RGA is an insurance holding company that was formed on December 31, 1992. The consolidated financial statements include the assets, liabilities, and results of operations of RGA, RGA Reinsurance, RGA Barbados, RGA Americas, RGA Canada, RGA Australia, RGA UK and RGA Atlantic as well as several other subsidiaries subject to an ownership position of greater than fifty percent (collectively, the “Company”).
primary factors that drive profitability of the underlying treaties, namely investment income, fee income, and interest credited.
Income (loss) before income taxes increased by $80.6 million, or 205.7%, and $3.0 million, or 7.0%, in 2009 and 2008, respectively. The increase in income in 2009 is primarily due to a $22.9 million decrease in investment related losses, a $49.0 million increase in other revenues, a $20.5 million decrease in collateral finance facility expense and a $6.2 million decrease in interest expense slightly offset by a $15.6 million increase in other expenses. The increase in income in 2008 is primarily due to a $26.7 million increase in investment related losses, due to investment impairments, a $17.7 million decrease in investment income, largely offset by a $23.3 million decrease in collateral finance facility expense, a $10.8 million decrease in policy acquisition costs and other insurance expenses and a $15.2 million decrease in other operating expenses.
The following table displays DAC balances for asset-intensive business and non-asset-intensive business by segment as of December 31, 2009:
As of December 31, 2009, the Company estimates that approximately 91.2% of its DAC balance is collateralized by surrender fees due to the Company and the reduction of policy liabilities, in excess of termination values, upon surrender or lapse of a policy.
Historically, RGA has paid quarterly dividends ranging from $0.027 per share in 1993 to $0.09 per share in 2009. In January 2010, the quarterly dividend was increased to $0.12 per share. All future payments of dividends are at the discretion of RGA’s board of directors and will depend on the Company’s earnings, capital requirements, insurance regulatory conditions, operating conditions, and other such factors as the board of directors may deem relevant. The amount of dividends that RGA can pay will depend in part on the operations of its reinsurance subsidiaries. Under certain circumstances, RGA may be contractually prohibited from paying dividends on common stock, see discussion below in “Debt and Trust Preferred Securities”.
The Company does not invest in the common equity securities of Fannie Mae and Freddie Mac, both government sponsored entities; however, as of December 31, 2009 and 2008, the Company held in its general portfolio $41.0 million and $6.8 million, respectively, amortized cost in direct exposure in the form of senior unsecured agency and preferred securities with the increase attributable to purchases of senior unsecured agency debentures. Additionally, as of December 31, 2009 and 2008, the portfolios held by the Company’s ceding companies that support its funds withheld asset contain approximately $543.6 million and $359.6 million, respectively, in amortized cost of unsecured agency bond holdings and no equity exposure. As of December 31, 2009 and 2008, indirect exposure in the form of secured, structured mortgaged securities issued by Fannie Mae and Freddie Mac totaled approximately $0.9 billion and $1.1 billion, respectively, in amortized cost across the Company’s general and funds withheld portfolios. Including the funds withheld portfolios, the Company’s direct holdings in the form of preferred securities had a total book value of $0.7 million and $0.7 million at December 31, 2009 and 2008, respectively. As a result of the U.S. government intervention and cessation of dividend payments, the Company recorded an other-than-temporary impairment of its preferred holdings of Fannie Mae and Freddie Mac totaling $12.2 million in 2008. The Company did not record any further other-than-temporary impairments on its preferred holdings of Fannie Mae and Freddie Mac in 2009.
During 2009 and 2008, the Company sold fixed maturity securities and equity securities with fair values of $687.8 million and $536.7 million at losses of $73.0 million and $24.1 million, respectively, or at 90.4% and 95.7% of book value, respectively. The Company generally does not engage in short-term buying and selling of securities.
In September 2006, the FASB amended the general accounting principles for Fair Value Measurements and Disclosures as it relates to defining fair value, establishing a framework for measuring fair value, establishing a fair value hierarchy based on the inputs used to measure fair value and enhanced disclosure requirements for fair value measurements. The Company adopted the amendment effective January 1, 2008. The Company’s adoption of the amendment resulted in a pre-tax gain of approximately $3.9 million, included in interest credited, related primarily to the decrease in the fair value of embedded derivative liabilities associated with equity-indexed annuity products primarily from the incorporation of nonperformance risk, also referred to as the Company’s own credit risk, into the fair value calculation.
Cash and cash equivalents include cash on deposit and highly liquid debt instruments purchased with an original maturity of three months or less. The consolidated statements of cash flows includes the results of discontinued operations in net cash from operations for all years presented, as the effect of the discontinued operations on cash flows is not considered material.
Information regarding the Company’s loan valuation allowances for mortgage loans as of December 31, 2009 and 2008 are as follows (dollars in thousands):
CPI swaps are used by the Company primarily to economically hedge liabilities embedded in certain insurance products assumed by the Company whose value is directly affected by changes in a designated benchmark consumer price index. With a CPI swap transaction, the Company agrees with another party to exchange the actual amount of inflation realized over a specified period of time for a fixed amount of inflation determined at inception. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments to be made by the counterparty at each due date. Most of these swaps will require a single payment to be made by one counterparty at the maturity date of the swap.
The Company files income tax returns with the U.S. federal government and various state and foreign jurisdictions. The Company is under continuous examination by the Internal Revenue Service and is subject to audit by taxing authorities in other foreign jurisdictions in which the Company has significant business operations. The income tax years under examination vary by jurisdiction. With a few exceptions, the Company is no longer subject to U.S. federal, state and foreign tax examinations by tax authorities for years prior to 2006.
Results for the Pension and Other Benefits Plans are measured at December 31 for each year presented.
On September 12, 2008 (“the Divestiture Date”), the Company’s majority shareholder, General American Life Insurance Company (“General American”), disposed of its majority ownership in the Company. General American is a wholly-owned subsidiary of MetLife, Inc. (“MetLife”), a New York-based insurance and financial services holding company. Prior to the Divestiture Date, General American and MetLife provided certain administrative services to RGA and RGA Reinsurance. Such services included risk management and corporate travel. The cost of these services for the years ended December 31, 2008 and 2007 was approximately $1.8 million (through the Divestiture Date) and $2.8 million, respectively, included in other expenses. Management does not believe that the various amounts charged for these services would have been materially different if they had been incurred from an unrelated third party.
In February 2010, the board approved an incentive compensation package including 531,804 incentive stock options at $47.10 per share and 251,328 PCUs under the Plan. In addition, non-employee directors received 10,600 shares of common stock under the Directors Plan.