results of operations and financial condition.
Assumed insurance in force for the Company increased $70.1 billion to $616.0 billion at December 31, 2001. Assumed new business production for 2001 totaled $171.1 billion compared to $161.1 billion in 2000 and $164.9 billion in 1999.
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. Additionally, the Company is exposed to the economic and political risk associated with its net investment in foreign locations. The Company's operations in Canada transact business in Canadian dollars. The exchange rate from Canadian to U.S. currency was 0.6277, 0.6676, and 0.6876 at December 31, 2001, 2000, and 1999, respectively. The Company's Latin America operations primarily conduct business in Argentine and Mexican pesos.
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 an effort to reduce its exposure to this volatile situation, during 2001, the Company liquidated substantially all its Argentine based investment securities, resulting in pre-tax losses of $27.0 million, and reinvested the proceeds into investment securities denominated in U.S. dollars. The Company's obligations under its insurance and reinsurance contracts continue to be denominated in Argentine pesos, which is the functional currency for this business. Those net contract liabilities totaled approximately 97.6 million Argentine pesos as of December 31, 2001. As a result, the devaluation of the Argentine peso has generated a net unrealized foreign currency gain of $38.5 million, which has been reflected in accumulated other comprehensive income on the consolidated balance sheets as of December 31, 2001. The ongoing volatility of the exchange rate suggests that the Company's results for its Argentine business may be volatile going forward, particularly since the Company cannot reasonably predict the timing of its claim settlements and what the exchange rate will be at settlement. The Company does not expect the ongoing economic turmoil in Argentina, including the devaluation of the Argentine peso, to have additional negative impact on its Argentine policy liabilities. However, the Company cannot predict the impact on its ability to write new business in that market.
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. During 2001, the accident and health division reported a net loss of $6.9 million due to reserve increases related to the settlement of an arbitration for an amount in excess of the Company's reserves.
The Company has five main operational segments segregated primarily by geographic region: U.S., Canada, Latin America, Asia Pacific, and Europe & South Africa operations. 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. The Latin America operations include traditional reinsurance, reinsurance of privatized pension products primarily in Argentina, which the Company ceased writing during 2001, 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 and, to a lesser extent, financial reinsurance through RGA Reinsurance Company of Australia, Limited ("RGA Australia") and RGA Reinsurance Company ("RGA Reinsurance"). Europe & South Africa 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.
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
Consolidated income from continuing operations decreased 62.3% in 2001 to $39.9 million and increased 99.4% in 2000 to $105.8 million. Diluted earnings per share from continuing operations were $0.80 for 2001 compared to $2.12 for 2000 and $1.15 for 1999. Earnings during these years were attributed primarily to the traditional reinsurance in the U.S. and Canada. Earnings during 2001 were adversely affected by the terrorist attacks of September 11, investment losses on sales and impairments of investment securities, the accrual of additional reserves to support the Company's Argentinean business, and higher than expected mortality results in the U.S. operations. Earnings in 1999 were affected by the investment losses incurred in connection with the recapture of the funding agreement business.
The U.S. traditional reinsurance sub-segment is the oldest and largest sub-segment of the Company. This sub-segment provides life reinsurance to domestic clients for a variety of life products through yearly renewable term agreements, coinsurance, and modified coinsurance arrangements. These reinsurance arrangements may be either facultative or automatic agreements. During 2001, production totaled $99.5 billion face amount of new business, compared to $115.7 billion in 2000 and $121.3 billion in 1999. The decrease in 2001 and 2000 can be attributed to more inforce blocks of business being reinsured in 1999 compared to 2000 and 2001. This decrease was somewhat offset by continued strong production on new and existing treaties. Management believes industry consolidation, demutualizations, and the trend toward reinsuring mortality risks should continue to provide reinsurance opportunities.
Income before income taxes for U.S. traditional reinsurance decreased 30.9% in 2001 and increased 36.9% in 2000. The decrease in income for 2001 was primarily due to lower investment yields, and the poor claims experience in 2001, as well as the events of September 11th. The increase in income for 2000 was primarily due to premium growth, improved investment performance and favorable mortality experience.
The U.S. asset-intensive reinsurance sub-segment 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. As of December 31, 2001, approximately 41.2%, or $631.3 million of the invested assets associated with the Company's asset-intensive business were funds withheld at interest.
Income before income taxes increased in 2001 to $15.0 million from $11.7 million in 2000, a 28.1% increase over prior year. Contributing to this growth was a new coinsurance agreement of single premium deferred annuities, executed during the third quarter, with assets of approximately $200 million as of December 31, 2001. The growth in revenue is offset, in part, by the growth in claims and other policy benefits, interest credited, and policy acquisition costs and other insurance expenses.
Income before income taxes increased significantly in 2000 as a result of funding agreement losses incurred in 1999. The funding agreement business in 1999 had a net loss before income taxes of approximately $47.8 million, which included pre-tax investment losses of $52.9 million. Excluding the impact of the funding agreements, income grew 77.3% in 2000, from $6.6 million to $11.7 million. The income growth was primarily attributable to a new coinsurance agreement on a block of single premium deferred annuities.
The U.S. financial reinsurance sub-segment includes net fees earned on financial reinsurance agreements and the Company's investment in RGA Financial Group, L.L.C. ("RGA Financial Group"). Effective July 1, 2000, the Company increased its ownership of RGA Financial Group from 40% to 80%. The Company acquired the remaining 20% interest during the fourth quarter of 2000. The majority of the financial reinsurance transactions assumed by the Company are retroceded to other insurance companies. Financial reinsurance agreements represent low risk mortality business that the Company assumes and subsequently retrocedes with a net fee earned on the transaction. The fees earned from the assumption of the financial reinsurance contracts are reflected in other revenues, and the fees paid to retrocessionaires are reflected in policy acquisition costs and other insurance expenses.
Income before income taxes increased 12.2% and 104.9% in 2001 and 2000, respectively. The results in 2001 and 2000 can be primarily attributed to the increased ownership interest in RGA Financial Group coupled with higher amounts of financial reinsurance placed during the respective periods. At December 31, 2001, 2000, and 1999, the amount of outstanding statutory financial reinsurance assumed from client companies, as measured by pre-tax statutory surplus, was $547.8 million, $498.4 million, and $310.0 million, respectively.
The Company conducts reinsurance business in Canada through RGA Canada. RGA Canada assists clients with capital management activity and mortality risk management and is primarily engaged in traditional individual life reinsurance, including preferred underwriting products, as well as creditor and critical illness products. The Canadian operation is one of the leading life reinsurers in Canada. RGA Canada's reinsurance inforce has more than doubled over a
five-year period, to approximately $55.8 billion in 2001 from approximately $22.7 billion in 1996. At December 31, 2001, RGA Canada included most of the life insurance companies in Canada as clients.
Policy acquisition costs and other insurance expenses as a percentage of net premiums totaled 8.1% in 2001, 9.4% in 2000, and 12.3% in 1999. 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.
Other operating expenses increased $0.2 million in 2001 and $1.4 million in 2000. The overall increase in operating expenses was attributed to planned increases in costs associated with the ongoing growth of the business.
In 1993, the Company entered into a joint venture in Chile to form BHIFAmerica Seguros de Vida, S.A. ("BHIFAmerica"). This company was a direct life insurer whose primary source of premium was generated from single
premium immediate annuities in addition to other lines including credit, individual, and group life. During 1996, in an effort to support the growth of this business and develop additional reinsurance opportunities in Chile, the Company formed RGA Reinsurance Company Chile, S.A. ("RGA Chile"), a wholly-owned reinsurance company licensed to assume life reinsurance in Chile. During April 2000, the Company sold its interest in all of its Chilean subsidiaries: RGA Sudamerica, S.A., RGA Reinsurance Company Chile, S.A. and BHIFAmerica. The Company received approximately $26.5 million in proceeds and recorded a loss on the sale of approximately $8.6 million, primarily consisting of the realization of accumulated foreign currency depreciation on the Company's net investment.
Net premiums increased 40.6%, to $265.6 million in 2001 and decreased 6.8%, to $188.9 million, in 2000. The increase during 2001 was primarily the result of renewal premiums from existing blocks of business, new business premiums from facultative and automatic treaties and several large blocks of business, and premiums associated with accelerated critical illness coverage in Asia Pacific and Europe & South Africa. Accelerated critical illness coverage provides a benefit in the event of a death from or the diagnosis of a defined critical illness. Premiums earned during 2001 from this coverage totaled $43.3 million for Asia Pacific and Europe & South Africa compared to $9.8 million in 2000. Increases in net premiums were partially offset by a decrease in privatized pension business in Argentina and a decrease in premiums related to the sale of the Chilean operations. Premiums from other sources included the development of new business opportunities in Mexico and Argentina, however current economic instability in Argentina may have a negative impact on future growth in this market. The Company's operation in South Africa also contributed to the 2001 net premium growth mainly through the facultative market as well as the Company's representative office in Spain through reinsuring both individual and group products. Premium levels are significantly influenced by large transactions and reporting practices of ceding companies and therefore can fluctuate from period to period.
Corporate activity generally represents investment income on invested assets not allocated to support segment operations, undeployed proceeds from the Company's capital raising efforts, unallocated realized capital gains or losses, corporate expenses that include unallocated overhead and executive costs, and interest expense related to the $225.0 million, 5.75% mandatorily redeemable trust preferred securities issued by a wholly-owned subsidiary in 2001 ("Preferred Securities"), the $200.0 million, 6.75% Senior Notes issued in 2001 ("2001 Senior Notes"), borrowings under the Company's $140 million credit agreement executed during 2000 (the "U.S. Credit Agreement"), a $75.0 million term loan note with a subsidiary of MetLife ("MetLife Note") issued and terminated in 2001 and the $100.0 million 7.25% Senior Notes ("Senior Notes") issued in 1996.
Corporate revenues decreased $9.5 million in 2001 and $7.4 million in 2000, primarily a result of unallocated investment losses associated with the sale or impairment of investment securities. Corporate unallocated other operating expenses were less than one percent of consolidated premiums in 2001, 2000 and 1999. Corporate interest expense was $16.5 million in 2001, compared to $16.1 million in 2000 and $10.5 million in 1999. The moderate increase in 2001 compared to 2000 was affected by increased weighted average borrowings outstanding, partially offset by a decrease in the interest rate on those borrowings. The increase in 2000 compared to 1999 was primarily affected by an increase in the weighted average borrowings outstanding. Management expects corporate interest expense to increase significantly in 2002 due to the addition of the Preferred Securities (See Note 17, "Issuance of Trust Piers Units" of the Notes to Consolidated Financial Statements) and the 2011 Senior Notes, the proceeds of which were used to pay down a balance of $120 million on its U.S. Credit Agreement and to prepay and terminate the $75 million term loan with MetLife Credit Corp. Interest rates on the U.S. Credit Agreement and MetLife Note ranged from 2.6% to 7.1% in 2001. The Company views its long-term debt at its current level as an integral and ongoing part of its capital structure, and therefore felt it appropriate to convert its shorter-term borrowings under its U.S. Credit Agreement into longer-term capital.
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 recission, 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.
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 rescission, 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.
As of January 31, 2002, the Company is a party to arbitrations that involve four separate medical reinsurance arrangements. The Company expects two of these arbitrations to be completed during 2002 and 2003. The other two medical reinsurance arbitrations have only recently been instituted and no final hearing date has been set. Also, there are two arbitrations under way relative to the Company's portfolio of personal accident business. Both of these personal accident reinsurance arbitrations have only recently been instituted and no final hearing date has been set. Finally, there is one recent lawsuit in progress involving aviation bodily injury carve-out reinsurance coverage in which no final hearing date has been set.
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 in the discontinued accident and health business. 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.
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, 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.
RGA Reinsurance is subject to statutory provisions that restrict the payment of dividends. It 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 to RGA equal to its unassigned surplus, approximately $19.3 million. The maximum amount available for dividends by RGA Canada under the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR") is $50.6 million. Dividend payments from other subsidiaries are subject to regulations in the country of domicile.
The dividend limitation is based on statutory financial results. Statutory accounting practices differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. The significant differences relate to deferred acquisition costs, deferred income taxes, required investment reserves, reserve calculation assumptions, and surplus notes.
Certain of the Company's debt agreements contain financial covenant restrictions related to, among others, liens, the issuance and disposition of stock of restricted subsidiaries, minimum requirements of net worth ranging from $600 million to $700 million, and minimum rating requirements. A material ongoing covenant default could require immediate payment of the amount due, including principal, under the various agreements. Additionally, the Company's debt agreements contain cross-default covenants, which would make outstanding borrowings immediately payable in the event of a material uncured covenant default under any of the agreements, including, but not limited to, non-payment of indebtedness when due for amounts greater than $10 million or $25 million depending on the agreement, bankruptcy proceedings, and any event which results in the acceleration of the maturity of indebtedness. The facility fee and interest rate for the Company's credit facilities is based on its senior long-term debt ratings. A decrease in those ratings could result in an increase in costs for the credit facilities. As of December 31, 2001, the Company had $323.4 million in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. Of that amount, approximately $24.2 million is subject to immediate payment upon a downgrade of the Company's senior long-term debt rating, unless a waiver is obtained from the lenders. The ability of the Company to make debt principal and interest payments depends primarily on the earnings and surplus of subsidiaries, investment earnings on undeployed capital proceeds, and the Company's ability to raise additional funds.
premiums ceded prior to the recapture of such business, but would reduce premiums in subsequent periods. Additionally, some treaties give the ceding company the right to request the Company to place assets in trust for their benefit to support their reserve credits, in the event of a downgrade of the Company's ratings to specified levels. As of December 31, 2001, these treaties had approximately $246.7 million in reserves. Assets placed in trust continue to be owned by the Company, but their use is restricted based on the terms of the trust agreement. Securities with an amortized cost of $396.8 million were held in trust in Canada at December 31, 2001 to satisfy collateral requirements for reinsurance business. Additionally, securities with an amortized cost of $820.9 million, as of December 31, 2001, were held in trust to satisfy collateral requirements of certain other reinsurance treaties. Under certain conditions, RGA may be obligated to move reinsurance from one RGA subsidiary company to another RGA subsidiary or make payments under the treaty. These conditions generally include unusual or remote circumstances, such as change in control, insolvency, nonperformance under a treaty, or loss of reinsurance license of such subsidiary.
The Company's principal cash inflows from its investing activities results from investment income, maturity and sales of invested assets, and repayments of principal. The primary liquidity concern with respect to these cash inflows relates to the risk of default by debtors and interest rate volatility. The Company manages these risks very closely. See -- Investments and - -- Interest Rate Risk below.
Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash flows include selling short-term investments or fixed maturity securities and drawing additional funds under existing credit facilities, under which the Company had availability of $155.8 million as of December 31, 2001.
The Company's net cash flows from operating activities for the years ended December 31, 2001, 2000, and 1999, were $243.9 million, $192.8 million, and $277.7 million, respectively. Cash flows from operating activities are affected by the timing of premiums received, claims paid, and working capital changes. The Company believes the short-term cash requirements of its business operations will be sufficiently met by the positive cash flows generated. Additionally, the Company maintains a very high quality fixed maturity portfolio with good liquidity characteristics. These securities are available for sale and can be easily sold to meet the Company's obligations, if necessary.
The following table displays the Company's contractual obligations, which primarily consist of the payment of outstanding debt upon maturity and leases.
Net cash provided by (used in) investing activities was $(576.4) million, $(712.5) million, and $1,341.8 million in 2001, 2000, and 1999, respectively. Changes in cash provided by investing activities primarily relate to the management of the Company's investment portfolios and the investment of excess capital generated by operating and financing activities. The $1.3 billion source of cash in 1999 primarily relates to the transfer of investment assets to satisfy funding agreement liabilities that were recaptured (See Note 5, "Significant Transactions - Recapture Transaction," of the Notes to Consolidated Financial Statements).
Net cash provided by (used in) financing activities was $487.9 million, $565.5 million, and $(1,611.4) million in 2001, 2000, and 1999, respectively. Changes in cash provided by investing activities primarily relate to the issuance of equity or debt securities, borrowings or payments under the Company's existing credit agreements, treasury stock activity, and excess deposits or withdrawals under investment type contracts. The $1.6 billion use of cash in 1999 primarily relates to the recapture of deposits on funding agreement business.
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. As of December 31, 2001, funds withheld at interest totaled $631.3 million for the Company's asset-intensive products.
Effective December 31, 1993, the National Association of Insurance Commissioners ("NAIC") adopted risk-based capital ("RBC") statutory requirements for U.S.-based life insurance companies. These requirements measure statutory capital and surplus needs based on the risks associated with a company's mix of products and investment portfolio. At December 31, 2001, statutory capital and surplus of RGA Reinsurance and RCM exceeded all RBC thresholds and RGA Canada's capital levels exceeded any MCCSR requirements. All of the Company's insurance operating subsidiaries exceed the minimum capital requirements in their respective jurisdiction.
The Company's fixed maturity securities are invested primarily in commercial and industrial bonds, public utilities, Canadian government securities, and mortgage and asset-backed securities. As of December 31, 2001, more than 94% of the Company's consolidated investment portfolio of fixed maturity securities was investment-grade. Important factors in the selection of investments include diversification, quality, yield, total rate of return potential, and call protection. The relative importance of these factors is determined by market conditions and the underlying product or portfolio characteristics. Cash equivalents are invested in high-grade money market instruments. The largest asset class in which fixed maturities were invested was in commercial and industrial bonds, which represented approximately 16.6% of total investments as of December 31, 2001, a decrease from 23.3% of total investments as of December 31, 2000. A majority of these securities were classified as corporate securities, with an average Standard and Poor's rating of A at December 31, 2001. The Company owns floating rate securities that represent approximately 3.3% of total investments at December 31, 2001, compared to 4.7% at December 31, 2000. These investments may have a higher degree of income variability than the other fixed income holdings in the portfolio due to the floating rate nature of the interest payments.
The Company monitors its fixed maturity securities to determine impairments in value. In conjunction with its external investments manager, the Company evaluates factors such as:
As of December 31, 2001, the invested assets of RGA, RCM, RGA Reinsurance, RGA Barbados, Australian Holdings, and RGA Canada are primarily managed by a third-party, however, the Company's chief investment officer has the primary responsibility for the day to day oversight of all the Company's investments.
Interest rate sensitivity analysis is used to measure the Company's interest rate price risk by computing estimated changes in fair value of fixed rate assets and liabilities in the event of a hypothetical 10% change (increase or decrease) in
The cash flows from coupon payments move in the same direction as interest rates for the Company's floating rate instruments. The volatility in mortgage prepayments partially offsets the cash flows from interest. At December 31, 2001, the Company's estimated changes in cash flows 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). The majority of the Company's foreign currency transactions are denominated in Australian dollars, Argentine pesos, Canadian dollars, and Great British pounds. Currently, the Company believes its foreign currency transaction exposure, with the possible exception of its Argentine peso exposure, to be immaterial to the consolidated results of operations. In an effort to reduce its exposure to the Argentine peso, during 2001, the Company liquidated substantially all its Argentine based investment securities and reinvested the proceeds into investment securities denominated in U.S. dollars. The Company's obligations under its insurance and reinsurance contracts continue to be denominated in Argentine pesos, which is the functional currency for this sub-segment. Those net contract liabilities totaled approximately 97.6 million Argentine pesos as of December 31, 2001. As a result, the devaluation of the Argentine peso has generated a net unrealized foreign currency gain of $38.5 million, which has been reflected in accumulated other comprehensive income on the consolidated balance sheet as of December 31, 2001.
The Company does not expect the ongoing economic turmoil in Argentina, including the devaluation of the Argentine peso, to have additional negative impact on its Argentine policy liabilities, however, because the Company cannot reasonably predict the timing of its claim settlements and what the exchange rate will be at settlement, reported results may be volatile in the future. Additionally, the Company cannot predict the impact on its ability to write new business in that market. 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 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 mortgage loan loss allowance policies and procedures are in compliance with SAB 102.
Also in July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS No. 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The Company will adopt the provisions of each statement, which apply to goodwill and intangible assets acquired prior to June 30, 2001, on January 1, 2002. Based on its preliminary assessment during the first quarter of 2002, the Company does not currently expect a significant adjustment related to the adoption of these accounting standards; however, impairment reviews subsequent to the initial adoption date may result in future write-downs.
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.
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
Consolidation and Basis of Presentation. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for stock life insurance companies. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. The most significant estimates include those used in determining deferred policy acquisition costs, premiums receivable, future policy benefits, other policy claims and benefits, provision for adverse litigation, and valuation of investment impairments. In all instances, actual results could differ materially from the estimates and assumptions used by management.
twenty percent, but less than or equal to fifty percent are reported under the equity method of accounting. All significant intercompany balances and transactions have been eliminated.
Investments. Fixed maturity securities available for sale are reported at fair value and are so classified based upon the possibility that such securities could be sold prior to maturity if that action enables the Company to execute its investment philosophy and appropriately match investment results to operating and liquidity needs.
Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances. Valuation allowances on mortgage loans are being established based upon losses expected by management to be realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The valuation allowances are being established after management considers, among other things, the value of underlying collateral and payment capabilities of debtors.
The Company has a variety of reasons to use derivative instruments, such as to attempt to protect the Company against possible changes in the market value of its investment portfolio as a result of interest rate changes and to manage the portfolio's effective yield, maturity, and duration. The Company does not invest in derivatives for speculative purposes. The Company uses both exchange-traded and customized over-the-counter derivative financial instruments. The Company's use of derivatives historically has not been significant to its financial position. Income or expense on derivative financial instruments used to manage interest-rate exposure is recorded on an accrual basis as an adjustment to the yield of the related interest-earning assets or interest-bearing liabilities for the periods covered by the contracts. Gains or losses from early terminations of derivative contracts are deferred and amortized as an adjustment to the yield of the designated assets or liabilities over the remaining period originally contemplated by the derivative financial instrument. The Company is currently holding exchange-traded derivatives with a notional amount of $25.6 million, which are carried at fair value of $8.1 million. It is the Company's policy to enter into derivative contracts primarily with highly rated companies.
Other Reinsurance Balances. The Company assumes and retrocedes financial reinsurance contracts that represent low mortality risk reinsurance treaties. These contracts are reported as deposits and included in other reinsurance assets/liabilities. The amount of revenue reported on these contracts represents fees and the cost of insurance under the terms of the reinsurance agreement. Balances resulting from the assumption and/or subsequent transfer of benefits and obligations resulting from cash flows related to variable annuities have also been classified as other reinsurance balance assets and/or liabilities.
Goodwill and Value of Business Acquired. Through December 31, 2001, goodwill representing the excess of purchase price over the fair value of net assets acquired was amortized on a straight-line basis over ten to twenty years. Beginning January 1, 2002, the Company will utilize a non-amortization approach (see "New Accounting Pronouncements"). 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 was approximately $7.8 million and $9.5 million as of December 31, 2001 and 2000, respectively, including accumulated amortization of $6.0 million and $4.4 million. The value of business acquired was approximately $9.8 million and $12.6 million as of December 31, 2001 and 2000, respectively, including accumulated amortization of $3.7 million and $0.8 million. Goodwill amortization expense for the years ended December 31, 2001, 2000, and 1999 was $1.6 million, $1.4 million, and $1.7 million, respectively. Value of business acquired amortization expense for the years ended December 31, 2001, 2000, and 1999 was $2.9 million, $0.8 million, and $0.0 million, respectively. These amortized balances are included in other assets on the consolidated balance sheet.
characteristics of the plan of insurance, year of issue, age of insured, and other appropriate factors. Interest rates range from 6.0% to 10.0%. The mortality and withdrawal assumptions are based on the Company's experience as well as industry experience and standards. Liabilities for future benefits on interest-sensitive life and investment-type contract liabilities are carried at the accumulated contract holder values without reduction for potential surrender or withdrawal charges.
Other Liabilities. Liabilities primarily related to investments in transit, separate accounts, employee benefits, and current federal income taxes payable are included in other liabilities on the consolidated balance sheet.
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Company. During December 2001, RGA Capital Trust I (the "Trust"), a wholly owned subsidiary of RGA, sold Preferred Income Equity Redeemable Securities (PIERS) Units. Each unit consists of a preferred security 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 preferred security on the date issued is recorded in liabilities on the consolidated balance sheet under
the caption "Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated debentures of the Company."
Recognition of Revenues and Related Expenses. Revenues and expenses are reported gross, except that initial reserve changes are netted against premiums when an in force block of business is reinsured. Life and health premiums are recognized as revenue when due from the insured. Benefits and expenses are associated with earned premiums so that profits are recognized over the life of the related contract. This association is accomplished through the provision for future policy benefits and the amortization of deferred policy acquisition costs. Other revenue includes items such as treaty recapture fees, profit and risk fees associated with financial reinsurance. Any fees that are collected in advance of the period benefited are deferred and recognized over the period benefited.
charged to expenses include claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. The weighted average interest-crediting rates for interest-sensitive products were 6.1%, 6.7%, and 6.4%, during 2001, 2000, and 1999, respectively. Interest crediting rates for U.S. dollar-denominated investment-type contracts ranged from 3.6% to 7.3% during 2001, 5.3% to 7.2% during 2000, and 5.2% to 6.7% during 1999. Weighted average interest crediting rates for Mexican peso-denominated investment-type contracts were 12.8%, 26.0% and 33.0% for 2001, 2000 and 1999, respectively.
Net Earnings Per Share. Basic earnings per share exclude any dilutive effects of options and warrants. Diluted earnings per share include the dilutive effects assuming outstanding stock options and warrants 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.
In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133". This Statement addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS 133. 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. The Company adopted SFAS No. 138 as of January 1, 2001, resulting in an after-tax loss included in the first quarter of 2001 of $0.5 million, substantially all of which related to embedded derivatives on a specific market value annuity product. The Company has a variety of reasons to use derivative instruments, such as to attempt to protect the Company against possible changes in the market value of its investment portfolio as a result of interest rate changes and to manage the portfolio's effective yield, maturity, and duration. The Company does not invest in derivatives for speculative purposes. The Company may use both exchange-traded and customized over-the-counter derivative financial instruments. The Company's use of derivatives historically has not been significant to its financial position.
On September 18, 2001, the board of directors approved a repurchase program authorizing the Company to purchase up to $25 million of its shares of stock. Subsequent to December 31, 2001 the board of directors approved an additional repurchase of $25 million shares under the program, for a total of up to $50 million of its shares of stock, as conditions warrant. The Board's action allows management, in its discretion, to purchase shares on the open market. As of December 31, 2001, no shares have been purchased under this program.
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, to MetLife. The price per share was $26.125, and the aggregate value of the transaction was approximately $125 million.
There were no investments in any entity in excess of 10% of stockholders' equity at December 31, 2001 or 2000, other than investments issued or guaranteed by the U.S. government.
Common and preferred 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, 2001 and 2000 was
At December 31, 2001, the contractual maturities of investments in fixed maturity securities were as follows (in thousands):
Securities with an amortized cost of $2.8 million and $3.1 million were on deposit with various state or governmental insurance departments to comply with applicable insurance laws at December 31, 2001 and 2000, respectively. Securities with an amortized cost of $396.8 million and $411.6 million were held in trust in Canada at December 31, 2001 and 2000, respectively, to satisfy collateral requirements for reinsurance business conducted in Canada. Additionally, securities with an amortized cost of $820.9 million and $821.5 million at December 31, 2001 and 2000, respectively, were held in trust to satisfy collateral requirements of certain reinsurance treaties.
At December 31, 2001, 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 $159.5 million. At December 31, 2001, the Company owned non-income producing securities with an amortized cost of $48.1 million.
All the Company's mortgage loans are amortizing loans. As of December 31, 2001 and 2000, the Company's mortgage loans were distributed as follows (in thousands):
The effect of reinsurance on premiums and amounts earned is as follows (in thousands):
Reinsurance agreements, whether facultative or automatic, may provide for recapture rights on the part of the ceding company. Recapture rights permit the ceding company to reassume all or a portion of the risk formerly ceded to the reinsurer after an agreed-upon period of time (generally 10 years) or in some cases due to changes in the financial condition or ratings of the reinsurer. Recapture of business previously ceded does not affect premiums ceded prior to the recapture of such business, but would reduce premiums in subsequent periods. Additionally, some treaties give the ceding company the right to request the Company to place assets in trust for their benefit to support their reserve credits, in the event of a downgrade of the Company's ratings to specified levels. As of December 31, 2001, these treaties had approximately $246.7 million in reserves. Assets placed in trust continue to be owned by the Company, but their use is restricted based on the terms of the trust agreement. Securities with an amortized cost of $396.8 million were held in trust in Canada at December 31, 2001 to satisfy collateral requirements for reinsurance business. Additionally, securities with an amortized cost of $820.9 million, as of December 31, 2001, were held in trust to satisfy collateral requirements of certain other reinsurance treaties. Additionally, under certain conditions, RGA may be obligated to move reinsurance from one RGA subsidiary company to another RGA subsidiary or make payments under the treaty. These conditions generally include unusual or remote circumstances, such as change in control, insolvency, nonperformance under a treaty, or loss of reinsurance license of such subsidiary.
Provision for income tax expense 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, 2001 and 2000, are presented in the following tables (in thousands):
As of December 31, 2001 and 2000, a valuation allowance for deferred tax assets of approximately $13.7 million and $6.2 million, respectively, was provided on the foreign tax credits and net operating and capital losses of RGA, RGA Reinsurance, RGA Australia, GA Argentina, RGA South Africa, and RGA UK. The Company utilizes valuation allowances when it determines, based on the weight of the available evidence, that it is more likely than not that the deferred income taxes will not be realized. The Company has not recognized a deferred tax liability for the undistributed earnings of its wholly owned domestic and foreign subsidiaries because the Company currently does not expect those unremitted earnings to become taxable to the Company in the foreseeable future. This is due to the fact that the unremitted earnings will not be repatriated in the foreseeable future, or because those unremitted earnings that may be repatriated will not be taxable through the application of tax planning strategies that management would utilize.
Most of the Company's U.S. employees participate in a non-contributory defined benefit pension plan sponsored by RGA Reinsurance. The benefits under the pension plan are based on years of service and compensation levels. Certain management individuals participate in several nonqualified defined benefit and defined contribution plans sponsored by RGA Reinsurance. Those plans are unfunded and are deductible for federal income tax purposes when the benefits are paid. The Company recorded net benefits expense of approximately $1.1 million, $0.9 million, and $0.7 million for 2001, 2000 and 1999, respectively, related to these plans. The unfunded benefit liability related to these plans as of December 31, 2001 and 2000 was approximately $6.5 million and $5.4 million, respectively.
The 2001 postretirement benefit cost assumes a 12% annual rate of increase in the per capita cost of covered health care benefits. The rate is assumed to decrease gradually to 5% for 2008 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point increase in assumed health care cost trend rates would increase the 2001 net periodic benefit cost by approximately $98,000 and the 2001 postretirement benefit obligation by approximately $664,000.
Prior to moving its operations in August of 1999 to a leased facility owned by a third party, the Company conducted its business primarily from premises leased by RGA Reinsurance from General American. RGA Reinsurance made rental payments in 1999 to General American, principally for office space, of approximately $1.1 million.
The Company also has direct policies and reinsurance agreements with MetLife and certain of its subsidiaries. As of December 31, 2001 and 2000, the Company had assets and liabilities related to these agreements totaling $112.5 million and $109.0 million, and $103.3 million and $114.1 million, respectively. Additionally, the Company reflected net assumed premiums of approximately $149.3 million, $144.0 million, and $130.3 million in 2001, 2000, and 1999, 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 $26.1 million, $17.8 million, and $(31.0) million in 2001, 2000, and 1999, respectively. This includes realized gains (losses) on the disposal of investment securities of ($70.4) million for 1999.
The Company leases office space and furniture and equipment under non-cancelable operating lease agreements, which expire at various dates. Future minimum office space annual rentals under non-cancelable operating leases at December 31, 2001 are as follows:
2002 $4.4 million 2003 $4.3 million 2004 $3.8 million 2005 $3.7 million 2006 $3.7 million Thereafter $12.0 million
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.
On December 19, 2001, RGA issued 6.75% Senior Notes with a face value of $200.0 million. These senior notes have been registered with the SEC. The net proceeds from the offering were approximately $198.5 million and were used to pay down a balance of $120 million on a revolving credit facility and to prepay and terminate the $75 million term loan with MetLife Credit Corp. Capitalized issuance costs were $2.1 million.
The Company has revolving credit facilities in the United States, Great Britain, and Australia, under which it may borrow up to approximately $180 million. As of December 31, 2001, the Company had drawn approximately $24.2 million under these facilities at rates ranging from 4.40% to 4.97%.
Terminations of revolving credit facilities and maturities of senior notes over the next five years, assuming the exercise of extension options, would be $24.2 million in 2005 and $100.0 million in 2006. The Company may draw up to $140.0 million on its U.S. revolving credit facility that expires in 2003.
event which results in the acceleration of the maturity of indebtedness. As of December 31, 2001, the Company had $323.4 million in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. Of that amount, approximately $24.2 million is subject to immediate payment upon a downgrade of the Company's senior long-term debt rating, unless a waiver is obtained from the lenders. The ability of the Company to make debt principal and interest payments depends on the earnings and surplus of subsidiaries, investment earnings on undeployed capital proceeds, and the Company's ability to raise additional funds. Interest paid on debt during 2001, 2000, and 1999 totaled $18.5 million, $16.9 million, and $9.6 million, respectively.
Subsidiaries in which the Company has an ownership position less than or equal to fifty percent, but greater than or equal to twenty percent are reported on the equity basis of accounting. The equity in the net income of subsidiaries is not material to the results of operations or financial position of individual segments or the Company taken as a whole.
The table above includes amortization of the Company's deferred acquisition costs.
The Company adopted the RGA Flexible Stock Plan (the "Plan") in February 1993 and the Flexible Stock Plan for Directors (the "Directors Plan") in January 1997 (collectively, the "Stock Plans"). The Stock Plans provide for the award of benefits (collectively "Benefits") of various types, including stock options, stock appreciation rights ("SARs"), restricted stock, performance shares, cash awards, and other stock based awards, to key employees, officers, directors and others performing significant services for the benefit of the Company or its subsidiaries. In general, options granted under the Plan become exercisable over vesting periods ranging from one to eight years while options granted under the Directors Plan become exercisable after one year. As of December 31, 2001, shares authorized for the granting of Benefits under the Plan and the Directors Plan totaled 4,317,530 and 112,500, respectively. Options are generally granted with an exercise price equal to the stock's fair value at the date of grant and expire 10 years after the date of grant. Information with respect to option grants under the Stock Plans follow.
The per share weighted-average fair value of stock options granted during 2001, 2000, and 1999 was $11.87, $9.40, and $11.24 on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2001-expected dividend yield of 0.8%, risk-free interest rate of 5.04%, expected life of 5.8 years, and an expected rate of volatility of the stock of 35% over the expected life of the options; 2000-expected dividend yield of 0.8%, risk-free interest rate of 6.12%, expected life of 5.8 years, and an expected rate of volatility of the stock of 33% over the expected life of the options; 1999-expected dividend yield of 0.8%, risk-free interest rate of 5.64%, expected life of 5.0 years, and an expected rate of volatility of the stock of 26% over the expected life of the options.
In January 1999, the Board approved restricted stock awards of 13,500 non-voting shares under the Company's Flexible Stock Plan. During 1999, the non-voting restricted stock awards 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 2002, the Board approved an additional 539,342 incentive stock options at $31.91 per share under the Company's Flexible Stock Plan.
The following table presents the components of the Company's other comprehensive income for the years ended December 31, 2001, 2000 and 1999 (in thousands):
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. 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 rescission, 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.
As of January 31, 2002, the Company is a party to arbitrations that involve four separate medical reinsurance arrangements. The Company expects two of these arbitrations to be completed during 2002 and 2003. The other two medical reinsurance arbitrations have only recently been instituted and no final hearing date has been set. Also, there are two arbitrations under way relative to the Company's portfolio of personal accident business. Both of these personal accident reinsurance arbitrations have only recently been instituted and no final hearing date has been set. Finally, there is one recent lawsuit in progress involving aviation bodily injury carve-out reinsurance coverage in which no final hearing date has been set. As of
In accordance with applicable accounting guidance, the Company translated its Argentine peso functional currency balances as of December 31, 2001 using a floating rate of 1.65 Argentine pesos to one U.S. dollar, which was the closing rate on January 11, 2002. As a result of that translation, the Company reflected a net unrealized foreign currency gain of $38.5 million, which has been reflected in accumulated other comprehensive income (loss) on the consolidated balance sheets as of December 31, 2001.
We have audited the accompanying consolidated balance sheets of Reinsurance Group of America, Incorporated and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the two years in the period ended December 31, 2001. Our audits also included the financial statement schedules as of December 31, 2001 and 2000, and for the years then ended listed in the index at Item 14. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
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, 2001 and 2000, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2001, 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 statements of income, stockholders' equity and cash flows of Reinsurance Group of America, Incorporated and subsidiaries for the year ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Reinsurance Group of America, Incorporated and subsidiaries for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America.
Under date of January 25, 2000, we reported on the statement of income, stockholders' equity and cash flows of Reinsurance Group of America, Incorporated and subsidiaries (the Company) for the year ended December 31, 1999, as contained in the 2001 annual report to stockholders. These consolidated financial statements and our report thereon appear in the annual report on Form 10-K for the year 2001. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audit.
The consolidated balance sheets of Reinsurance Group of America, Incorporated and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, cash flows and stockholders' equity for the years ended December 31, 2001, 2000 and 1999, 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.
The Board of Directors, through its Audit Committee, which is composed solely of directors who are not employees of the Company, is responsible for overseeing the integrity and reliability of the Company's accounting and financial reporting practices and the effectiveness of its system of internal controls. The independent certified public accountants and internal auditors meet regularly with, and have access to, this committee, with and without management present, to discuss the results of their audit work.
Reinsurance Group of America, Incorporated common stock is traded on the New York Stock Exchange (NYSE) under the symbol "RGA". There were 106 stockholders of record of RGA's common stock on March 1, 2002.