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| RGA > SEC Filings for RGA > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
interest in RGA by exchanging 29,243,539 of its shares of RGA common stock to
MetLife shareholders for shares of MetLife common stock. As of December 31,
2008, MetLife has a retained interest of 4.1% of RGA common stock.
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").
The Company is primarily engaged in traditional individual and group life,
asset-intensive, critical illness and financial reinsurance. RGA and its
predecessor, the Reinsurance Division of General American, have been engaged in
the business of life reinsurance since 1973. Approximately 68.0% of the
Company's 2008 net premiums were from its more established operations in North
America, represented by its U.S. and Canada segments.
The Company derives revenues primarily from renewal premiums from existing
reinsurance treaties, new business premiums from existing or new reinsurance
treaties, income earned on invested assets, and fees earned from financial
reinsurance transactions.
The Company's primary business is life reinsurance, which involves reinsuring
life insurance policies that are often in force for the remaining lifetime of
the underlying individuals insured, with premiums earned typically over a period
of 10 to 30 years. Each year, however, a portion of the business under existing
treaties terminates due to, among other things, lapses or voluntary surrenders
of underlying policies, deaths of insureds, and the exercise of recapture
options by ceding companies.
As is customary in the reinsurance business, life insurance clients
continually update, refine, and revise reinsurance information provided to the
Company. Such revised information is used by the Company in preparation of its
financial statements and the financial effects resulting from the incorporation
of revised data are reflected currently.
The Company's profitability primarily depends on the volume and amount of
death claims incurred and the ability to adequately price the risks it assumes.
Additionally, in 2008 market volatility, changes in risk-free rates and
increased credit spreads have resulted in significant losses associated with
embedded derivatives in the Company's U.S. Asset-Intensive sub-segment. While
death claims are reasonably predictable over a period of many years, claims
become less predictable over shorter periods and are subject to significant
fluctuation from quarter to quarter and year to year. Effective January 1, 2008,
the Company increased the maximum amount of coverage that it retains per life in
the U.S. from $6.0 million to $8.0 million. This increase does not affect
business written prior to January 1, 2008. Claims in excess of this retention
amount are retroceded to retrocessionaires; however, the Company remains fully
liable to the ceding company for the entire amount of risk it assumes. The
increase in the Company's U.S. retention limit from $6.0 million to $8.0 million
reduces the amount of premiums it pays to retrocessionaires, but increases the
maximum effect a single death claim can have on its results and therefore may
result in additional volatility to its results. For other countries,
particularly those with higher risk factors or smaller books of business, the
Company systematically reduces its retention. The Company has a number of
retrocession arrangements whereby certain business in force is retroceded on an
automatic or facultative basis.
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 over a number of
years as the level of business diminishes. The Company will report a loss to the
extent claims and related expenses exceed established reserves. See Note 21 -
"Discontinued Operations" in the Notes to Consolidated Financial Statements.
The Company has five main geographic-based operational segments, each of
which is a distinct reportable segment: U.S., Canada, Europe & South Africa,
Asia Pacific and Corporate and Other. The U.S. operations provide traditional
life, asset-intensive, and financial reinsurance primarily to domestic clients.
The Canada operations provide insurers with reinsurance of traditional life
products as well as creditor reinsurance, group life and health reinsurance and
non-guaranteed critical illness products. Europe & South Africa operations
include traditional life reinsurance and critical illness business from Europe &
South Africa, in addition to other markets the Company is developing. Asia
Pacific operations provide primarily traditional and group life reinsurance,
critical illness and, to a lesser extent, financial reinsurance. The Corporate
and Other segment results include the corporate investment activity, general
corporate expenses, interest expense of RGA, operations of RTP, a wholly-owned
subsidiary that develops and markets technology solutions for the insurance
industry, Argentine business in run-off, and the investment income and expense
associated with the Company's collateral finance facility. The Company's
discontinued accident and health business is excluded from continuing
operations. The Company measures segment performance based on profit or loss
from operations before income taxes.
The Company allocates capital to its segments based on an internally
developed risk capital model, the purpose of which is to measure the risk in the
business and to provide a basis upon which capital is deployed. The economic
capital model considers the unique and specific nature of the risks inherent in
RGA's businesses. As a result of the economic capital allocation process, a
portion of investment income and investment related gains and losses are
credited to the segments based on the level of allocated equity. In addition,
the segments are charged for excess capital utilized above the allocated
economic capital basis. This charge is included in policy acquisition costs and
other insurance expenses.
The Company believes it is one of the leading life reinsurers in North
America based on premiums and the amount of life reinsurance in force. The
Company believes, based on an industry survey of 2007 information prepared by
Munich American at the request of the Society of Actuaries Reinsurance Section
("SOA survey"), that it has the second largest market share in North America as
measured by life insurance in force. The Company's approach to the North
American market has been to:
• focus on large, high quality life insurers as clients;
• provide quality facultative underwriting and automatic reinsurance capacity; and
• deliver responsive and flexible service to its clients.
In 1994, the Company began using its North American underwriting expertise
and industry knowledge to expand into international markets and now has
subsidiaries, branches or representative offices in Australia, Barbados,
Bermuda, China, France, Germany, Hong Kong, India, Ireland, Italy, Japan,
Mexico, Poland, South Africa, South Korea, Spain, Taiwan and the United Kingdom.
These operations are included in either the Company's Asia Pacific segment or
its Europe & South Africa segment. The Company generally starts new operations
from the ground up in these markets as opposed to acquiring existing operations,
and it often enters these markets to support its North American clients as they
expand internationally. Based on information from a nationally recognized rating
agency, the Company believes it is the third largest life reinsurer in the world
based on 2007 net life reinsurance premiums. While the Company believes
information provided by the rating agency is generally reliable, the Company has
not independently verified the data. The rating agency does not guarantee the
accuracy and completeness of the information. The Company conducts business with
the majority of the largest U.S. and international life insurance companies. The
Company has also developed its capacity and expertise in the reinsurance of
asset-intensive products (primarily annuities and corporate-owned life
insurance) and financial reinsurance.
Industry Trends
The Company believes that the following trends in the life insurance industry
will continue to create demand for life reinsurance.
Outsourcing of Mortality. The SOA survey indicates that U.S. life reinsurance in
force has more than tripled from $2.2 trillion in 1997 to $7.5 trillion at
year-end 2007. The Company believes this trend reflects the continued
utilization by life insurance companies of reinsurance to manage capital and
mortality risk and to develop competitive products. However, the survey results
indicate a smaller percentage of new business was reinsured in 2007 than
previous years, which has caused premium growth rates in the U.S. life
reinsurance market to moderate from previous years. The Company believes the
decline in new business being reinsured is likely a reaction by ceding companies
to a broad-based increase in reinsurance rates in the market and stronger
capital positions maintained by ceding companies in recent years. However, the
Company believes reinsurers will continue to be an integral part of the life
insurance market due to their ability to efficiently aggregate a significant
volume of life insurance in force, creating economies of scale and greater
diversification of risk. As a result of having larger amounts of data at their
disposal compared to primary life insurance companies, reinsurers tend to have
better insights into mortality trends, creating more efficient pricing for
mortality risk.
Capital Management. Regulatory environments, rating agencies and competitive
business pressures are causing life insurers to reinsure as a means to:
• manage risk-based capital by shifting mortality and other risks to
reinsurers, thereby reducing amounts of reserves and capital they need to
maintain;
• release capital to pursue new business initiatives; and
• unlock the capital supporting, and value embedded in, non-core product lines.
Consolidation and Reorganization Within the Life Reinsurance and Life Insurance Industry. As a result of consolidations in recent years within the life reinsurance industry, there are fewer competitors. According to the
SOA survey, as of December 31, 2007, the top five companies held approximately
75.7% of the market share in North America based on life reinsurance in force,
whereas in 1997, the top five companies held approximately 47.7% of the market
share. As a consequence, the Company believes the life reinsurance pricing
environment will remain attractive for the remaining life reinsurers,
particularly those with a significant market presence and strong ratings.
The SOA surveys indicate that the authors obtained information from
participating or responding companies and do not guarantee the accuracy and
completeness of their information. Additionally, the surveys do not survey all
reinsurance companies, but the Company believes most of its principal
competitors are included. While the Company believes these surveys to be
generally reliable, the Company has not independently verified their data.
Additionally, merger and acquisition transactions within the life insurance
industry continue. The Company believes that reorganizations and consolidations
of life insurers will continue. As reinsurance services are increasingly used to
facilitate these transactions and manage risk, the Company expects demand for
its products to continue.
Changing Demographics of Insured Populations. The aging of the population in
North America is increasing demand for financial products among "baby boomers"
who are concerned about protecting their peak income stream and are considering
retirement and estate planning. The Company believes that this trend is likely
to result in continuing demand for annuity products and life insurance policies,
larger face amounts of life insurance policies and higher mortality risk taken
by life insurers, all of which should fuel the need for insurers to seek
reinsurance coverage.
The Company continues to follow a two-part business strategy to capitalize on
industry trends.
Continue Growth of North American Business. The Company's strategy includes
continuing to grow each of the following components of its North American
operations:
• Facultative Reinsurance. Based on discussions with the Company's clients,
an industry survey and informal knowledge about the industry, the Company
believes it is a leader in facultative underwriting in North America. The
Company intends to maintain that status by emphasizing its underwriting
standards, prompt response on quotes, competitive pricing, capacity and
flexibility in meeting customer needs. The Company believes its
facultative business has allowed it to develop close, long-standing client
relationships and generate additional business opportunities with its
facultative clients. During both 2007 and 2008, the Company's U.S.
facultative operation processed over 100,000 facultative submissions.
• Automatic Reinsurance. The Company intends to expand its presence in the North American automatic reinsurance market by using its mortality expertise and breadth of products and services to gain additional market share.
• In Force Block Reinsurance. There are occasions to grow the business by reinsuring in force blocks, as insurers and reinsurers seek to exit various non-core businesses and increase financial flexibility in order to, among other things, redeploy capital and pursue merger and acquisition activity.
Continue Expansion Into Selected Markets and Products. The Company's strategy
includes building upon the expertise and relationships developed in its North
American business platform to continue its expansion into selected markets and
products, including:
• International Markets. Management believes that international markets
offer opportunities for growth, and the Company intends to capitalize on
these opportunities by establishing a presence in selected markets. Since
1994, the Company has entered new markets internationally, including, in
the mid-to-late 1990's, Australia, Hong Kong, Japan, Malaysia, New
Zealand, South Africa, Spain, Taiwan and the UK, and beginning in 2002,
China, India and South Korea. The Company received regulatory approval to
open a representative office in China in 2005, opened representative
offices in Poland and Germany in 2006 and opened new offices in France and
Italy in 2007. Before entering new markets, the Company evaluates several
factors including:
o the size of the insured population,
o competition,
o the level of reinsurance penetration,
o regulation,
o existing clients with a presence in the market, and
o the economic, social and political environment.
As previously indicated, the Company generally starts new operations in these markets from the ground up as opposed to acquiring existing operations, and it often enters these markets to support its large international clients as they expand into additional markets. Many of the markets that the Company has entered since 1994, or may enter in the future, are not utilizing life reinsurance, including facultative life reinsurance, at the same levels as the North American market, and therefore, the Company believes these markets represent opportunities for increasing reinsurance penetration. In particular, management believes markets such as Japan and South Korea are beginning to realize the benefits that reinsurers bring to the life insurance market. Additionally, the Company believes that in certain European markets, ceding companies may want to reduce counterparty exposure to their existing life reinsurers, creating opportunities for the Company.
• Asset-intensive and Other Products. The Company intends to continue leveraging its existing client relationships and reinsurance expertise to create customized reinsurance products and solutions. Industry trends, particularly the increased pace of consolidation and reorganization among life insurance companies and changes in products and product distribution, are expected to enhance existing opportunities for asset-intensive and other products. The Company began reinsuring annuities with guaranteed minimum benefits on a limited basis in 2007. To date, most of the Company's asset-intensive business and other products have been written in the U.S.; however, the Company believes opportunities outside of the U.S. may further develop in the near future, particularly in Japan.
Results of Operations
Consolidated income from continuing operations decreased $120.5 million, or
39.1%, and increased $15.0 million, or 5.1%, in 2008 and 2007, respectively.
Diluted earnings per share from continuing operations were $2.88 for 2008
compared to $4.80 for 2007 and $4.65 for 2006. The decrease in income from
continuing operations in 2008 reflects an increase in investment related losses
due to the recognition of investment impairments and an increase in the
unrealized loss due to an unfavorable change in the value of embedded
derivatives within the U.S. Asset-Intensive sub-segment due primarily to the
impact of widening credit spreads in the U.S. debt markets. Also contributing to
the decrease in income in 2008 was unfavorable mortality experience in the U.S.
Traditional sub-segment. Offsetting these negative income items in 2008 were
increases in premium levels in all segments and favorable mortality experience
in the Canada, Europe & South Africa and Asia Pacific segments. The increase in
income from continuing operations in 2007 was due to increased premiums in all
segments and favorable mortality experience in the U.S. Traditional sub-segment
and Canada segment. The increase in 2007 was partially offset by an increase in
the unrealized loss due to an unfavorable change in the value of embedded
derivatives within the U.S. Asset-Intensive sub-segment due to the impact of
widening credit spreads in the U.S. debt markets and unfavorable mortality
experience in the Europe & South Africa and Asia Pacific segments. Foreign
currency exchange fluctuations resulted in a decrease to income from continuing
operations of approximately $4.2 million in 2008 and an increase of
approximately $8.0 million in 2007.
The unrealized loss due to an unfavorable change in value of embedded
derivatives is primarily related to reinsurance treaties written on a modified
coinsurance or funds withheld basis and subject to the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 133 Implementation Issue No. B36,
"Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments
That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Creditworthiness of the Obligor under Those Instruments" ("Issue
B36"). Additionally, changes in risk-free rates used in the present value
calculations of embedded derivatives associated with equity-indexed annuity
treaties ("EIAs") negatively affected income before income taxes in 2008 and
2007. Changes in these two types of embedded derivatives, after adjustment for
deferred acquisition costs and retrocession, resulted in a decrease in
consolidated income from continuing operations of approximately $103.2 million
and $26.2 million in 2008 and 2007, respectively. These fluctuations do not
affect current cash flows, crediting rates or spread performance on the
underlying treaties. Therefore, Company management believes it is helpful to
distinguish between the effects of changes in the valuation in these embedded
derivatives and the primary factors that drive profitability of the underlying
treaties, namely investment income, fee income, and interest credited.
Additionally, over the expected life of the underlying treaties, management
expects the cumulative effect of the embedded derivatives to be immaterial.
Consolidated net premiums increased $440.3 million, or 9.0%, and
$563.1 million, or 13.0%, in 2008 and 2007, respectively, due to growth in life
reinsurance in force and scheduled premium increases on treaties written on a
yearly-renewable-term basis. Consolidated assumed insurance in force was $2.1
trillion, $2.1 trillion and $1.9 trillion as of December 31, 2008, 2007 and
2006, respectively. The Company added new business production, measured by face
amount of insurance in force, of $305.0 billion, $302.4 billion and
$374.6 billion during 2008, 2007 and 2006, respectively. Management believes
industry consolidation and the established practice of reinsuring mortality
risks should continue to provide opportunities for growth, albeit at rates less
than historically experienced. Foreign currency fluctuations relative to the
prior year unfavorably affected net premiums by approximately $50.3 million in
2008 and favorably affected net premiums by approximately $116.1 million in
2007.
Consolidated investment income, net of related expenses, decreased
$36.6 million, or 4.0%, and increased $128.2 million, or 16.4%, in 2008 and
2007, respectively. The decrease in 2008 is primarily due to market value
changes related to the Company's funds withheld at interest investment related
to the reinsurance of certain equity indexed annuity products, which are
substantially offset by a corresponding change in interest credited to
policyholder account balances resulting in a negligible effect on net income.
Largely offsetting the decrease in investment income in 2008 was a larger
invested asset base and a higher effective investment portfolio yield. The
increase in 2007 is related to a larger invested asset base and a higher
effective investment portfolio yield. The cost basis of invested assets,
. . .
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