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 2000 were approximately $22,000, $166,000, $293,000, and $51,000 for Norwalk, Hong Kong, Tokyo, and Taipei, respectively. RGA Australia conducts business from approximately 20,700 square feet of office space located in Sydney, Australia and paid approximately $98,000 during 2000 for lease expense. The Norwalk, Hong Kong, Tokyo, and Taipei leases expire in December 2002, October 2002, January 2002, and October, 2003, respectively. The Sydney lease expires in October 2003.
The selected financial data presented for, and as of the end of, each of the years in the five-year period ended December 31, 2000, 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 Consolidate Financial Statements and the Notes to the 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
The statements included in this Annual Report regarding the Company's business which are not historical facts, including, without limitations, statements and information relating to future financial performance, growth potential, the effect of mortality rates and experience, claims levels, and other statements related to the Company's business, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These "forward-looking" statements include, without limitation, certain statements in the "Letter to Shareholders," "Divisional Highlights," and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Such statements also may include, but are not limited to, projections of earnings, revenues, income or loss, or capital expenditures; estimated fair values of fixed rate instruments; estimated cash flows of floating rate instruments; plans for future operations and financing needs, growth prospects and targets; industry trends; trends in or expectations regarding operations and capital commitments; the sufficiency of claims reserves; and assumptions relating to the foregoing. 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.
Important factors that could cause actual results and events to differ materially from those expressed or implied by forward-looking statements including, without limitation, (1) market conditions and the timing of sales of investment securities, (2) regulatory action taken by the New York or Missouri Departments of Insurance with respect to Metropolitan Life Insurance Company ("MetLife") or General American Life Insurance Company ("General American") or the Company or its subsidiaries, (3) changes in the credit ratings of the Company, MetLife or General American and the effect of such changes on the Company's future results of operations and financial condition, (4) material changes in mortality and claims experience, (5) competitive factors and competitors' responses to the Company's initiatives, (6) general economic conditions affecting the demand for insurance and reinsurance in the Company's current and planned markets, (7) successful execution of the Company's entry into new markets, (8) successful development and introduction of new products, (9) the stability of governments and economies in foreign markets in which we operate, (10) fluctuations in U.S. and foreign currency exchange rates, interest rates, and securities and real estate markets, (11) the success of the Company's clients, (12) changes in laws, regulations, and accounting standards applicable to the Company and its subsidiaries, and (13) other risks and uncertainties described in this Annual Report and in the Company's other filings with the Securities and Exchange Commission.
Reinsurance Group of America, Incorporated ("RGA") is an insurance holding company formed December 31, 1992. On December 31, 2000, Equity Intermediary Company, a Missouri holding company, directly owned approximately 49.0% of the outstanding shares of common stock of RGA. Equity Intermediary Company is a wholly owned subsidiary of General American, 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 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 58.7% of the outstanding shares of common stock of RGA at December 31, 2000.
Assumed insurance in force for the Company increased $99.0 billion to $545.9 billion at December 31, 2000. Assumed new business production for 2000 totaled $161.1 billion compared to $164.9 billion in 1999 and $125.0 billion in 1998. Significant growth in assumed new business in the U.S. and Canada operations of $129.5 billion provided most of this increase in 2000.
to pay claims out of existing reserves over a number of years as the level of business diminishes. During 2000, the accident and health division lost $28.1 million, including a pre-tax charge of $25.0 million to strengthen its reserves.
Income before income taxes and minority interest for U.S. traditional reinsurance increased 36.9% and decreased 3.7% in 2000 and 1999, respectively. The increase in income for 2000 was primarily due to premium growth, improved investment performance and favorable mortality experience. The decrease in income for 1999 is attributable to realized investment losses of $17.0 million on securities transactions. Excluding realized investment losses on securities transactions, income before income taxes and minority interest increased 13.2% in 1999.
Net premiums for U.S. traditional reinsurance rose 9.2% and 32.8% in 2000 and 1999, respectively. The 2000 increase in premiums of 9.2% is smaller because not as many in-force blocks were reinsured in the current year. New premiums from facultative and automatic treaties and renewal premium 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 11.1% and 17.9% in 2000 and 1999, respectively. This increase in both years was due to the continued growth of business in this subsegment from facultative and automatic treaties, which resulted in an increase in the underlying invested asset base.
Realized investment losses of approximately $12.2 million were reported for 2000 compared to $17.0 million in 1999. Included in the net realized losses for 2000 was the write-down of several fixed income securities along with capital losses associated with the sale of some investments. The 1999 losses also included the write-off of the Company's investment in a financial services consulting firm specializing in the development of distribution systems.
The amount of policy acquisition costs and other insurance expenses rose 3.3% and 28.8% in 2000 and 1999, respectively. As a percentage of net premiums, policy acquisition costs and other insurance expenses were 14.5%, 15.3%, and 15.8% in 2000, 1999, and 1998, respectively. These percentages fluctuate slightly due to variations in the mixture of business being written.
Income before income taxes and minority interest 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 and minority interest of approximately $47.8 million, which included pre-tax investment losses of $52.9 million. Substantially all pre-tax investment losses in 1999 were incurred in connection with liquidating securities and the recapture of the funding agreement business by General American. 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.
Net premiums reported in this subsegment primarily relate to a yearly renewable term treaty that reinsures the mortality risk of a corporate-owned life insurance product.
Net premiums increased 8.5% to $176.3 million in 2000 and increased 12.2% to $162.5 million in 1999. The premium growth in 2000 and 1999 resulted primarily from increasing renewal premiums and new business premiums. Business 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 17.4% and 35.8% during 2000 and 1999, respectively. Investment income is allocated to the various operating segments on the basis of net capital, and investment performance varies with the composition of investments.
The increase in investment income was mainly the result of an increase in the invested asset base. For 2000 and 1999, 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 in-force block added in 1998. In 1999, 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 increased slightly to 7.02% for year ended December 31, 2000 from 6.97% for 1999 and 7.37% for 1998.
Claims and other policy benefits increased 11.2% and 20.6% during 2000 and 1999, respectively. Claims and other policy benefits as a percentage of net premiums were 97.2% of total 2000 net premiums compared to 94.9% in 1999 and 88.3% in 1998. The increased percentages experienced are primarily the result of several large in-force 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. 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 71.9% of total 2000 net premiums compared to 71.6% in 1999 and 69.6% in 1998. 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 operating expenses increased $1.4 million in 2000 and $0.3 million in 1999. The overall increase in operating expenses was attributed to planned increases in costs associated with the ongoing growth of the business.
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 enters into new contracts related to the privatized pension system, but continues to market individual universal life and group life products.
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. As of April 1, 2000, the Company reached an agreement to sell its interest in all of its Chilean subsidiaries: RGA Sudamerica, S.A., RGA Reinsurance Company Chile, S.A. and BHIFAmerica. The transaction closed on April 27, 2000. 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.
Income before income taxes and minority interest decreased to a loss of approximately $6.2 million in 2000 from income of $3.3 million and $3.8 million in 1999 and 1998, respectively. This was a result of the losses in the direct operations, primarily from the sale of the Chilean companies during the second quarter of 2000. These losses offset earnings in the reinsurance operations that resulted from growth in the Mexican and Argentine traditional life reinsurance business. The Company has limited its participation in the reinsurance of privatized pensions in Argentina, and has focused its efforts on seeking traditional reinsurance opportunities in other areas. More limited participation in the Argentine privatized pension system, combined with continuing experience refund payments to the ceding companies, contributed to the fluctuation in net premiums compared to the prior year.
Net premiums decreased from prior years as a result of the sale of the Chilean operations and reduced reinsurance of privatized pensions during 2000. Premiums from other sources related primarily to the development of new business opportunities in Mexico and Argentina. Net investment income decreased 16.7% and increased 33.6% during 2000 and 1999, respectively. Investment income for direct business declined with the sale of the Chilean companies, but increased for the reinsurance business. Investment income is allocated to the various operating segments on the basis of net capital, and investment performance varies with the composition of investments. This increase was due to the continued growth of business in this segment that resulted in an increase in the invested asset base.
The Asia Pacific income before income taxes and minority interest was an $8.0 million improvement over 1999. The improvement in profitability was caused by a combination of better mortality and persistency, additional premium volume, and a full year of experience from a large financial reinsurance transaction executed at the end of 1999. The Asia Pacific loss before income taxes and minority interest increased $3.7 million in 1999. The increase in the Asia Pacific loss before income taxes in 1999 compared to 1998 was due to higher than expected mortality experience, termination of a large financial reinsurance contract, and higher than expected lapses.
Net premiums increased 27.6%, to $94.3 million in 2000 and increased 39.2%, to $73.9 million, in 1999. Renewal premiums from the existing block of business, new business premiums from facultative and automatic treaties, and premium flows from larger blocks of business all contributed to the premium increase. Business 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 by 112.1% in 2000 and declined by 14.3% in 1999. Investment income is allocated on the basis of average net capital, and the investment performance varies with the composition of the assets. Other revenue during 2000 and 1999 predominantly represented profit and risk fees associated with financial reinsurance in Taiwan and Japan. The Taiwanese treaty was commenced in late 1999, with a full year in 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 increased 20.5% in 2000 and 46.7% in 1999. Claims and other policy benefits as a percentage of net premiums decreased to 59.8% in 2000 and increased to 63.3% in 1999 from 60.1% in 1998. The increase in claims and other policy benefits as a percentage of premiums in 1999 was primarily the result of adverse experience in the Japanese business. The Company expects mortality to fluctuate somewhat from period to period, but believes it is fairly constant over longer periods of time. The Company continues to monitor mortality trends to determine the appropriateness of reserve levels.
The other international segment is the newest segment of the Company. This segment includes business received from reinsurance clients located in Europe and South Africa in addition to business received as a Corporate Name supporting a life reinsurance syndicate at Lloyd's of London. 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. These agreements may be either facultative or automatic agreements. During 2000, the Company's United Kingdom subsidiary obtained approval as a licensed U.K. life reinsurer, and the Company opened a representative office in Spain.
Corporate activity generally represents investment income on the undeployed proceeds from the Company's capital raising efforts, corporate expenses that include unallocated overhead and executive costs, as well as the interest expense related to borrowings under the Company's $140 million credit agreement entered into during 2000 (the "Credit Agreement"), a $75.0 million term loan note with General American ("GA Note") issued during 1999 and the $100.0 million 7 1/4% Senior Notes ("Senior Notes") issued in 1996. In addition, the provision for income taxes is generally calculated based on the overall operations of the Company and allocated to the segments. Tax expense (benefit) is not used as a basis of measuring segment profit/loss.
The consolidated provision for income taxes for continuing operations increased 77.3% in 2000 and decreased 20.4% in 1999 as a result of fluctuations in pre-tax income. Income tax expense from continuing operations represented approximately 39.5%, 42.0%, and 35.5% of pre-tax income for 2000, 1999, and 1998, respectively. The effective tax rate for 2000 and 1999 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 $15.1 million, $6.9 million, and $14.9 million related to the discontinued operations in 2000, 1999, and 1998, respectively. The effective tax rate on the discontinued operations was 35.0%, 36.0%, and 35.1% in 2000, 1999, and 1998, respectively.
Since December 31, 1998, the Company has formally reported its accident and health division as a discontinued operation. The accident and health business was placed into run-off, and all treaties were terminated at the earliest possible date. Notice was given to all cedants and retrocessionaires that all treaties were being cancelled at the expiration of their terms. If a treaty was continuous, a written Preliminary Notice of Cancellation was given, followed by a final notice within 90 days of the expiration date. The nature of the underlying risks is such that the claims may take several years to reach the reinsurers involved. Thus, the Company expects to pay claims out of existing reserves over a number of years as the level of business diminishes.
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, 2000 and 1999 was $89.1 million and $53.8 million, respectively. The balance as of December 31, 2000 includes an additional $25.0 million charge taken by the Company during the fourth quarter of 2000 based upon the most recent claims development to strengthen its reserves. 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 recission, 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 $23.7 million, $113.6 million, and $158.2 million for 2000, 1999, and 1998.
As RGA continues its expansion efforts, management continually analyzes capital adequacy issues. Funds generated through the Company's capital raising efforts are used for general corporate purposes, including, but not limited to, the immediate capital needs associated with the Company's primary businesses, dividends paid by RGA to its shareholders, and interest payments. On May 24, 2000, the Company entered into the Credit Agreement with a bank syndicate, under which it may borrow up to $140.0 million. Interest on borrowings is payable quarterly at rates based either on the prime, federal funds or LIBOR rates plus a base rate margin defined in the Credit Agreement. As of December 31, 2000, the Company had approximately $80.0 million outstanding under the Credit Agreement. The termination date of the Credit Agreement is May 24, 2003. On May 8, 2000, RGA UK, entered into a revolving credit facility, whereby it may borrow up to (pound)15.0 million (approximately $22.0 million). Interest on borrowings is payable quarterly at LIBOR rates plus a base rate margin defined in the agreement. As of December 31, 2000, the Company had borrowed (pound)6.0 million (approximately $8.8 million) under the U.K. Credit Agreement. The termination date of the U.K. Credit Agreement is May 8, 2003, extendable for two, one-year terms. On 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. On June 1, 1999, the Company
At RGA's annual stockholders' meeting on May 27, 1998, a new class of non-voting common stock was authorized. In June 1998, RGA completed a public offering in which it sold 7,417,500 shares of non-voting common stock, after split, traded on the New York Stock Exchange under the symbol RGA.A. The offering provided net proceeds of approximately $221.8 million that have been utilized to finance the continued growth of RGA's operations domestically and internationally. This non-voting class of stock was subsequently converted into voting common shares at a 0.97 conversion rate upon shareholder approval at a special meeting held September 14, 1999.
Historically, RGA has paid quarterly dividends ranging from $0.027 per share in 1993 to $0.06 per share in 2000. 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. The transfer of funds from the subsidiaries to RGA is subject to applicable insurance laws and regulations.
As of December 31, 2000, RGA Reinsurance had statutory capital and surplus of $499.1 million. 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 2001 would be $80.6 million. However, the applicable statutory provisions only permit an insurer to pay a shareholder dividend from unassigned surplus. As of December 31, 2000, RGA Reinsurance had unassigned surplus of $67.1 million. Any dividends paid by RGA Reinsurance would be paid to RCM, who in turn has restrictions related to its ability to pay dividends to RGA. As of December 31, 2000, RCM could pay a maximum dividend to RGA equal to its unassigned surplus, approximately $39.0 million. As of December 31, 2000, RGA Canada's statutory capital was $167.7 million. The maximum amount available for dividends by RGA Canada under the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR") is $28.7 million. Dividend payments from other subsidiaries and joint ventures are subject to regulations in the country of domicile.
The Company's net cash flows from consolidated operating activities for the years ended December 31, 2000, 1999, and 1998 were $192.8 million, $277.7 million, and $349.1 million, respectively. The sources of funds of the operating subsidiaries of RGA consist of direct investment by RGA, premiums and deposits received from ceding insurers and direct insureds, investment income, and proceeds from the sales and redemptions of investments. Premiums and deposits are generally received in advance of related claim payments and withdrawals. Funds are applied to policy claims and benefits, operating expenses, income taxes, and investment purchases. The Company believes the short-term cash requirements of its business operations will be sufficiently met by the positive cash flows generated. The Company expects to address its longer-term liquidity needs and capital required to support possible future growth and expansion of the business through equity or debt financing. Any public offering would only be made by means of a prospectus. Because its traditional life reinsurance business generates positive cash flow, the Company's future policy benefit liabilities generally are not subject to disintermediation risk, and because the reinsured treaties offer no withdrawal options and require no return of premium if canceled or allowed to lapse, the Company historically has had more than sufficient funds to pay claims and expenses. The Company expects any future increase in the need for liquidity due to relatively large policy loans or unanticipated material claim levels would be met first by operating cash flows and then by selling short-term investments or fixed maturity securities.
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, 2000, 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, 2000, more than 96% 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 23.3% of total investments as of December 31, 2000, an increase from 19.2% as of December 31, 1999. A majority of these securities were classified as corporate securities, with an average Standard and Poor's rating of A at December 31, 2000. The Company owns floating rate securities that represent approximately 4.7% of total investments 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.
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. Funds withheld at interest comprised approximately 20.6% and 20.9% of the Company's investments as of December 31, 2000 and 1999, respectively.
Policy loans comprised approximately 15.5% and 17.3% of the Company's investments as of December 31, 2000 and 1999, 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 2.8% and 5.6% of the Company's investments as of December 31, 2000 and 1999, respectively. The decrease is due to the sale of RGA Sudamerica, S.A. and its subsidiaries. As of December 31, 2000, 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 $8.0 million, with the average mortgage loan investment as of December 31, 2000, totaling approximately $3.1 million. The mortgage loan portfolio was diversified by geographic region and property type as discussed further in Note 6 of the notes to the consolidated financial statements.
The Company utilizes derivative financial instruments on a very limited basis, primarily to improve the management of the investment-related risks on a small portfolio of equity-indexed annuities. The Company uses both exchange-traded and customized, over-the-counter derivative financial instruments. RGA Reinsurance has established minimum credit quality standards for counterparties and seeks to obtain collateral or other credit supports. The Company limits its total financial exposure to counterparties. The Company's use of derivative financial instruments historically has not been significant to its financial position.
This risk arises from many of the Company's primary activities, as the Company invests substantial funds in interest-sensitive assets and also has certain interest-sensitive contract liabilities. The Company manages interest rate risk and credit risk to maximize the return on the Company's capital effectively and to preserve the value created by its business operations. As such, certain management monitoring processes are designed to minimize the impact of sudden and sustained changes in interest rates on fair value, cash flows, and net interest income.
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 off-balance sheet items in the event of a range of assumed changes in market interest rates. Interest sensitive contract liabilities are generally supported by related policy loans or funds withheld at interest. As these amounts are affected similarly by interest rate changes, the net impact on estimated fair values or cash flows is not considered material and is excluded from the following sensitivity analysis. This analysis assesses the risk of loss in market risk sensitive fixed rate instruments in the event of a sudden and sustained 100 to 300 basis points increase or decrease in the market interest rates. The
following table presents the Company's projected change in fair value of financial instruments for the various rate shock levels at its fiscal year ended December 31, 2000. All market risk sensitive instruments presented in this table are available for sale. RGA has no trading securities.
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, liabilities, and off-balance sheet items 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 sudden and sustained 100 to 300 basis points increase or decrease in the market interest rates. The following table presents the Company's projected change in cash flows in the near term associated with floating-rate instruments for various rate shock levels at December 31, 2000. All floating rate interest sensitive instruments presented in this table are classified as available for sale.
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, 2000, the Company's estimated changes in cash flows were within the targets outlined in the Company's investment policy.
Missouri has not amended its laws and rules to closely mirror SSAP, but the Missouri Department of Insurance has instructed its domestic insurers to conform to the new codified SSAP in anticipation of changes to applicable Missouri laws and rules during 2001. The Company estimates that the adoption of Codification as modified by the Missouri Department of Insurance, as currently interpreted, will not decrease statutory capital and surplus as of January 1, 2001.
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. Significant accounts that the Company deems to be sensitive to changes in estimates include deferred policy acquisition costs, premiums receivable, future policy benefits, and other policy claims and benefits. In all instances, actual results could differ materially from such estimates and assumptions.
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 of twenty percent or more, but less than or equal to fifty percent are recorded on the equity method of accounting. All significant intercompany balances and transactions have been eliminated.
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
Other invested assets, including derivative and equity securities, are carried at fair value.
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 $9.3 million.
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, are reflected as a direct charge or credit to accumulated other comprehensive income 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 statement 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 Policy Acquisition Costs. Costs of acquiring new business, which vary with and are primarily related to the production of new business, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include commissions and allowances as well as certain costs of policy issuance and underwriting. The Company performs periodic tests to determine that the cost of business acquired remains recoverable, and the cumulative amortization is re-estimated and adjusted by a cumulative charge or credit to current operations.
Other Reinsurance Balances. The Company assumes and retrocedes financial reinsurance contracts which 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.
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 characteristics of the plan of insurance, year of issue, age of insured, and other appropriate factors. Interest rates range from 6.0% to 8.0%. 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.
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, 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 Barbados, 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, Chilean, Malaysian, South African and United Kingdom subsidiaries are taxed under applicable local statutes.
In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts. 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. RGA Reinsurance has a number of retrocession arrangements whereby certain business in force is retroceded on an automatic or facultative basis. The Company also retrocedes most of its financial reinsurance business to other insurance companies to alleviate capital requirements created by this business.
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 over the premium paying periods of the policies. 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 as well as earnings in unconsolidated subsidiaries. Any fees that are collected in advance of the period benefited are deferred and recognized over the period benefited.
Revenues for interest-sensitive and investment-type products consist of investment income, policy charges for the cost of insurance, policy administration, and surrenders that have been assessed against policy account balances during the period. Interest-sensitive contract liabilities for these products represent policy account balances before applicable surrender charges. Deferred policy
acquisition costs are recognized as expenses over the term of the policies. Policy benefits and claims that are charged to expenses include claims incurred in the period in excess of related policy account balances and interest credited to policy account balances. The weighted average interest-crediting rates for interest-sensitive products were 6.7%, 6.4%, and 6.2%, during 2000, 1999, and 1998, respectively. Interest crediting rates for U.S. dollar-denominated investment-type contracts ranged from 5.3% to 7.2% during 2000, 5.2% to 6.7% during 1999, and 5.4% to 6.5% during 1998. Interest crediting rates for Mexican peso-denominated investment-type contracts ranged from 9.3% to 19.4% during 2000.
New Accounting Standards. In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but carries over most of the provisions of SFAS No. 125. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Adoption of the provisions of SFAS No. 140 effective for the year ended December 31, 2000 did not have a material effect on the Company's consolidated financial statements. The Company is in the process of quantifying the impact, if any, of the provisions of SFAS No. 140 effective for future periods.
In March 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles ("Codification"). The purpose of Codification is to establish a uniform set of accounting rules and regulations ("SSAP") for use by insurance companies in financial report preparation in connection with financial reporting to regulatory authorities. The proposed effective date of the uniform statutory accounting principles is January 1, 2001. As of December 31, 2000, the State of Missouri has not amended its laws and rules to closely mirror SSAP, but the Missouri Department of Insurance has instructed its domestic insurers to conform to the new codified SSAP in anticipation of changes to applicable Missouri laws and rules during 2001. The Company estimates that the adoption of Codification as modified by the Missouri Department of Insurance, as currently interpreted, will not decrease statutory capital and surplus as of January 1, 2001.
During 2000, the Company purchased 689,953 shares of treasury stock at an aggregate cost of $20.0 million. The Company plans to use the repurchased shares to support the future exercise of options granted under its stock option plan.
During 1999, the Company entered into a new agreement reinsuring a market value adjusted annuity product on a modified coinsurance basis. Pursuant to the terms of the reinsurance agreement, the annuity liabilities and funds supporting the liabilities are withheld by the ceding company. To reflect the Company's obligations under the agreement, the amounts withheld have been reflected in "Funds withheld at interest" and "Interest sensitive contract liabilities" on the balance sheet. As of December 31, 2000, approximately $457.9 million and $470.3 million related to this agreement were included in funds withheld at interest and interest sensitive contract liabilities, respectively. As of December 31, 1999, approximately $364.5 million and $395.7 million were included in funds withheld at interest and interest sensitive contract liabilities, respectively.
The amortized cost and estimated fair value of fixed maturity investments at December 31, 2000 are shown by contractual maturity for all securities except U.S. Government agencies mortgage-backed 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.
At December 31, 2000, the contractual maturities of investments in fixed maturity securities were as follows (in thousands):
Included in net realized losses are permanent write-downs of fixed maturity securities of approximately $10.1 million, $15.4 million, and $0.8 million in 2000, 1999, and 1998, respectively. Other losses during 2000 include $8.9 million in realized losses associated with the sale of subsidiaries.
Securities with an amortized cost of $3.1 million and $3.7 million were on deposit with various state or governmental insurance departments to comply with applicable insurance laws at December 31, 2000 and 1999, respectively. Securities with an amortized cost of $411.6 million and $321.4 million were held in trust in Canada at December 31, 2000 and 1999, respectively, to satisfy collateral requirements for reinsurance business conducted in Canada. Additionally, securities with an amortized cost of $821.5 million and $385.0 million at December 31, 2000 and 1999, respectively, were held in trust to satisfy collateral requirements of certain treaties.
The Company makes mortgage loans on income producing properties, such as apartments, retail and office buildings, light warehouses and light industrial facilities. Loan to value ratios at the time of loan approval are 64 percent or less for domestic mortgages. The distribution of mortgage loans by property type is as follows (dollars in thousands):
The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2000 and 1999. 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, 2000 and 1999 approximates fair value. 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 is estimated based on quoted market prices for corporations with similar credit quality.
The impact of reinsurance on life insurance in force is shown in the following schedule (in millions):
Provision for income taxes differed from the amounts computed by applying the U.S. federal income tax statutory rate of 35% to pre-tax income as a result of the following (in thousands):
As of December 31, 2000, and 1999, a valuation allowance for deferred tax assets of approximately $6.2 million and $3.7 million respectively, was provided on the net operating and capital losses of RGA, RGA Australia, GA Argentina, RGA South Africa, and RGA UK. The Company utilizes valuation allowances when it determines, based on the weight of available evidence, that it is more likely than not that the deferred income tax assets 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 are based on years of service and compensation levels. RGA Reinsurance's funding policy is to contribute the maximum amount deductible for federal income tax purposes annually.
The liabilities and periodic pension costs associated with the Company's employee benefit plans are not material to the consolidated financial statements.
Prior to September 1, 2000, Conning Asset Management Company ("Conning"), a majority-owned subsidiary of General American, 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 back securitization portfolios. The cost for Conning's services for the years ended December 31, 2000, 1999, and 1998, was approximately $1.7 million, $2.8 million, and $2.9 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 include legal, treasury, employee benefit, payroll, and personnel. The cost for the years ended December 31, 2000, 1999, and 1998, was approximately $2.6 million, $2.2 million, and $2.7 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.
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 and 1998 to General American, principally for office space, of approximately $1.1 million and $1.6 million, respectively.
The loss in 1999 includes the impact of reinsuring the General American funding agreements and an annuity coinsurance agreement with Cova Financial Services Life Insurance Company ("Cova"), a subsidiary of General American, both of which were recaptured during 1999. The funding agreement and annuity coinsurance agreement contributed net pre-tax earnings (loss) of $(47.8) million and $2.6 million, respectively, during 1999, including pre-tax net capital losses on disposal of investment securities of $52.9 million and $13.1 million, respectively. Deposits related to funding agreements and the annuity coinsurance at the time of recapture were $1.5 billion and $206.6 million, respectively.
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, 2000 are as follows:
Rent expenses amounted to approximately $4.7 million, $4.3 million, and $2.8 million for the years ended December 31, 2000, 1999, and 1998, respectively.
The statutory basis financial condition of RGA Reinsurance and RGA Canada, as of December 31, 2000 and 1999 was as follows (in thousands):
surplus at the preceding year-end, without regulatory approval. Pursuant to this calculation, RGA Reinsurance's allowable dividend without prior approval for 2001 would be $80.6 million. However, the applicable statutory provisions only permit an insurer to pay a shareholder dividend from unassigned surplus. As of December 31, 2000, RGA Reinsurance had unassigned surplus of $67.1 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 December 31, 2000, RCM could pay a maximum dividend to RGA equal to its unassigned surplus, approximately $38.9 million. The maximum amount available for dividends by RGA Canada under the Canadian Minimum Continuing Capital and Surplus Requirements ("MCCSR") is $28.7 million. Dividend payments from other subsidiaries and joint ventures are subject to regulations in the country of domicile.
The Company is currently a party in arbitrations that involve three separate group medical reinsurance coverages as discussed in Note 21 to the consolidated financial statements. 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.
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 credit. The letters of credit issued by banks represent a guarantee of performance under the reinsurance agreements. At December 31, 2000, there were approximately $34.9 million of outstanding bank letters of credit in favor of unaffiliated entities and $5.5 million in favor of General American.
On May 24, 2000, the Company entered into a credit agreement (the "Credit Agreement") with a bank syndicate, under which it may borrow up to $140.0 million to continue expansion of the Company's business. Interest on borrowings is payable quarterly at rates based either on the prime, federal funds or LIBOR rates plus a base rate margin (7.07% as of December 31, 2000) defined in the Credit Agreement. As of December 31, 2000, the Company had approximately $80.0 million outstanding under the Credit Agreement. The termination date of the Credit Agreement is May 24, 2003.
On June 1, 1999, the Company entered into a term loan agreement with General American, whereby it borrowed $75.0 million to continue expansion of the Company's business. Interest on the term loan is payable quarterly at 100 basis points over the British Bankers' Association three-month LIBOR rate (7.81% and 7.02% as of December 31, 2000 and 1999, respectively). The term loan matures on June 30, 2004.
Interest paid on debt during 2000, 1999, and 1998 was $16.9 million, $9.6 million and $8.8 million, respectively.
The Company has five main operational segments segregated primarily by geographic region: U.S., Canada, Latin America, Asia Pacific, and other international operations. The U.S. operations provide traditional life reinsurance and non-traditional reinsurance to domestic clients. Non-traditional business includes asset-intensive and financial reinsurance. Asset-intensive products include reinsurance of corporate-owned life insurance, annuities and, prior to September 30, 1999, funding agreement products. The Canada operations provide insurers with traditional reinsurance as well as assistance with capital management activity. The Latin America operations include direct life insurance through a joint venture and subsidiaries in Chile and Argentina. The Company sold its Chilean operations in April 2000. See Note 22. The Latin America operations also include traditional reinsurance and reinsurance of privatized pension products, primarily in Argentina. Asia Pacific operations provide primarily traditional life reinsurance through RGA Australia and RGA Reinsurance. Other international operations include traditional business from Europe and South Africa, in addition to other markets being developed by the Company. The operational segment results do not include the corporate investment activity, general corporate expenses and interest expense of RGA. In addition, the Company's discontinued accident and health operations are not reflected in the continuing operations of the Company.
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 and minority interest. 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 minority interest, and assets of the Company's continuing operations are summarized below.
Capital expenditures of each reporting segment were insignificant in the periods noted.
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, 2000, shares authorized for the granting of Benefits under the Plan and the Directors Plan totaled 4,111,933 and 112,500, respectively. Options are 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 2000, 1999, and 1998 was $9.40, $11.24, and $10.05 on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 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; 1998-expected dividend yield of 0.7%, risk-free interest rate of 5.50%, expected life of 6.0 years, and an expected rate of volatility of the stock of 24% over the expected life of the options.
The Company applies APB Opinion No. 25 in accounting for its Stock Plans and, accordingly, no compensation cost has been recognized for its stock options in the financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under Statement of Financial Accounting Standards No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. The effects of applying Statement of Financial Accounting Standards No. 123 may not be representative of the effects on reported net income for future years.
A summary of the components of net unrealized (depreciation) appreciation of balances carried at fair value is as follows (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. The Company continues to investigate to determine if any material indirect claims exposures arise from workers' compensation carve-out or personal accident plans through pool participations or high level common account retrocessional coverage. To date, no such material exposures have been identified. If any material exposure is identified at some point in the future, based upon the experience of others involved in these markets, any exposures will potentially be subject to claims for recission, arbitration, or litigation. Thus, resolution of any disputes will likely take several years. In any event, it is management's opinion that future developments, if any, will not materially adversely affect the Company's financial position.
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, 2000 and 1999 was $89.1 million and $53.8 million, respectively. The balance as of December 31, 2000 includes an additional $25.0 million charge taken by the Company during the fourth quarter of 2000 based upon the most recent claims development to strengthen its reserves. 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 recission, 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 $23.7 million, $113.6 million, and $158.2 million for 2000, 1999, and 1998.
As of April 1, 2000, the Company reached an agreement to sell its interest in RGA Sudamerica, S.A. and its subsidiaries, RGA Reinsurance Company Chile, S.A. and Bhif America Seguros de Vida, S.A. The transaction closed on April 27, 2000. The Company received approximately $26.5 million in proceeds and recorded a loss on the sale of approximately $8.6 million. The loss included $4.7 million of accumulated foreign currency depreciation on the Company's net investment and $1.4 million in previously unrealized depreciation of the investment portfolio. During 2000, the Company also sold its interest in RGA Bermuda for nominal consideration.
We have audited the accompanying consolidated balance sheet of Reinsurance Group of America, Incorporated and subsidiaries (the Company) as of December 31, 2000 and the related consolidated statements of income, stockholders' equity, and cash flows for the year ended December 31, 2000. Our audit also included the financial statement schedules as of December 31, 2000 and for the year 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 audit.
Under date of January 25, 2000, we reported on the consolidated balance sheet of Reinsurance Group of America, Incorporated and subsidiaries (the Company) as of December 31, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the two-year period ended December 31, 1999, as contained in the 2000 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 2000. In connection with our audits 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 audits.
/s/ Richard A. Liddy /s/ A. Greig Woodring Richard A. Liddy A. Greig Woodring Chairman of the Board of Directors President and Chief Executive Officer
(1) Loss from discontinued operations for the fourth quarter of 2000 includes a $25.0 million pre-tax charge to increase reserves. (2) Non-voting shares were issued on June 6, 1998 and were converted to voting shares on September 14, 1999. (3) Dividends are payable on voting and non-voting shares of common stock.