2013 Annual Report
Reinsurance Group of America, Incorporated®
To Our Shareholders:
With revenue exceeding $10 billion in 2013, RGA added significant value through new business
activity. RGA’s results for 2013 are best described as mixed, however, with operating income of
$4.95 per share1 falling well short of expectations. The shortfall was mainly related to results
from our operations in Australia, as all other geographic operations performed well.
RGA’s operations in Australia have experienced difficult claims patterns over the past four
years. In the second quarter, on the heels of freshly updated claims information, we
strengthened liabilities by A$300 million related to our Australia operations. Most of the reserve
increase involved lump-sum total permanent disability (TPD) benefits reinsured on a group
basis. At that time, we suspended quoting on new TPD accounts until market outlooks improve.
With this significant action, we believe future claims to be fully reserved, although the liability
runoff is anticipated to extend for many years. We believe we have taken the appropriate
measures to put these problems behind us. RGA views the Australian market as large, dynamic
and important to our future. Our capable team has been working tirelessly to remediate existing
business, and they look forward to working with our clients in developing a framework to move
ahead on a sustainable basis.
The Global Financial Solutions (GFS) business unit at RGA, which focuses on financial
reinsurance, asset-intensive reinsurance and longevity risk acceptance, enjoyed another
standout year in 2013. Over the past five years, this collection of globally operating GFS teams
has significantly increased its contribution to our worldwide operations. Financial reinsurance
excelled in 2013, with notable transactions in Asia, Europe and the U.S. These transactions
improve the capital efficiency and effectiveness of our customers; RGA’s expertise is
acknowledged and welcomed around the globe.
While the asset-intensive reinsurance business did not grow through new transactions in 2013,
its existing in force performed very well from an operating income perspective. In short, GFS
generated strong results in all product lines and across all geographies. We have assembled a
highly skilled team and look forward to continued success in this area.
1 Operating income is a non-GAAP financial measure. See page V for reconciliation of earnings per share from net income
to operating earnings per share.
I
In the U.S. marketplace, strong mortality results propelled RGA to a successful 2013. The
market shows little signs of growth as direct insurers continue to reinsure less and retain more
mortality risk; this has become a long-term trend. The market also appears to have become
increasingly competitive; nevertheless, our U.S. mortality markets team achieved growth of 3%
in premiums through a combination of providing unique value and seizing attractive
opportunities. Mortality risk assumption represents our largest and most mature business, one
in which we have significant expertise and understanding.
The group business in the U.S. enjoyed a year of positive growth. The overall strong earnings
performance of our U.S. group business over the past few years has been subject to some
volatility. In 2013, the group health line rebounded sharply from prior-year experience, while
group life claims exceeded anticipated targets. Strong revenue growth in group businesses
contributed to the good growth overall for RGA in the U.S.
Individual health business in the U.S., primarily composed of long-term care reinsurance, posted
another successful year with good experience and premium growth of 26%. RGA has
developed significant capability in this marketplace; however, we proceed cautiously, given the
abundant potential risks involved, which we believe are currently under control.
When the results from the entire U.S. Operations lines of business, including U.S. financial
reinsurance and asset-intensive reinsurance, are combined with the traditional businesses of
mortality markets, group life and health, and individual health, total U.S. operating income
increased by 13%2 over 2012, a very strong performance.
RGA Canada continued to occupy a leadership role in the Canadian life reinsurance market.
Revenues exceeded $1 billion for the year, an increase of 4% over 2012. Pre-tax operating
income decreased 7%3 from an extremely strong prior year, but met our expectations. Over the
course of the past several years, the diversity of RGA Canada’s revenue streams has increased
markedly with the development of group, annuity and living benefits businesses. We expect this
trend to continue and to provide increasing stability to our already-strong Canadian franchise.
2 Pre-tax operating income, a non-GAAP financial measure, for the U.S. operating segment was $579 million and $513
million during 2013 and 2012, respectively. These amounts exclude investment-related gains (losses), net of deferred
acquisition costs, of $(128) million and $80 million, and the change in value of embedded derivatives, net of deferred
acquisition costs, of $167 million and $44 million during 2013 and 2012, respectively.
3 Pre-tax operating income, a non-GAAP financial measure, for the Canada operating segment was $148 million and $159
million during 2013 and 2012, respectively. These amounts exclude investment-related gains of $17 million and $28 million
during 2013 and 2012, respectively.
II
Premiums in RGA’s Europe and South Africa segment increased by 2% from a high-growth year
in 2012, which included some large one-time premium transactions. In 2013, financial
reinsurance activity increased in Europe, and longevity reinsurance from the U.K. also
contributed significantly to RGA’s success. While some pockets of adverse claims appeared
here and there in this segment, as expected, the majority of our operations enjoyed favorable
results for the year.
For Asia Pacific, excluding Australia, RGA saw strong growth and excellent operating income.
Premiums exceeded $600 million for the year, an increase of 6% over 2012, despite currency
headwinds, and $66 million4 of pre-tax operating income represented a 12%4 increase. The
impressive momentum established over the past years can be expected to propel RGA forward
strongly in the future, in a region of the world where life insurance market penetration is growing
rapidly. RGA occupies strong market positions throughout Asia Pacific and has capable, highly
functioning operations to support continued growth in the region.
In 2013, RGA received a preparatory license to operate in China and has been working
diligently to prepare the infrastructure of our office there to begin comprehensive marketing
when full branch licensing is confirmed. We expect steady growth in China as we move forward
in a disciplined manner, providing expertise and capacity to the local market, beginning later in
2014.
Facultative cases submitted to RGA worldwide exceeded 580,000 during 2013, representing a
large, broad-based increase in demand for RGA underwriting services. Our facultative business,
long a strong suit for RGA, entails using RGA’s underwriting prowess to assess individual,
difficult-to-price cases. This high value-added capability relies upon strong underwriting, medical
expertise, and appropriate actuarial design. We expect to place approximately 50-55% of the
cases that have been submitted, and this production adds nicely to our overall new business
flow. RGA’s underwriting and medical teams accomplished another outstanding year of building
our facultative business in 2013.
Once again, in 2013, RGA’s portfolio investment yield declined from the previous year, a
reflection of the continued low interest rate environment. This creates downward pressure on
4 Pre-tax operating income (loss), a non-GAAP financial measure, for the Asia Pacific operating segment was $(227) million
and $37 million during 2013 and 2012, respectively. These amounts exclude investment-related gains (losses) of $(8)
million and $8 million during 2013 and 2012, respectively. Excluding Australia, Asia Pacific pre-tax operating income was
$66 million and $59 million during 2013 and 2012, respectively.
III
earnings, which has been cumulatively significant over the past several years. This downward
pressure abated somewhat in 2013 and, while we expect our portfolio yield to decline further in
2014, we estimate the negative earnings effect to be half or less that of a few prior years. RGA
carefully matches assets and liabilities on our annuity business and other interest-sensitive
operations, which derive earnings from spreads. The earnings effect from declining portfolio
yields has been felt mostly in our mortality segment, where we continue to invest new cash to
meet long-term obligations. In the near future, we expect to reach the end of negative effects on
operating income by low interest rates.
The changing investment climate, among other factors, has encouraged many of our clients in
the primary life insurance business to adopt growth agendas. This change, welcomed by all,
allows RGA to bring into full service many of the tools available to us to help insurers in their
efforts. We provide our partners with outstanding product development, customized underwriting
programs, expert analytic capabilities, state-of-the-art technological tools and an ability to unlock
trapped capital to support our customers’ agendas. We look forward to an active, productive
2014.
A. Greig Woodring
President and Chief Executive Officer
IV
This 2013 Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform
Act of 1995 including, among others, statements relating to projections of the strategies, earnings, revenues, income or loss,
ratios, future financial performance, and growth potential of the Company. 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. See “Item 7 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Forward Looking and Cautionary Statements” of the Company’s Annual
Report on Form 10-K, included herein.
Reconciliation of Consolidated Net Income to Operating Income
(Dollars and shares in thousands)
Net income
Capital losses, derivatives and other, net
Change in fair value of embedded derivatives
Deferred acquisition cost offset, net
Gain on repurchase of collateral finance facility securities
Total non-operating income (loss)
Operating income
For the year ended December 31, 2013
Amount
Diluted
earnings
per share
$ 418,837
$ 5.78
95,150
(189,278)
63,966
(30,229)
(60,391)
(0.83)
$ 358,446
$ 4.95
Average diluted shares outstanding
72,461
V
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended
December 31, 2013
X
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission file number 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact name of registrant as specified in its charter)
Missouri
(State or other jurisdiction
of incorporation or organization)
1370 Timberlake Manor Parkway, Chesterfield, Missouri
(Address of principal executive offices)
43-1627032
(I.R.S. Employer
Identification No.)
63017
(Zip Code)
Registrant’s telephone number, including area code: (636) 736-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
No
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [
]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrant is a shell company. Yes No
The aggregate market value of the stock held by non-affiliates of the registrant, based upon the closing sale price of the common
stock on June 30, 2013, as reported on the New York Stock Exchange was approximately $4.9 billion.
As of January 31, 2014, 70,790,937 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Definitive Proxy Statement in connection with the 2014 Annual Meeting of Shareholders (“the Proxy
Statement”) which will be filed with the Securities and Exchange Commission not later than 120 days after the Registrant’s fiscal
year ended December 31, 2013, are incorporated by reference in Part III of this Form 10-K.
2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
Item
1
1A
1B
2
3
4
5
6
7
7A
8
9
9A
9B
10
11
12
13
14
15
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholders Matters, and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Page
4
16
27
27
27
27
28
29
30
74
74
145
145
147
147
149
149
149
149
150
3
Item 1. BUSINESS
A.
Overview
Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed on December 31,
1992. The consolidated financial statements herein include the assets, liabilities, and results of operations of RGA, RGA Reinsurance
Company (“RGA Reinsurance”), Reinsurance Company of Missouri, Incorporated (“RCM”), RGA Reinsurance Company
(Barbados) Ltd. (“RGA Barbados”), RGA Americas Reinsurance Company, Ltd. (“RGA Americas”), RGA Atlantic Reinsurance
Company, Ltd. (“RGA Atlantic”), RGA Life Reinsurance Company of Canada (“RGA Canada”), RGA Reinsurance Company of
Australia, Limited (“RGA Australia”) and RGA International Reinsurance Company (“RGA International”) as well as several
other subsidiaries, all of which are wholly owned (collectively, the “Company”).
The Company is primarily engaged in the reinsurance of individual and group coverages for traditional life and health,
longevity, disability, asset-intensive (e.g., annuities) and critical illness products, and financial reinsurance. RGA and its
predecessor, the Reinsurance Division of General American Life Insurance Company, a Missouri life insurance company, have
been engaged in the business of life and health reinsurance since 1973. The Company’s operations in the U.S. and Canada contributed
approximately 66.7% of its consolidated net premiums during 2013. In 1994, the Company began expanding into international
markets and now has subsidiaries, branch operations, or representative offices in Australia, Barbados, Bermuda, China, France,
Germany, Hong Kong, India, Ireland, Italy, Japan, Mexico, the Netherlands, New Zealand, Poland, Singapore, South Africa, South
Korea, Spain, Taiwan, Turkey, the United Arab Emirates (“UAE”) and the United Kingdom (“UK”). RGA is considered one of
the leading life reinsurers in the world based on premiums and the amount of life reinsurance in force. As of December 31, 2013,
the Company had approximately $2.9 trillion of life reinsurance in force and $39.7 billion in consolidated assets.
Reinsurance is an arrangement under which an insurance company, the “reinsurer,” agrees to indemnify another insurance
company, the “ceding company,” for all or a portion of the insurance risks underwritten by the ceding company. Reinsurance is
designed to (i) reduce the net amount at risk on individual risks, thereby enabling the ceding company to increase the volume of
business it can underwrite, as well as increase the maximum risk it can underwrite on a single risk; (ii) stabilize operating results
by leveling fluctuations in the ceding company’s loss experience; (iii) assist the ceding company in meeting applicable regulatory
requirements; and (iv) enhance the ceding company’s financial strength and surplus position.
Life reinsurance primarily refers to reinsurance of individual or group-issued term, whole life, universal life, and joint
and last survivor insurance policies. Health and disability reinsurance primarily refers to reinsurance of individual or group health
policies. Critical illness reinsurance provides a benefit in the event of the diagnosis of a pre-defined critical illness. Asset-intensive
reinsurance primarily refers to reinsurance of annuities and corporate-owned life insurance. Longevity reinsurance primarily refers
to reinsurance of annuities in payout status. Financial reinsurance primarily involves assisting ceding companies in meeting
applicable regulatory requirements by enhancing the ceding companies’ financial strength and regulatory surplus position. Financial
reinsurance transactions do not qualify as reinsurance under U.S. generally accepted accounting principles (“GAAP”), due to the
low-risk nature of the transactions. These transactions are reported in accordance with deposit accounting guidelines. Ceding
companies will often contract with more than one reinsurance company to reinsure their automatic business. Group reinsurance
and facultative treaties are typically written with one reinsurer.
Reinsurance may be written on an indemnity or an assumption basis; however, the Company has not entered into any
assumption reinsurance contracts. Indemnity reinsurance does not discharge a ceding company from liability to the policyholder.
A ceding company is required to pay the full amount of its insurance obligations regardless of whether it is entitled or able to
receive payments from its reinsurer. In the case of assumption reinsurance, the ceding company is discharged from liability to the
policyholder, with such liability passed directly to the reinsurer. Reinsurers also may purchase reinsurance, known as retrocession
reinsurance, to transfer their risk exposure. Reinsurance companies enter into retrocession agreements for reasons similar to those
that drive primary insurers to purchase reinsurance.
Reinsurance is written on a facultative or automatic treaty basis. Facultative reinsurance is individually underwritten by
the reinsurer for each policy to be reinsured, with the pricing and other terms established based upon rates negotiated in advance.
Facultative reinsurance is normally purchased by ceding companies for medically impaired lives, unusual risks, or liabilities in
excess of the binding limits specified in their automatic reinsurance treaties.
An automatic reinsurance treaty provides that the ceding company will cede risks to a reinsurer on specified blocks of
policies where the underlying policies meet the ceding company’s underwriting criteria. In contrast to facultative reinsurance, the
reinsurer does not approve each individual policy being reinsured. Automatic reinsurance treaties generally provide that the
reinsurer will be liable for a portion of the risk associated with the specified policies written by the ceding company. Automatic
reinsurance treaties specify the ceding company’s binding limit, which is the maximum amount of risk on a given life that can be
ceded automatically to the reinsurer and that the reinsurer must accept. The binding limit may be stated either as a multiple of the
ceding company’s retention or as a stated dollar amount.
4
Facultative and automatic reinsurance may be written as yearly renewable term, coinsurance, modified coinsurance or
coinsurance with funds withheld. Under a yearly renewable term treaty, the reinsurer assumes primarily the mortality or morbidity
risk. Under a coinsurance arrangement, depending upon the terms of the contract, the reinsurer may share in the risk of loss due
to mortality or morbidity, lapses, and the investment risk, if any, inherent in the underlying policy. Modified coinsurance and
coinsurance with funds withheld differs from coinsurance in that the assets supporting the reserves are retained by the ceding
company.
Generally, the amount of life and health reinsurance ceded is stated on an excess or a quota share basis. Reinsurance on
an excess basis covers amounts in excess of an agreed-upon retention limit. Retention limits vary by ceding company and also
may vary by the age or underwriting classification of the insured, the product, and other factors. Under quota share reinsurance,
the ceding company states its retention in terms of a fixed percentage of the risk with the remainder to be ceded to one or more
reinsurers up to the maximum binding limit.
Reinsurance agreements, whether facultative or automatic, may include recapture rights, which permit the ceding company
to reassume all or a portion of the risk formerly ceded to the reinsurer after an agreed-upon period of time (generally 10 years) or
in some cases due to changes in the financial condition or ratings of the reinsurer. Recapture of business previously ceded does
not affect premiums ceded prior to the recapture of such business, but would reduce premiums in subsequent periods. The potential
adverse effects of recapture rights are mitigated by the following factors: (i) recapture rights vary by treaty and the risk of recapture
is a factor that is considered when pricing a reinsurance agreement; (ii) ceding companies generally may exercise their recapture
rights only to the extent they have increased their retention limits for the reinsured policies; and (iii) ceding companies generally
must recapture all of the policies eligible for recapture under the agreement in a particular year if any are recaptured (which prevents
a ceding company from recapturing only the most profitable policies). In addition, when a ceding company recaptures reinsured
policies, the reinsurer releases the reserves it maintained to support the recaptured portion of the policies.
Reinsurers may place assets in trust to satisfy collateral requirements for certain treaties. Securities with an amortized
cost of $2,124.7 million were held in trust for the benefit of certain RGA subsidiaries to satisfy collateral requirements for reinsurance
business at December 31, 2013. Additionally, securities with an amortized cost of $7,842.9 million as of December 31, 2013 were
held in trust to satisfy collateral requirements under certain third-party reinsurance treaties. Under certain conditions, the Company
may be obligated to move reinsurance from one subsidiary of RGA to another subsidiary of RGA or make payments under a given
treaty. These conditions include change in control or ratings of the subsidiary, insolvency, nonperformance under a treaty, or loss
of the subsidiary’s reinsurance license. If the Company is ever required to perform under these obligations, the risk to the
consolidated company under the reinsurance treaties would not change; however, additional capital may be required due to the
change in jurisdiction of the subsidiary reinsuring the business and may create a strain on liquidity, possibly causing a reduction
in dividend payments or hampering the Company’s ability to write new business or retain existing business.
During 2006, RGA’s subsidiary, Timberlake Financial, L.L.C. (“Timberlake Financial”), issued $850.0 million of Series
A Floating Rate Insured Notes due June 2036 in a private placement. The notes were issued to fund the collateral requirements
for statutory reserves required by the U.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX)
on specified term life insurance policies reinsured by RGA Reinsurance. Proceeds from the notes and the Company’s direct
investment in Timberlake Financial were deposited into a series of trust accounts as collateral and are not available to satisfy the
general obligations of the Company. As of December 31, 2013, the Company held assets in trust and in custody of $913.5 million
for this purpose, which is not included in the assets held in trust amounts above. See Note 14 - “Collateral Finance Facility” in
the Notes to Consolidated Financial Statements for additional information on the Timberlake Financial notes.
Some reinsurance agreements give the ceding company the right to force the reinsurer to place assets in trust for the
ceding company’s benefit to provide collateral for statutory reserve credits taken by the ceding company, in the event of a downgrade
of the reinsurer’s ratings to specified levels, generally non-investment grade levels, or if minimum levels of financial condition
are not maintained, or based on certain treaty performance measures. As of December 31, 2013, the Company had approximately
$1,552.3 million in statutory reserves associated with these types of treaties. Assets placed in trust continue to be owned by the
Company, but their use is restricted based on the terms of the trust agreement.
B.
Corporate Structure
RGA is an insurance holding company, the principal assets of which consist of the common stock of RCM, RGA Barbados,
RGA Americas, RGA Canada, RGA International and RGA Atlantic as well as several other subsidiaries, all of which are wholly
owned. Potential sources of funds for RGA to make stockholder dividend distributions and to fund debt service obligations are
dividends and interest paid to RGA by its subsidiaries, securities maintained in its investment portfolio, and proceeds from securities
offerings and borrowings. RCM’s primary sources of funds are dividend distributions paid by RGA Reinsurance Company, whose
principal source of funds is derived from current operations. Dividends paid by RGA’s reinsurance subsidiaries are subject to
regulatory restrictions of the respective governing bodies where each reinsurance subsidiary is domiciled.
5
The Company has five geographic-based or function-based operational segments: U.S., Canada, Europe & South
Africa, Asia Pacific and Corporate and Other. The U.S. operations are further segmented into traditional and non-traditional
businesses. The Company's segments primarily write reinsurance business that is wholly or partially retained in one or more of
RGA’s reinsurance subsidiaries. See “Segments” for more information concerning the Company’s operating segments.
Ratings
Insurer financial strength ratings, sometimes referred to as claims paying ratings, represent the opinions of rating
agencies regarding the financial ability of an insurance company to meet its obligations under an insurance policy. The Company’s
insurer financial strength ratings as of the date of this filing are listed in the table below for each rating agency that meets with
the Company’s management on a regular basis:
Insurer Financial Strength Ratings
RGA Reinsurance Company
RGA Life Reinsurance Company of Canada
RGA International Reinsurance Company
RGA Global Reinsurance Company
RGA Reinsurance Company of Australia Limited
A.M. Best
Company (1)
A+
Moody’s
Investors
Service (2)
A1
Standard &
Poor’s (3)
AA-
A+
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
Not Rated
AA-
AA-
AA-
AA-
(1) An A.M. Best Company (“A.M. Best”) insurer financial strength rating of “A+ (superior)” is the second highest out of fifteen possible ratings and is assigned
to companies that have, in A.M. Best’s opinion, a superior ability to meet their ongoing obligations to policyholders.
(2) A Moody’s Investors Service (“Moody’s”) insurer financial strength rating of “A1” (good) is the fifth highest rating out of twenty-one possible ratings and
indicates that Moody’s believes the insurance company offers good financial security; however, elements may be present which suggest a susceptibility to
impairment sometime in the future.
(3) A Standard & Poor’s (“S&P”) insurer financial strength rating of “AA-” (very strong) is the fourth highest rating out of twenty-one possible ratings. According
to S&P’s rating scale, a rating of “AA-” means that, in S&P’s opinion, the insurer has very strong financial security characteristics.
The ability to write reinsurance partially depends on a reinsurer’s financial condition and its financial strength ratings.
These ratings are based on a company’s ability to pay policyholder obligations and are not directed toward the protection of
investors. A ratings downgrade could adversely affect the Company’s ability to compete. See Item 1A – “Risk Factors” for more
on the potential effects of a ratings downgrade.
Regulation
The following table provides the jurisdiction of the regulatory authority for RGA’s primary operating and captive
Subsidiary
Regulatory Authority
subsidiaries:
RGA Reinsurance
Parkway Reinsurance Company (“Parkway Re”)
Rockwood Reinsurance Company (“Rockwood Re”)
Castlewood Reinsurance Company (“Castlewood Re”)
RCM
Missouri
Missouri
Missouri
Missouri
Missouri
Timberlake Reinsurance Company II (“Timberlake Re”)
South Carolina
RGA Canada
RGA Barbados
RGA Americas
Manor Reinsurance, Ltd. (“Manor Re”)
RGA Atlantic
RGA Worldwide Reinsurance Company, Ltd. (“RGA Worldwide”)
RGA Global Reinsurance Company, Ltd. (“RGA Global”);
RGA Australia
RGA International
Canada
Barbados
Barbados
Barbados
Barbados
Barbados
Bermuda
Australia
Ireland
RGA Reinsurance Company of South Africa, Limited (“RGA South Africa”)
South Africa
RGA Reinsurance, RGA Global and RGA International are also subject to regulations in the other jurisdictions in
which they are licensed or authorized to do business. Insurance laws and regulations, among other things, establish minimum
capital requirements and limit the amount of dividends, distributions, and intercompany payments affiliates can make without
regulatory approval. Additionally, insurance laws and regulations impose restrictions on the amounts and types of investments
that insurance companies may hold. In addition, new standards to be imposed upon European insurers by Solvency II, revisions
to the insurance laws of Bermuda similar to Solvency II, changes to regulations in Canada and revisions to the insurance holding
6
company laws in the U.S. and other jurisdictions could, in the near future, affect RGA International, RGA Global, RGA Canada,
RGA Reinsurance and other subsidiaries, and the clients of each to varying degrees.
General
The insurance laws and regulations, as well as the level of supervisory authority that may be exercised by the various
insurance departments, vary by jurisdiction, but generally grant broad powers to supervisory agencies or regulators to examine
and supervise insurance companies and insurance holding companies with respect to every significant aspect of the conduct of
the insurance business, including approval or modification of contractual arrangements. These laws and regulations generally
require insurance companies to meet certain solvency standards and asset tests, to maintain minimum standards of business conduct,
and to file certain reports with regulatory authorities, including information concerning their capital structure, ownership, and
financial condition; and subject insurers to potential assessments for amounts paid by guarantee funds. RGA Reinsurance and
RCM are subject to the state of Missouri’s adoption of the National Association of Insurance Commissioners (“NAIC”) Model
Audit Rule which requires an insurer to have an annual audit by an independent certified public accountant, provide an annual
management report of internal control over financial reporting, file the resulting reports with the Director of Insurance and maintain
an audit committee. Moreover, the new model insurance holding company standards promulgated by the NAIC during 2010 will
likely be adopted by the state of Missouri to become effective in 2014. These new standards will permit the Missouri regulator to
request and consider, in its regulation of the solvency of and capital standards for RGA Reinsurance and RCM, information about
the operations of other subsidiaries of RGA and the extent to which there may be deemed to exist contagion risk posed by those
operations. In addition, the RGA insurers are now the subject of a supervisory college which involves regular meetings of the
insurance regulators of the insurance entities of RGA. These regular meetings are expected to bring about additional questions
and perhaps even limitations on some of the activities of the insurance company members of RGA.
RGA’s reinsurance subsidiaries are required to file statutory financial statements in each jurisdiction in which they are
licensed and may be subject to periodic examinations by the insurance regulators of the jurisdictions in which each is licensed,
authorized, or accredited. To date, none of the regulators’ reports related to the Company’s periodic examinations have contained
material adverse findings.
Although some of the rates and policy terms of U.S. direct insurance agreements are regulated by state insurance
departments, the rates, policy terms, and conditions of reinsurance agreements generally are not subject to regulation by any
regulatory authority. The same is true outside of the U.S. In the U.S., however, the NAIC Model Law on Credit for Reinsurance,
which has been adopted in most states, imposes certain requirements for an insurer to take reserve credit for risk ceded to a reinsurer.
Generally, the reinsurer is required to be licensed or accredited in the insurer’s state of domicile, or post security for reserves
transferred to the reinsurer in the form of letters of credit or assets placed in trust. The NAIC Life and Health Reinsurance
Agreements Model Regulation, which has been passed in most states, imposes additional requirements for insurers to claim reserve
credit for reinsurance ceded (excluding yearly renewable term reinsurance and non-proportional reinsurance). These requirements
include bona fide risk transfer, an insolvency clause, written agreements, and filing of reinsurance agreements involving in force
business, among other things. Outside of the U.S., rules for reinsurance and requirements for minimum risk transfer are less specific
and are less likely to be published as rules, but nevertheless standards can be imposed to varying extents.
Regulation XXX, implemented in the U.S. for various types of life insurance business, significantly increased the level
of reserves that U.S. life insurance and life reinsurance companies must hold on their statutory financial statements for various
types of life insurance business, primarily certain level premium term life products. The reserve levels required under Regulation
XXX are normally in excess of reserves required under GAAP. In situations where primary insurers have reinsured business to
reinsurers that are unlicensed and unaccredited in the U.S., the reinsurer must provide collateral equal to its reinsurance reserves
in order for the ceding company to receive statutory financial statement credit. Reinsurers have historically utilized letters of credit
for the benefit of the ceding company, or have placed assets in trust for the benefit of the ceding company, or have used other
structures as the primary forms of collateral.
RGA Reinsurance is the primary subsidiary of the Company subject to Regulation XXX. In order to manage the effect
of Regulation XXX on its statutory financial statements, RGA Reinsurance has retroceded a majority of Regulation XXX reserves
to unaffiliated and affiliated unlicensed reinsurers and special purpose reinsurers, or captives. RGA Reinsurance’s statutory capital
may be significantly reduced if the unaffiliated or affiliated reinsurer is unable to provide the required collateral to support RGA
Reinsurance’s statutory reserve credits and RGA Reinsurance cannot find an alternative source for the collateral. In 2012, the
NAIC began a study of the uses life insurers make of special purpose reinsurers. While this study continues, it is possible that in
the future there may be some limitations on RGA Reinsurance’s ability to use special purpose vehicles to finance Regulation XXX
reserves. Such limitations could cause the Company to utilize alternative financing methods.
RGA Reinsurance, Parkway Re, Rockwood Re, Castlewood Re and RCM prepare statutory financial statements in
conformity with accounting practices prescribed or permitted by the State of Missouri. Timberlake Re prepares statutory financial
statements in conformity with accounting practices prescribed or permitted by the State of South Carolina. Both states require
domestic insurance companies to prepare their statutory financial statements in accordance with the NAIC Accounting Practices
and Procedures manual subject to any deviations permitted by each state’s insurance commissioner. The Company’s non-U.S.
7
subsidiaries are subject to the regulations and reporting requirements of their respective countries of domicile. In the future, a
convergence between U.S. reporting standards and International Financial Reporting Standards ("IFRS") or the replacement of
one or more individual U.S. reporting standards with individual IFRS may occur, which may affect the presentation of the
Company’s consolidated financial statements.
Capital Requirements
Risk-Based Capital (“RBC”) guidelines promulgated by the NAIC are applicable to RGA Reinsurance and RCM, and
identify minimum capital requirements based upon business levels and asset mix. RGA Reinsurance and RCM maintain capital
levels in excess of the amounts required by the applicable guidelines. Timberlake Re, Parkway Re, Rockwood Re and Castlewood
Re’s capital requirements are determined solely by their licensing orders issued by their states of domicile. Pursuant to its licensing
order issued by the South Carolina Department of Insurance, Timberlake Re only calculates RBC as a means of demonstrating its
ability to pay principal and interest on its surplus note issued to Timberlake Financial. It is not otherwise subject to the RBC
guidelines. Similarly, Parkway Re, Rockwood Re and Castlewood Re are not subject to the requirements of the NAIC’s RBC
guidelines. Regulations in international jurisdictions also require certain minimum capital levels, and subject the companies
operating there to oversight by the applicable regulatory bodies. RGA’s subsidiaries meet the minimum capital requirements in
their respective jurisdictions. The Company cannot predict the effect that any proposed or future legislation or rulemaking in the
countries in which it operates may have on the financial condition or operations of the Company or its subsidiaries.
Insurance Holding Company Regulations
RGA Reinsurance, Parkway Re, Rockwood Re, Castlewood Re and RCM are subject to regulation under the insurance
and insurance holding company statutes of Missouri. The Missouri insurance holding company laws and regulations generally
require insurance and reinsurance subsidiaries of insurance holding companies to register and file with the Missouri Department
of Insurance, Financial Institutions and Professional Registration (“MDI”), certain reports describing, among other information,
their capital structure, ownership, financial condition, certain intercompany transactions, and general business operations. The
Missouri insurance holding company statutes and regulations also require prior approval of, or in certain circumstances, prior
notice to the MDI of certain material intercompany transfers of assets, as well as certain transactions between insurance companies,
their parent companies and affiliates.
Under current Missouri insurance laws and regulations, unless (i) certain filings are made with the MDI, (ii) certain
requirements are met, including a public hearing, and (iii) approval or exemption is granted by the Director of the MDI, no person
may acquire any voting security or security convertible into a voting security of an insurance holding company, such as RGA,
which controls a Missouri insurance company, or merge with such an insurance holding company, if as a result of such transaction
such person would “control” the insurance holding company. “Control” is presumed to exist under Missouri law if a person directly
or indirectly owns or controls 10% or more of the voting securities of another person. New model insurance holding company
standards promulgated by the NAIC during 2010 will likely be adopted by the state of Missouri before the end of 2014 to require
greater disclosure to regulators of matters within the RGA group of companies.
Restrictions on Dividends and Distributions
Current Missouri law, applicable to RCM, and its wholly-owned subsidiary, RGA Reinsurance, permits the payment of
dividends or distributions which, together with dividends or distributions paid during the preceding twelve months, do not exceed
the greater of (i) 10% of statutory capital and surplus as of the preceding December 31, or (ii) statutory net gain from operations
for the preceding calendar year. Any proposed dividend in excess of this amount is considered an “extraordinary dividend” and
may not be paid until it has been approved, or a 30-day waiting period has passed during which it has not been disapproved, by
the Director of the MDI. Additionally, dividends may be paid only to the extent the insurer has unassigned surplus (as opposed to
contributed surplus). Pursuant to these restrictions, RCM’s and RGA Reinsurance’s allowable dividends without prior approval
for 2014 are approximately $145.9 million and $155.0 million, respectively. Any dividends paid by RGA Reinsurance would be
paid to RCM, which in turn has the ability to pay dividends to RGA. The MDI allows RCM to pay a dividend to RGA to the extent
RCM received the dividend from RGA Reinsurance, without limitation related to the level of unassigned surplus. Historically,
RGA has not relied upon dividends from its subsidiaries to fund its obligations. However, the regulatory limitations described
here could limit the Company’s financial flexibility in the future should it choose to or need to use subsidiary dividends as a
funding source for its obligations.
In contrast to current Missouri law, the NAIC Model Insurance Holding Company Act (the “Model Act”) defines an
extraordinary dividend as a dividend or distribution which, together with dividends or distributions paid during the preceding
twelve months, exceeds the lesser of (i) 10% of statutory capital and surplus as of the preceding December 31, or (ii) statutory net
gain from operations for the preceding calendar year. The Company is unable to predict whether, when, or if, Missouri will enact
a new measure for extraordinary dividends.
Missouri insurance laws and regulations also require that the statutory surplus of RCM and RGA Reinsurance following
any dividend or distribution be reasonable in relation to their outstanding liabilities and adequate to meet their financial needs.
8
The Director of the MDI may call for a rescission of the payment of a dividend or distribution by RGA Reinsurance or RCM that
would cause their statutory surplus to be inadequate under the standards of the Missouri insurance regulations.
Pursuant to the South Carolina Director of Insurance, Timberlake Re may declare dividends after June 2012 subject to
a minimum Total Adjusted Capital threshold, as defined by the NAIC’s RBC regulation. As of December 31, 2013, Timberlake
Re met the minimum required threshold. Any dividends paid by Timberlake Re would be paid to Timberlake Financial, which in
turn is subject to contractual limitations on the amount of dividends it can pay to RCM.
Dividend payments from other subsidiaries are subject to the regulations in the country of domicile, which are generally
based on their earnings and/or capital level.
Default or Liquidation
In the event that RGA defaults on any of its debt or other obligations, or becomes the subject of bankruptcy, liquidation,
or reorganization proceedings, the creditors and stockholders of RGA will have no right to proceed against the assets of any of
the subsidiaries of RGA. If any of RGA’s reinsurance subsidiaries were to be liquidated or dissolved, the liquidation or dissolution
would be conducted in accordance with the rules and regulations of the appropriate governing body in the state or country of the
subsidiary’s domicile. The creditors of any such reinsurance company, including, without limitation, holders of its reinsurance
agreements and state guaranty associations (if applicable), would be entitled to payment in full from such assets before RGA, as
a direct or indirect stockholder, would be entitled to receive any distributions or other payments from the remaining assets of the
liquidated or dissolved subsidiary.
Federal Regulation
With enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act during 2010, discussions will
continue in the Congress of the United States concerning the future of the McCarran-Ferguson Act, which exempts the “business
of insurance” from most federal laws, including anti-trust laws, to the extent such business is subject to state regulation. With the
McCarran-Ferguson Act exemption for the business of insurance, a reinsurer may set rate, underwriting and claims handling
standards for its ceding company clients to follow. Judicial decisions narrowing the definition of what constitutes the “business
of insurance” and repeal or modification of the McCarran-Ferguson Act may limit the ability of the Company, and RGA Reinsurance
in particular, to share information with respect to matters such as rate setting, underwriting, and claims management. Likewise,
discussions may again resume in the Congress of the United States concerning potential future regulation of insurance and
reinsurance at the Federal level. It is not possible to predict the effect of such decisions or changes in the law on the operation of
the Company, but it is now more likely than in the past that insurance or reinsurance may be regulated at the Federal level in the
U.S. Additionally, new credit for reinsurance rules in the U.S. allowing for collateral reduction has the potential to allow foreign
competitors to provide reinsurance to U.S. insurers with reduced collateral requirements. This may ultimately lower the cost at
which RGA Reinsurance’s competitors are able to provide reinsurance to U.S. insurers. In addition, the vesting of authority in the
U.S. Federal Reserve to review the solvency of certain financial institutions deemed systemically important could impose an
additional layer of solvency regulation upon selected insurers and reinsurers. While it is not expected that any RGA entity would
be deemed to be systemically important and become the subject to this additional scrutiny, the potential exists for one or more of
RGA Reinsurance’s clients to be given the designation subjecting the client’s reinsurance programs to scrutiny by the Federal
Reserve.
Environmental Considerations
Federal, state and local environmental laws and regulations apply to the Company’s ownership and operation of real
property. Inherent in owning and operating real property are the risks of hidden environmental liabilities and the costs of any
required clean-up. Under the laws of certain states, contamination of a property may give rise to a lien on the property to secure
recovery of the costs of clean-up. In several states, this lien has priority over the lien of an existing mortgage against such property.
In addition, in some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of
1980 (“CERCLA”), the Company may be liable, in certain circumstances, as an “owner” or “operator,” for costs of cleaning-up
releases or threatened releases of hazardous substances at a property mortgaged to it. The Company also risks environmental
liability when it forecloses on a property mortgaged to it, although Federal legislation provides for a safe harbor from CERCLA
liability for secured lenders that foreclose and sell the mortgaged real estate, provided that certain requirements are met. However,
there are circumstances in which actions taken could still expose the Company to CERCLA liability. Application of various other
federal and state environmental laws could also result in the imposition of liability on the Company for costs associated with
environmental hazards.
The Company routinely conducts environmental assessments prior to taking title to real estate through foreclosure on
real estate collateralizing mortgages that it holds. Although unexpected environmental liabilities can always arise, the Company
seeks to minimize this risk by undertaking these environmental assessments and complying with its internal procedures, and as a
result, the Company believes that any costs associated with compliance with environmental laws and regulations or any clean-up
of properties would not have a material adverse effect on the Company’s results of operations.
9
Underwriting
Automatic. The Company’s management determines whether to write automatic reinsurance business by considering
many factors, including the types of risks to be covered; the ceding company’s retention limit and binding authority, product, and
pricing assumptions; and the ceding company’s underwriting standards, financial strength and distribution systems. For automatic
business, the Company ensures that the underwriting standards, procedures and guidelines of its ceding companies are priced
appropriately and consistent with the Company’s expectations. To this end, the Company conducts periodic reviews of the ceding
companies’ underwriting and claims personnel and procedures.
Facultative. The Company has developed underwriting policies, procedures and standards with the objective of controlling
the quality of business written as well as its pricing. The Company’s underwriting process emphasizes close collaboration between
its underwriting, actuarial, and administration departments. Management periodically updates these underwriting policies,
procedures, and standards to account for changing industry conditions, market developments, and changes occurring in the field
of medical technology. These policies, procedures, and standards are documented in electronic underwriting manuals made available
to all the Company’s underwriters. The Company regularly performs internal reviews of both its underwriters and underwriting
process.
The Company’s management determines whether to accept facultative reinsurance business on a prospective insured by
reviewing the application, medical information and other underwriting information appropriate to the age of the prospective insured
and the face amount of the application. An assessment of medical and financial history follows with decisions based on underwriting
knowledge, manual review and consultation with the Company’s medical directors as necessary. Many facultative applications
involve individuals with multiple medical impairments, such as heart disease, high blood pressure, and diabetes, which require a
complex underwriting/mortality assessment. The Company employs medical directors and medical consultants to assist its
underwriters in making these assessments.
Pricing
Automatic and Facultative. The Company has pricing actuaries dedicated in every geographic market and in every product
category who develop reinsurance treaty rates following the Company’s policies, procedures and standards. Biometric assumptions
are based on the Company’s own mortality, morbidity and persistency experience, taking into account industry and client-specific
experience. Economic and asset-related pricing assumptions are based on current and long-term market conditions and are
developed by actuarial and investment personnel with appropriate experience and expertise. Management has established a high-
level oversight of the processes and results of these activities, which includes peer reviews in every market as well as centralized
procedures and processes for reviewing and auditing pricing activities.
Operations
Generally, the Company’s business has been obtained directly, rather than through brokers. The Company has an
experienced sales and marketing staff that works to provide responsive service and maintain existing relationships.
The Company’s administration, auditing, valuation and finance departments are responsible for treaty compliance
auditing, financial analysis of results, generation of internal management reports, and periodic audits of administrative and
underwriting practices. A significant effort is focused on periodic audits of administrative and underwriting practices, and treaty
compliance of clients.
The Company’s claims departments review and verify reinsurance claims, obtain the information necessary to evaluate
claims, and arrange for timely claims payments. Claims are subjected to a detailed review process to ensure that the risk was
properly ceded, the claim complies with the contract provisions, and the ceding company is current in the payment of reinsurance
premiums to the Company. In addition, the claims departments monitor both specific claims and the overall claims handling
procedures of ceding companies.
Customer Base
The Company provides reinsurance products primarily to the largest life insurance companies in the world. In 2013, the
Company’s five largest clients generated approximately $1,922.7 million or 22.4% of the Company’s gross premiums. In addition,
18 other clients each generated annual gross premiums of $100.0 million or more, and the aggregate gross premiums from these
clients represented approximately 32.6% of the Company’s gross premiums. No individual client generated 10% or more of the
Company’s total gross premiums. For the purpose of this disclosure, companies that are within the same insurance holding company
structure are combined.
Competition
Reinsurers compete on the basis of many factors, including financial strength, pricing and other terms and conditions of
reinsurance agreements, reputation, service, and experience in the types of business underwritten. The Company’s competition
includes other reinsurance companies as well as other providers of financial services. The Company believes that its primary
competitors on a global basis are currently the following, or their affiliates: Munich Re, Swiss Re, Hannover Re and SCOR Global
10
Re. In addition, the Company competes with Pacific Life Re, Prudential Financial and a number of other financial service providers
on annuity block business. However, within the reinsurance industry, the competitors can change from year to year.
Employees
As of December 31, 2013, the Company had 1,890 employees located throughout the world. None of these employees
are represented by a labor union.
C.
Segments
The Company obtains substantially all of its revenues through reinsurance agreements that cover a portfolio of life and
health insurance products, including term life, credit life, universal life, whole life, group life and health, joint and last survivor
insurance, critical illness, disability, longevity as well as asset-intensive (e.g., annuities) and financial reinsurance. Generally, the
Company, through various subsidiaries, has provided reinsurance for mortality, morbidity, and lapse risks associated with such
products. With respect to asset-intensive products, the Company has also provided reinsurance for investment-related risks.
The following table sets forth the Company’s premiums attributable to each of its segments for the periods indicated on
both a gross assumed basis and net of premiums ceded to third parties:
Gross and Net Premiums by Segment
(in millions)
2013
2012
2011
Amount
% of Total
Amount
% of Total
Amount
% of Total
Year Ended December 31,
$
$
$
4,663.4
67.2
1,016.5
1,359.7
1,466.8
(0.2)
8,573.4
4,518.0
22.5
962.3
1,331.6
1,419.8
(0.2)
54.4% $
4,460.4
54.2% $
4,124.2
53.5%
0.8
11.8
15.9
17.1
—
64.6
968.6
1,338.0
1,391.8
9.2
0.8
11.8
16.2
16.9
0.1
65.5
940.1
1,224.4
1,341.3
8.7
0.9
12.2
15.9
17.4
0.1
100.0% $
8,232.6
100.0% $
7,704.2
100.0%
54.7% $
4,308.8
54.5% $
3,979.5
54.2%
0.3
11.7
16.1
17.2
—
14.1
915.7
1,308.5
1,350.3
9.2
0.2
11.6
16.5
17.1
0.1
13.2
835.3
1,194.5
1,304.5
8.7
0.2
11.4
16.3
17.8
0.1
$
8,254.0
100.0% $
7,906.6
100.0% $
7,335.7
100.0%
Gross Premiums:
U.S. Traditional
U.S. Non-Traditional
Canada
Europe & South Africa
Asia Pacific
Corporate and Other
Total
Net Premiums:
U.S. Traditional
U.S. Non-Traditional
Canada
Europe & South Africa
Asia Pacific
Corporate and Other
Total
The following table sets forth selected information concerning assumed life reinsurance business in force by segment for
the periods indicated. The term “in force” refers to insurance policy face amounts or net amounts at risk.
Reinsurance Business In Force by Segment
(in billions)
U.S. Traditional
U.S. Non-Traditional
Canada
Europe & South Africa
Asia Pacific
Total
2013
As of December 31,
2012
2011
Amount
% of Total
Amount
% of Total
Amount
% of Total
$
1,385.6
47.9% $
1,393.3
47.6% $
1,343.0
50.4%
2.2
386.3
629.8
486.0
0.1
13.4
21.8
16.8
2.3
389.7
602.5
539.8
0.1
13.3
20.6
18.4
5.5
344.9
513.4
457.6
0.2
12.9
19.3
17.2
$
2,889.9
100.0% $
2,927.6
100.0% $
2,664.4
100.0%
Reinsurance business in force reflects the addition or acquisition of new life reinsurance business, offset by terminations
(e.g., life and group contract terminations, lapses of underlying policies, deaths of insureds, and recapture), changes in foreign
11
currency exchange, and any other changes in the amount of insurance in force. As a result of terminations and other changes,
assumed in force amounts at risk of $408.1 billion, $163.4 billion, and $304.8 billion were released in 2013, 2012 and 2011,
respectively. In 2011, the Asia Pacific segment experienced significant production relative to group business in Australia somewhat
offset by the termination of group contracts.
The following table sets forth selected information concerning assumed new business volume by segment for the indicated
periods. The term “volume” refers to insurance policy face amounts or net amounts at risk.
New Business Volume by Segment
(in billions)
U.S. Traditional
U.S. Non-Traditional
Canada
Europe & South Africa
Asia Pacific
Total
Year Ended December 31,
2013
2012
2011
Amount
% of Total
Amount
% of Total
Amount
% of Total
$
$
89.7
—
46.0
132.8
101.9
370.4
24.2% $
—
12.4
35.9
27.5
100.0% $
151.4
—
49.0
136.0
90.2
426.6
35.5% $
—
11.5
31.9
21.1
100.0% $
110.5
—
51.1
148.3
119.0
428.9
25.8%
—
11.9
34.6
27.7
100.0%
Additional information regarding the operations of the Company’s segments and geographic operations is contained in
Note 15 – “Segment Information” in the Notes to Consolidated Financial Statements.
U.S. Operations
The U.S. operations represented 55.0%, 54.7% and 54.4% of the Company’s net premiums in 2013, 2012 and 2011,
respectively. The U.S. operations market traditional life and health reinsurance, reinsurance of asset-intensive products, and
financial reinsurance, primarily to large U.S. life insurance companies.
Traditional Reinsurance
The U.S. Traditional segment provides life and health reinsurance to domestic clients for a variety of products through
yearly renewable term agreements, coinsurance, and modified coinsurance. This business has been accepted under many different
rate scales, with rates often tailored to suit the underlying product and the needs of the ceding company. Premiums typically vary
for smokers and non-smokers, males and females, and may include a preferred underwriting class discount. Reinsurance premiums
are paid in accordance with the treaty, regardless of the premium mode for the underlying primary insurance. This business is
made up of facultative and automatic treaty business.
Automatic business is generated pursuant to treaties which generally require that the underlying policies meet the ceding
company’s underwriting criteria, although in certain cases such policies may be rated substandard. In contrast to facultative
reinsurance, reinsurers do not engage in underwriting assessments of each risk assumed through an automatic treaty.
As the Company does not apply its underwriting standards to each policy ceded to it under automatic treaties, the U.S.
operations generally require ceding companies to retain a portion of the business written on an automatic basis, thereby increasing
the ceding companies’ incentives to underwrite risks with due care and, when appropriate, to contest claims diligently.
The U.S. facultative reinsurance operation involves the assessment of the risks inherent in (i) multiple impairments, such
as heart disease, high blood pressure, and diabetes; (ii) cases involving large policy face amounts; and (iii) financial risk cases,
i.e., cases involving policies disproportionately large in relation to the financial characteristics of the proposed insured. The U.S.
operations’ marketing efforts have focused on developing facultative relationships with client companies because management
believes facultative reinsurance represents a substantial segment of the reinsurance activity of many large insurance companies
and also serves as an effective means of expanding the U.S. operations’ automatic business. In 2013, 2012 and 2011, approximately
19.8%, 20.4%, and 20.4%, respectively, of the U.S. gross premiums were written on a facultative basis.
Only a portion of approved facultative applications ultimately result in reinsurance, as applicants for impaired risk policies
often submit applications to several primary insurers, which in turn seek facultative reinsurance from several reinsurers. Ultimately,
only one insurance company and one reinsurer are likely to obtain the business. The Company tracks the percentage of declined
and placed facultative applications on a client-by-client basis and generally works with clients to seek to maintain such percentages
at levels deemed acceptable. As the Company applies its underwriting standards to each application submitted to it facultatively,
it generally does not require ceding companies to retain a portion of the underlying risk when business is written on a facultative
basis.
12
In addition, several of the Company’s U.S. clients have purchased life insurance policies insuring the lives of their
executives. These policies have generally been issued to fund deferred compensation plans and have been reinsured with the
Company. The Company’s consolidated balance sheets included interest-sensitive contract reserves of $1.3 billion as of both
December 31, 2013 and 2012, and policy loans of $1.2 billion and $1.3 billion as of December 31, 2013 and 2012, respectively,
associated with this business.
Non-Traditional - Asset-Intensive Reinsurance
The Asset-intensive segment primarily concentrates on the investment risk within underlying annuities and corporate-
owned life insurance policies. These reinsurance agreements are mostly structured as coinsurance, coinsurance with funds withheld,
or modified coinsurance of primarily investment risk such that the Company recognizes profits or losses primarily from the spread
between the investment earnings and the interest credited on the underlying annuity contract liabilities. Reinsurance of such
business was reflected in interest-sensitive contract liabilities of approximately $11.0 billion and $11.5 billion as of December 31,
2013 and 2012, respectively.
Annuities are normally limited by the size of the deposit from any single depositor. The Company also reinsures certain
indexed annuities, variable annuity products that contain guaranteed minimum death or living benefits and corporate-owned life
insurance products. Corporate-owned life insurance normally involves a large number of insureds associated with each deposit,
and the Company’s underwriting guidelines limit the size of any single deposit. The individual policies associated with any single
deposit are typically issued within pre-set guaranteed issue parameters.
The Company primarily targets highly rated, financially secure companies as clients for asset-intensive business. These
companies may wish to limit their own exposure to certain products. Ongoing asset/liability analysis is required for the management
of asset-intensive business. The Company performs this analysis internally, in conjunction with asset/liability analysis performed
by the ceding companies.
Non-Traditional - Financial Reinsurance
The Company’s U.S. Financial Reinsurance segment assists ceding companies in meeting applicable regulatory
requirements while enhancing their financial strength and regulatory surplus position. The Company commits cash or assumes
regulatory insurance liabilities from the ceding companies. Generally, such amounts are offset by receivables from ceding
companies that are repaid by the future profits from the reinsured block of business. The Company structures its financial reinsurance
transactions so that the projected future profits of the underlying reinsured business significantly exceed the amount of regulatory
surplus provided to the ceding company.
The Company primarily targets highly rated insurance companies for financial reinsurance due to the credit risk associated
with this business. A careful analysis is performed before providing any regulatory surplus enhancement to the ceding company.
This analysis is intended to ensure that the Company understands the risks of the underlying insurance product and that the
transaction has a high likelihood of being repaid through the future profits of the underlying business. If the future profits of the
business are not sufficient to repay the Company or if the ceding company becomes financially distressed and is unable to make
payments under the treaty, the Company may incur losses. A staff of actuaries and accountants track experience for each treaty
on a quarterly basis in comparison to models of expected results.
Customer Base
The U.S. operations market life reinsurance primarily to the largest U.S. life insurance companies. The Company estimates
that approximately 87 of the top 100 U.S. life insurance companies, based on premiums, are clients. The treaties underlying this
business generally are terminable by either party on 90 days written notice, but only with respect to future new business. Existing
business generally is not terminable, unless the underlying policies terminate or are recaptured. In 2013, the five largest clients
generated approximately $1,600.7 million or 33.8% of U.S. operation’s gross premiums. In addition, 42 other clients each generated
annual gross premiums of $20.0 million or more, and the aggregate gross premiums from these clients represented approximately
56.7% of U.S. operation’s gross premiums. For the purpose of this disclosure, companies that are within the same insurance holding
company structure are combined.
Canada Operations
The Canada operations represented 11.7%, 11.6%, and 11.4% of the Company’s net premiums in 2013, 2012 and 2011,
respectively. In 2013, this segment assumed $46.0 billion in new business, predominately representing recurring new business,
as opposed to in force transactions. Approximately 85.9% of the 2013 recurring new business was written on an automatic basis.
The Company operates in Canada primarily through RGA Canada, a wholly-owned subsidiary. RGA Canada is a leading
life reinsurer in Canada, based on new individual life insurance production. It assists clients with capital management and mortality
and morbidity risk management and is primarily engaged in traditional individual life reinsurance, as well as creditor, group life
and health, critical illness, and longevity reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage
13
or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than individual life
insurance.
Clients include most of the life insurers in Canada, although the number of life insurers is much smaller compared to the
U.S. In 2013, the five largest clients generated approximately $541.1 million or 53.2% of Canada operation’s gross premiums. In
addition, 10 other clients each generated annual gross premiums of $20.0 million or more, and the aggregate gross premiums from
these clients represented approximately 39.3% of Canada operation’s gross premiums. For the purpose of this disclosure, companies
that are within the same insurance holding company structure are combined.
RGA Canada employs its own underwriting, actuarial, claims, pricing, accounting, systems, marketing and administrative
staff in offices located in Montreal and Toronto.
Europe & South Africa Operations
The Europe & South Africa operations represented 16.1%, 16.5%, and 16.3% of the Company’s net premiums in 2013,
2012 and 2011, respectively. This segment serves clients from subsidiaries, licensed branch offices and/or representative offices
primarily located in France, Germany, India, Ireland, Italy, Mexico, the Netherlands, Poland, South Africa, Spain, Turkey, the
UAE and the UK.
The principal types of reinsurance for this segment include life and health products through yearly renewable term and
coinsurance agreements, the reinsurance of critical illness coverage that provides a benefit in the event of the diagnosis of a pre-
defined critical illness and the reinsurance of longevity risk related to payout annuities. The reinsurance agreements of critical
illness coverage may be either facultative or automatic agreements. Premiums earned from critical illness coverage represented
19.2% of the total net premiums for this segment in 2013.
In 2013, the UK operations generated approximately $903.8 million, or 66.5% of the segment’s gross premiums. In 2013,
the five largest clients generated approximately $635.9 million or 46.8% of Europe & South Africa operation’s gross premiums.
In addition, 10 other clients each generated annual gross premiums of $20.0 million or more, and the aggregate gross premiums
from these clients represented approximately 24.7% of Europe & South Africa operation’s gross premiums. For the purpose of
this disclosure, companies that are within the same insurance holding company structure are combined.
RGA’s operations in the UK, Continental Europe, South Africa, India and Mexico employ their own underwriting,
actuarial, claims, pricing, accounting, marketing, and administration staffs with additional support services provided by the
Company’s staff in the U.S. and Canada.
Asia Pacific Operations
The Asia Pacific operations represented 17.2%, 17.1%, and 17.8% of the Company’s net premiums in 2013, 2012 and
2011, respectively. The Company has a presence in the Asia Pacific region with licensed branch offices and/or representative
offices in Hong Kong, Japan, South Korea, Taiwan, New Zealand, Labuan (Malaysia) and China. The Company also established
a reinsurance subsidiary in Australia in January 1996.
The principal types of reinsurance for this segment include life, critical illness, health, disability, superannuation, and
financial reinsurance. Superannuation is the Australian government mandated compulsory retirement savings program.
Superannuation funds accumulate retirement funds for employees, and in addition, offer life and disability insurance coverage.
Reinsurance agreements may be either facultative or automatic agreements covering primarily individual risks and, in some
markets, group risks. Premiums earned from critical illness coverage represented 17.4% of the total net premiums for this segment
in 2013.
The Australian operations generated approximately $833.5 million, or 56.8% of the total gross premiums for the Asia
Pacific operations in 2013. In 2013, the five largest clients generated approximately $607.5 million or 41.4% of Asia Pacific
operation’s gross premiums. In addition, 15 other clients each generated annual gross premiums of $20.0 million or more, and the
aggregate gross premiums from these clients represented approximately 38.9% of Asia Pacific operation’s gross premiums. For
the purpose of this disclosure, companies that are within the same insurance holding company structure are combined.
The Hong Kong, Labuan, Japan, Taiwan, China and South Korea offices provide full reinsurance services and are
supported by the Company’s U.S. and International Division Sydney offices. RGA Australia employs its own underwriting,
actuarial, claims, pricing, accounting, systems, marketing, and administration service with additional support provided by the
Company’s U.S. and International Division Sydney offices.
Corporate and Other
Corporate and Other operations include investment income from invested assets not allocated to support segment
operations and undeployed proceeds from the Company’s capital raising efforts, in addition to unallocated investment related
gains or losses. Corporate expenses consist of the offset to capital charges allocated to the operating segments within the policy
acquisition costs and other insurance expenses line item, unallocated overhead and executive costs, and interest expense related
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to debt. Additionally, Corporate and Other includes results from, among others, RGA Technology Partners, Inc. (“RTP”), a wholly-
owned subsidiary that develops and markets technology solutions for the insurance industry and the investment income and expense
associated with the Company’s collateral finance facilities.
D.
Financial Information About Foreign Operations
The Company’s foreign operations are primarily in Canada, the Asia Pacific region, Europe, and South Africa. Revenue,
income (loss) before income taxes, which include investment related gains (losses), interest expense, depreciation and amortization,
and identifiable assets attributable to these geographic regions are identified in Note 15 – “Segment Information” in the Notes to
Consolidated Financial Statements. Although there are risks inherent to foreign operations, such as currency fluctuations and
restrictions on the movement of funds, as described in Item 1A – “Risk Factors”, the Company’s financial position and results of
operations have not been materially adversely affected thereby to date.
E.
Available Information
Copies of the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-
K, and amendments to those reports are available free of charge through the Company’s website (www.rgare.com) as soon as
reasonably practicable after the Company electronically files such reports with the Securities and Exchange Commission
(www.sec.gov). Information provided on such websites does not constitute part of this Annual Report on Form 10-K.
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Item 1A. RISK FACTORS
In the Risk Factors below, we refer to the Company as “we,” “us,” or “our”. Investing in our securities involves certain
risks. Any of the following risks could materially adversely affect our business, results of operations, or financial condition and
could result in a loss of your investment. These risks are not exclusive, and additional risks to which we are subject include, but
are not limited to, the factors mentioned under “Forward-Looking and Cautionary Statements” in Item 7 below and the risks of
our businesses described elsewhere in this Annual Report on Form 10-K. Many of these risks are interrelated and occur under
similar business and economic conditions, and the occurrence of certain of them may in turn cause the emergence, or exacerbate
the effect, of others. Such a combination could materially increase the severity of the impact on our operations, liquidity and
financial condition.
Risks Related to Our Business
A downgrade in our ratings or in the ratings of our reinsurance subsidiaries could adversely affect our ability to
compete.
Our financial strength and credit ratings are important factors in our competitive position. Rating organizations
periodically review the financial performance and condition of insurers, including our reinsurance subsidiaries. These ratings are
based on an insurance company’s ability to pay its obligations and are not directed toward the protection of investors. Rating
organizations assign ratings based upon several factors. While most of the factors considered relate to the rated company, some
of the factors relate to general economic conditions and circumstances outside the rated company’s control. The various rating
agencies periodically review and evaluate our capital adequacy in accordance with their established guidelines and capital models.
In order to maintain our existing ratings, we may commit from time to time to manage our capital at levels commensurate with
such guidelines and models. If our capital levels are insufficient to fulfill any such commitments, we could be required to reduce
our risk profile by, for example, retroceding some of our business or by raising additional capital by issuing debt, hybrid, or equity
securities. Any such actions could have a material adverse impact on our earnings or materially dilute our shareholders’ equity
ownership interests.
Any downgrade in the ratings of our reinsurance subsidiaries could adversely affect their ability to sell products, retain
existing business, and compete for attractive acquisition opportunities. Ratings are subject to revision or withdrawal at any time
by the assigning rating organization. A rating is not a recommendation to buy, sell or hold securities, and each rating should be
evaluated independently of any other rating. We believe that the rating agencies consider the financial strength and flexibility of
a parent company and its consolidated operations when assigning a rating to a particular subsidiary of that company. The ability
of our subsidiaries to write reinsurance partially depends on their financial condition and is influenced by their ratings. In addition,
a downgrade in the rating or outlook of RGA, among other factors, could adversely affect our ability to raise and then contribute
capital to our subsidiaries for the purpose of facilitating their operations and growth. A downgrade could also increase our own
cost of capital. For example, the facility fee and interest rate for our syndicated revolving credit facility are based on our senior
long-term debt ratings. A decrease in those ratings could result in an increase in costs for that credit facility and others. Also, if
there is a downgrade in the rating of RGA, or any of our rated subsidiaries, some of our reinsurance contracts would require us
to post collateral to secure our obligations under these reinsurance contracts. Accordingly, we believe a ratings downgrade of
RGA, or any of our rated subsidiaries, could have a negative effect on our ability to conduct business.
We cannot assure you that actions taken by ratings agencies would not result in a material adverse effect on our business
and results of operations. In addition, it is unclear what effect, if any, a ratings change would have on the price of our securities
in the secondary market.
We make assumptions when pricing our products relating to mortality, morbidity, lapsation, investment returns and
expenses, and significant deviations in experience could negatively affect our financial results.
Our life reinsurance contracts expose us to mortality risk, which is the risk that the level of death claims may differ from
that which we assumed in pricing our reinsurance contracts. Some of our reinsurance contracts expose us to morbidity risk, which
is the risk that an insured person will become critically ill or disabled. Our risk analysis and underwriting processes are designed
with the objective of controlling the quality of the business and establishing appropriate pricing for the risks we assume. Among
other things, these processes rely heavily on our underwriting, our analysis of mortality and morbidity trends, lapse rates, expenses
and our understanding of medical impairments and their effect on mortality or morbidity.
We expect mortality, morbidity and lapse experience to fluctuate somewhat from period to period, but believe they should
remain reasonably predictable over a period of many years. Mortality, morbidity or lapse experience that is less favorable than
the mortality, morbidity or lapse rates that we used in pricing a reinsurance agreement will negatively affect our net income because
the premiums we receive for the risks we assume may not be sufficient to cover the claims and profit margin. Furthermore, even
if the total benefits paid over the life of the contract do not exceed the expected amount, unexpected increases in the incidence of
deaths or illness can cause us to pay more benefits in a given reporting period than expected, adversely affecting our net income
in any particular reporting period. Likewise, adverse experience could impair our ability to offset certain unamortized deferred
16
acquisition costs and adversely affect our net income in any particular reporting period. We perform annual tests to establish that
deferred policy acquisition costs remain recoverable at all times. These tests require us to make a significant number of assumptions.
If our financial performance significantly deteriorates to the point where a premium deficiency exists, a cumulative charge to
current operations will be recorded which may adversely affect our net income in a particular reporting period.
RGA is an insurance holding company, and our ability to pay principal, interest and/or dividends on securities is
limited.
RGA is an insurance holding company, with our principal assets consisting of the stock of our reinsurance company
subsidiaries, and substantially all of our income is derived from those subsidiaries. Our ability to pay principal and interest on any
debt securities or dividends on any preferred or common stock depends, in part, on the ability of our reinsurance company
subsidiaries, our principal sources of cash flow, to declare and distribute dividends or to advance money to RGA. We are not
permitted to pay common stock dividends or make payments of interest or principal on securities which rank equal or junior to
our subordinated debentures and junior subordinated debentures, until we pay any accrued and unpaid interest on such debentures.
Our reinsurance company subsidiaries are subject to various statutory and regulatory restrictions, applicable to insurance companies
generally, that limit the amount of cash dividends, loans and advances that those subsidiaries may pay to us. Covenants contained
in some of our debt agreements and regulations relating to capital requirements affecting some of our more significant subsidiaries
also restrict the ability of certain subsidiaries to pay dividends and other distributions and make loans to us. In addition, we cannot
assure you that more stringent dividend restrictions will not be adopted, as discussed below under “Our reinsurance subsidiaries
are highly regulated, and changes in these regulations could negatively affect our business.”
As a result of our insurance holding company structure, in the event of the insolvency, liquidation, reorganization,
dissolution or other winding-up of one of our reinsurance subsidiaries, all creditors of that subsidiary would be entitled to payment
in full out of the assets of such subsidiary before we, as shareholder, would be entitled to any payment. Our subsidiaries would
have to pay their direct creditors in full before our creditors, including holders of any class of common stock, preferred stock or
debt securities of RGA, could receive any payment from the assets of such subsidiaries.
The availability and cost of collateral, including letters of credit, asset trusts and other credit facilities, could adversely
affect our operations and financial condition.
Regulatory reserve requirements in various jurisdictions in which we operate may be significantly higher than the reserves
required under GAAP. Accordingly, we reinsure, or retrocede, business to affiliated and unaffiliated reinsurers to reduce the amount
of regulatory reserves and capital we are required to hold in certain jurisdictions. A regulation in the United States, commonly
referred to as Regulation XXX, requires a relatively high level of regulatory, or statutory, reserves that U.S. life insurance and life
reinsurance companies must hold on their statutory financial statements for various types of life insurance business, primarily
certain level term life products. The reserve levels required under Regulation XXX increase over time and are normally in excess
of reserves required under GAAP. The degree to which these reserves will increase and the ultimate level of reserves will depend
upon the mix of our business and future production levels in the United States. Based on the assumed rate of growth in our current
business plan, and the increasing level of regulatory reserves associated with some of this business, we expect the amount of
required regulatory reserves to grow significantly.
In order to reduce the effect of Regulation XXX, our principal U.S. operating subsidiary, RGA Reinsurance Company,
has retroceded Regulation XXX-related reserves to affiliated and unaffiliated reinsurers, including affiliated insurers governed by
captive insurance laws. Additionally, some of our reinsurance subsidiaries in foreign jurisdictions enter into various reinsurance
arrangements with affiliated and unaffiliated reinsurers from time to time in order to reduce statutory capital and reserve
requirements. We retrocede business to our affiliates to help reduce the amount of regulatory capital required by the laws of certain
jurisdictions, including the U.S. and the UK.
State insurance regulators have been scrutinizing the use of captive reinsurers to satisfy certain reserve requirements. If
a state insurance regulator that regulates any of our domestic insurance companies restricts the use of such captive reinsurers or
makes them less effective, our ability to reinsure certain products, maintain risk based capital ratios and deploy excess capital
could be adversely affected. As a result, we may need to alter the type and volume of business we reinsure, increase prices on
those products, and raise additional capital to support higher regulatory reserves or implement higher cost strategies, all of which
could adversely impact our competitive position and our results of operations and financial position. We cannot estimate the impact
of discontinuing or altering our captive strategy in response to potential regulatory changes due to many unknown variables such
as the cost and availability of alternative capital, potential changes in regulatory reserving requirements under a principle-based
reserving approach which would likely reduce required collateral, changes in acceptable collateral for statutory reserves, the
potential introduction of the concept of a “certified reinsurer” in the laws and regulations in certain jurisdictions where we operate,
the potential for increased pricing of products offered by us and the potential change in mix of products sold and/or offered by us
and/or our clients.
We believe that the capital required to support the business ceded to our affiliated reinsurers reflects a more realistic
expectation than the capital requirements applicable to our insurance subsidiaries that are retroceding such policies, which have
17
capital requirements that are often considered to be quite conservative. As a general matter, for us to reduce regulatory reserves
on business that we retrocede, the affiliated or unaffiliated reinsurer must provide an equal amount of regulatory-compliant
collateral. Such collateral may be provided in the form of a letter of credit from a commercial bank, through the placement of
assets in trust for our benefit, or through a capital markets securitization.
In connection with these reserve requirements, we face the following risks:
• The availability of collateral and the related cost of such collateral in the future could affect the type and volume of
business we reinsure and could increase our costs.
• We may need to raise additional capital to support higher regulatory reserves, which could increase our overall cost
of capital.
•
If we, or our retrocessionaires, are unable to obtain or provide sufficient collateral to support our statutory ceded
reserves, we may be required to increase regulatory reserves. In turn, this reserve increase could significantly reduce
our statutory capital levels and adversely affect our ability to satisfy required regulatory capital levels, unless we are
able to raise additional capital to contribute to our operating subsidiaries.
• Because term life insurance is a particularly price-sensitive product, any increase in insurance premiums charged on
these products by life insurance companies, in order to compensate them for the increased statutory reserve
requirements or higher costs of insurance they face, may result in a significant loss of volume in their life insurance
operations, which could, in turn, adversely affect our life reinsurance operations.
We cannot assure you that we will be able to implement actions to mitigate the effect of increasing regulatory reserve
requirements.
Changes in the equity markets, interest rates and/or volatility affects the profitability of variable annuities with guaranteed
living benefits that we reinsure; therefore, such changes may have a material adverse effect on our business and profitability.
We reinsure variable annuity products that include guaranteed minimum living benefits. These include guaranteed
minimum withdrawal benefits (“GMWB”), guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum
income benefits (“GMIB”). The amount of reserves related to these benefits is based on their fair value and is affected by changes
in equity markets, interest rates and volatility. Accordingly, strong equity markets, increases in interest rates and decreases in
volatility will generally decrease the fair value of the liabilities underlying the benefits.
Conversely, a decrease in the equity markets along with a decrease in interest rates and an increase in volatility will
generally result in an increase in the fair value of the liabilities underlying the benefits, which has the effect of increasing the
amount of reserves that we must carry. Such an increase in reserves would result in a charge to our earnings in the quarter in which
we increase our reserves. We maintain a customized dynamic hedge program that is designed to mitigate the risks associated with
income volatility around the change in reserves on guaranteed benefits. However, the hedge positions may not be effective to
exactly offset the changes in the carrying value of the guarantees due to, among other things, the time lag between changes in their
values and corresponding changes in the hedge positions, high levels of volatility in the equity markets and derivatives markets,
extreme swings in interest rates, contract holder behavior different than expected, and divergence between the performance of the
underlying funds and hedging indices. These factors, individually or collectively, may have a material adverse effect on our net
income, capital levels, financial condition or liquidity.
We are exposed to foreign currency risk.
We are a multi-national company with operations in numerous countries and, as a result, are exposed to foreign currency
risk to the extent that exchange rates of foreign currencies are subject to adverse change over time. The U.S. dollar value of our
net investments in foreign operations, our foreign currency transaction settlements and the periodic conversion of the foreign-
denominated earnings to U.S. dollars (our reporting currency) are each subject to adverse foreign exchange rate movements.
Approximately 39% of our revenues and 30% of our fixed maturity securities available for sale were denominated in currencies
other than the U.S. dollar as of and for the year ended December 31, 2013. We use foreign denominated revenues and investments
to fund foreign denominated expenses and liabilities when possible to mitigate exposure to foreign currency fluctuations.
We depend on the performance of others, and their failure to perform in a satisfactory manner would negatively affect us.
In the normal course of business, we seek to limit our exposure to losses from our reinsurance contracts by ceding a
portion of the reinsurance to other insurance enterprises or retrocessionaires. We cannot assure you that these insurance enterprises
or retrocessionaires will be able to fulfill their obligations to us. As of December 31, 2013, the retrocession pool members
participating in our excess retention pool that have been reviewed by A.M. Best Company, were rated “A-”, the fourth highest
rating out of fifteen possible ratings, or better. We are also subject to the risk that our clients will be unable to fulfill their obligations
to us under our reinsurance agreements with them.
We rely upon our insurance company clients to provide timely, accurate information. We may experience volatility in
our earnings as a result of erroneous or untimely reporting from our clients. We work closely with our clients and monitor their
18
reporting to minimize this risk. We also rely on original underwriting decisions made by our clients. We cannot assure you that
these processes or those of our clients will adequately control business quality or establish appropriate pricing.
For some reinsurance agreements, the ceding company withholds and legally owns and manages assets equal to the net
statutory reserves, and we reflect these assets as funds withheld at interest on our balance sheet. In the event that a ceding company
was to become insolvent, we would need to assert a claim on the assets supporting our reserve liabilities. We attempt to mitigate
our risk of loss by offsetting amounts for claims or allowances that we owe the ceding company with amounts that the ceding
company owes to us. We are subject to the investment performance on the withheld assets, although we do not directly control
them. We help to set, and monitor compliance with, the investment guidelines followed by these ceding companies. However, to
the extent that such investment guidelines are not appropriate, or to the extent that the ceding companies do not adhere to such
guidelines, our risk of loss could increase, which could materially adversely affect our financial condition and results of operations.
Interest earned on funds withheld represented 5.3% and 4.0% of our consolidated revenues in 2013 and 2012, respectively. Funds
withheld at interest totaled $5.8 billion and $5.6 billion at December 31, 2013 and 2012, respectively.
We use the services of third-party investment managers to manage certain assets where our investment management
expertise is limited. We rely on these investment managers to provide investment advice and execute investment transactions that
are within our investment policy guidelines. Poor performance on the part of our outside investment managers could negatively
affect our financial performance.
As with all financial services companies, our ability to conduct business depends on consumer confidence in the industry
and our financial strength. Actions of competitors, and financial difficulties of other companies in the industry, and related adverse
publicity, could undermine consumer confidence and harm our reputation.
Natural and man-made disasters, catastrophes, and events, including terrorist attacks, epidemics and pandemics, could
adversely affect our business and results of operations.
Natural disasters and terrorist attacks, as well as epidemics and pandemics, can adversely affect our business and results
of operations because they accelerate mortality and morbidity risk. Terrorist attacks on the United States and in other parts of the
world and the threat of future attacks could have a negative effect on our business.
We believe our reinsurance programs are sufficient to reasonably limit our net losses for individual life claims relating
to potential future natural disasters and terrorist attacks. However, the consequences of further natural disasters, terrorist attacks,
armed conflicts, epidemics and pandemics are unpredictable, and we may not be able to foresee events that could have an adverse
effect on our business.
We operate in a competitive industry which could adversely affect our market share.
The reinsurance industry is highly competitive, and we encounter significant competition in all lines of business from
other reinsurance companies, as well as competition from other providers of financial services. Our competitors vary by geographic
market, and many of our competitors have greater financial resources than we do. Our ability to compete depends on, among other
things, our ability to maintain strong financial strength ratings from rating agencies, pricing and other terms and conditions of
reinsurance agreements, and our reputation, service, and experience in the types of business that we underwrite. However,
competition from other reinsurers could adversely affect our competitive position.
We compete based on the strength of our underwriting operations, insights on mortality trends based on our large book
of business, and responsive service. We believe our quick response time to client requests for individual underwriting quotes and
our underwriting expertise are important elements to our strategy and lead to other business opportunities with our clients. Our
business will be adversely affected if we are unable to maintain these competitive advantages or if our international strategy is
not successful.
Tax law changes or a prolonged economic downturn could reduce the demand for insurance products, which could adversely
affect our business.
Under the U.S. Internal Revenue Code, income tax payable by policyholders on investment earnings is deferred during
the accumulation period of some life insurance and annuity products. To the extent that the U.S. Internal Revenue Code is revised
to reduce the tax-deferred status of life insurance and annuity products, or to increase the tax-deferred status of competing products,
all life insurance companies would be adversely affected with respect to their ability to sell such products, and, depending on
grandfathering provisions, by the surrenders of existing annuity contracts and life insurance policies. In addition, life insurance
products are often used to fund estate tax obligations. The estate tax provisions of the U.S. Internal Revenue Code have been
revised frequently in the recent past. If Congress adopts legislation in the future to reduce or eliminate the estate tax, our U.S. life
insurance company customers could face reduced demand for some of their life insurance products, which in turn could negatively
affect our reinsurance business. We cannot predict whether any tax legislation impacting corporate taxes or insurance products
will be enacted, what the specific terms of any such legislation will be or whether, if at all, any legislation would have a material
adverse effect on our financial condition and results of operations.
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A general economic downturn or a downturn in the equity and other capital markets could adversely affect the market
for many life insurance and annuity products. Factors including consumer spending, business investment, government spending,
the volatility and strength of the capital markets, deflation and inflation all affect the economic environment and thus the amount
of profitability of our business. An economic downturn may yield higher unemployment, lower family income, lower corporate
earnings, lower business investment and lower consumer spending, and could result in decreased demand for life insurance and
annuity products. Because we obtain substantially all of our revenues through reinsurance arrangements that cover a portfolio of
life insurance products, as well as annuities, our business would be harmed if the market for annuities or life insurance was adversely
affected. Therefore, adverse changes in the economy could affect earnings negatively and could have an adverse effect on our
business, results of operations and financial condition. In addition, the market for annuity reinsurance products is currently not
well developed, and we cannot assure you that such market will develop in the future.
Our reinsurance subsidiaries are highly regulated, and changes in these regulations could negatively affect our business.
Our reinsurance subsidiaries are subject to government regulation in each of the jurisdictions in which they are licensed
or authorized to do business. Governmental agencies have broad administrative power to regulate many aspects of the reinsurance
business, which may include reinsurance terms and capital adequacy. These agencies are concerned primarily with the protection
of policyholders and their direct insurers rather than shareholders or holders of debt securities. Moreover, insurance laws and
regulations, among other things, establish minimum capital requirements and limit the amount of dividends, tax distributions, and
other payments our reinsurance subsidiaries can make without prior regulatory approval, and impose restrictions on the amount
and type of investments we may hold. The State of Missouri also regulates our reinsurance subsidiaries as members of an insurance
holding company system. The regulation of our reinsurance subsidiaries in this way necessitates restrictions upon RGA as the
ultimate parent of these entities.
Recently, insurance regulators have increased their scrutiny of insurance holding company systems in the United States.
Much of the additional scrutiny is on activities of the insurance company’s entire group which includes the group’s parent company
and any non-insurance subsidiaries. While the laws have not extended regulation to RGA and its non-insurance subsidiaries, the
manner in which the insurance regulators regulate RGA’s insurance subsidiaries is now influencing the activities of all other entities
within the Company. In 2010, the National Association of Insurance Commissioners, or “NAIC”, amended its Model Insurance
Holding Company System Regulatory Act to provide for an expanded supervision of insurance groups operating in the United
States. The scope of these changes includes a review of enterprise risk management programs as well as expanded review of
agreements between licensed insurers and their group members. Twenty-six states have either adopted these new standards or are
in the process of adopting these standards. It is expected that Missouri will adopt these new standards as law before 2015.
At the United States Federal level, the Dodd-Frank Wall Street Reform and Consumer Protection Act established a Federal
Solvency Oversight Counsel to identify financial institutions, including insurers and reinsurers that are systemically important to
the United States financial system. A finding that RGA, or one of its U.S. subsidiaries, is systemically important could ultimately
subject the identified entity to additional capital requirements based on business levels and asset mix and other supervision. Such
additional scrutiny might also impact RGA’s ability to pay dividends. While we do not currently anticipate that the Financial
Stability Oversight Counsel will find RGA to be systemically important, a few of RGA’s client insurance companies have been
designated systemically important and we anticipate that more could receive such designation. Designation of RGA’s client
insurance companies could impact RGA through additional scrutiny of the client’s reinsurance programs with the Company,
including a consideration of the volume of business ceded by the insurer to the Company. Moreover, we cannot assure you that
more stringent restrictions will not be adopted from time to time in other jurisdictions in which our reinsurance subsidiaries are
domiciled, which could, under certain circumstances, significantly reduce dividends or other amounts payable to us by our
subsidiaries unless they obtain approval from insurance regulatory authorities. We cannot predict the effect that any NAIC
recommendations or proposed or future legislation or rule-making in the United States or elsewhere may have on our financial
condition or operations.
Acquisitions and significant transactions involve varying degrees of risk that could affect our profitability.
We have made, and may in the future make, strategic acquisitions, either of selected blocks of business or other companies.
The success of these acquisitions depends on, among other factors, our ability to appropriately price the acquired business.
Additionally, acquisitions may expose us to operational challenges and various risks, including:
•
•
•
•
the ability to integrate the acquired business operations and data with our systems;
the availability of funding sufficient to meet increased capital needs;
the ability to fund cash flow shortages that may occur if anticipated revenues are not realized or are delayed, whether
by general economic or market conditions or unforeseen internal difficulties; and
the possibility that the value of investments acquired in an acquisition, may be lower than expected or may diminish
due to credit defaults or changes in interest rates and that liabilities assumed may be greater than expected (due to,
among other factors, less favorable than expected mortality or morbidity experience).
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A failure to successfully manage the operational challenges and risks associated with or resulting from significant
transactions, including acquisitions, could adversely affect our financial condition or results of operations.
Our international operations involve inherent risks.
In 2013, approximately 33.3% of our net premiums came from our operations in Europe & South Africa and Asia Pacific.
One of our strategies is to grow these international operations. International operations subject us to various inherent risks. In
addition to the regulatory and foreign currency risks identified above, other risks include the following:
• managing the growth of these operations effectively, particularly given the recent rates of growth;
•
•
•
•
changes in mortality and morbidity experience and the supply and demand for our products that are specific to these
markets and that may be difficult to anticipate;
political and economic instability in the regions of the world where we operate;
uncertainty arising out of foreign government sovereignty over our international operations; and
potentially uncertain or adverse tax consequences, including the repatriation of earnings from our non-U.S.
subsidiaries.
Some of our international operations are in emerging markets where these risks are heightened and we anticipate that
we will continue to do business in such markets. Our pricing assumptions may be less predictable in emerging markets, and
deviations in actual experience from these assumptions could impact or profitability in these markets. Additionally, lack of legal
certainty and stability in the emerging markets exposes us to increased risk of disruption, to adverse or unpredictable actions by
regulators and may make it more difficult for us to enforce our contracts, which may negatively impact our business.
We cannot assure you that we will be able to manage these risks effectively or that they will not have an adverse effect
on our business, financial condition or results of operations.
Our risk management policies and procedures could leave us exposed to unidentified or unanticipated risk, which could
negatively affect our business or result in losses.
Our risk management policies and procedures to identify, monitor, and manage both internal and external risks may not
predict future exposures, which could be different or significantly greater than expected. These identified risks may not be the
only risks facing us. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may
adversely affect our business, financial condition and/or operating results.
Unanticipated events affecting our disaster recovery systems and business continuity planning could impair our ability to
conduct business.
In the event of a disaster such as a natural catastrophe, an industrial accident, a blackout, a computer virus, a terrorist
attack or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to
conduct business and on our results of operations and financial position, particularly if those problems affect our computer-based
data processing, transmission, storage and retrieval systems and destroy valuable data. We depend heavily upon computer systems
to provide reliable service, data and reports. Like other global companies, we have experienced threats to our data and systems
from time to time, but we have not experienced a material breach of cyber security. Administrative and technical controls, security
measures and other preventative actions we take to reduce the risk of such incidents and protect our information technology may
not be sufficient to prevent physical and electronic break-ins, and similar disruptions from unauthorized tampering with our
computer systems. In addition, in the event that a significant number of our managers were unavailable in the event of a disaster,
our ability to effectively conduct business could be severely compromised. These interruptions also may interfere with our clients’
ability to provide data and other information and our employees’ ability to perform their job responsibilities.
Risks Related to Our Investments
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital
and cost of capital.
The capital and credit markets experience varying degrees of volatility and disruption. In some periods, the markets have
exerted downward pressure on availability of liquidity and credit capacity for certain issuers.
We need liquidity to pay our operating expenses, interest on our debt and dividends on our capital stock and to replace
certain maturing liabilities. Without sufficient liquidity, we will be forced to curtail our operations, and our business will suffer.
The principal sources of our liquidity are reinsurance premiums under reinsurance treaties and cash flow from our investment
portfolio and other assets. Sources of liquidity in normal markets also include proceeds from the issuance of a variety of short-
and long-term instruments, including medium-and long-term debt, subordinated and junior subordinated debt securities, capital
securities and common stock.
In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of
additional financing will depend on a variety of factors such as market conditions, the general availability of equity, credit, the
21
volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity,
as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects.
Similarly, our access to funds may be impaired if regulatory authorities or rating agencies take negative actions against us. Our
internal sources of liquidity may prove to be insufficient, and in such case, we may not be able to successfully obtain additional
financing on favorable terms, or at all.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital required to
operate our business, most significantly our reinsurance operations. Such market conditions may limit our ability to replace, in a
timely manner, maturing liabilities; satisfy statutory capital requirements; generate fee income and market-related revenue to meet
liquidity needs; and access the capital necessary to grow our business. As such, we may be forced to delay raising capital, issue
shorter tenor securities than we prefer, or bear an unattractive cost of capital which could decrease our profitability and significantly
reduce our financial flexibility. Further, our ability to finance our statutory reserve requirements depends on marketplace conditions.
If marketplace capacity is limited for a prolonged period of time, our ability to obtain new funding for such purposes may be
hindered and, as a result, it may limit or adversely affect our ability to write additional business in a cost-effective manner. Our
results of operations could be materially adversely affected by disruptions in the financial markets.
Difficult conditions in the global capital markets and the economy generally may materially adversely affect our business,
results of operations and financial condition.
Our results of operations, financial condition, cash flows and statutory capital position are materially affected by conditions
in the global capital markets and the economy generally, both in the United States and elsewhere around the world. Poor economic
conditions, volatility and disruptions in capital markets or financial asset classes can have an adverse effect on our business because
our investment portfolio and some of our liabilities are sensitive to changing market factors. Additionally, disruptions in one market
or asset class can also spread to other markets or asset classes. Past economic uncertainties and weakness and disruption of the
financial markets around the world have led to concerns over capital markets access and the solvency of certain European Union
member states and of financial institutions that have significant direct or indirect exposure to debt issued by such countries. While
the governments of certain European Union member states have either enacted measures to address their debt problems or
demonstrated willingness to negotiate a solution to these problems, it is uncertain how effective any measures that have been
adopted or proposed would be in resolving concerns regarding sovereign debt in those countries.
Concerns over U.S. fiscal policy and the trajectory of the U.S. national debt could have severe repercussions to the U.S.
and global credit and financial markets, further exacerbate concerns over sovereign debt and could disrupt economic activity in
the U.S. and elsewhere. As a result, our access to, or cost of, liquidity may deteriorate. In 2011, S&P downgraded the AAA rating
on U.S. Treasury securities to AA+ with a negative outlook, and in October 2013 Fitch warned that it may downgrade its credit
rating of U.S. national debt. As a result of uncertainty regarding U.S. national debt, the market value of some of our investments
may decrease, and our capital adequacy could be adversely affected. Further downgrades, together with the sustained current
trajectory of the U.S. national debt, could have adverse effects on our business, financial condition and results of operations.
These events and continuing market upheavals may have an adverse effect on us, in part because we have a large investment
portfolio and are also dependent upon customer behavior. Our revenues may decline in such circumstances and our profit margins
may erode. In addition, in the event of extreme prolonged market events, such as the global credit crisis, we could incur significant
investment-related losses. Even in the absence of a market downturn, we are exposed to substantial risk of loss due to market
volatility.
If our investment strategy is unsuccessful, we could suffer losses.
The success of our investment strategy is crucial to the success of our business. In particular, we structure our investments
to match our anticipated liabilities under reinsurance treaties to the extent we believe necessary. If our calculations with respect
to these reinsurance liabilities are incorrect, or if we improperly structure our investments to match such liabilities, we could be
forced to liquidate investments prior to maturity at a significant loss.
Our investment guidelines permit us to invest up to 10% of our investment portfolio in non-investment grade fixed
maturity securities. Those guidelines also permit us to make and invest in commercial mortgage loans. While any investment
carries some risk, the risks associated with lower-rated securities are greater than the risks associated with investment grade
securities. The risk of loss of principal or interest through default is greater because lower-rated securities are usually unsecured
and are often subordinated to an issuer’s other obligations. Additionally, the issuers of these securities frequently have relatively
high debt levels and are thus more sensitive to difficult economic conditions, specific corporate developments and rising interest
rates, which could impair an issuer’s capacity or willingness to meet its financial commitment on such lower-rated securities. As
a result, the market price of these securities may be quite volatile, and the risk of loss is greater.
The success of any investment activity is affected by general economic conditions, which may adversely affect the markets
for interest-rate-sensitive securities, mortgages and equity securities, including the level and volatility of interest rates and the
extent and timing of investor participation in such markets. Unexpected volatility or illiquidity in the markets in which we directly
22
or indirectly hold positions could adversely affect us. For additional information on risks related to our investments, see “Risks
Related to Our Investments” below.
Interest rate fluctuations could negatively affect the income we derive from the difference between the interest rates we
earn on our investments and interest we pay under our reinsurance contracts.
Significant changes in interest rates expose reinsurance companies to the risk of reduced investment income or actual
losses based on the difference between the interest rates earned on investments and the credited interest rates paid on outstanding
reinsurance contracts. Both rising and declining interest rates can negatively affect the income we derive from these interest rate
spreads. During periods of rising interest rates, we may be contractually obligated to reimburse our clients for the greater amounts
they credit on certain interest-sensitive products. However, we may not have the ability to immediately acquire investments with
interest rates sufficient to offset the increased crediting rates on our reinsurance contracts. During periods of falling interest rates,
our investment earnings will be lower because new investments in fixed maturity securities will likely bear lower interest rates.
We may not be able to fully offset the decline in investment earnings with lower crediting rates on underlying annuity products
related to certain of our reinsurance contracts. Our asset/liability management programs and procedures may not reduce the
volatility of our income when interest rates are rising or falling, and thus we cannot assure you that changes in interest rates will
not affect our interest rate spreads.
Changes in interest rates may also affect our business in other ways. Higher interest rates may result in increased surrenders
on interest-based products of our clients which may affect our fees and our earnings on those products. Lower interest rates may
result in lower sales of certain insurance and investment products of our customers, which would reduce the demand for our
reinsurance of these products. In January 2014, Janet Yellen assumed the position of Chair of the U.S. Federal Reserve. During
her confirmation hearings in November 2013, Ms. Yellen indicated that she supported continuing the Fed’s low interest rate policies,
but it is uncertain whether or not the Fed’s current monetary policies will continue during Ms. Yellen’s tenure as Fed Chair. If
interest rates remain low for an extended period of time, it may affect our results of operations, financial position and cash flows.
The liquidity and value of some of our investments may become significantly diminished.
We hold certain investments that may lack liquidity, such as privately placed fixed maturity securities, mortgage loans,
policy loans, and equity real estate. If we require significant amounts of cash on short notice in excess of normal cash requirements
or are required to post or return collateral in connection with our investment portfolio, derivatives transactions or securities lending
activities, we may have difficulty selling these investments in a timely manner, be forced to sell them for less than we otherwise
would have been able to realize, or both.
We could be forced to sell investments at a loss to cover policyholder withdrawals, recaptures of reinsurance treaties or
other events.
Some of the products offered by our insurance company customers allow policyholders and contract holders to withdraw
their funds under defined circumstances. Our reinsurance subsidiaries manage their liabilities and configure their investment
portfolios so as to provide and maintain sufficient liquidity to support anticipated withdrawal demands and contract benefits and
maturities under reinsurance treaties with these customers. While our reinsurance subsidiaries own a significant amount of liquid
assets, a portion of their assets are relatively illiquid. Unanticipated withdrawal or surrender activity could, under some
circumstances, require our reinsurance subsidiaries to dispose of assets on unfavorable terms, which could have an adverse effect
on us. Reinsurance agreements may provide for recapture rights on the part of our insurance company customers. Recapture rights
permit these customers to reassume all or a portion of the risk formerly ceded to us after an agreed upon time, usually ten years,
subject to various conditions.
Recapture of business previously ceded does not affect premiums ceded prior to the recapture, but may result in immediate
payments to our insurance company customers and a charge to income for costs that we deferred when we acquired the business
but are unable to recover upon recapture. Under some circumstances, payments to our insurance company customers could require
our reinsurance subsidiaries to dispose of assets on unfavorable terms.
The defaults or deteriorating credit of other financial institutions could adversely affect us.
We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties
in the financial services industry, including brokers and dealers, insurance companies, commercial banks, investment banks,
investment funds and other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty.
In addition, with respect to secured and other transactions that provide for us to hold collateral posted by the counterparty, our
credit risk may be exacerbated when the collateral we hold cannot be liquidated at prices sufficient to recover the full amount of
our exposure. We also have exposure to these financial institutions in the form of unsecured debt instruments, derivative transactions
and equity investments. There can be no assurance that any such losses or impairments to the carrying value of these assets would
not materially and adversely affect our business and results of operations.
23
Defaults on our mortgage loans and volatility in performance may adversely affect our profitability.
Our mortgage loans face default risk and are principally collateralized by commercial properties. Mortgage loans are
stated on our balance sheet at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or
expenses, and are net of valuation allowances. We establish valuation allowances for estimated impairments as of the balance
sheet date. Such valuation allowances are based on the excess carrying value of the loan over the present value of expected future
cash flows discounted at the loan’s original effective interest rate, the value of the loan’s collateral if the loan is in the process of
foreclosure or otherwise collateral dependent, or the loan’s market value if the loan is being sold. At December 31, 2013, we had
valuation allowances of $10.1 million related to our mortgage loans. The performance of our mortgage loan investments, however,
may fluctuate in the future. An increase in the default rate of our mortgage loan investments could have a material adverse effect
on our results of operations and financial condition.
Further, any geographic or sector concentration of our mortgage loans may have adverse effects on our investment
portfolios and consequently on our consolidated results of operations or financial condition. While we seek to mitigate this risk
by having a broadly diversified portfolio, events or developments that have a negative effect on any particular geographic region
or sector may have a greater adverse effect on the investment portfolios to the extent that the portfolios are concentrated. Moreover,
our ability to sell assets relating to such particular groups of related assets may be limited if other market participants are seeking
to sell at the same time.
Our valuation of fixed maturity and equity securities and derivatives include methodologies, estimations and assumptions
that are subject to differing interpretations and could result in changes to investment valuations that may have a material
adverse effect on our results of operations or financial condition.
Fixed maturity, equity securities and short-term investments, which are reported at fair value on the consolidated balance
sheet, represent the majority of our total cash and invested assets. We have categorized these securities into a three-level hierarchy,
based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level
3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation.
For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level
3). Therefore, gains and losses for such assets and liabilities categorized within Level 3 may include changes in fair value that are
attributable to both observable market inputs (Levels 1 and 2) and unobservable market inputs (Level 3).
The determination of fair values in the absence of quoted market prices is based on: (i) valuation methodologies;
(ii) securities we deem to be comparable; and (iii) assumptions deemed appropriate based on market conditions specific to the
security. The fair value estimates are made at a specific point in time, based on available market information and judgments about
financial instruments, including estimates of the timing and amounts of expected future cash flows and the credit standing of the
issuer or counterparty. Factors considered in estimating fair value include: coupon rate, maturity, estimated duration, call provisions,
sinking fund requirements, credit rating, industry sector of the issuer, and quoted market prices of comparable securities. The use
of different methodologies and assumptions may have a material effect on the estimated fair value amounts.
During periods of market disruption including periods of significantly rising or high interest rates, rapidly widening credit
spreads or illiquidity, it may be difficult to value certain of our securities, such as alternative residential mortgage loan (“Alt-A”)
securities and subprime mortgage-backed securities, if trading becomes less frequent and/or market data becomes less observable.
There may be certain asset classes that were in active markets with significant observable data that become illiquid due to the
financial environment. In such cases, more securities may fall to Level 3 and thus require more subjectivity and management
judgment. As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well
as valuation methods that are more sophisticated or require greater estimation thereby resulting in values that may be different
than the value at which the investments may be ultimately sold. Further, rapidly changing and/or disruptive credit and equity
market conditions could materially impact the valuation of securities as reported within our consolidated financial statements and
the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results
of operations or financial condition.
The reported value of our relatively illiquid types of investments, our investments in the asset classes described in the
paragraph above and, at times, our high quality, generally liquid asset classes, do not necessarily reflect the lowest current market
price for the asset. If we were forced to sell certain of our assets in disruptive and/or volatile market conditions, there can be no
assurance that we will be able to sell them for the prices at which we have recorded them and we may be forced to sell them at
significantly lower prices.
The determination of the amount of allowances and impairments taken on our investments is highly subjective and could
materially affect our results of operations or financial position.
The determination of the amount of allowances and impairments vary by investment type and is based upon our periodic
evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments
24
are revised as conditions change and new information becomes available. Management updates its evaluations regularly and
reflects changes in allowances and impairments in operations as such evaluations are revised.
For example, the cost of our fixed maturity and equity securities is adjusted for impairments in value deemed to be other-
than-temporary in the period in which the determination is made. The assessment of whether impairments have occurred is based
on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. Our management considers a
wide range of factors about the security issuer and uses their best judgment in evaluating the cause of the decline in the estimated
fair value of the security and in assessing the prospects for near-term recovery. Inherent in management’s evaluation of the security
are assumptions and estimates about the operations of the issuer and its future earnings potential. There can be no assurance that
our management has accurately assessed the level of impairments taken, or allowances reflected in our financial statements and
their potential impact on regulatory capital. Furthermore, additional impairments or additional allowances may be needed in the
future.
Defaults, downgrades or other events impairing the value of our fixed maturity securities portfolio may reduce our earnings.
We are subject to the risk that the issuers, or guarantors, of fixed maturity securities we own may default on principal
and interest payments they owe us. At December 31, 2013, the fixed maturity securities of $21.5 billion in our investment portfolio
represented 64.4% of our total cash and invested assets. The occurrence of a major economic downturn (or a prolonged downturn
in the economy), acts of corporate malfeasance, widening risk spreads, or other events that adversely affect the issuers or guarantors
of these securities could cause the value of our fixed maturity securities portfolio and our net income to decline and the default
rate of the fixed maturity securities in our investment portfolio to increase. A ratings downgrade affecting issuers or guarantors of
particular securities, or similar trends that could worsen the credit quality of issuers, such as the corporate issuers of securities in
our investment portfolio, could also have a similar effect. With economic uncertainty, credit quality of issuers or guarantors could
be adversely affected. Any event reducing the value of these securities other than on a temporary basis could have a material
adverse effect on our business, results of operations and financial condition.
Our investments are reflected within the consolidated financial statements utilizing different accounting bases and
accordingly we may not have recognized differences, which may be significant, between cost and fair value in our
consolidated financial statements.
Our principal investments are in fixed maturity and equity securities, short-term investments, mortgage loans, policy
loans, funds withheld at interest and other invested assets. The carrying value of such investments is as follows:
•
•
Fixed maturity and equity securities are classified as available-for-sale and are reported at their estimated fair value.
Unrealized investment gains and losses on these securities are recorded as a separate component of accumulated
other comprehensive income or loss, net of related deferred acquisition costs and deferred income taxes.
Short-term investments include investments with remaining maturities of one year or less, but greater than three
months, at the time of acquisition and are stated at amortized cost, which approximates fair value.
• Mortgage and policy loans are stated at unpaid principal balance. Additionally, mortgage loans are adjusted for any
unamortized premium or discount, deferred fees or expenses, net of valuation allowances.
•
Funds withheld at interest represent amounts contractually withheld by ceding companies in accordance with
reinsurance agreements. The value of the assets withheld and interest income are recorded in accordance with specific
treaty terms.
• We use the cost method of accounting for investments in real estate joint ventures and other limited partnership
interests in which we have a minor equity investment and virtually no influence over the joint ventures or the
partnership’s operations. The equity method of accounting is used for investments in real estate joint ventures and
other limited partnership interests in which we have significant influence over the operating and financing decisions
but are not required to be consolidated. These investments are reflected in other invested assets on the consolidated
balance sheets.
Investments not carried at fair value in our consolidated financial statements — principally, mortgage loans, policy loans,
real estate joint ventures, and other limited partnerships — may have fair values that are substantially higher or lower than the
carrying value reflected in our consolidated financial statements. Each of such asset classes is regularly evaluated for impairment
under the accounting guidance appropriate to the respective asset class.
Risks Related to Ownership of Our Common Stock
We may not pay dividends on our common stock.
Our shareholders may not receive future dividends. Historically, we have paid quarterly dividends ranging from $0.027
per share in 1993 to $0.30 per share in 2013. All future payments of dividends, however, are at the discretion of our board of
directors and will depend on our earnings, capital requirements, insurance regulatory conditions, operating conditions, and such
other factors as our board of directors may deem relevant. The amount of dividends that we can pay will depend in part on the
25
operations of our reinsurance subsidiaries. Under certain circumstances, we may be contractually prohibited from paying dividends
on our common stock due to restrictions associated with certain of our debt securities.
Certain provisions in our articles and bylaws may delay or prevent a change in control, which could adversely affect the
price of our common stock.
Certain provisions in our articles of incorporation and bylaws, as well as Missouri law, may delay or prevent a change
of control of RGA, which could adversely affect the price of our common stock. Our articles of incorporation and bylaws contain
some provisions that may make the acquisition of control of RGA without the approval of our board of directors more difficult,
including provisions relating to the nomination, election and removal of directors, the structure of the board of directors and
limitations on actions by our shareholders. In addition, Missouri law also imposes some restrictions on mergers and other business
combinations between RGA and holders of 20% or more of our outstanding common stock.
These provisions may have unintended anti-takeover effects. These provisions of our articles of incorporation and bylaws
and Missouri law may delay or prevent a change in control of RGA, which could adversely affect the price of our common stock.
Applicable insurance laws may make it difficult to effect a change of control of RGA.
Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the
insurance commission of the state where the domestic insurer is domiciled. Missouri insurance laws and regulations provide that
no person may acquire control of us, and thus indirect control of our Missouri reinsurance subsidiaries, including RGA Reinsurance,
unless:
•
•
such person has provided certain required information to the Missouri Department of Insurance; and
such acquisition is approved by the Director of Insurance of the State of Missouri, to whom we refer as the Missouri
Director of Insurance, after a public hearing.
Under Missouri insurance laws and regulations, any person acquiring 10% or more of the outstanding voting securities
of a corporation, such as our common stock, is presumed to have acquired control of that corporation and its subsidiaries.
Canadian federal insurance laws and regulations provide that no person may directly or indirectly acquire “control” of
or a “significant interest” in our Canadian insurance subsidiary, RGA Canada, unless:
•
•
such person has provided information, material and evidence to the Canadian Superintendent of Financial Institutions
as required by him; and
such acquisition is approved by the Canadian Minister of Finance.
For this purpose, “significant interest” means the direct or indirect beneficial ownership by a person, or group of persons
acting in concert, of shares representing 10% or more of a given class, and “control” of an insurance company exists when:
•
a person, or group of persons acting in concert, beneficially owns or controls an entity that beneficially owns securities,
such as our common stock, representing more than 50% of the votes entitled to be cast for the election of directors
and such votes are sufficient to elect a majority of the directors of the insurance company, or
•
a person has any direct or indirect influence that would result in control in fact of an insurance company.
Similar laws in other countries where we operate limit our ability to effect changes of control for subsidiaries organized
in such jurisdictions without the approval of local insurance regulatory officials. Prior to granting approval of an application to
directly or indirectly acquire control of a domestic or foreign insurer, an insurance regulator in any jurisdiction may consider such
factors as the financial strength of the applicant, the integrity of the applicant’s board of directors and executive officers, the
applicant’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the
consummation of the acquisition of control.
Issuing additional shares may dilute the value or affect the price of our common stock.
Our board of directors has the authority, without action or vote of the shareholders, to issue any or all authorized but
unissued shares of our common stock, including securities convertible into, or exchangeable for, our common stock and authorized
but unissued shares under our stock option and other equity compensation plans. In the future, we may issue such additional
securities, through public or private offerings, in order to raise additional capital. Any such issuance will dilute the percentage
ownership of shareholders and may dilute the per share projected earnings or book value of the common stock. In addition, option
holders may exercise their options at any time when we would otherwise be able to obtain additional equity capital on more
favorable terms.
The price of our common stock may fluctuate significantly.
The overall market and the price of our common stock may continue to fluctuate as a result of many factors in addition
to those discussed in the preceding risk factors. These factors, some or all of which are beyond our control, include:
•
actual or anticipated fluctuations in our operating results;
26
•
•
•
•
•
changes in expectations as to our future financial performance or changes in financial estimates of securities analysts;
success of our operating and growth strategies;
investor anticipation of strategic and technological threats, whether or not warranted by actual events;
operating and stock price performance of other comparable companies; and
realization of any of the risks described in these risk factors or those set forth in any subsequent Annual Report on
Form 10-K or Quarterly Reports on Form 10-Q.
In addition, the stock market has historically experienced volatility that often has been unrelated or disproportionate to
the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the trading
price of our common stock, regardless of our actual operating performance.
The occurrence of various events may adversely affect the ability of RGA and its subsidiaries to fully utilize any net operating
losses (“NOL”s) and other tax attributes.
RGA and its subsidiaries may, from time to time, have a substantial amount of NOLs and other tax attributes, for
U.S. federal income tax purposes, to offset taxable income and gains. Events outside of our control may cause RGA (and,
consequently, its subsidiaries) to experience an “ownership change” under Section 382 of the Internal Revenue Code and the
related Treasury regulations, and limit the ability of RGA and its subsidiaries to utilize fully such NOLs and other tax attributes.
In general, an ownership change occurs when, as of any testing date, the percentage of stock of a corporation owned by
one or more “5-percent shareholders,” as defined in the Internal Revenue Code and the related Treasury regulations, has increased
by more than 50 percentage points over the lowest percentage of stock of the corporation owned by such shareholders at any time
during the three-year period preceding such date. In general, persons who own 5% or more (by value) of a corporation’s stock are
5-percent shareholders, and all other persons who own less than 5% (by value) of a corporation’s stock are treated, together, as a
single, public group 5-percent shareholder, regardless of whether they own an aggregate of 5% or more (by value) of a corporation’s
stock. If a corporation experiences an ownership change, it is generally subject to an annual limitation, which limits its ability to
use its NOLs and other tax attributes to an amount equal to the equity value of the corporation multiplied by the federal long-term
tax-exempt rate. If we were to experience an ownership change, we could potentially have in the future higher U.S. federal income
tax liabilities than we would otherwise have had and it may also result in certain other adverse consequences to RGA.
Item 1B. UNRESOLVED STAFF COMMENTS
The Company has no unresolved staff comments from the Securities and Exchange Commission.
Item 2. PROPERTIES
The Company leases its headquarters facility in Chesterfield, Missouri, which consists of approximately 197,354 square
feet. In addition, the Company leases approximately 349,927 square feet of office space in 36 locations throughout the U.S.,
Canada, Europe, South Africa, and the Asia Pacific region.
Most of the Company’s leases in the U.S. and other countries have lease terms of three to five years, although some
leases have terms of up to 15 years. As provided in Note 12 – “Commitments and Contingent Liabilities” in the Notes to Consolidated
Financial Statements, the rental expense on operating leases for office space and equipment totaled $18.5 million for 2013.
The Company believes its facilities have been generally well maintained and are in good operating condition. The
Company believes the facilities are sufficient for its current requirements. In February 2013, the Company commenced construction
of its new world headquarters in Chesterfield, Missouri, which will replace its current leased headquarters, to meet its projected
future capacity needs.
Item 3. LEGAL PROCEEDINGS
The Company is subject to litigation in the normal course of its business. The Company currently has no material litigation.
A legal reserve is established when the Company is notified of an arbitration demand or litigation or is notified that an arbitration
demand or litigation is imminent, it is probable that the Company will incur a loss as a result and the amount of the probable loss
is reasonably capable of being estimated.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
27
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Information about the market price of the Company’s common equity, dividends and related stockholder matters is
contained in Item 8 within Note 19 – “Quarterly Results of Operations (Unaudited)” and in Item 1 under the caption Regulation
– “Restrictions on Dividends and Distributions”. Additionally, insurance companies are subject to statutory regulations that restrict
the payment of dividends. See Item 1 under the caption Regulation – “Restrictions on Dividends and Distributions”. See Item 8,
Note 3 – “Stock Transactions” in the Notes to Consolidated Financial Statements for information regarding board approved stock
repurchase plans.
Set forth below is a graph for the Company’s common stock for the period beginning December 31, 2008 and ending
December 31, 2013. The graph compares the cumulative total return on the Company’s common stock, based on the market price
of the common stock and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard &
Poor’s 500 Stock Index and the Standard & Poor’s Insurance (Life/Health) Index. The indices are included for comparative purposes
only. They do not necessarily reflect management’s opinion that such indices are an appropriate measure of the relative performance
of the Company’s common stock, and are not intended to forecast or be indicative of future performance of the common stock.
12/08
12/09
12/10
12/11
12/12
12/13
Cumulative Total Return
Reinsurance Group of America, Incorporated
$
100.00
$
112.36
$
127.89
$
125.74
$
130.80
$
S & P 500
S & P Life & Health Insurance
100.00
100.00
126.46
115.57
145.51
144.76
148.59
114.78
172.37
131.53
192.33
228.19
215.02
28
Item 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from the Company’s audited consolidated financial statements.
The consolidated statement of income data for the years ended December 31, 2013, 2012 and 2011, and the consolidated balance
sheet data at December 31, 2013 and 2012 have been derived from the Company’s audited consolidated financial statements
included elsewhere herein. The consolidated statement of income data for the years ended December 31, 2010 and 2009, and the
consolidated balance sheet data at December 31, 2011, 2010 and 2009 have been derived from the Company’s audited consolidated
financial statements not included herein. The selected financial data set forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial
statements and related notes included elsewhere herein.
Selected Consolidated Financial and Operating Data
(in millions, except per share and operating data)
As of or For the Years Ended December 31,
2013
2012
2011
2010
2009
Investment income, net of related expenses
1,699.9
1,436.2
1,281.2
1,238.7
$
8,254.0
$
7,906.6
$
7,335.7
$
6,659.7
$
5,725.2
1,122.5
Income Statement Data
Revenues:
Net premiums
Investment related gains (losses), net:
Other-than-temporary impairments on fixed
maturity securities
Other-than-temporary impairments on fixed
maturity securities transferred to (from)
accumulated other comprehensive income
Other investment related gains (losses), net
Total investment related gains (losses), net
Other revenues
Total revenues
Benefits and expenses:
Claims and other policy benefits
Interest credited
Policy acquisition costs and other insurance
expenses
Other operating expenses
Interest expense
Collateral finance facility expense
Total benefits and expenses
Income before income taxes
Provision for income taxes
Net income
Earnings Per Share
Basic earnings per share
Diluted earnings per share
Weighted average diluted shares, in thousands
Dividends per share on common stock
Balance Sheet Data
Total investments
Total assets
Policy liabilities
(1)
Short-term debt
Long-term debt
Collateral finance facility
Trust preferred securities
Total stockholders’ equity
Total stockholders’ equity per share
Operating Data (in billions)
$
$
$
$
(0.2)
76.9
64.0
300.5
10,318.4
7,304.3
476.5
1,300.8
466.7
124.3
10.5
9,683.1
635.3
216.4
418.9
5.82
5.78
72,461
1.08
32,441.1
39,674.5
28,386.1
—
2,214.4
484.8
—
5,935.5
83.87
$
$
$
$
(12.7)
(15.9)
(30.9)
(31.9)
(128.8)
(7.6)
277.6
254.1
244.0
3.9
(9.1)
(36.1)
248.7
2.0
241.9
212.0
151.3
16.0
146.9
34.1
185.0
9,840.9
8,829.5
8,261.7
7,066.8
6,666.0
379.9
1,306.5
451.8
105.3
12.2
8,921.7
919.2
287.3
631.9
8.57
8.52
74,153
0.84
32,912.2
40,360.4
27,886.6
—
1,815.3
652.0
—
6,910.2
93.47
$
$
$
$
6,225.2
316.4
990.1
419.3
102.6
12.4
8,066.0
763.5
217.5
546.0
7.42
7.37
74,108
0.60
24,964.6
31,634.0
21,139.7
—
1,414.7
652.0
—
5,818.7
79.31
$
$
$
$
5,547.1
310.0
1,137.6
362.0
91.0
7.8
7,455.5
806.2
270.5
535.7
7.32
7.17
74,694
0.48
22,666.6
28,670.2
19,647.2
200.0
1,016.4
850.0
159.4
4,765.4
64.96
$
$
$
$
4,819.4
323.7
1,010.0
294.9
69.9
8.3
6,526.2
540.6
167.6
373.0
5.12
5.09
73,327
0.36
19,224.1
24,905.8
17,643.6
—
1,216.1
850.0
159.2
3,639.8
49.87
2,325.1
321.0
Assumed ordinary life reinsurance in force
$
2,889.9
$
2,927.6
$
2,664.4
$
2,540.3
$
Assumed new business production
370.4
426.6
428.9
327.6
(1) Policy liabilities include future policy benefits, interest-sensitive contract liabilities, and other policy claims and benefits.
29
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking and Cautionary Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 including, among others, statements relating to projections of the strategies, earnings, revenues, income or loss, ratios, future
financial performance, and growth potential of the Company. The words “intend,” “expect,” “project,” “estimate,” “predict,”
“anticipate,” “should,” “believe,” and other similar expressions also are intended to identify forward-looking statements. Forward-
looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events
and actual results, performance, and achievements could differ materially from those set forth in, contemplated by, or underlying
the forward-looking statements.
Numerous important factors could cause actual results and events to differ materially from those expressed or implied
by forward-looking statements including, without limitation, (1) adverse capital and credit market conditions and their impact on
the Company’s liquidity, access to capital and cost of capital, (2) the impairment of other financial institutions and its effect on
the Company’s business, (3) requirements to post collateral or make payments due to declines in market value of assets subject
to the Company’s collateral arrangements, (4) the fact that the determination of allowances and impairments taken on the Company’s
investments is highly subjective, (5) adverse changes in mortality, morbidity, lapsation or claims experience, (6) changes in the
Company’s financial strength and credit ratings and the effect of such changes on the Company’s future results of operations and
financial condition, (7) inadequate risk analysis and underwriting, (8) general economic conditions or a prolonged economic
downturn affecting the demand for insurance and reinsurance in the Company’s current and planned markets, (9) the availability
and cost of collateral necessary for regulatory reserves and capital, (10) market or economic conditions that adversely affect the
value of the Company’s investment securities or result in the impairment of all or a portion of the value of certain of the Company’s
investment securities, that in turn could affect regulatory capital, (11) market or economic conditions that adversely affect the
Company’s ability to make timely sales of investment securities, (12) risks inherent in the Company’s risk management and
investment strategy, including changes in investment portfolio yields due to interest rate or credit quality changes, (13) fluctuations
in U.S. or foreign currency exchange rates, interest rates, or securities and real estate markets, (14) adverse litigation or arbitration
results, (15) the adequacy of reserves, resources and accurate information relating to settlements, awards and terminated and
discontinued lines of business, (16) the stability of and actions by governments and economies in the markets in which the Company
operates, including ongoing uncertainties regarding the amount of United States sovereign debt and the credit ratings thereof,
(17) competitive factors and competitors’ responses to the Company’s initiatives, (18) the success of the Company’s clients,
(19) successful execution of the Company’s entry into new markets, (20) successful development and introduction of new products
and distribution opportunities, (21) the Company’s ability to successfully integrate and operate reinsurance business that the
Company acquires, (22) action by regulators who have authority over the Company’s reinsurance operations in the jurisdictions
in which it operates, (23) the Company’s dependence on third parties, including those insurance companies and reinsurers to which
the Company cedes some reinsurance, third-party investment managers and others, (24) the threat of natural disasters, catastrophes,
terrorist attacks, epidemics or pandemics anywhere in the world where the Company or its clients do business, (25) changes in
laws, regulations, and accounting standards applicable to the Company, its subsidiaries, or its business, (26) the effect of the
Company’s status as an insurance holding company and regulatory restrictions on its ability to pay principal of and interest on its
debt obligations, and (27) other risks and uncertainties described in this document and in the Company’s other filings with the
Securities and Exchange Commission (“SEC”).
Forward-looking statements should be evaluated together with the many risks and uncertainties that affect the Company’s
business, including those mentioned in this document and the cautionary statements described in the periodic reports the Company
files with the SEC. These forward-looking statements speak only as of the date on which they are made. The Company does not
undertake any obligations to update these forward-looking statements, even though the Company’s situation may change in the
future. The Company qualifies all of its forward-looking statements by these cautionary statements. For a discussion of these risks
and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements, you
are advised to see Item 1A – “Risk Factors”.
Overview
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, RCM, RGA Barbados, RGA Americas, RGA
Atlantic, RGA Canada, RGA Australia and RGA International as well as other subsidiaries, all of which are wholly owned
(collectively, the Company).
The Company is primarily engaged in the reinsurance of individual and group coverages for traditional life and health,
longevity, disability, annuity and critical illness products, and financial reinsurance. RGA and its predecessor, the Reinsurance
Division of General American Life Insurance Company, a Missouri life insurance company, have been engaged in the business
30
of life reinsurance since 1973. Approximately 66.7% of the Company’s 2013 net premiums were from its 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 and income earned on invested assets.
The Company’s primary business is life and health 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, 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 in the current period.
The Company’s long-term profitability primarily depends on the volume and amount of death and health-related claims
incurred and the ability to adequately price the risks it assumes. 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. The maximum amount of individual life coverage the Company retains per life varies by market and can be as
high as $8.0 million. In certain limited situations the Company has retained more than $8.0 million per individual life. Exposures
in excess of these retention amounts are typically retroceded to retrocessionaires; however, the Company remains fully liable to
the ceding company for the entire amount of risk it assumes. The Company believes its sources of liquidity are sufficient to cover
potential claims payments on both a short-term and long-term basis.
The Company has five geographic-based or function-based operational segments: U.S., Canada, Europe & South Africa,
Asia Pacific and Corporate and Other. The U.S. operations are further segmented into traditional and non-traditional businesses.
The U.S. operations provide individual life, long-term care, group life and health reinsurance, annuity and financial reinsurance
products. During 2012, the Company issued its first fee-based synthetic guaranteed investment contracts, which include investment-
only, stable value contracts, to retirement plans. The Canada operations reinsure traditional individual life products as well as
creditor reinsurance, group life and health reinsurance, non-guaranteed critical illness products and longevity reinsurance. Europe &
South Africa operations include a variety of life and health products, critical illness and longevity business throughout Europe and
in South Africa, in addition to other markets the Company is developing. The principle types of reinsurance in Asia Pacific include
life, critical illness, health, disability, superannuation and financial reinsurance. Corporate and Other includes results from, among
others, RTP, a wholly-owned subsidiary that develops and markets technology solutions for the insurance industry, interest expense
related to debt and the investment income and expense associated with the Company’s collateral finance facility. 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 economic capital model, the purpose of
which is to measure the risk in the business and to provide a consistent 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 is credited to the segments based on
the level of allocated capital. 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 is one of the leading life reinsurers in North America based on premiums and the amount of life reinsurance
in force. Based on an industry survey of 2012 information prepared by Munich American at the request of the Society of Actuaries
Reinsurance Section (“SOA survey”), the Company has the second largest market share in North America as measured by individual
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 operations in Australia, Barbados, Bermuda, China, France, Germany, Hong Kong, India,
Ireland, Italy, Japan, Mexico, the Netherlands, New Zealand, Poland, Singapore, South Africa, South Korea, Spain, Taiwan, the
UAE and the UK. 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 competitors’ annual reports, the Company believes it is the third largest global life and health reinsurer in
the world based on 2012 life and health reinsurance premiums. 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.
31
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 nearly doubled from $5.3
trillion in 2002 to $9.7 trillion at year-end 2012. 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 decline in the percentage of new business being reinsured in recent years, which has caused premium growth rates in
the U.S. life reinsurance market to moderate. 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, stronger capital positions maintained by ceding
companies in recent years and a desire by ceding companies to adjust their risk profiles. 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. Changing regulatory environments, most notably in Europe, rating agencies and competitive
business pressures are causing life insurers to evaluate reinsurance 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
over the last decade within the life reinsurance industry, there are fewer competitors. According to the SOA survey, as of
December 31, 2012, the top five companies held approximately 74.3% of the market share in North America based on life
reinsurance in force. 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 to occur. The Company
believes that reorganizations and consolidations of life insurers will continue. As reinsurance services are 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 and longevity 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.
1) Continue Growth of North American Mortality Business. The Company’s strategy includes continuing to grow each
of the following components of its North American mortality 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, value added services 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. The Company has processed over 300,000 facultative submissions annually
since 2011.
• 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. The Company continually seeks these types of
opportunities.
32
2) 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 long-term 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 and
a provisional branch license in 2013, opened representative offices in Poland and Germany in 2006, opened new
offices in France and Italy in 2007, opened a representative office in the Netherlands in 2009 and commenced
operations in the UAE in 2011. Before entering new markets, the Company evaluates several factors including:
the size of the insured population,
competition,
the level of reinsurance penetration,
regulation,
existing clients with a presence in the market, and
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. Markets such as China and India represent longer-term
opportunities for growth as the underlying direct life insurance markets grow to meet the needs of growing middle
class populations. Additionally, the Company believes that regulatory changes (e.g., Solvency II) in European markets
may cause ceding companies to reduce counterparty exposure to their existing life reinsurers and reinsure more
business, creating opportunities for the Company.
• Asset-intensive Reinsurance 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 reinsurance 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 reinsurance business has been written in the U.S.; however,
the Company believes opportunities outside of the U.S. may further develop in the near future, particularly expanding
its operations in Japan. The Company also provides longevity reinsurance in the UK and Canada, and in 2008 entered
the U.S. healthcare reinsurance market with a primary focus on long-term care and Medicare supplement insurance.
In 2010, the Company expanded into the group reinsurance market in North America with the acquisition of Reliastar
Life Insurance Company’s U.S. and Canada operations.
33
Results of Operations
Consolidated
Consolidated net income decreased $213.1 million, or 33.7%, and increased $85.8 million, or 15.7%, in 2013 and 2012,
respectively. Diluted earnings per share on net income were $5.78 in 2013 compared to $8.52 in 2012 and $7.37 in 2011. The
decrease in net income in 2013 is primarily due to a significant loss in the Asia Pacific segment and a decrease in investment
related gains partially offset by higher investment income and the recognition in other revenues of gains on the repurchase of
collateral finance facility securities of $46.5 million. The loss in the Asia Pacific segment reflects an increase in Australian group
claims liabilities primarily related to total and permanent disability coverage and disability income benefits as well as poor claims
experience in the Australian operation’s individual lump sum and individual disability businesses, primarily in the second quarter
of 2013. The decrease in investment related gains was primarily due to a decrease in net hedging gains related to the liabilities
associated with guaranteed minimum living benefits.
The increase in net income in 2012 was primarily due to an increase in investment related gains and an increase in net
premiums in all segments. The increase in investment related gains reflected a favorable change in the value of embedded
derivatives within the U.S. segment due to the effect of tightening credit spreads and a reduction in the benchmark interest rate in
the U.S. debt markets. During 2012, the Company executed a large fixed deferred annuity reinsurance transaction in its U.S.
Asset-Intensive segment. The Company deployed approximately $350.0 million of capital to support this transaction, which
increased the Company’s invested asset base by approximately $5.4 billion. Foreign currency exchange fluctuations resulted in
decreases to net income of approximately $1.3 million and $4.5 million in 2013 and 2012, respectively.
The Company recognizes in consolidated income, any changes in the value of embedded derivatives on modco or funds
withheld treaties, equity-indexed annuity treaties (“EIAs”) and variable annuity products. The combined changes in these three
types of embedded derivatives, after adjustment for deferred acquisition costs and retrocession, resulted in increases to net income
of approximately $80.3 million and $77.0 million in 2013 and 2012, respectively, as compared to the prior years. These fluctuations
do not affect current cash flows, crediting rates or spread performance on the underlying treaties. Therefore, management believes
it is helpful to distinguish between the effects of changes in these embedded derivatives, net of related hedging activity, and the
primary factors that drive profitability of the underlying treaties, namely investment income, fee income, and interest credited.
The individual effect on income before income taxes for these three types of embedded derivatives is as follows:
The change in the value of embedded derivatives related to reinsurance treaties written on a modco or funds withheld
basis are subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. The unrealized
gains and losses associated with these embedded derivatives, after adjustment for deferred acquisition costs, reduced net income
by $6.5 million in 2013 and increased it by $33.1 million in 2012, respectively, as compared to the prior years.
Changes in risk-free rates used in the fair value estimates of embedded derivatives associated with EIAs affect the amount
of unrealized gains and losses the Company recognizes. The unrealized gains and losses associated with EIAs, after adjustment
for deferred acquisition costs and retrocession, increased net income by $23.0 million and $7.3 million in 2013 and 2012,
respectively, as compared to the prior years.
The change in the Company’s liability for variable annuities associated with guaranteed minimum living benefits affects
the amount of unrealized gains and losses the Company recognizes. The unrealized gains and losses associated with guaranteed
minimum living benefits, after adjustment for deferred acquisition costs, increased net income by $63.8 million and $36.6 million
in 2013 and 2012, respectively, as compared to the prior years.
Consolidated net premiums increased $347.4 million, or 4.4%, and $570.9 million, or 7.8%, in 2013 and 2012, respectively,
due to growth in life reinsurance in force, before the effect of foreign currency fluctuations. Foreign currency fluctuations relative
to the prior year affected net premiums unfavorably by approximately $142.0 million and $62.6 million in 2013 and 2012,
respectively. Consolidated assumed life insurance in force was $2,889.9 billion, $2,927.6 billion and $2,664.4 billion as of
December 31, 2013, 2012 and 2011, respectively. Foreign currency fluctuations affected the increases in assumed life insurance
in force unfavorably by $86.7 billion in 2013 and positively by $34.2 billion in 2012. The Company added new business production,
measured by face amount of insurance in force, of $370.4 billion, $426.6 billion and $428.9 billion during 2013, 2012 and 2011,
respectively. Premiums on U.S. health and group related coverages contributed $101.4 million and $164.6 million to the increase
in net premiums in 2013 and 2012, 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 in
some markets.
Consolidated investment income, net of related expenses, increased $263.7 million, or 18.4%, and $155.0 million, or
12.1%, in 2013 and 2012, respectively. The increases in investment income in 2013 and 2012 reflect a larger average invested
asset base somewhat offset by lower effective investment portfolio yields. Contributing $163.5 million to the increase in investment
income in 2013 were market value changes related to the Company’s funds withheld at interest investment associated with the
reinsurance of certain EIAs. The effect on investment income of the EIAs' market value changes is substantially offset by a
corresponding change in interest credited to policyholder account balances resulting in an insignificant effect on net income. In
34
addition, investment income associated with a large fixed annuity transaction executed in the second quarter of 2012 increased
investment income by $85.2 million and $129.8 million in 2013 and 2012, respectively. Average invested assets at amortized cost,
excluding funds withheld and other spread business, totaled $18.1 billion, $16.6 billion and $15.3 billion in 2013, 2012 and 2011,
respectively. The average yield earned on investments, excluding funds withheld and other spread business, was 4.73%, 4.98%
and 5.28% in 2013, 2012 and 2011, respectively. The average yield will vary from year to year depending on a number of variables,
including the prevailing interest rate and credit spread environment, changes in the mix of the underlying investments and cash
balances, and the timing of dividends and distributions on certain investments. While there has been some improvement in 2013,
a continued low interest rate environment in the U.S. and Canada is expected to put downward pressure on this yield in future
reporting periods.
Total investment related gains (losses), net, declined by $190.1 million in 2013 and improved by $290.2 million in 2012.
The decline in 2013 was primarily due a decrease in net hedging gains related to the liabilities associated with guaranteed minimum
living benefits of $106.5 million and unfavorable changes in the value of embedded derivatives associated with reinsurance treaties
written on a modco or funds withheld basis of $44.8 million, partially offset by favorable changes in the embedded derivatives
related to guaranteed minimum living benefits of $37.4 million. The improvement in 2012 is primarily due to a favorable change
in the value of embedded derivatives related to guaranteed minimum living benefits of $328.8 million and a favorable change in
the value of embedded derivatives associated with reinsurance treaties written on a modco or funds withheld basis of $202.2
million offset by a decrease in the fair value of derivatives used to hedge the embedded derivative liabilities associated with
guaranteed minimum living benefits of $261.6 million. See Note 4 - “Investments” and Note 5 - “Derivative Instruments” in the
Notes to Consolidated Financial Statements for additional information on investment related gains (losses), net, and derivatives.
Investment income and investment related gains and losses are allocated to the operating segments based upon average assets and
related capital levels deemed appropriate to support segment operations.
The consolidated provision for income taxes represented approximately 34.1%, 31.3% and 28.5%, of pre-tax income for
2013, 2012, and 2011, respectively. In 2011 the Company recognized an income tax benefit associated with previously enacted
reductions in federal statutory tax rates and adjustments to various provincial statutory tax rates in Canada. This 2007 enactment
included phased in effective dates through 2012. These adjustments in tax rates should have been recognized beginning in 2007,
when the Canadian tax legislation was enacted. The Company recorded a cumulative tax benefit adjustment of $30.7 million in
2011 in “Provision for income taxes” to correct the deferred tax liabilities that were not properly adjusted. If the impact of the
tax rates had been recorded in the prior years, the Company estimates that it would have recognized approximately $3.0 million,
$6.0 million, $9.0 million, and $12.0 million of tax benefit in the years ended 2007, 2008, 2009, and 2010, respectively.
The effective tax rates for 2013, 2012 and 2011 are affected by earnings of non-U.S. subsidiaries in which the Company
is permanently reinvested whose statutory tax rates are less than the U.S. statutory tax rate of 35.0%, Subpart F income, tax expense
related to uncertain tax positions and differences in tax bases in foreign jurisdictions. Both Canada and Australia statutory rates
of approximately 27% and 30% (blended federal and provincial in Canada), respectively, are less than the U.S. statutory rate
resulting in the legal entities in these jurisdictions giving rise to the majority of the foreign rate differential. The Company’s
valuation allowance on total deferred taxes increased to $102.2 million as of December 31, 2013 from $10.1 million as of December
31, 2012. See Note 9 - “Income Tax” in the Notes to Consolidated Financial Statements for additional information on the Company’s
consolidated effective tax rate. The increase is primarily related to the establishment of deferred tax assets and a corresponding
valuation allowance in connection with the transfer of the RGA Re New Zealand branch to RGA Australia, and the establishment
of a valuation allowance on a portion of the deferred tax asset in RGA Australia.
Critical Accounting Policies
The Company’s accounting policies are described in Note 2 – “Summary of Significant Accounting Policies” in the Notes
to Consolidated Financial Statements. The Company believes its most critical accounting policies include the establishment of
premiums receivable; amortization of deferred acquisition costs (“DAC”); the establishment of liabilities for future policy benefits
and incurred but not reported claims; the valuation of investments and investment impairments; the valuation of embedded
derivatives; and accounting for income taxes. The balances of these accounts require extensive use of assumptions and estimates,
particularly related to the future performance of the underlying business.
Differences in experience compared with the assumptions and estimates utilized in establishing premiums receivable,
the justification of the recoverability of DAC, in establishing reserves for future policy benefits and claim liabilities, or in the
determination of other-than-temporary impairments to investment securities can have a material effect on the Company’s results
of operations and financial condition.
Premiums Receivable
Premiums are accrued when due and in accordance with information received from the ceding company. When the
Company enters into a new reinsurance agreement, it records accruals based on the terms of the reinsurance treaty. Similarly, when
a ceding company fails to report information on a timely basis, the Company records accruals based on the terms of the reinsurance
treaty as well as historical experience. Other management estimates include adjustments for increased in force on existing treaties,
35
lapsed premiums given historical experience, the financial health of specific ceding companies, collateral value and the legal right
of offset on related amounts (i.e. allowances and claims) owed to the ceding company. Under the legal right of offset provisions
in its reinsurance treaties, the Company can withhold payments for allowances and claims from unpaid premiums.
Deferred Acquisition Costs
Costs of acquiring new business, which vary with and are directly 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. Non-commission costs related to the acquisition of
new and renewal insurance contracts may be deferred only if they meet the following criteria:
•
•
Incremental direct costs of a successful contract acquisition.
Portions of employees’ salaries and benefits directly related to time spent performing specified acquisition activities
for a contract that has been acquired or renewed.
• Other costs directly related to the specified acquisition or renewal activities that would not have been incurred had
that acquisition contract transaction not occurred.
The Company tests the recoverability for each year of business at issue before establishing additional DAC. The Company
also performs annual tests to establish that DAC remain recoverable at all times, and if financial performance significantly
deteriorates to the point where a deficiency exists, a cumulative charge to current operations will be recorded. No such adjustments
related to DAC recoverability were made in 2013, 2012 and 2011.
DAC related to traditional life insurance contracts are amortized with interest over the premium-paying period of the
related policies in proportion to the ratio of individual period premium revenues to total anticipated premium revenues over the
life of the policy. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for
future policy benefits.
DAC related to interest-sensitive life and investment-type policies are amortized over the lives of the policies, in proportion
to the actual and estimated gross profits expected to be realized from mortality, investment income less interest credited, and
expense margins.
Liabilities for Future Policy Benefits and Incurred but not Reported Claims
Liabilities for future policy benefits under long-term life insurance policies (policy reserves) are computed based upon
expected investment yields, mortality and withdrawal (lapse) rates, and other assumptions, including a provision for adverse
deviation from expected claim levels. The Company primarily relies on its own valuation and administration systems to establish
policy reserves. The policy reserves the Company establishes may differ from those established by the ceding companies due to
the use of different mortality and other assumptions. However, the Company relies upon its ceding company clients to provide
accurate data, including policy-level information, premiums and claims, which is the primary information used to establish reserves.
The Company’s administration departments work directly with its clients to help ensure information is submitted by them in
accordance with the reinsurance contracts. Additionally, the Company performs periodic audits of the information provided by
ceding companies. The Company establishes reserves for processing backlogs with a goal of clearing all backlogs within a ninety-
day period. The backlogs are usually due to data errors the Company discovers or computer file compatibility issues, since much
of the data reported to the Company is in electronic format and is uploaded to its computer systems.
The Company periodically reviews actual historical experience and relative anticipated experience compared to the
assumptions used to establish aggregate policy reserves. Further, the Company establishes premium deficiency reserves if actual
and anticipated experience indicates that existing aggregate policy reserves, together with the present value of future gross
premiums, are not sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover
unamortized acquisition costs. The premium deficiency reserve is established through a charge to income, as well as a reduction
to unamortized acquisition costs and, to the extent there are no unamortized acquisition costs, an increase to future policy benefits.
Because of the many assumptions and estimates used in establishing reserves and the long-term nature of the Company’s reinsurance
contracts, the reserving process, while based on actuarial science, is inherently uncertain. If the Company’s assumptions, particularly
on mortality, are inaccurate, its reserves may be inadequate to pay claims and there could be a material adverse effect on its results
of operations and financial condition.
Claims payable for incurred but not reported losses are determined using case-basis estimates and lag studies of past
experience. The time lag from the date of the claim or death to the date when the ceding company reports the claim to the Company
can be several months and can vary significantly by ceding company, business segment and product type. Incurred but not reported
claims are estimates on an undiscounted basis, using actuarial estimates of historical claims expense, adjusted for current trends
and conditions. These estimates are continually reviewed and the ultimate liability may vary significantly from the amount
recognized, which are reflected in net income in the period in which they are determined.
36
Valuation of Investments and Other-than-Temporary Impairments
The Company primarily invests in fixed maturity securities, mortgage loans, short-term investments, and other invested
assets. For investments reported at fair value, the Company utilizes, when available, fair values based on quoted prices in active
markets that are regularly and readily obtainable. Generally, these are very liquid investments and the valuation does not require
management judgment. When quoted prices in active markets are not available, fair value is based on market valuation techniques,
market comparable pricing and the income approach. The Company may utilize information from third parties, such as pricing
services and brokers, to assist in determining the fair value for certain investments; however, management is ultimately responsible
for all fair values presented in the Company’s consolidated financial statements. This includes responsibility for monitoring the
fair value process, ensuring objective and reliable valuation practices and pricing of financial instruments, and approving changes
to valuation methodologies and pricing sources. The selection of the valuation technique(s) to apply considers the definition of
an exit price and the nature of the investment being valued and significant expertise and judgment is required.
Fixed maturity securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on
fixed maturity securities classified as available-for-sale, less applicable deferred income taxes as well as related adjustments to
deferred acquisition costs, if applicable, are reflected as a direct charge or credit to accumulated other comprehensive income
(“AOCI”) in stockholders’ equity on the consolidated balance sheets.
See “Investments” in Note 2 – “Summary of Significant Accounting Policies” and Note 6 – “Fair Value of Assets and
Liabilities” in the Notes to the Consolidated Financial Statements for additional information regarding the valuation of the
Company’s investments.
Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and
valuation allowances. For a discussion regarding the valuation allowance for mortgage loans see “Mortgage Loans on Real Estate”
in Note 2 – “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements.
In addition, investments are subject to impairment reviews to identify when a decline in value is other-than-temporary.
Other-than-temporary impairment losses related to non-credit factors are recognized in AOCI whereas the credit loss portion is
recognized in investment related gains (losses), net. See “Other-than-Temporary Impairment” in Note 2 – “Summary of Significant
Accounting Policies” in the Notes to the Consolidated Financial Statements for a discussion of the policies regarding other-than-
temporary impairments.
Valuation of Embedded Derivatives
The Company reinsures certain annuity products that contain terms that are deemed to be embedded derivatives, primarily
equity-indexed annuities and variable annuities with guaranteed minimum benefits. The Company assesses each identified
embedded derivative to determine whether it is required to be bifurcated under the general accounting principles for Derivatives
and Hedging. If the instrument would not be reported in its entirety at fair value and it is determined that the terms of the embedded
derivative are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument
with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and
accounted for as a freestanding derivative. Such embedded derivatives are carried on the consolidated balance sheets at fair value
with the host contract.
Additionally, reinsurance treaties written on a modified coinsurance or funds withheld basis are subject to the general
accounting principles for Derivatives and Hedging related to embedded derivatives. The majority of the Company’s funds withheld
at interest balances are associated with its reinsurance of annuity contracts, the majority of which are subject to the general
accounting principles for Derivatives and Hedging related to embedded derivatives. Management believes the embedded derivative
feature in each of these reinsurance treaties is similar to a total return swap on the assets held by the ceding companies.
The valuation of the various embedded derivatives requires complex calculations based on actuarial and capital markets
inputs and assumptions related to estimates of future cash flows and interpretations of the primary accounting guidance continue
to evolve in practice. See “Derivative Instruments” in Note 2 – “Summary of Significant Accounting Policies” and Note 6 – “Fair
Value of Assets and Liabilities” in the Notes to the Consolidated Financial Statements for additional information regarding the
valuation of the Company’s embedded derivatives.
Income Taxes
The Company provides for federal, state and foreign income taxes currently payable, as well as those deferred due to
temporary differences between the financial reporting and tax bases of assets and liabilities and are recognized in net income or
in certain cases in other comprehensive income. The Company’s accounting for income taxes represents management’s best
estimate of various events and transactions considering the laws enacted as of the reporting date.
Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of
assets and liabilities are measured at the reporting date using enacted tax rates in the relevant jurisdictions expected to apply to
taxable income in the years the temporary differences are expected to reverse.
37
The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or
carryforward periods under the tax law in the applicable tax jurisdiction. The Company has deferred tax assets related to net
operating and capital losses. The Company has projected its ability to utilize its U.S. and foreign net operating losses and has
determined that all of the U.S. losses are expected to be utilized prior to their expiration and established a valuation allowance on
the portion of the foreign deferred tax assets the Company believes more likely than not that deferred income tax assets will not
be realized.
The Company will establish a valuation allowance if management determines, based on available information, that it is
more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether
valuation allowances should be established as well as the amount of such allowances. When making such determination,
consideration is given to, among other things, the following:
(i)
(ii)
(iii)
(iv)
future projected taxable income exclusive of reversing temporary differences and carryforwards;
future reversals of existing taxable temporary differences;
taxable income in prior carryback years; and
tax planning strategies.
Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year
these changes occur. The Company accounts for its total liability for uncertain tax positions considering the recognition and
measurement thresholds established in general accounting principles for income taxes. The tax effects of a position are recognized
in the consolidated statement of income only if it is more likely than not to be sustained upon examination by the appropriate
taxing authority. Unrecognized tax benefits due to tax uncertainties that do not meet the more likely than not criteria are included
within other liabilities and are charged to earnings in the period that such determination is made. The Company classifies interest
related to tax uncertainties as interest expense whereas penalties related to tax uncertainties are classified as a component of income
tax.
U.S. Operations
U.S. operations consist of two major segments: Traditional and Non-Traditional. The Traditional segment primarily
specializes in individual mortality-risk reinsurance and to a lesser extent, group, health and long-term care reinsurance. The Non-
Traditional segment consists of Asset-Intensive and Financial Reinsurance. During 2012, Asset-Intensive within the Non-
Traditional segment issued its first fee-based synthetic guaranteed investment contracts which include investment-only, stable
value contracts, to retirement plans.
For the year ended December 31, 2013
Non-Traditional
Traditional
Asset-Intensive
Financial
Reinsurance
Total U.S.
(dollars in thousands)
Revenues:
Net premiums
Investment income, net of related expenses
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity
securities
Other-than-temporary impairments on fixed maturity
securities transferred to (from) accumulated other
comprehensive income
Other investment related gains (losses), net
Total investment related gains (losses), net
Other revenues
Total revenues
Benefits and expenses:
Claims and other policy benefits
Interest credited
Policy acquisition costs and other insurance expenses
Other operating expenses
Total benefits and expenses
Income before income taxes
$
4,518,051
$
22,521
$
542,657
716,658
— $
4,624
4,540,572
1,263,939
(8,404)
(260)
—
(8,664)
(253)
13,515
4,858
3,066
5,068,632
3,927,991
53,285
623,126
92,667
4,697,069
—
44,676
44,416
114,098
897,693
28,244
415,149
239,661
14,291
697,345
—
(392)
(392)
60,893
65,125
—
—
12,771
7,053
19,824
$
371,563
$
200,348
$
45,301
$
(253)
57,799
48,882
178,057
6,031,450
3,956,235
468,434
875,558
114,011
5,414,238
617,212
38
For the year ended December 31, 2012
Non-Traditional
Traditional
Asset-Intensive
Financial
Reinsurance
Total U.S.
(dollars in thousands)
Revenues:
Net premiums
Investment income, net of related expenses
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity
securities
Other-than-temporary impairments on fixed maturity
securities transferred to (from) accumulated other
comprehensive income
Other investment related gains (losses), net
Total investment related gains (losses), net
Other revenues
Total revenues
Benefits and expenses:
Claims and other policy benefits
Interest credited
Policy acquisition costs and other insurance expenses
Other operating expenses
Total benefits and expenses
Income before income taxes
$
4,308,780
$
14,095
$
535,589
497,431
— $
1,068
4,322,875
1,034,088
(10,608)
(1,566)
—
(12,174)
(6,303)
14,441
(2,470)
4,616
4,846,515
3,732,717
55,667
598,875
91,161
4,478,420
—
207,211
205,645
112,016
829,187
12,724
322,857
245,579
12,442
593,602
—
(141)
(141)
46,005
46,932
—
—
4,567
9,635
14,202
$
368,095
$
235,585
$
32,730
$
(6,303)
221,511
203,034
162,637
5,722,634
3,745,441
378,524
849,021
113,238
5,086,224
636,410
For the year ended December 31, 2011
Non-Traditional
Traditional
Asset-Intensive
Financial
Reinsurance
Total U.S.
(dollars in thousands)
Revenues:
Net premiums
Investment income, net of related expenses
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity
securities
Other-than-temporary impairments on fixed maturity
securities transferred to (from) accumulated other
comprehensive income
Other investment related gains (losses), net
Total investment related gains (losses), net
Other revenues
Total revenues
Benefits and expenses:
Claims and other policy benefits
Interest credited
Policy acquisition costs and other insurance expenses
Other operating expenses
Total benefits and expenses
Income before income taxes
$
3,979,489
$
13,189
$
495,650
362,722
— $
164
3,992,678
858,536
(14,493)
(6,519)
(57)
(21,069)
2,980
55,724
44,211
3,401
4,522,751
3,458,279
59,891
555,511
85,106
4,158,787
756
(101,771)
(107,534)
87,518
355,895
14,277
255,354
42,717
8,217
320,565
12
(83)
(128)
36,373
36,409
—
—
3,191
6,875
10,066
$
363,964
$
35,330
$
26,343
$
3,748
(46,130)
(63,451)
127,292
4,915,055
3,472,556
315,245
601,419
100,198
4,489,418
425,637
Income before income taxes for the U.S. operations segment decreased by $19.2 million, or 3.0%, and increased by
$210.8 million, or 49.5%, in 2013 and 2012, respectively. The decrease in income before income taxes in 2013 can be largely
attributed to Asset-Intensive business within the U.S. Non-Traditional segment. The decrease is primarily the result of a decrease
in investment related gains (losses), net due to the significant amount of investment related gains recognized in 2012 associated
with the portfolio restructure of a new fixed annuity transaction. In addition, rising interest rates during the year reduced the fair
value of embedded derivatives associated with treaties written on a modco or funds withheld basis. These decreases were slightly
offset by improved performance in Asset-Intensive business within the U.S. Non-Traditional segment mainly as a result of the
aforementioned fixed annuity transaction that was entered into during 2012 and the strong equity market performance in 2013.
39
In addition, continued growth in Financial Reinsurance business within the U.S. Non-Traditional segment also offset some of the
negative variance, with an increase in income of approximately $12.6 million, or 38.4%.
The increase in income before income taxes in 2012 can primarily be attributed to Asset-Intensive business within the
U.S. Non-Traditional segment. The increase in Asset-Intensive income before income taxes in 2012 is largely due to a new fixed
annuity coinsurance transaction entered into during the year and the effect of changes in credit spreads on the fair value of embedded
derivatives associated with treaties written on a modified coinsurance or funds withheld basis. Also contributing to the increase
in income in 2012 was the net effect of the embedded derivative supporting the guaranteed minimum living benefits associated
with the Company’s variable annuities, after adjustments for related deferred acquisition expenses.
Traditional Reinsurance
The U.S. Traditional segment provides life and health reinsurance to domestic clients for a variety of products through
yearly renewable term, coinsurance and modified coinsurance agreements. These reinsurance arrangements may involve either
facultative or automatic agreements.
Income before income taxes for the U.S. Traditional segment increased by $3.5 million, or 0.9%, and $4.1 million, or
1.1% in 2013 and 2012, respectively. The increase in income before income taxes in 2013 can be attributed to an increase in
investment income, net of related expenses, mainly due to a higher invested asset base and investment related gains (losses), net.
Offsetting this somewhat was slightly unfavorable mortality experience compared to 2012. The increase in income before income
taxes in 2012 is primarily due to slightly more favorable mortality experience in 2012 compared to 2011. Investment income
increased $39.9 million due to a higher invested asset base, however this was more than offset by a decrease in net investment
related gains of $46.7 million.
Net premiums increased $209.3 million, or 4.9%, and $329.3 million, or 8.3% in 2013 and 2012, respectively. These
increases in net premiums were driven primarily by the growth in individual life business in force and health and group related
coverages. The segment added new life business production, measured by face amount of insurance in force, of $89.7 billion,
$151.4 billion and $110.5 billion during 2013, 2012 and 2011, respectively. Total face amount of life business in force was $1,385.6
billion, $1,393.3 billion and $1,343.0 billion as of December 31, 2013, 2012 and 2011, respectively. Contributing to the increase
in 2012 was a large in force block transaction of $42.4 billion which contributed $64.8 million to the increase in net premiums.
In addition, premiums on health and group related coverages contributed $101.4 million and $164.6 million to the increase in net
premiums in 2013 and 2012, respectively.
Net investment income increased $7.1 million, or 1.3%, and $39.9 million, or 8.1%, in 2013 and 2012, respectively,
primarily due to growth in the average invested asset base offset by lower yields in both years. In 2012, a new in force transaction
was recorded which generated approximately $21.9 million of investment income. Investment related gains increased by $7.3
million and decreased by $46.7 million in 2013 and 2012, respectively. Investment income and investment related gains and losses
are allocated to the various operating segments based on average assets and related capital levels deemed appropriate to support
segment operations. Investment performance varies with the composition of investments and the relative allocation of capital to
the operating segments.
Claims and other policy benefits as a percentage of net premiums (“loss ratios”) were 86.9%, 86.6% and 86.9% in 2013,
2012 and 2011, respectively. Although reasonably predictable over a period of years, claims experience is typically volatile over
shorter periods.
Interest credited expense decreased $2.4 million, or 4.3%, and $4.2 million, or 7.1%, in 2013 and 2012, respectively.
The variances in interest credited expense are largely offset by variances in investment income. The decreases in both 2013 and
2012 can be attributed to one treaty in which the most prevalent credited loan rate decreased, partially offset by a slight increase
in its asset base. Interest credited in this segment relates to amounts credited on cash value products which also have a significant
mortality component. Income before income taxes is affected by the spread between the investment income and the interest credited
on the underlying products.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 13.8%, 13.9% and 14.0%
in 2013, 2012 and 2011, respectively. Overall, while these ratios are expected to remain in a predictable range, they may fluctuate
from period to period due to varying allowance levels within coinsurance-type arrangements. In addition, the amortization pattern
of previously capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying insurance policies,
may vary. Also, the mix of first year coinsurance business versus yearly renewable term business can cause the percentage to
fluctuate from period to period.
Other operating expenses increased $1.5 million, or 1.7%, and $6.1 million, or 7.1% in 2013 and 2012, respectively.
Other operating expenses, as a percentage of net premiums, were 2.1% in each of 2013, 2012 and 2011. The expense ratio tends
to fluctuate only slightly from period to period due to maturity and scale of this segment.
40
Non-Traditional - Asset-Intensive Reinsurance
Asset-Intensive within the U.S. Non-Traditional segment primarily assumes investment risk within underlying annuities
and corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance with funds withheld or modco
whereby the Company recognizes profits or losses primarily from the spread between the investment income earned and the interest
credited on the underlying deposit liabilities, as well as fees associated with variable annuity account values and guaranteed
investment contracts.
Impact of certain derivatives
Income for the asset-intensive business tends to be volatile due to changes in the fair value of certain derivatives, including
embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis, as well as embedded
derivatives associated with the Company’s reinsurance of EIAs and variable annuities with guaranteed minimum benefit riders.
Fluctuations occur period to period primarily due to changing investment conditions including, but not limited to, interest rate
movements (including risk-free rates and credit spreads), implied volatility and equity market performance, all of which are factors
in the calculations of fair value. Therefore, management believes it is helpful to distinguish between the effects of changes in these
derivatives, net of related hedging activity, and the primary factors that drive profitability of the underlying treaties, namely
investment income, fee income (included in other revenues), and interest credited. These fluctuations are considered unrealized
by management and do not affect current cash flows, crediting rates or spread performance on the underlying treaties.
The following table summarizes the asset-intensive results and quantifies the impact of these embedded derivatives for
the periods presented. Revenues before certain derivatives, benefits and expenses before certain derivatives, and income before
income taxes and certain derivatives, should not be viewed as substitutes for GAAP revenues, GAAP benefits and expenses, and
GAAP income before income taxes.
For the year ended December 31,
2013
2012
2011
(dollars in thousands)
Revenues:
Total revenues
Less:
Embedded derivatives – modco/funds withheld treaties
Guaranteed minimum benefit riders and related free standing derivatives
Revenues before certain derivatives
Benefits and expenses:
Total benefits and expenses
Less:
Embedded derivatives – modco/funds withheld treaties
Guaranteed minimum benefit riders and related free standing derivatives
Equity-indexed annuities
Benefits and expenses before certain derivatives
Income (loss) before income taxes:
Income before income taxes
Less:
Embedded derivatives – modco/funds withheld treaties
Guaranteed minimum benefit riders and related free standing derivatives
Equity-indexed annuities
$
897,693
$
829,187
$
355,895
68,285
(19,627)
849,035
697,345
41,068
(8,346)
(30,082)
694,705
200,348
27,217
(11,281)
30,082
117,055
49,392
662,740
593,602
75,849
27,862
5,264
484,627
235,585
41,206
21,530
(5,264)
(89,648)
(17,851)
463,394
320,565
(75,546)
(7,339)
16,507
386,943
35,330
(14,102)
(10,512)
(16,507)
76,451
Income before income taxes and certain derivatives
$
154,330
$
178,113
$
Embedded Derivatives - Modco/Funds Withheld Treaties - Represents the change in the fair value of embedded derivatives
on funds withheld at interest associated with treaties written on a modco or funds withheld basis. The fair value changes of
embedded derivatives on funds withheld at interest associated with treaties written on a modco or funds withheld basis are reflected
in revenues, while the related impact on deferred acquisition expenses is reflected in benefits and expenses. Changes in the fair
value of the embedded derivative are driven by changes in investment credit spreads, including the Company’s own credit risk.
Generally, an increase in investment credit spreads, ignoring changes in the Company’s own credit risk, will have a negative impact
on the fair value of the embedded derivative (decrease in income). Changes in fair values of these embedded derivatives are net
of an increase (decrease) in revenues of $(1.6) million, $(62.7) million and $23.1 million for the years ended December 31, 2013,
2012 and 2011, respectively, associated with the Company’s own credit risk. A 10% increase in the Company’s own credit risk
rate would have increased revenues in 2013 by approximately $0.1 million. Conversely, a 10% decrease in the Company’s own
credit risk rate would have decreased revenues in 2013 by approximately $0.1 million.
In 2013, the change in fair value of the embedded derivative increased revenues by $68.3 million and related deferred
acquisition expenses increased benefits and expenses by $41.1 million, for a positive pre-tax income impact of $27.2 million,
41
primarily due to a decrease in investment credit spreads. In 2012, the change in fair value of the embedded derivative increased
revenues by $117.1 million and related deferred acquisition expenses increased benefits and expenses by $75.8 million, for a
positive pre-tax income impact of $41.2 million, primarily due to a decrease in investment credit spreads.
Guaranteed Minimum Benefit Riders - Represents the impact related to guaranteed minimum benefits associated with
the Company’s reinsurance of variable annuities. The fair value changes of the guaranteed minimum benefits along with the
changes in fair value of the free standing derivatives (interest rate swaps, financial futures and equity options), purchased by the
Company to substantially hedge the liability are reflected in revenues, while the related impact on deferred acquisition expenses
is reflected in benefits and expenses. Changes in fair values of these embedded derivatives are net of an increase (decrease) in
revenues of $(12.5) and $16.5 million in 2013 and 2012, respectively, associated with the Company’s own credit risk. Changes
in fair values of embedded derivatives on variable annuity contracts associated with the Company’s own credit risk for the year
ended December 31, 2011 were not material. A 10% increase in the Company’s own credit risk rate would have increased revenues
by approximately $0.4 million in 2013. Conversely, a 10% decrease in the Company’s own credit risk rate would have decreased
revenues by approximately $0.4 million in 2013.
In 2013, the change in the fair value of the guaranteed minimum benefits, after allowing for changes in the associated
free standing derivatives to substantially economically hedge risk, decreased revenues by $19.6 million and related deferred
acquisition expenses decreased benefits and expenses by $8.3 million for a negative pre-tax income impact of $11.3 million. In
2012, the change in the fair value of the guaranteed minimum benefits, after allowing for changes in the associated free standing
derivatives to economically hedge risk, increased revenues by $49.4 million and related deferred acquisition expenses increased
benefits and expenses by $27.9 million for a positive pre-tax income impact of $21.5 million.
Equity-Indexed Annuities - Primarily represents the impact of changes in the benchmark rate on the calculation of the
fair value of embedded derivative liabilities associated with EIAs, after adjustments for related deferred acquisition expenses. In
2013 and 2012, expenses decreased $30.1 million and increased $5.3 million respectively.
Discussion and analysis before certain derivatives
Income before income taxes and certain derivatives decreased by $23.8 million and increased by $101.7 million in 2013
and 2012, respectively. The decrease in income in 2013 was largely a result of a higher level of investment related gains and
corresponding changes in DAC in 2012. This decrease was largely offset by the effect of a full year of earnings from a large
deferred annuity coinsurance agreement entered into during the second quarter of 2012. The increase in income in 2012 was in
part due to net changes in investment related gains and losses associated with the funds withheld and coinsurance portfolios and
their related DAC impact. Funds withheld capital gains and losses are reported through investment income while coinsurance
activity is reflected in investment related gains (losses), net. In addition, income earned on a new fixed annuity coinsurance
transaction also contributed to the increase in earnings in 2012 compared to 2011.
Revenue before certain derivatives increased by $186.3 million and $199.3 million in 2013 and 2012, respectively. These
increases were driven by a combination of changes in investment income related to equity options held in a funds withheld portfolio
associated with equity-indexed annuity treaties and an increase in investment income attributed to the new coinsurance agreement
mentioned above. The effect on investment income related to equity options is substantially offset by a corresponding change in
interest credited expense. In addition, other revenues increased $2.5 million and $27.1 million in 2013 and 2012, respectively, due
primarily to the amortization of the deferred profit liability associated with the new fixed annuity coinsurance transaction.
Benefits and expenses before certain derivatives increased by $210.1 million and $97.7 million in 2013 and 2012,
respectively. These increases were primarily due to an increase in interest credited related to the new fixed annuity coinsurance
transaction and EIAs. These changes were mostly offset by corresponding increases or decreases in investment income.
The invested asset base supporting this sub-segment decreased by $0.3 billion and increased by $5.4 billion in 2013 and
2012, respectively. The growth in the asset base in 2012 was driven by the new fixed annuity coinsurance transaction executed
during the year. As of December 31, 2013 and 2012, $4.3 billion and $4.2 billion, respectively, of the invested assets were funds
withheld at interest, of which 95.6% and 92.3%, respectively, was associated with one client.
Non-Traditional - Financial Reinsurance
Financial Reinsurance within the U.S. Non-Traditional segment income before income taxes consists primarily of net
fees earned on financial reinsurance transactions. Additionally, a portion of the business is brokered business in which the Company
does not participate in the assumption of risk. The fees earned from financial reinsurance contracts and brokered business are
reflected in other revenues, and the fees paid to retrocessionaires are reflected in policy acquisition costs and other insurance
expenses.
Income before income taxes increased by $12.6 million, or 38.4%, and $6.4 million, or 24.2%, in 2013 and 2012,
respectively. The increases in 2013 and 2012 were primarily related to the addition of new contracts and related additional fees
from financial reinsurance.
42
At December 31, 2013, 2012 and 2011, the amount of reinsurance assumed from client companies, as measured by pre-
tax statutory surplus, risk based capital and other financial reinsurance structures, was $4.4 billion, $2.7 billion and $2.0 billion,
respectively. The increases in both 2013 and 2012 can primarily be attributed to an increase in the number of new transactions
executed each year and is consistent with the increase in related income. Fees earned from this business can vary significantly
depending on the size of the transactions and the timing of their completion and, therefore, can fluctuate from period to period.
Canada Operations
The Company conducts reinsurance business in Canada primarily through RGA Life Reinsurance Company of Canada
(“RGA Canada”), a wholly-owned subsidiary. RGA Canada assists clients with capital management activity and mortality and
morbidity risk management, and is primarily engaged in traditional individual life reinsurance, as well as creditor, group life and
health, critical illness, and longevity reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or
commercial loans in the event of death, disability or critical illness and is generally shorter in duration than individual life insurance.
For the year ended December 31,
2013
2012
2011
(dollars in thousands)
Revenues:
Net premiums
Investment income, net of related expenses
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity securities
Other-than-temporary impairments on fixed maturity securities transferred to
(from) accumulated other comprehensive income
Other investment related gains (losses), net
Total investment related gains (losses), net
Other revenues
Total revenues
Benefits and expenses:
Claims and other policy benefits
Interest credited
Policy acquisition costs and other insurance expenses
Other operating expenses
Total benefits and expenses
Income before income taxes
$
962,311
$
204,851
915,764
$
190,337
—
—
17,010
17,010
845
—
—
27,659
27,659
6,504
835,298
188,304
—
—
26,996
26,996
5,433
1,185,017
1,140,264
1,056,031
758,519
46
221,638
40,496
1,020,699
706,716
28
206,337
40,212
953,293
$
164,318
$
186,971
$
673,105
—
180,712
37,261
891,078
164,953
Income before income taxes decreased by $22.7 million, or 12.1%, and increased by $22.0 million, or 13.3%, in 2013
and 2012, respectively. The decrease in 2013 is due to better traditional individual life mortality experience in the prior year and
a decrease of $10.6 million in net investment related gains. In addition, 2012 income before income taxes reflected the impact of
a decrease in reserves of $16.2 million for a block of group creditor business as a result of a refinement of estimates and $6.3
million of income from the recapture of a previously assumed block of individual life business. The increase in income in 2012
is primarily due to the aforementioned items. Foreign currency exchange fluctuation in the Canadian dollar resulted in a decrease
in income before income taxes of approximately $6.1 million and $0.9 million in 2013 and 2012, respectively.
Net premiums increased $46.5 million, or 5.1%, and $80.5 million, or 9.6%, in 2013 and 2012, respectively. Foreign
currency exchange fluctuation in the Canadian dollar resulted in a decrease in net premiums of approximately $29.4 million and
$9.0 million in 2013 and 2012, respectively. Premiums increased in 2013 and 2012 primarily due to new business from both new
and existing treaties. In addition, creditor premiums increased by $10.1 million and $23.9 million in 2013 and 2012, respectively.
The segment added new business production, measured by face amount of insurance in force, of $46.0 billion, $49.0 billion and
$51.1 billion during 2013, 2012 and 2011, respectively. The face amount of total reinsurance in force totaled approximately $386.3
billion, $389.7 billion, and $344.9 billion at December 31, 2013, 2012 and 2011, respectively. Excluding the impact of foreign
exchange, reinsurance in force increased 6.8% in 2013. Premium levels can be significantly influenced by currency fluctuations,
large transactions, mix of business and reporting practices of ceding companies, and therefore may fluctuate from period to period.
Net investment income increased $14.5 million, or 7.6%, and $2.0 million, or 1.1%, in 2013 and 2012, respectively. The
effect of changes in the Canadian dollar exchange rates resulted in a decrease in net investment income of approximately $6.4
million and $2.9 million in 2013 and 2012, respectively. Investment income and investment related gains and losses are allocated
to the segments based upon average assets and related capital levels deemed appropriate to support segment operations. Investment
performance varies with the composition of investments and the relative allocation of capital to the operating segments. The
increases in investment income, excluding the impact of foreign exchange, were mainly the result of increases in the average
invested asset base due to growth in the underlying business volume, offset by decreases in investment yields.
43
Other revenues decreased by $5.7 million and increased by $1.1 million in 2013 and 2012, respectively. Other revenues
in 2012 were primarily related to fees earned from the modification of an existing treaty and a fee earned from the recapture of a
previously assumed block of individual life business. Other revenues in 2011 were primarily related to a $4.9 million fee earned
from the recapture of a previously assumed block of individual life business.
Loss ratios for this segment were 78.8%, 77.2% and 80.6% in 2013, 2012 and 2011, respectively. The increase in the
loss ratio for 2013 compared to 2012 is due to better traditional individual life mortality experience in 2012. Loss ratios for the
traditional individual life mortality business were 93.7%, 91.8% and 93.4% in 2013, 2012 and 2011, respectively. The decrease
in the 2012 loss ratio was primarily due to the aforementioned $16.2 million decrease in reserves for a block of group creditor
business. Excluding creditor business, loss ratios for this segment were 92.3%, 90.9% and 92.1% in 2013, 2012 and 2011,
respectively. Historically, the loss ratio increased primarily as the result of several large permanent level premium in force blocks
assumed in 1997 and 1998. These blocks are mature blocks of long-term permanent level premium business in which mortality
as a percentage of net premiums is expected to be higher than historical ratios. The nature of permanent level premium policies
requires the Company to set up actuarial liabilities and invest the amounts received in excess of early-year claims costs to fund
claims in later years when premiums, by design, continue to be level as compared to expected increasing mortality or claim costs.
Excluding creditor business, claims and other policy benefits, as a percentage of net premiums and investment income were 72.6%,
71.8% and 72.0% in 2013, 2012 and 2011, respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums totaled 23.0%, 22.5% and 21.6%
in 2013, 2012 and 2011, respectively. Policy acquisition costs and other insurance expenses as a percentage of net premiums for
traditional individual life business were 12.7%, 12.7% and 12.6% in 2013, 2012 and 2011, respectively. Overall, while these ratios
are expected to remain in a predictable range, they may fluctuate from period to period due to varying allowance levels and product
mix. In addition, the amortization pattern of previously capitalized amounts, which are subject to the form of the reinsurance
agreement and the underlying insurance policies, may vary.
Other operating expenses increased $0.3 million, or 0.7%, and $3.0 million, or 7.9%, in 2013 and 2012, respectively.
The effect of changes in the Canadian dollar exchange rates resulted in decreases in operating expenses of approximately $1.1
million and $0.3 million in 2013 and 2012, respectively. Other operating expenses as a percentage of net premiums were 4.2%,
4.4% and 4.5% in 2013, 2012 and 2011, respectively.
Europe & South Africa Operations
The Europe & South Africa segment includes business generated by our offices principally in the UK, South Africa,
France, Germany, India, Ireland, Italy, Mexico, the Netherlands, Poland, Spain, Turkey and the UAE. The segment provides
reinsurance for a variety of life and health products through yearly renewable term and coinsurance agreements, critical illness
coverage and longevity risk related to payout annuities. Reinsurance agreements may be facultative or automatic agreements
covering primarily individual risks and, in some markets, group risks.
For the year ended December 31,
(dollars in thousands)
Revenues:
Net premiums
Investment income, net of related expenses
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity securities
Other-than-temporary impairments on fixed maturity securities transferred
to (from) accumulated other comprehensive income
Other investment related gains (losses), net
Total investment related gains (losses), net
Other revenues
Total revenues
Benefits and expenses:
Claims and other policy benefits
Interest credited
Policy acquisition costs and other insurance expenses
Other operating expenses
Total benefits and expenses
Income before income taxes
2013
2012
2011
$
$
1,331,559
55,604
$
1,308,462
45,576
$
1,194,477
44,351
—
—
9,161
9,161
25,164
1,421,488
1,159,318
6,114
55,054
111,880
1,332,366
89,122
$
—
—
11,574
11,574
6,679
1,372,291
1,134,219
—
51,236
112,889
1,298,344
73,947
$
(332)
—
6,332
6,000
5,031
1,249,859
1,001,921
—
59,217
105,619
1,166,757
83,102
Income before income taxes increased by $15.2 million, or 20.5%, and decreased by $9.2 million, or 11.0%, in 2013 and
2012, respectively. The increase in income before income taxes in 2013 was primarily due to increased business volumes, most
notably in fee income treaties, partially offset by unfavorable claims experience. The decrease in income before income taxes in
44
2012 was primarily due to unfavorable claims experience in the UK. Foreign currency exchange fluctuations contributed to a
decrease in income before income taxes of approximately $2.6 million and $5.9 million in 2013 and 2012, respectively.
Net premiums grew by $23.1 million, or 1.8%, and $114.0 million, or 9.5%, in 2013 and 2012, respectively. These
increases were the result of new business from both new and existing treaties including an increase associated with reinsurance
of longevity risk in the UK of $48.0 million and $39.0 million in 2013 and 2012, respectively. In addition, net premiums in 2013
and 2012 include approximately $9.9 million and $110.0 million, respectively, associated with single premium in force transactions
in Italy. The segment added new business production, measured by face amount of insurance in force, of $132.8 billion, $136.0
billion and $148.3 billion during 2013, 2012 and 2011, respectively. The face amount of reinsurance in force totaled approximately
$629.8 billion, $602.5 billion, and $513.4 billion at December 31, 2013, 2012 and 2011, respectively. Foreign currency exchange
fluctuations contributed to a decrease in net premiums of approximately $30.3 million and $51.6 million in 2013 and 2012,
respectively. The segment’s primary currencies are the British pound, the Euro and the South African rand. Premium levels can
be significantly influenced by currency fluctuations, large transactions and reporting practices of ceding companies and therefore
can fluctuate from period to period.
A portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage,
primarily in the UK. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Net premiums
earned from this coverage totaled $255.5 million, $248.6 million and $244.8 million in 2013, 2012 and 2011, respectively.
Net investment income increased $10.0 million, or 22.0%, and $1.2 million, or 2.8%, in 2013 and 2012, respectively.
The increase in 2013 can be primarily attributed to growth in the average invested asset base. The increase in 2012 can be primarily
attributed to growth in the average invested asset base largely offset by a decrease in the investment yields. Investment income
and investment related gains and losses are allocated to the various operating segments based on average assets and related capital
levels deemed appropriate to support segment operations. Investment performance varies with the composition of investments
and the relative allocation of capital to the operating segments.
Other revenues increased by $18.5 million, or 276.8% and $1.6 million, or 32.8%, in 2013 and 2012, respectively. The
increase in other revenues in 2013 relates to a new transaction in Continental Europe which resulted in initial fee income of $14.8
million. At December 31, 2013 and 2012, the amount of reinsurance assumed from client companies, as measured by pre-tax
statutory surplus, risk based capital and other financial reinsurance structures was $1.0 billion and $0.3 billion, respectively. The
increase was primarily due to the aforementioned transaction in Continental Europe. Fees earned from this business can vary
significantly depending on the size of the transactions and the timing of their completion and, therefore, can fluctuate from period
to period.
Loss ratios for this segment were 87.1%, 86.7% and 83.9% in 2013, 2012 and 2011, respectively. The increases in the
loss ratios in 2013 and 2012 were due to unfavorable claims experience, primarily from UK critical illness and mortality coverages.
Although reasonably predictable over a period of years, claims experience is typically volatile over shorter periods. Management
views recent experience as normal volatility that is inherent in the business.
Interest credited expense increased by $6.1 million in 2013. Interest credited in this segment relates to amounts credited
to the contractholders of unit-linked variable annuities associated with the Company’s acquisition of Leidsche Verzekeringen
Maatschappij N.V. on August 13, 2013. The effect on interest credited related to unit-linked variable annuities is substantially
offset by a corresponding change in investment income and investment related gains (losses), net.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 4.1%, 3.9% and 5.0% for
2013, 2012 and 2011, respectively. The increase in the ratio in 2013 is primarily due to new treaties and the performance of existing
treaties containing significant ceding allowances. The decrease in the ratio in 2012 is related to a decrease in the amortization of
deferred acquisition costs affected by the mix of business, primarily in the UK. These percentages fluctuate due to timing of client
company reporting, variations in the mixture of business and the relative maturity of the business. In addition, as the segment
grows, renewal premiums, which have lower allowances than first-year premiums, represent a greater percentage of the total net
premiums.
Other operating expenses decreased by $1.0 million, or 0.9%, and increased by $7.3 million, or 6.9%, in 2013 and 2012,
respectively. Foreign currency exchange fluctuations resulted in a decrease in operating expenses of approximately $0.8 million
and $3.9 million 2013 and 2012, respectively. Other operating expenses as a percentage of net premiums totaled 8.4%, 8.6% and
8.8% in 2013, 2012 and 2011, respectively. These decreases in expenses as a percentage of net premiums reflect sustained growth
in net premiums for this segment.
45
Asia Pacific Operations
The Asia Pacific segment includes business generated by our offices principally in Australia, Hong Kong, Japan, Malaysia,
Singapore, New Zealand, South Korea, Taiwan and mainland China. The principal types of reinsurance include life, critical illness,
disability, superannuation, and financial reinsurance. Superannuation is the Australian government mandated compulsory
retirement savings program. Superannuation funds accumulate retirement funds for employees, and, in addition, offer life and
disability insurance coverage. Reinsurance agreements may be facultative or automatic agreements covering primarily individual
risks and in some markets, group risks.
For the year ended December 31,
2013
2012
2011
(dollars in thousands)
Revenues:
Net premiums
Investment income, net of related expenses
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity securities
Other-than-temporary impairments on fixed maturity securities transferred
to (from) accumulated other comprehensive income
Other investment related gains (losses), net
Total investment related gains (losses), net
Other revenues
Total revenues
Benefits and expenses:
Claims and other policy benefits
Interest credited
Policy acquisition costs and other insurance expenses
Other operating expenses
Total benefits and expenses
Income (loss) before income taxes
$
1,419,828
$
1,350,330
$
91,927
83,387
—
—
(5,596)
(5,596)
35,300
—
—
8,990
8,990
52,838
1,541,459
1,495,545
1,430,255
1,118
222,833
122,464
1,776,670
1,079,699
1,311
252,041
117,116
1,450,167
$
(235,211) $
45,378
$
1,304,490
84,837
(336)
—
7,350
7,014
34,073
1,430,414
1,076,833
1,149
201,130
109,068
1,388,180
42,234
Income before income taxes decreased by $280.6 million, or 618.3%, and increased by $3.1 million, or 7.4%, in 2013
and 2012, respectively. The decrease in income before income taxes in 2013 is primarily due to a $274.1 million increase in
Australian group claims liabilities related to total and permanent disability coverage and disability income benefits occurring in
the second quarter of 2013, as discussed further below, as well as poor claims experience in the Australian operation's individual
disability business. Other operations in this segment reported results in line with management's expectations. In total, the Australia
operation reported a loss before income taxes of $291.6 million in 2013, while the other operations in this segment reported income
before income taxes of $56.4 million for the same period. The increase in income in 2012 was primarily due to strong revenue
growth in Hong Kong, Southeast Asia and Japan partially offset by both adverse claims experience and a net increase of $46.5
million in benefit reserves in Australia. Foreign currency exchange fluctuations contributed to an increase in income before income
taxes of approximately $7.6 million in 2013 and a decrease of approximately $0.8 million in 2012.
Net premiums increased by $69.5 million, or 5.1%, and $45.8 million, or 3.5%, in 2013 and 2012, respectively. Premiums
in 2013 increased mainly in Hong Kong and South East Asia, and Australia with new treaties and growth in existing treaties,
partially offset by a decrease in premiums in South Korea. Premiums in 2012 increased in most markets primarily due to new
treaties and increased production under existing treaties, notably Hong Kong and Southeast Asia by $52.0 million and Australia
and New Zealand, which increased by $25.0 million. These increases are partially offset by decreases in Japan and Korea. The
segment added new business production, measured by face amount of insurance in force, of $101.9 billion, $90.2 billion and
$119.0 billion during 2013, 2012 and 2011, respectively. The face amount of reinsurance in force totaled approximately $486.0
billion, $539.8 billion, and $457.6 billion at December 31, 2013, 2012 and 2011, respectively. Foreign currency fluctuations
unfavorably affected the face amount of reinsurance in force by $59.1 billion in 2013. Foreign currency exchange fluctuations
contributed to a decrease in net premiums of approximately $82.3 million and $2.0 million in 2013 and 2012, respectively. Premium
levels can be significantly influenced by currency fluctuations, large transactions and reporting practices of ceding companies
and, therefore, can fluctuate from period to period.
A portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage.
This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Reinsurance of critical illness in the
Asia Pacific operations is offered primarily in South Korea, Australia and Hong Kong. Net premiums from this coverage totaled
$246.6 million, $224.4 million, and $157.3 million in 2013, 2012 and 2011, respectively.
46
Net investment income increased $8.5 million, or 10.2%, and decreased by $1.5 million, or 1.7%, in 2013 and 2012,
respectively. The increase in 2013 can be primarily attributed to growth in the invested asset base. The decrease in 2012 was
primarily due to lower investment yields largely offset by growth in the average invested asset base. Investment income and
investment related gains and losses are allocated to the various operating segments based on average assets and related capital
levels deemed appropriate to support segment operations. Investment performance varies with the composition of investments
and the relative allocation of capital to the operating segments.
Other revenues decreased by $17.5 million, or 33.2%, and increased by $18.8 million, or 55.1%, in 2013 and 2012,
respectively. The primary source of other revenues is fees from financial reinsurance treaties in Japan. The decrease in other
revenues in 2013 relates to a reduction in the amount of financial reinsurance assumed and a transaction with a client in Australia
which resulted in a one-time fee of $12.2 million recognized in 2012. The transaction did not have a significant impact on income
before taxes because the amount was offset by additional amortization of deferred acquisition costs, net of the release of reserves.
The increase in other revenues in 2012 is largely due to the aforementioned transaction with a client in Australia and reflects fees
from two new financial reinsurance treaties in Japan. At December 31, 2013 and 2012, the amount of reinsurance assumed from
client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures was $1.5
billion and $2.1 billion, respectively. The decrease was primarily due to several financial reinsurance agreements, which are
performing as expected, where the amount of reinsurance assumed from the client decreases over time. Fees earned from this
business can vary significantly depending on the size of the transactions and the timing of their completion and therefore can
fluctuate from period to period.
Loss ratios for this segment were 100.7%, 80.0% and 82.5% for 2013, 2012 and 2011, respectively. The increase in the
loss ratio for 2013 is primarily due to a $274.1 million increase in Australian group claims liabilities recognized in the second
quarter of 2013 as well as poor claims experience in the Australian operation's individual disability business. The increase in
liabilities is reflected in the table above in claims and other policy benefits. Excluding the Australia operation, loss ratio for this
segment in 2013 was 78.9%.
The largest portion of the Australian liability increase relates to group total and permanent disability coverage, and to a
lesser extent, group disability income benefits. The Company completed a comprehensive claims analysis in the second quarter
of 2013 that indicated an increase in claim incidences as well as an increase in claim lags throughout the claim reporting process.
Even though these group contracts are typically only three years in duration, the increase in developing loss ratios, compared to
pricing, created the need for a significant increase in claims liabilities. The additional liabilities recorded reflect potential additional
deterioration in the projection of future claims development. The Company believes a number of factors in the current Australian
market are leading to a significant rise in claim levels and reporting lags, and the Company is working with the ceding companies
to better manage this business. The Company suspended new quoting activity in the Australian group total and permanent disability
market indefinitely, however the Company is required to provide renewal quotes in some instances. Group premiums recognized
in Australia for all group coverage types, including total and permanent disability, were $353.7 million and $369.1 million for the
years ended December 31, 2013 and 2012, respectively.
In 2012, while Australia experienced adverse individual and group claims experience as well as a net $46.5 million
increase in claim liabilities for group life, and total and permanent disability (“TPD”) reinsurance business, loss ratios decreased
for most other offices. Australia’s additional claim liabilities in 2012 were primarily associated with group treaties that exhibited
emerging negative claims development.
Interest credited expense decreased by $0.2 million, or 14.7%, and increased by $0.2 million, or 14.1%, in 2013 and
2012, respectively. The decrease in 2013 is due to a decrease in value of the Japanese yen and the run-off of an asset-intensive
treaty entered into in 2011. The increase in 2012 was due to contractual interest related to a new asset-intensive treaty in Japan
entered into in 2011.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 15.7%, 18.7% and 15.4%
for 2013, 2012 and 2011, respectively. The increase in the ratio in 2012 was due to additional amortization of deferred acquisition
costs which largely offsets the one-time fee related to the aforementioned transaction with a client in Australia. The ratio of policy
acquisition costs and other insurance expenses as a percentage of net premiums should generally decline as the business matures;
however, the percentage does fluctuate periodically due to variations in the mixture of business.
Other operating expenses increased $5.3 million, or 4.6%, and $8.0 million, or 7.4%, in 2013 and 2012, respectively.
Foreign currency exchange fluctuations resulted in a decrease in operating expenses of approximately $4.3 million and an increase
of approximately $0.3 million in 2013 and 2012, respectively. Other operating expenses as a percentage of net premiums totaled
8.6%, 8.7% and 8.4% in 2013, 2012 and 2011, respectively. The timing of premium flows and the level of costs associated with
the entrance into and development of new markets in the Asia Pacific segment may cause other operating expenses as a percentage
of net premiums to fluctuate over periods of time.
47
Corporate and Other
Corporate and Other revenues include investment income and investment related gains and losses from unallocated
invested assets. Corporate and Other expenses consist of the offset to capital charges allocated to the operating segments within
the policy acquisition costs and other insurance income line item, unallocated overhead and executive costs, interest expense
related to debt, and the investment income and expense associated with the Company’s collateral finance facility. Additionally,
Corporate and Other includes results from, among others, RTP, a wholly-owned subsidiary that develops and markets technology
solutions for the insurance industry.
For the year ended December 31,
2013
2012
2011
(dollars in thousands)
Revenues:
Net premiums
Investment income, net of related expenses
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity securities
Other-than-temporary impairments on fixed maturity securities transferred to
(from) accumulated other comprehensive income
Other investment related gains (losses), net
Total investment related gains (losses), net
Other revenues
Total revenues
Benefits and expenses:
Claims and other policy benefits
Interest credited
Policy acquisition costs and other insurance income
Other operating expenses
Interest expenses
Collateral finance facility expense
Total benefits and expenses
Income (loss) before income taxes
$
(243) $
83,544
9,165
$
82,818
(3,990)
6
(1,483)
(5,467)
61,105
138,939
5
802
(74,303)
77,866
124,307
10,449
139,126
(3,734)
(1,315)
7,928
2,879
15,315
110,177
(76)
52
(52,165)
68,304
105,348
12,197
133,660
$
(187) $
(23,483) $
8,744
105,169
(9,136)
176
(3,655)
(12,615)
76,881
178,179
768
—
(52,457)
67,194
102,638
12,391
130,534
47,645
Loss before income taxes decreased by $23.3 million, or 99.2%, and income before income taxes decreased by $71.1
million, or 149.3%, in 2013 and 2012, respectively. The decrease in loss before income taxes in 2013 is primarily due to an increase
in other revenues of $45.8 million, partially offset by a $19.0 million increase in interest expense, a decrease in investment related
gains and an increase in other operating expenses. The decrease in income before income taxes in 2012 is primarily due to a $61.6
million decrease in other revenue and a $22.4 million decrease in investment income.
Total revenues increased $28.8 million, or 26.1%, and decreased $68.0 million, or 38.2%, in 2013 and 2012, respectively.
The increase in total revenues in 2013 was largely due to a $46.5 million gain on repurchase of collateral finance facility securities,
included in other revenues, partially offset by a decrease in net premiums of $9.4 million primarily due to treaty terminations and
modifications, and a decrease in other investment related gains (losses) of $9.4 million primarily due to a decrease in investment
related gains on the fair value of interest rate swaps. The decrease in total revenues in 2012 is largely due to a $61.6 million
decrease in other revenue due to gains on the repurchase of collateral finance facility securities of $65.6 million in 2011 and a
$22.4 million decrease in investment income due to lower investment yields.
Total benefits and expenses increased $5.5 million or 4.1%, and $3.1 million or 2.4%, in 2013 and 2012, respectively.
The increase in total benefits and expenses in 2013 was primarily due to an increase in interest expense of $19.0 million, as a
result of a higher level of outstanding debt, and an increase in other operating expenses of $9.6 million primarily relating to
employee compensation. These expense increases were largely offset by a $22.1 million decrease in policy acquisition costs and
other insurance income primarily related to the offset to capital charges allocated to the operating segments. The increase in total
benefits and expenses in 2012 is primarily due to an increase in interest expense of $2.7 million largely due to interest expense
related to uncertain tax positions of $2.7 million.
48
Deferred Acquisition Costs
DAC related to interest-sensitive life and investment-type contracts is amortized over the lives of the contracts, in relation
to the present value of estimated gross profits (“EGP”) from mortality, investment income, and expense margins. The EGP for
asset-intensive products include the following components: (1) estimates of fees charged to policyholders to cover mortality,
surrenders and maintenance costs; (2) expected interest rate spreads between income earned and amounts credited to policyholder
accounts; and (3) estimated costs of administration. EGP is also reduced by the Company’s estimate of future losses due to defaults
in fixed maturity securities as well as the change in reserves for embedded derivatives. DAC is sensitive to changes in assumptions
regarding these EGP components, and any change in such assumptions could have an effect on the Company’s profitability.
The Company periodically reviews the EGP valuation model and assumptions so that the assumptions reflect best estimates
of future experience. Two assumptions are considered to be most significant: (1) estimated interest spread, and (2) estimated future
policy lapses. The following table reflects the possible change that would occur in a given year if assumptions, as a percentage of
current deferred policy acquisition costs related to asset-intensive products ($884.4 million as of December 31, 2013), are changed
as illustrated:
Quantitative Change in Significant Assumptions
One-Time Increase in
DAC
One-Time Decrease in
DAC
Estimated interest spread increasing (decreasing) 25 basis points from the current spread
Estimated future policy lapse rates decreasing (increasing) 20% on a permanent basis
(including surrender charges)
2.27%
1.44%
(2.44)%
(1.22)%
In general, a change in assumption that improves the Company’s expectations regarding EGP is going to have the effect
of deferring the amortization of DAC into the future, thus increasing earnings and the current DAC balance. DAC can be no greater
than the initial DAC balance plus interest and would be subject to recoverability testing which is ignored for purposes of this
analysis. Conversely, a change in assumption that decreases EGP will have the effect of speeding up the amortization of DAC,
thus reducing earnings and lowering the DAC balance. The Company also adjusts DAC to reflect changes in the unrealized gains
and losses on available-for-sale fixed maturity securities since these changes affect EGP. This adjustment to DAC is reflected in
accumulated other comprehensive income.
The DAC associated with the Company’s non-asset-intensive business is less sensitive to changes in estimates for
investment yields, mortality and lapses. In accordance with generally accepted accounting principles, the estimates include
provisions for the risk of adverse deviation and are not adjusted unless experience significantly deteriorates to the point where a
premium deficiency exists.
The following table displays DAC balances for asset-intensive business and non-asset-intensive business by segment as
of December 31, 2013:
(dollars in thousands)
U.S. Traditional
U.S. Non-Traditional
Canada
Europe & South Africa
Asia Pacific
Corporate and Other
Total
Asset-Intensive DAC
Non-Asset-
Intensive DAC
Total DAC
— $
1,591,100
$
1,591,100
884,377
—
—
—
—
—
259,092
302,007
481,220
—
884,377
259,092
302,007
481,220
—
884,377
$
2,633,419
$
3,517,796
$
$
As of December 31, 2013, the Company estimates that all 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.
49
Liquidity and Capital Resources
Current Market Environment
The current interest rate environment in select markets, primarily the U.S., continues to negatively affect the Company’s
earnings. The average investment yield, excluding funds withheld and other spread business, has decreased 25 basis points in 2013
as compared to 2012. In addition, the Company’s insurance liabilities, in particular its annuity products, are sensitive to changing
market factors. Results of operations in 2013 and 2012 reflect favorable changes in the value of embedded derivatives as credit
spreads in the U.S. markets continue to tighten since 2011. However, a rise in interest rates in 2013 has reduced gross unrealized
gains on fixed maturity and equity securities available-for-sale, which were $1,524.3 million and $2,871.4 million at December
31, 2013 and 2012, respectively. Gross unrealized losses totaled $324.6 million and $133.6 million at December 31, 2013 and
2012, respectively.
The Company continues to be in a position to hold any investment security showing an unrealized loss until recovery,
provided it remains comfortable with the credit of the issuer. As indicated above, gross unrealized gains on investment securities
of $1,524.3 million remain well in excess of gross unrealized losses of $324.6 million as of December 31, 2013. Historically low
interest rates continued to put pressure on the Company’s investment yield. In December 2013, the U.S. Federal Reserve announced
that it was modestly tapering its quantitative easing ("QE") program. The Federal Reserve Bank or New York indicated that the
“sizeable and still increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates,
support mortgage markets, and help to make broader financial conditions more accommodative.” The Company does not rely on
short-term funding or commercial paper and to date it has experienced no liquidity pressure, nor does it anticipate such pressure
in the foreseeable future.
The Company projects its reserves to be sufficient and it would not expect to write down deferred acquisition costs or
be required to take any actions to augment capital, even if interest rates remain at current levels for the next five years, assuming
all other factors remain constant. While the Company has felt the pressures of sustained low interest rates and volatile equity
markets and may continue to do so, its business operations are not overly sensitive to these risks. Although management believes
the Company’s current capital base is adequate to support its business at current operating levels, it continues to monitor new
business opportunities and any associated new capital needs that could arise from the changing financial landscape.
The Holding Company
RGA is an insurance holding company whose primary uses of liquidity include, but are not limited to, the immediate
capital needs of its operating companies, dividends paid to its shareholders, repurchase of common stock and interest payments
on its indebtedness. RGA recognized interest expense of $162.2 million, $143.3 million and $111.6 million in 2013, 2012 and
2011, respectively. RGA made capital contributions to subsidiaries of $144.5 million, $70.4 million and $105.6 million in 2013,
2012 and 2011, respectively. Dividends to shareholders were $77.6 million, $61.9 million and $44.2 million in 2013, 2012 and
2011, respectively. RGA made principal payments on debt of $200.0 million in 2011. The primary sources of RGA’s liquidity
include proceeds from its capital raising efforts, interest income on undeployed corporate investments, interest income received
on surplus notes with RGA Reinsurance, RCM and Rockwood Re and dividends from operating subsidiaries. RGA recognized
interest and dividend income of $275.2 million, $86.4 million and $245.6 million in 2013, 2012 and 2011, respectively. Net
proceeds from unaffiliated long-term debt issuance were $395.1 million, $393.7 million and $394.4 million in 2013, 2012 and
2011, respectively. Proceeds from affiliated long-term debt issuance were $500.0 million in 2011. As the Company continues its
expansion efforts, RGA will continue to be dependent upon these sources of liquidity. As of December 31, 2013 and 2012, RGA
held $788.4 million and $722.3 million, respectively, of cash and cash equivalents, short-term and other investments and fixed
maturity investments. See “Part IV – Item 15(a)(2) Financial Statement Schedules – Schedule II – Condensed Financial Information
of Registrant” for more information regarding RGA’s financial information.
RGA, through wholly-owned subsidiaries, has committed to provide statutory reserve support to third-parties, in exchange
for a fee, by funding loans if certain defined events occur. Such statutory reserves are required under the U.S. Valuation of Life
Policies Model Regulation (commonly referred to as Regulation XXX for term life insurance policies and Regulation A-XXX for
universal life secondary guarantees). The third-parties have recourse to RGA should the subsidiary fail to provide the required
funding, however, as of December 31, 2013, the Company does not believe that it will be required to provide any funding under
these commitments as the occurrence of the defined events is considered remote. See Note 12 - “Commitments and Contingent
Liabilities” in the Notes to Consolidated Financial Statements for a table that presents these commitments by period and maximum
obligation.
RGA established an intercompany revolving credit facility where certain subsidiaries can lend to or borrow from each
other and from RGA in order to manage capital and liquidity more efficiently. The intercompany revolving credit facility, which
is a series of demand loans among RGA and its affiliates, is permitted under applicable insurance laws. This facility reduces overall
borrowing costs by allowing RGA and its operating companies to access internal cash resources instead of incurring third-party
transaction costs. The statutory borrowing and lending limit for RGA’s Missouri-domiciled insurance subsidiaries is currently 3%
of the insurance company’s admitted assets as of its most recent year-end. There was $50.0 million outstanding under the
50
intercompany revolving credit facility as of December 31, 2013 and none as of December 31, 2012. In addition to loans associated
with the intercompany revolving credit facility, RGA and its subsidiary, RGA Capital LLC, each provided a loan to RGA Australian
Holdings Pty Limited, another RGA subsidiary, with each of the loans having an outstanding balance of $26.8 million as of
December 31, 2013.
The Company believes that it has sufficient liquidity for the next 12 months to fund its cash needs under various scenarios
that include the potential risk of early recapture of reinsurance treaties and higher than expected death claims. Historically, the
Company has generated positive net cash flows from operations. However, in the event of significant unanticipated cash
requirements beyond normal liquidity, the Company has multiple liquidity alternatives available based on market conditions and
the amount and timing of the liquidity need. These options include borrowings under committed credit facilities, secured borrowings,
the ability to issue long-term debt, preferred securities or common equity and, if necessary, the sale of invested assets, subject to
market conditions.
In July 2013, the Company’s quarterly dividend was increased to $0.30 per share from $0.24 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.
In January 2013, RGA’s board of directors authorized a share repurchase program, with no expiration date, to repurchase
up to $200 million of RGA’s outstanding common stock. During 2013, the board of directors authorized additional repurchases
bringing the total amount of the RGA's outstanding common stock authorized for repurchase to $400.0 million. During 2013,
RGA repurchased 4,151,312 shares of common stock under this program for $261.3 million. The common shares repurchased
have been placed into treasury to be used for general corporate purposes.
On February 20, 2014, RGA’s board of directors authorized a share repurchase program for up to $300.0 million of the
RGA’s outstanding common stock. The authorization is effective immediately and does not have an expiration date. In connection
with this new authorization, the board of directors terminated the stock repurchase authority granted in 2013.
The Company did not have any significant changes in its capital structure during 2012; however, in anticipation of the
redemption and remarketing of RGA’s trust preferred securities as discussed below in “Debt,” RGA purchased 3.0 million shares
of its outstanding common stock from MetLife, Inc. in February 2011, at a price of $61.14 per share, reflecting the most recent
closing price of the Company’s common stock. The purchased common shares were placed into treasury for general corporate
purposes.
In March 2011, RGA entered into an accelerated share repurchase (“ASR”) agreement with a financial counterparty.
Under the ASR agreement, RGA purchased 2.5 million shares of its outstanding common stock at an initial price of $59.76 per
share and an aggregate price of approximately $149.4 million. The purchase price was funded from cash on hand. The counterparty
completed its purchases during the second quarter of 2011 and as a result, RGA was required to pay $4.3 million to the counterparty
for the final settlement which resulted in a final price of $61.47 per share on the repurchased common stock. The common shares
repurchased were placed into treasury to be used for general corporate purposes.
The Company’s share repurchase transactions during 2011 were intended to offset share dilution associated with the
issuance of approximately 5.5 million common shares from the exercise of warrants as discussed below in “Debt”.
During the third quarter of 2011, RGA repurchased 838,362 shares of common stock under a previously approved stock
repurchase program for $43.1 million. The common shares repurchased were placed into treasury to be used for general corporate
purposes.
See Note 3 - "Stock Transactions", Note 13 - “Debt” and Note 20 - “Subsequent Event” in the Notes to Consolidated
Financial Statements for additional information regarding the Company’s securities transactions.
Statutory Dividend Limitations
RCM and RGA Reinsurance are subject to Missouri statutory provisions that restrict the payment of dividends. They
may not pay dividends in any 12-month period in excess of the greater of the prior year’s statutory net gain from operations or
10% of statutory capital and surplus at the preceding year-end, without regulatory approval. The applicable statutory provisions
only permit an insurer to pay a shareholder dividend from unassigned surplus. 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. RCM’s primary
asset is its investment in RGA Reinsurance. As of January 1, 2014, RCM and RGA Reinsurance could pay maximum dividends,
without prior approval, of approximately $145.9 million and $155.0 million, respectively. The MDI allows RCM to pay a dividend
to RGA to the extent RCM received the dividend from RGA Reinsurance, without limitation related to the level of unassigned
surplus. Dividend payments from other subsidiaries are subject to regulations in the jurisdiction of domicile, which are generally
based on their earnings and/or capital level. In addition, the earnings of substantially all of the Company’s foreign subsidiaries
have been indefinitely reinvested in foreign operations.
51
The dividend limitations for RCM and RGA Reinsurance are based on statutory financial results. Statutory accounting
practices differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP.
Significant differences include the treatment of deferred acquisition costs, deferred income taxes, required investment reserves,
reserve calculation assumptions and surplus notes.
Debt
Certain of the Company’s debt agreements contain financial covenant restrictions related to, among others, liens, the
issuance and disposition of stock of restricted subsidiaries, minimum requirements of consolidated net worth, maximum ratios of
debt to capitalization and change of control provisions. The Company is required to maintain a minimum consolidated net worth,
as defined in the debt agreements, of $2.8 billion, calculated as of the last day of each fiscal quarter. Also, consolidated indebtedness,
calculated as of the last day of each fiscal quarter, cannot exceed 35% of the sum of the Company’s consolidated indebtedness
plus adjusted consolidated net worth. A material ongoing covenant default could require immediate payment of the amount due,
including principal, under the various agreements. Additionally, the Company’s debt agreements contain cross-default covenants,
which would make outstanding borrowings immediately payable in the event of a material uncured covenant default under any
of the agreements, including, but not limited to, non-payment of indebtedness when due for an amount in excess of $100.0 million,
bankruptcy proceedings, or any other event which results in the acceleration of the maturity of indebtedness.
As of December 31, 2013 and 2012, the Company had $2,214.4 million and $1,815.3 million, respectively, in outstanding
borrowings under its debt agreements and was in compliance with all covenants under those agreements. As of December 31,
2013, the average interest rate on long-term debt outstanding was 5.76% compared to 5.99% at the end of 2012. The ability of
the Company to make debt principal and interest payments depends on the earnings and surplus of subsidiaries, investment earnings
on undeployed capital proceeds, and the Company’s ability to raise additional funds. Repayments of debt due over the next five
years total $300.0 million, due 2017.
The Company enters into derivative agreements with counterparties that reference either the Company’s debt rating or
its financial strength rating. If either rating is downgraded in the future it could trigger certain terms in the Company’s derivative
agreements, which could negatively affect overall liquidity. For the majority of the Company’s derivative agreements, there is a
termination event should the long-term senior debt ratings drop below either BBB+ (S&P) or Baa1 (Moody’s) or the financial
strength ratings drop below either A- (S&P) or A3 (Moody’s).
The Company may borrow up to $850.0 million in cash and obtain letters of credit in multiple currencies on its revolving
credit facility that expires in December 2015. As of December 31, 2013, the Company had no cash borrowings outstanding and
$67.6 million in issued, but undrawn, letters of credit under this facility.
On September 19, 2013, RGA issued 4.70% Senior Notes due September 15, 2023 with a face amount of $400.0 million.
These senior notes have been registered with the Securities and Exchange Commission. The net proceeds from the offering were
approximately $395.1 million and will be used for general corporate purposes. Capitalized issue costs were approximately $3.4
million.
On August 21, 2012, RGA issued 6.20% Fixed-To-Floating Rate Subordinated Debentures due September 15, 2042 with
a face amount of $400.0 million. These subordinated debentures have been registered with the Securities and Exchange Commission.
The net proceeds from the offering were approximately $393.7 million and will be used for general corporate purposes. Capitalized
issue costs were approximately $6.3 million.
On May 27, 2011, RGA issued 5.00% Senior Notes due June 1, 2021 with a face amount of $400.0 million. These senior
notes have been registered with the Securities and Exchange Commission. The net proceeds from the offering were approximately
$394.4 million and were used to fund the payment of the RGA’s $200.0 million senior notes that matured in December 2011 and
for general corporate purposes. Capitalized issue costs were approximately $3.4 million.
On March 4, 2011, RGA completed the remarketing of approximately 4.5 million trust preferred securities with an
aggregate accreted value of approximately $158.2 million that were initially issued as a component of its Trust Preferred Income
Equity Redeemable Securities ("PIERS Units"). When issued, each PIERS Unit initially consisted of a preferred security and a
warrant to purchase at any time prior to December 15, 2050, 1.2508 shares of RGA common stock. Approximately 4.4 million
of the warrants were exercised on March 4, 2011, at a price of $35.44 per warrant, resulting in the issuance of approximately 5.5
million shares. The warrant exercise price was paid to RGA. Remaining warrants were redeemed in cash at their redemption
amount of $14.56 per warrant. As a result of the remarketing, the remarketed preferred securities had a fixed accreted value of
$35.44 per security with a fixed annual distribution rate of 2.375% and were repaid on June 5, 2011, the revised maturity date. In
the first quarter of 2011, RGA recorded a $4.4 million pre-tax loss, included in other operating expenses, related to the recognition
of the unamortized issuance costs of the original preferred securities.
Based on the historic cash flows and the current financial results of the Company, management believes RGA’s cash
flows will be sufficient to enable RGA to meet its obligations for at least the next 12 months.
52
Collateral Finance Facilities and Statutory Reserve Funding
The Company uses various internal and third-party reinsurance arrangements and funding sources to manage statutory
reserve strain, including reserves associated with Regulation XXX, and collateral requirements. Assets in trust and letters of credit
are often used as collateral in these arrangements. See “Assets in Trust” and “Letters of Credit” below for more information.
Regulation XXX, implemented in the U.S. for various types of life insurance business beginning January 1, 2000,
significantly increased the level of reserves that U.S. life insurance and life reinsurance companies must hold on their statutory
financial statements for various types of life insurance business, primarily certain level premium term life products. The reserve
levels required under Regulation XXX increase over time and are normally in excess of reserves required under GAAP. In situations
where primary insurers have reinsured business to reinsurers that are unlicensed and unaccredited in the U.S., the reinsurer must
provide collateral equal to its reinsurance reserves in order for the ceding company to receive statutory financial statement credit.
In order to manage the effect of Regulation XXX on its statutory financial statements, RGA Reinsurance has retroceded a majority
of Regulation XXX reserves to unaffiliated and affiliated unlicensed reinsurers.
RGA Reinsurance’s statutory capital may be significantly reduced if the unaffiliated or affiliated reinsurer is unable to
provide the required collateral to support RGA Reinsurance’s statutory reserve credits and RGA Reinsurance cannot find an
alternative source for collateral.
In June 2006, RGA’s subsidiary, Timberlake Financial, issued $850.0 million of Series A Floating Rate Insured Notes
due June 2036 in a private placement. The notes were issued to fund the collateral requirements for statutory reserves required by
the U.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX) on specified term life insurance
policies reinsured by RGA Reinsurance and retroceded to Timberlake Re. Proceeds from the notes, along with a $112.8 million
direct investment by the Company, were deposited into a series of accounts that collateralize the notes and are not available to
satisfy the general obligations of the Company. As of December 31, 2013 and 2012, respectively, the Company held assets in trust
and in custody of $913.5 million and $909.2 million, of which $20.5 million and $33.2 million were held in a Debt Service
Coverage account to cover interest payments on the notes. Interest on the notes accrues at an annual rate of 1-month LIBOR plus
a base rate margin, payable monthly and totaled $5.1 million, $6.9 million and $7.1 million in 2013, 2012 and 2011, respectively.
The payment of interest and principal on the notes is insured through a financial guaranty insurance policy by a monoline insurance
company whose parent company emerged from Chapter 11 bankruptcy in 2013. The notes represent senior, secured indebtedness
of Timberlake Financial without legal recourse to RGA or its other subsidiaries.
Timberlake Financial relies primarily upon the receipt of interest and principal payments on a surplus note and dividend
payments from its wholly-owned subsidiary, Timberlake Re, a South Carolina captive insurance company, to make payments of
interest and principal on the notes. The ability of Timberlake Re to make interest and principal payments on the surplus note and
dividend payments to Timberlake Financial is contingent upon the South Carolina Department of Insurance’s regulatory approval.
As of December 31, 2013 and 2012, respectively, Timberlake Re’s capital and surplus totaled $51.5 million and $33.1 million.
Timberlake Re's capital and surplus is expected to remain above $35.0 million. Since Timberlake Re’s capital and surplus previously
fell below the minimum requirement in its licensing order of $35.0 million, it has been required, since the second quarter of 2011,
to request approval on a quarterly rather than annual basis and provide additional scenario testing results. Approval to pay interest
on the surplus note was granted through March 28, 2014.
During 2013, the Company repurchased $160.0 million face amount of the Timberlake Financial notes for $112.0 million,
which was the market value at the date of the purchase. The notes were purchased by RGA Reinsurance. As a result, the Company
recorded pre-tax gains of $46.5 million, after fees, in other revenues in 2013.
During 2011, the Company repurchased $198.5 million face amount of the Timberlake Financial notes for $130.8 million,
which was the market value at the date of the purchases. The notes were purchased by RGA Reinsurance. As a result, the Company
recorded pre-tax gains of $65.6 million, after fees, in other revenues in 2011.
The Company’s consolidated balance sheets include the assets of Timberlake Financial, a wholly-owned subsidiary,
recorded as fixed maturity investments and other invested assets, which consists of restricted cash and cash equivalents, with the
liability for the notes recorded as collateral finance facility. The Company’s consolidated statements of income include the
investment return of Timberlake Financial as investment income and the cost of the facility is reflected in collateral finance facility
expense.
During 2011, to enhance liquidity and capital efficiency within the group, various operating subsidiaries purchased $500.0
million of newly issued RGA subordinated debt. Similarly, RGA also purchased $475.0 million of surplus notes issued by its
newly formed subsidiary Rockwood Re. These intercompany debt securities are eliminated for consolidated financial reporting.
Based on the growth of the Company’s business and the pattern of reserve levels under Regulation XXX associated with
term life business and other statutory reserve requirements, the amount of ceded reserve credits is expected to grow. This growth
will require the Company to obtain additional letters of credit, put additional assets in trust, or utilize other funding mechanisms
to support the reserve credits. If the Company is unable to support the reserve credits, the regulatory capital levels of several of
53
its subsidiaries may be significantly reduced. The reduction in regulatory capital would not directly affect the Company’s
consolidated shareholders’ equity under GAAP; however, it could affect the Company’s ability to write new business and retain
existing business.
The National Association of Insurance Commissioners has been analyzing the insurance industry’s use of affiliated captive
reinsurers to satisfy certain reserve requirements and considering ways to promote uniformity in both the approval and supervision
of such reinsurers. Affiliated captives are commonly used in the insurance industry to help reduce statutory reserve and collateral
requirements and are often domiciled in the same state as the insurance company that sponsors the captive. If a state insurance
regulator that regulates any of the Company’s domestic insurance companies restricts the use of captive reinsurers or makes them
less effective, the Company’s ability to reinsure certain products, maintain risk based capital ratios and deploy excess capital could
be adversely affected. As a result, the Company may need to alter the type and volume of business it reinsures, increase prices on
those products, raise additional capital to support higher regulatory reserves or implement higher cost strategies, all of which could
adversely impact the Company’s competitive position and its results of operations.
No changes in the use or regulation of captives have been proposed and it is too early to predict the extent of any changes
that may be made. Accordingly, the Company expects to continue its strategy of using captives to enhance its capital efficiency
and competitive position while it monitors the regulations related to captives and any proposed changes in such regulations. The
Company cannot estimate the impact of discontinuing or altering its captive strategy in response to potential regulatory changes
due to many unknown variables such as the cost and availability of alternative capital, potential changes in regulatory reserving
requirements under a principle-based reserving approach which would likely reduce required collateral, changes in acceptable
collateral for statutory reserves, the potential introduction of the concept of a “certified reinsurer” in the laws and regulations in
certain jurisdictions where the Company operates, the potential for increased pricing of products offered by the Company and the
potential change in mix of products sold and/or offered by the Company and/or its clients.
Assets in Trust
Some treaties give ceding companies the right to request that the Company place assets in trust for the benefit of the
cedant to support statutory reserve credits in the event of a downgrade of the Company’s ratings to specified levels, generally non-
investment grade levels, or if minimum levels of financial condition are not maintained. As of December 31, 2013, these treaties
had approximately $1,552.3 million in statutory reserves. Assets placed in trust continue to be owned by the Company, but their
use is restricted based on the terms of the trust agreement. Securities with an amortized cost of $2,124.7 million were held in trust
for the benefit of certain RGA subsidiaries to satisfy collateral requirements for reinsurance business at December 31, 2013.
Additionally, securities with an amortized cost of $7,842.9 million as of December 31, 2013 were held in trust to satisfy collateral
requirements under certain third-party reinsurance treaties. Under certain conditions, the Company may be obligated to move
reinsurance from one subsidiary of RGA to another subsidiary of RGA or make payments under a given treaty. These conditions
include change in control or ratings of the subsidiary, insolvency, nonperformance under a treaty, or loss of reinsurance license of
such subsidiary. If the Company was ever required to perform under these obligations, the risk to the Company on a consolidated
basis under the reinsurance treaties would not change; however, additional capital may be required due to the change in jurisdiction
of the subsidiary reinsuring the business, which could lead to a strain on liquidity.
Proceeds from the notes issued by Timberlake Financial and the Company’s direct investment in Timberlake Financial
were deposited into a series of trust accounts as collateral and are not available to satisfy the general obligations of the Company.
As of December 31, 2013 the Company held deposits in trust and in custody of $913.5 million for this purpose, which is not
included above. See “Collateral Finance Facility” above for additional information on the Timberlake notes.
Letters of Credit
The Company has obtained bank letters of credit in favor of various affiliated and unaffiliated insurance companies from
which the Company assumes business. These letters of credit represent guarantees of performance under the reinsurance agreements
and allow ceding companies to take statutory reserve credits. Certain of these letters of credit contain financial covenant restrictions
similar to those described in the “Debt” discussion above. At December 31, 2013, there were approximately $210.3 million of
outstanding bank letters of credit in favor of third parties. Additionally, in accordance with applicable regulations, the Company
utilizes letters of credit to secure statutory reserve credits when it retrocedes business to its subsidiaries, including Parkway Re,
Timberlake Re, Rockwood Re, RGA Americas, RGA Barbados and RGA Atlantic. The Company cedes business to its affiliates
to help reduce the amount of regulatory capital required in certain jurisdictions, such as the U.S. and the UK. The Company believes
the capital required to support the business in the affiliates reflects more realistic expectations than the original jurisdiction of the
business, where capital requirements are often considered to be quite conservative. As of December 31, 2013, $995.5 million in
letters of credit from various banks were outstanding, but undrawn, backing reinsurance between the various subsidiaries of the
Company. See Note 12—“Commitments and Contingent Liabilities” in the Notes to Consolidated Financial Statements for
information regarding the Company’s letter of credit facilities.
In 2006, the Company entered into a reinsurance agreement that requires it to post collateral for a portion of the business
being reinsured. As part of the collateral requirements, a third party financial institution has issued a letter of credit for the benefit
54
of the ceding company (the “beneficiary”), which may draw on the letter of credit to be reimbursed for valid claim payments not
made by RGA pursuant to the reinsurance treaty. RGA is not a direct obligor under the letter of credit. To the extent the letter of
credit is drawn by the beneficiary, reimbursement to the third party financial institution will be through reduction in amounts owed
to RGA by the third party financial institution under a secured structured loan. RGA’s liability under the reinsurance agreement
will be reduced by any amount drawn by the ceding company under the letter of credit. As of December 31, 2013, the structured
loan totaled $132.5 million and the amount of the letter of credit totaled $192.6 million. The structured loan is recorded in other
invested assets on RGA’s consolidated balance sheets.
Reinsurance Operations
Reinsurance agreements, whether facultative or automatic, generally provide recapture provisions. Most U.S.-based
reinsurance treaties include a recapture right for ceding companies, generally after 10 years. Outside of the U.S., treaties primarily
include a mutually agreed upon recapture provision. Recapture rights permit the ceding company to reassume all or a portion of
the risk formerly ceded to the reinsurer. In some situations, the Company has the right to place assets in trust for the benefit of the
ceding party in lieu of recapture. Additionally, certain treaties may grant recapture rights to ceding companies in the event of a
significant decrease in RGA Reinsurance’s NAIC risk based capital ratio or financial strength rating. The RBC ratio trigger varies
by treaty, with the majority between 125% and 225% of the NAIC’s company action level. Financial strength rating triggers vary
by treaty with the majority of the triggers reached if RGA Reinsurance’s financial strength rating falls five notches from its current
rating of “AA-” to the “BBB” level on the S&P scale. Recapture of business previously ceded does not affect premiums ceded
prior to the recapture of such business, but would reduce premiums in subsequent periods. Upon recapture, the Company would
reflect a net gain or loss on the settlement of the assets and liabilities associated with the treaty. In some cases, the ceding company
is required to pay the Company a recapture fee. The Company estimates approximately $337.9 billion of its gross assumed in
force business, as of December 31, 2013, was subject to treaties where the ceding company could recapture in the event minimum
levels of financial condition or ratings were not maintained.
Guarantees
RGA has issued guarantees to third parties on behalf of its subsidiaries for the payment of amounts due under certain
reinsurance treaties, securities borrowing arrangements, financing arrangements and office lease obligations, whereby if a
subsidiary fails to meet an obligation, RGA or one of its other subsidiaries will make a payment to fulfill the obligation. In limited
circumstances, treaty guarantees are granted to ceding companies in order to provide additional security, particularly in cases
where RGA’s subsidiary is relatively new, unrated, or not of significant size, relative to the ceding company. Liabilities supported
by the treaty guarantees, before consideration for any legally offsetting amounts due from the guaranteed party, totaled $826.9
million and $686.0 million as of December 31, 2013 and 2012, respectively, and are reflected on the Company’s consolidated
balance sheets in future policy benefits. As of December 31, 2013 and 2012, the Company’s exposure related to treaty guarantees,
net of assets held in trust, was $647.9 million and $463.5 million, respectively. Potential guaranteed amounts of future payments
will vary depending on production levels and underwriting results. Guarantees related to borrowed securities provide additional
security to third parties should a subsidiary fail to return the borrowed securities when due. As of December 31, 2013 and 2012,
RGA’s obligation related to borrowed securities guarantees was $93.0 million and $87.5 million, respectively. There were no
amounts guaranteed under financing arrangements as of December 31, 2013 and 2012. RGA has issued payment guarantees on
behalf of two of its subsidiaries in the event the subsidiaries fail to make payment under their office lease obligations, the exposure
of which was $8.3 million and $10.1 million as of December 31, 2013 and 2012, respectively.
In addition, the Company indemnifies its directors and officers pursuant to its charters and by-laws. Since this indemnity
generally is not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine
the maximum potential amount due under this indemnity in the future.
Off-Balance Sheet Arrangements
At December 31, 2013, the Company’s commitments to fund investments were $239.5 million in limited partnerships,
$4.6 million in commercial mortgage loans, $22.0 million in private placement investments and $37.0 million in bank loans,
including revolving credit agreements. At December 31, 2012, the Company’s commitments to fund investments were $176.7
million in limited partnerships, $22.2 million in commercial mortgage loans and $68.5 million in bank loans, including revolving
credit agreements. The Company anticipates that the majority of its current commitments will be invested over the next five years;
however, these commitments could become due any time at the request of the counterparties. Investments in limited partnerships
and private placements are carried at cost or reported using the equity method and included in other invested assets in the consolidated
balance sheets. Bank loans are carried at fair value and included in fixed maturities available-for-sale.
The Company has not engaged in trading activities involving non-exchange-traded contracts reported at fair value, nor
has it engaged in relationships or transactions with persons or entities that derive benefits from their non-independent relationship
with the Company.
55
Cash Flows
The Company’s principal cash inflows from its reinsurance operations include premiums and deposit funds received
from ceding companies. The primary liquidity concerns with respect to these cash flows are early recapture of the reinsurance
contract by the ceding company and lapses of annuity products reinsured by the Company. The Company’s principal cash inflows
from its invested assets result from investment income and the maturity and sales of invested assets. The primary liquidity concern
with respect to these cash inflows relates to the risk of default by debtors and interest rate volatility. The Company manages these
risks very closely. See “Investments” and “Interest Rate Risk” below.
Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash inflows and current cash
and equivalents on hand include selling short-term investments or fixed maturity securities and drawing funds under a revolving
credit facility, under which the Company had availability of $782.4 million as of December 31, 2013. The Company also has
$599.1 million of funds available through collateralized borrowings from the Federal Home Loan Bank of Des Moines (“FHLB”).
The Company’s principal cash outflows relate to the payment of claims liabilities, interest credited, operating expenses,
income taxes, and principal and interest under debt and other financing obligations. The Company seeks to limit its exposure to
loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers
under excess coverage and coinsurance contracts (See Note 2, “Summary of Significant Accounting Policies” of the Notes to
Consolidated Financial Statements). The Company performs annual financial reviews of its retrocessionaires to evaluate financial
stability and performance. The Company has never experienced a material default in connection with retrocession arrangements,
nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given
as to the future performance of such retrocessionaires nor to the recoverability of future claims. The Company’s management
believes its current sources of liquidity are adequate to meet its cash requirements for the next 12 months.
Summary of Primary Sources and Uses of Liquidity and Capital
The Company's primary sources and uses of liquidity and capital are summarized as follows:
Sources:
Net cash provided by operating activities
Proceeds from long-term debt issuance
Proceeds from redemption and remarketing of trust preferred securities
Excess tax benefits from share-based payment arrangement
Exercise of stock options, net
Change in securities sold under agreements to repurchase and cash
collateral for derivative positions
Cash provided by changes in universal life and other
investment type policies and contracts
Effect of exchange rate changes on cash
Total sources
Uses:
Net cash used in investing activities
Dividends to stockholders
Repurchase and repayment of collateral finance facility securities
Debt issuance costs
Principal payments and repurchase of long-term debt
Maturity of trust preferred securities
Purchases of treasury stock
Excess tax benefits from share-based payment arrangement
Exercise of stock options, net
Change in securities sold under agreements to repurchase and cash
collateral for derivative positions
Cash used for changes in universal life and other
investment type policies and contracts
Effect of exchange rate changes on cash
Total uses
Net increase (decrease) in cash and cash equivalents
2013
For the years ended December 31,
2012
(Dollars in thousands)
2011
$
$
1,727,160
398,492
—
3,125
28,390
$
1,974,527
400,000
—
416
—
1,309,532
397,788
154,588
4,933
6,449
—
—
231,180
—
—
2,157,167
1,335,101
77,642
119,255
3,400
—
—
269,204
—
—
92,667
8,552
2,476,162
1,967,996
61,945
—
6,255
—
—
6,924
—
3,087
73,338
132,933
225,302
—
2,329,772
905,781
44,229
130,798
3,400
200,000
159,473
380,345
—
—
—
568,381
47,091
2,493,412
(336,245)
$
—
—
2,179,140
297,022
$
—
6,537
1,830,563
499,209
$
Cash Flows from Operations - The principal cash inflows from the Company’s insurance activities come from insurance
premiums, annuity considerations and deposit funds. The principal cash outflows relate to the liabilities associated with various
life and health insurance, annuity and disability products, operating expenses, income tax and interest on outstanding debt
obligations. A primary liquidity concern with respect to these cash flows is the risk of early contractholder and policyholder
withdrawal.
56
Cash Flows from Investments - The principal cash inflows from the Company’s investment activities come from
repayments of principal on invested assets, proceeds from maturities of invested assets, sales of invested assets, settlements of
freestanding derivatives and net investment income. The principal cash outflows relate to purchases of investments, issuances of
policy loans and settlements of freestanding derivatives. The Company typically has a net cash outflow from investing activities
because cash inflows from insurance operations are reinvested in accordance with its asset/liability management discipline to fund
insurance liabilities. The Company closely monitors and manages these risks through its credit risk management process. The
primary liquidity concerns with respect to these cash flows are the risk of default by debtors and market disruption.
Financing Cash Flows - The principal cash inflows from the Company’s financing activities come from issuances of
RGA debt and equity securities, and deposit funds associated with universal life and other investment type policies and contracts.
The principal cash outflows come from repayments of debt, payments of dividends to stockholders, purchases of treasury stock,
and withdrawals associated with universal life and other investment type policies and contracts. A primary liquidity concern with
respect to these cash flows is the risk of early contractholder and policyholder withdrawal.
Contractual Obligations
The following table displays the Company’s contractual obligations, including obligations arising from its reinsurance
business (in millions):
Future policy benefits
(1)
Interest-sensitive contract liabilities
(2)
Long-term debt, including interest
Collateral financing, including interest
(3)
Other policy claims and benefits
Operating leases
Limited partnerships
Payables for collateral received under derivative
transactions
Other investment related commitments
Total
Less than 1 Year
1-3 Years
4-5 Years
After 5 Years
Payment Due by Period
$
4,864.0
$
(469.4) $
(906.5) $
(789.5) $
17,606.1
4,616.5
847.6
3,571.8
61.8
239.5
51.0
65.0
1,724.4
127.3
12.6
3,571.8
16.9
239.5
51.0
65.0
3,232.3
255.7
74.7
—
19.3
—
—
—
2,805.0
530.4
110.5
—
10.1
—
—
—
7,029.4
9,844.4
3,703.1
649.8
—
15.5
—
—
—
Total
$
31,923.3
$
5,339.1
$
2,675.5
$
2,666.5
$
21,242.2
(1) Future policyholder benefits include liabilities related primarily to the Company’s reinsurance of life and health insurance products. Amounts presented in
the table above represent the estimated obligations as they become due to ceding companies for benefits under such contracts, and also include future
premiums, allowances and other amounts due to or from the ceding companies as the result of the Company’s assumptions of mortality, morbidity, policy
lapse and surrender risk as appropriate to the respective product. Total payments may vary materially from prior years due to the assumption of new treaties
or as a result of changes in projections of future experience. All estimated cash payments presented in the table above are undiscounted as to interest, net of
estimated future premiums on policies currently in force and gross of any reinsurance recoverable. The sum of the undiscounted estimated cash flows shown
for all years in the table is an obligation of $4,864.0 million compared to the discounted liability amount of $11,866.8 million included on the consolidated
balance sheet, substantially all due to the effects of discounting the estimated cash flows in the balance sheet liability. The time value of money is not factored
into the calculations in the table above. In addition, differences will arise due to changes in the projection of future benefit payments compared with those
developed when the reserve was established. Expected premiums can exceed expected policy benefit payments and allowances due to the nature of the
reinsurance treaties, which generally have increasing premium rates that exceed the increasing benefit payments.
(2)
Interest-sensitive contract liabilities include amounts related to the Company’s reinsurance of asset-intensive products, primarily deferred annuities and
corporate-owned life insurance. Amounts presented in the table above represent the estimated obligations as they become due both to and from ceding
companies relating to activity of the underlying policyholders. Amounts presented in the table above represent the estimated obligations under such contracts
undiscounted as to interest, including assumptions related to surrenders, withdrawals, premium persistency, partial withdrawals, surrender charges,
annuitizations, mortality, future interest credited rates and policy loan utilization. The sum of the obligations shown for all years in the table of $17,606.1
million exceeds the liability amount of $12,947.6 million included on the consolidated balance sheet principally due to the lack of discounting and accounting
for separate account contracts.
(3)
Includes the Manor Re collateral financing arrangement that does not appear on the consolidated balance sheets due to a master netting agreement where
the Company holds a term deposit note of equal value from the counterparty.
Excluded from the table above are net deferred income tax liabilities, unrecognized tax benefits, and accrued interest
related to unrecognized tax benefits of $2,117.3 million, for which the Company cannot reliably determine the timing of payment.
Current income tax payable is also excluded from the table.
The net funded status of the Company’s qualified and nonqualified pension and other postretirement liabilities included
within other liabilities has been excluded from the amounts presented in the table above. As of December 31, 2013, the Company
had a net unfunded balance of $82.4 million related to qualified and nonqualified pension and other postretirement liabilities. See
Note 10 – “Employee Benefit Plans” in the Notes to Consolidated Financial Statements for information related to the Company’s
obligations and funding requirements for pension and other post-employment benefits.
57
Asset / Liability Management
The Company actively manages its cash and invested assets using an approach that is intended to balance quality,
diversification, asset/liability matching, liquidity and investment return. The goals of the investment process are to optimize after-
tax, risk-adjusted investment income and after-tax, risk-adjusted total return while managing the assets and liabilities on a cash
flow and duration basis.
The Company has established target asset portfolios for each major insurance product, which represent the investment
strategies intended to profitably fund its liabilities within acceptable risk parameters. These strategies include objectives and limits
for effective duration, yield curve sensitivity and convexity, liquidity, asset sector concentration and credit quality.
The Company’s asset-intensive products are primarily supported by investments in fixed maturity securities reflected on
the Company’s consolidated balance sheets and under funds withheld arrangements with the ceding company. Investment guidelines
are established to structure the investment portfolio based upon the type, duration and behavior of products in the liability portfolio
so as to achieve targeted levels of profitability. The Company manages the asset-intensive business to provide a targeted spread
between the interest rate earned on investments and the interest rate credited to the underlying interest-sensitive contract liabilities.
The Company periodically reviews models projecting different interest rate scenarios and their effect on profitability. Certain of
these asset-intensive agreements, primarily in the U.S. operating segment, are generally funded by fixed maturity securities that
are withheld by the ceding company.
The Company’s liquidity position (cash and cash equivalents and short-term investments) was $1,063.0 million and
$1,548.0 million at December 31, 2013 and 2012, respectively. The decrease in cash and cash equivalents in 2013 is primarily
related to the timing and execution of the Company’s investment strategies. Cash and cash equivalents includes cash collateral
received from derivative counterparties of $51.0 million and $136.4 million as of December 31, 2013 and 2012, respectively. This
unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in other liabilities
in the Company’s consolidated balance sheets. Liquidity needs are determined from valuation analyses conducted by operational
units and are driven by product portfolios. Periodic evaluations of demand liabilities and short-term liquid assets are designed to
adjust specific portfolios, as well as their durations and maturities, in response to anticipated liquidity needs.
The Company participates in a securities borrowing program whereby securities, which are not reflected on the Company’s
consolidated balance sheets, are borrowed from a third party. The Company is required to maintain a minimum of 100% of the
market value of the borrowed securities as collateral. The Company had borrowed securities with an amortized cost of $93.0
million and $87.5 million as of December 31, 2013 and 2012, respectively, which was equal to the market value in both periods.
The borrowed securities are used to provide collateral under an affiliated reinsurance transaction.
The Company also participates in a repurchase/reverse repurchase program in which securities, reflected as investments
on the Company’s consolidated balance sheets, are pledged to a third party. In return, the Company receives securities from the
third party with an estimated fair value equal to a minimum of 100% of the securities pledged. The securities received are not
reflected on the Company’s consolidated balance sheets. As of December 31, 2013 the Company had pledged securities with an
amortized cost of $300.3 million and an estimated fair value of $310.8 million, in return the Company received securities with an
estimated fair value of $344.2 million. As of December 31, 2012 the Company had pledged securities with an amortized cost of
$290.2 million and an estimated fair value of $305.9 million, in return the Company received securities with an estimated fair
value of $342.0 million. In addition to its security agreements with third parties, certain RGA’s subsidiaries have entered into
intercompany securities lending agreements to more efficiently source securities for lending to third parties and to provide for
more efficient regulatory capital management.
RGA Reinsurance is a member of the FHLB and holds $33.9 million of FHLB common stock, which is included in other
invested assets on the Company’s consolidated balance sheets. Membership provides RGA Reinsurance access to borrowing
arrangements with the FHLB ("advances") and funding agreements, discussed below. RGA Reinsurance did not have advances
at December 31, 2013 and 2012. RGA Reinsurance's average outstanding balance of advances was $24.2 million and $6.1 million
in 2013 and 2012, respectively. Interest on advances is reflected in interest expense on the Company’s consolidated statements of
income.
In addition, RGA Reinsurance has also entered into funding agreements with the FHLB under guaranteed investment
contracts whereby RGA Reinsurance has issued the funding agreements in exchange for cash and for which the FHLB has been
granted a blanket lien on RGA Reinsurance’s commercial and residential mortgage-backed securities and commercial mortgage
loans used to collateralize RGA Reinsurance’s obligations under the funding agreements. RGA Reinsurance maintains control
over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no
event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The funding
agreements and the related security agreements represented by this blanket lien provide that upon any event of default by RGA
Reinsurance, the FHLB’s recovery is limited to the amount of RGA Reinsurance’s liability under the outstanding funding
agreements. The amount of the RGA Reinsurance’s liability for the funding agreements with the FHLB under guaranteed investment
contracts was $597.1 million and $500.0 million at December 31, 2013 and 2012, respectively, which is included in interest
58
sensitive contract liabilities on the Company's consolidated balance sheets. The advances on these agreements are collateralized
primarily by commercial and residential mortgage-backed securities and commercial mortgage loans. The amount of collateral
exceeds the liability and is dependent on the type of assets collateralizing the guaranteed investment contracts.
Investments
Management of Investments
The Company’s investment and derivative strategies involve matching the characteristics of its reinsurance products and
other obligations and to seek to closely approximate the interest rate sensitivity of the assets with estimated interest rate sensitivity
of the reinsurance liabilities. The Company achieves its income objectives through strategic and tactical asset allocations, security
and derivative strategies within an asset/liability management and disciplined risk management framework. Derivative strategies
are employed within the Company’s risk management framework to help manage duration, currency, and other risks in assets and/
or liabilities and to replicate the credit characteristics of certain assets. For a discussion of the Company’s risk management process
see “Market Risk” in the “Enterprise Risk Management” section below.
The Company’s portfolio management groups work with the Enterprise Risk Management function to develop the
investment policies for the assets of the Company’s domestic and international investment portfolios. All investments held by the
Company, directly or in a funds withheld at interest reinsurance arrangement, are monitored for conformance with the Company’s
stated investment policy limits as well as any limits prescribed by the applicable jurisdiction’s insurance laws and regulations.
See Note 4 – “Investments” in the Notes to Consolidated Financial Statements for additional information regarding the Company’s
investments.
Portfolio Composition
The Company had total cash and invested assets of $33.4 billion and $34.2 billion at December 31, 2013 and 2012,
respectively, as illustrated below (dollars in thousands):
Fixed maturity securities, available-for-sale
Mortgage loans on real estate
Policy loans
Funds withheld at interest
Short-term investments
Other invested assets
Cash and cash equivalents
Total cash and invested assets
Investment Yield
2013
2012
21,474,136
$
22,291,614
2,486,680
1,244,469
5,771,467
139,395
1,324,960
923,647
2,300,587
1,278,175
5,594,182
288,082
1,159,543
1,259,892
33,364,754
$
34,172,075
$
$
The following table presents consolidated average invested assets at amortized cost, net investment income and investment
yield, excluding funds withheld at interest and spread related business. Funds withheld at interest assets and other spread related
business are primarily associated with the reinsurance of annuity contracts on which the Company earns an interest rate spread
between assets and liabilities. Fluctuations in the yield on funds withheld assets and other spread related business are generally
subject to varying degrees, by corresponding adjustments to the interest credited on the liabilities (dollars in thousands).
2013
2012
2011
2013
2012
Increase /(Decrease)
Average invested assets at amortized cost
$
18,124,333
$
16,555,144
$
15,288,576
856,615
823,987
806,655
9.5 %
4.0 %
8.3 %
2.1 %
Net investment income
Investment yield (ratio of net investment
income to average invested assets)
4.73%
4.98%
5.28%
(0.25)%
(0.30)%
Investment yield decreased in 2013 and 2012 due to lower yields upon reinvestment. The lower yields are due primarily
to a lower interest rate environment on a historical basis.
59
Fixed Maturity and Equity Securities Available-for-Sale
See “Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Consolidated
Financial Statements for tables that provide the amortized cost, unrealized gains and losses, estimated fair value of fixed maturity
and equity securities, and the other-than-temporary impairments in AOCI by sector as of December 31, 2013 and 2012.
The Company’s fixed maturity securities are invested primarily in corporate bonds, mortgage-and asset-backed securities,
and U.S. and Canadian government securities. As of December 31, 2013 and 2012, approximately 93.7% and 94.2%, respectively,
of the Company’s consolidated investment portfolio of fixed maturity securities were investment grade.
Important factors in the selection of investments include diversification, quality, yield, call protection and total rate of
return potential. The relative importance of these factors is determined by market conditions and the underlying reinsurance liability
and existing portfolio characteristics. The largest asset class in which fixed maturity securities were invested was in corporate
securities, which represented approximately 56.4% of total fixed maturity securities at December 31, 2013, compared to 55.5%
at December 31, 2012. See “Corporate Fixed Maturity Securities” in Note 4 – “Investments” in the Notes to Consolidated Financial
Statements for tables showing the major industry types which comprise the corporate fixed maturity holdings at December 31,
2013 and 2012.
As of December 31, 2013, the Company’s investments in Canadian and Canadian provincial government securities
represented 15.7% of the fair value of total fixed maturity securities compared to 18.2% of the fair value of total fixed maturity
securities at December 31, 2012. These assets are primarily high quality, long duration provincial strips whose valuation is closely
linked to the interest rate curve. The Company’s holdings in Canadian securities were one of the largest contributors to the decrease
in net unrealized gain reported in the accumulated other comprehensive income reflected in the Company’s consolidated balance
sheets. These assets are longer in duration and held primarily for asset/liability management to meet Canadian regulatory
requirements. See “Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes to Consolidated
Financial Statements for tables showing the various sectors as of December 31, 2013 and 2012.
The creditworthiness of Greece, Ireland, Italy, Portugal and Spain, commonly referred to as “Europe’s peripheral region”
and Cyprus is under ongoing stress and uncertainty due to high debt levels and economic weakness, although the situation in 2013
and 2012 appears more stable than previous years. The Company did not have material exposure to sovereign fixed maturity
securities, which includes global government agencies, from Europe’s peripheral region and Cyprus as of December 31, 2013 and
2012. In addition, the Company did not purchase or sell credit protection, through credit default swaps, referenced to sovereign
entities of Europe’s peripheral region and Cyprus.
The tables below show the Company’s exposure to fixed maturity and equity securities, based on the security’s country
of issuance, from Europe’s peripheral region and Cyprus as of December 31, 2013 and 2012 (dollars in thousands):
December 31, 2013:
Sovereign:
Ireland
Spain
Total sovereign
Financial institutions:
Ireland
Italy
Spain
Total financial institutions
Other:
Ireland
Italy
Spain
Total other
Total
Amortized Cost
Estimated Fair Value
% of Total
$
$
5,000
4,987
9,987
7,391
13,932
31,292
52,615
42,514
8,795
26,392
77,701
$
140,303
$
4,574
5,119
9,693
7,665
14,518
33,689
55,872
43,596
9,354
28,770
81,720
147,285
3.1 %
3.5
6.6
5.2
9.8
22.9
37.9
29.6
6.4
19.5
55.5
100.0 %
60
December 31, 2012:
Financial institutions:
Ireland
Spain
Total financial institutions
Other:
Ireland
Italy
Spain
Total other
Total
Amortized Cost
Estimated Fair Value
% of Total
$
4,093
$
38,422
42,515
38,852
6,434
24,725
70,011
$
112,526
$
4,520
39,920
44,440
41,019
6,653
26,547
74,219
118,659
3.8%
33.7
37.5
34.6
5.6
22.3
62.5
100.0%
Improvement in European financial markets, as the governments of the European Union have demonstrated willingness
to negotiate a solution to the region’s debt problems during 2013, has resulted in unrealized gains in both financial institutions
and all other fixed maturity and equity securities held by the Company that were issued within the region with the exception of
the Company's sovereign exposure to Ireland, which had fair values slightly below amortized cost.
The tables below show the Company’s exposure to sovereign fixed maturity securities originated in countries other than
Europe’s peripheral region, included in “Other foreign government, supranational and foreign government-sponsored enterprises,”
in Note 4 – “Investments,” as of December 31, 2013 and 2012 (dollars in thousands):
December 31, 2013:
Amortized Cost
Estimated Fair Value
% of Total
Australia
Japan
United Kingdom
South Africa
New Zealand
Cayman Islands
South Korea
Germany
France
Other
Total
December 31, 2012:
Australia
Japan
United Kingdom
Cayman Islands
South Africa
South Korea
Germany
New Zealand
France
Other
Total
26.0%
18.7
9.7
5.0
4.2
3.5
3.3
3.1
3.1
23.4
100.0%
$
420,682
$
299,745
158,308
81,231
70,185
53,561
52,863
49,600
48,157
424,446
304,488
158,110
79,788
68,961
56,344
54,526
51,266
50,067
377,973
1,612,305
$
381,694
1,629,690
$
$
Amortized Cost
Estimated Fair Value
% of Total
472,188
$
291,955
130,792
69,172
63,721
52,613
51,413
53,593
45,342
258,578
483,629
297,025
139,826
77,912
66,372
55,563
54,602
54,092
48,761
287,421
1,565,203
30.9%
19.0
8.9
5.0
4.2
3.5
3.5
3.5
3.1
18.4
100.0%
$
1,489,367
$
As of December 31, 2013, the Company’s investment in sovereign fixed maturity securities represented 7.6% of the fair
value of total fixed maturity securities compared to 7.0% of the fair value of total fixed maturity securities at December 31, 2012.
The Company typically invests in sovereign fixed maturity securities to help mitigate exposure to foreign currency fluctuations
from liabilities denominated in the same currencies.
The Company references rating agency designations in some of its investments disclosures. These designations are based
on the ratings from nationally recognized statistical rating organizations, primarily those assigned by S&P. In instances where a
S&P rating is not available the Company references the rating provided by Moody’s and in the absence of both the Company will
generally assign equivalent ratings based on information from the National Association of Insurance Commissioners (“NAIC”)
or other rating agency. The NAIC assigns securities quality ratings and uniform valuations called “NAIC Designations” which
are used by insurers when preparing their statutory filings. The NAIC assigns designations to publicly traded as well as privately
placed securities. The designations assigned by the NAIC range from class 1 to class 6, with designations in classes 1 and 2
61
generally considered investment grade (BBB or higher rating agency designation). NAIC designations in classes 3 through 6 are
generally considered below investment grade (BB or lower rating agency designation).
The quality of the Company’s available-for-sale fixed maturity securities portfolio, as measured at fair value and by the
percentage of fixed maturity securities invested in various ratings categories, relative to the entire available-for-sale fixed maturity
security portfolio, at December 31, 2013 and 2012 was as follows (dollars in thousands):
NAIC
Designation
Rating Agency
Designation
Amortized Cost
December 31, 2013
Estimated
Fair Value
% of Total
Amortized Cost
December 31, 2012
Estimated
Fair Value
% of Total
1
2
3
4
5
6
AAA/AA/A
$
12,868,061
$
13,867,584
64.6% $
12,059,154
$
14,300,571
BBB
BB
B
CCC and lower
In or near default
6,072,604
6,255,451
725,733
387,687
106,619
110,030
740,465
400,775
106,873
102,988
29.1
3.4
1.9
0.5
0.5
6,186,536
6,692,929
694,349
444,996
118,738
55,659
712,712
444,035
95,906
45,461
64.2%
30.0
3.2
2.0
0.4
0.2
Total
$
20,270,734
$
21,474,136
100.0% $
19,559,432
$
22,291,614
100.0%
The Company’s fixed maturity portfolio includes structured securities. The following table shows the types of structured
securities the Company held at December 31, 2013 and 2012 (dollars in thousands):
Residential mortgage-backed securities:
Agency
Non-agency
Total residential mortgage-backed securities
Commercial mortgage-backed securities
Asset-backed securities
Total
December 31, 2013
December 31, 2012
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
$
$
567,113
$
580,855
$
497,918
$
403,321
970,434
1,314,782
891,751
408,788
989,643
1,388,946
894,832
471,349
969,267
1,608,376
700,455
3,176,967
$
3,273,421
$
3,278,098
$
555,535
486,529
1,042,064
1,698,903
691,555
3,432,522
The residential mortgage-backed securities include agency-issued pass-through securities and collateralized mortgage
obligations. A majority of the agency-issued pass-through securities are guaranteed or otherwise supported by the Federal Home
Loan Mortgage Corporation, Federal National Mortgage Association, or the Government National Mortgage Association. The
weighted average credit rating of residential mortgage-backed securities was “A+” at both December 31, 2013 and 2012. The
principal risks inherent in holding mortgage-backed securities are prepayment and extension risks, which will affect the timing
of when cash will be received and are dependent on the level of mortgage interest rates. Prepayment risk is the unexpected increase
in principal payments from the expected, primarily as a result of owner refinancing. Extension risk relates to the unexpected
slowdown in principal payments from the expected. In addition, non-agency mortgage-backed securities face credit risk should
the borrower be unable to pay the contractual interest or principal on their obligation. The Company monitors its mortgage-backed
securities to mitigate exposure to the cash flow uncertainties associated with these risks.
As of December 31, 2013 and 2012, the Company had exposure to commercial mortgage-backed securities with amortized
costs totaling $1,702.2 million and $1,969.4 million, and estimated fair values of $1,784.2 million and $2,090.0 million. Those
amounts include exposure to commercial mortgage-backed securities held directly in the Company’s investment portfolios of
fixed maturity securities, as well as securities held by ceding companies that support the Company’s funds withheld at interest
investment. The securities are highly rated with weighted average credit ratings of approximately “A+” at December 31, 2013
and 2012. Approximately 31.8% and 30.3% of commercial mortgage-backed securities, based on estimated fair value, were
classified in the “AAA” category at December 31, 2013 and 2012, respectively. The decrease in the ratings was primarily attributable
to the repositioning of assets to achieve target yields in underlying portfolios. The Company recorded $10.1 million, $14.2 million
and $12.4 million of other-than-temporary impairments in its direct investments in commercial mortgage-backed securities for
the years ended December 31, 2013, 2012 and 2011, respectively. The following tables summarize the Company’s commercial
mortgage-backed securities by rating and underwriting year at December 31, 2013 and 2012 (dollars in thousands):
62
December 31, 2013:
AAA
AA
A
Underwriting Year
2006 & Prior
2007
2008
2009
2010
2011
2012
2013
Total
Underwriting Year
2006 & Prior
2007
2008
2009
2010
2011
2012
2013
Total
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
$
249,757
$
267,589
$
163,831
$
171,565
$
125,939
$
147,160
157,539
—
1,669
28,003
15,037
39,154
60,534
—
1,753
29,360
15,327
37,821
58,738
32,962
54,511
7,165
45,258
20,957
60,407
35,786
62,106
7,771
46,857
22,233
59,225
164,397
162,896
54,440
18,176
—
19,198
9,825
19,377
8,301
133,371
59,787
19,412
—
20,050
10,382
19,052
8,139
$
541,314
$
568,127
$
549,488
$
568,439
$
255,256
$
270,193
BBB
Below Investment Grade
Total
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
$
95,812
$
98,568
$
74,447
$
78,917
$
709,786
$
87,555
—
7,638
—
6,073
17,474
—
99,183
—
10,866
—
6,122
17,085
—
64,023
3,168
61,681
5,035
—
—
—
—
—
—
—
—
—
—
386,140
75,855
16,472
92,459
51,892
136,412
233,232
750,010
413,976
86,553
20,390
96,267
54,064
133,183
229,773
$
214,552
$
231,824
$
141,638
$
145,633
$
1,702,248
$
1,784,216
December 31, 2012:
AAA
AA
A
Underwriting Year
2005 & Prior
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
$
69,810
$
75,706
$
129,430
$
141,189
$
99,840
$
103,112
2006
2007
2008
2009
2010
2011
2012
Total
Underwriting Year
2005 & Prior
2006
2007
2008
2009
2010
2011
2012
Total
243,222
182,456
7,674
1,655
27,984
15,748
28,324
270,756
201,131
7,672
1,820
29,956
16,411
29,080
59,773
32,810
53,510
17,399
47,085
16,069
36,340
66,862
37,542
67,624
19,483
53,027
18,184
36,925
85,198
69,266
14,387
3,463
13,273
40,546
58,376
93,688
77,657
17,098
5,599
14,405
42,726
59,595
$
576,873
$
632,532
$
392,416
$
440,836
$
384,349
$
413,880
BBB
Below Investment Grade
Total
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
Amortized Cost
Estimated
Fair Value
$
110,887
$
113,801
$
42,838
$
37,720
$
452,805
$
83,565
93,414
—
3,880
—
33,242
43,346
84,689
108,902
—
5,547
—
33,757
43,811
67,131
115,028
22,416
—
—
—
—
65,645
91,505
17,386
—
—
—
—
538,889
492,974
97,987
26,397
88,342
105,605
166,386
471,528
581,640
516,737
109,780
32,449
97,388
111,078
169,411
$
368,334
$
390,507
$
247,413
$
212,256
$
1,969,385
$
2,090,011
Asset-backed securities include credit card and automobile receivables, subprime mortgage-backed securities, home
equity loans, manufactured housing bonds and collateralized debt obligations. The Company’s asset-backed securities are
diversified by issuer and contain both floating and fixed rate securities and had weighted average credit ratings of "A+" and “AA-”
at December 31, 2013 and 2012, respectively. The Company owns floating rate securities that represent approximately 14.0% and
15.0% of the total fixed maturity securities at December 31, 2013 and 2012, respectively. These investments have a higher degree
of income variability than the other fixed income holdings in the portfolio due to the floating rate nature of the interest payments.
The Company holds these investments to match specific floating rate liabilities primarily reflected in the consolidated balance
sheets as collateral finance facility. In addition to the risks associated with floating rate securities, principal risks in holding asset-
63
backed securities are structural, credit and capital market risks. Structural risks include the securities’ cash flow priority in the
capital structure and the inherent prepayment sensitivity of the underlying collateral. Credit risks include the adequacy and ability
to realize proceeds from the collateral. Credit risks are mitigated by credit enhancements which include excess spread, over-
collateralization and subordination. Capital market risks include general level of interest rates and the liquidity for these securities
in the marketplace.
The Company monitors its fixed maturity and equity securities to determine impairments in value and evaluates factors
such as financial condition of the issuer, payment performance, the length of time and the extent to which the market value has
been below amortized cost, compliance with covenants, general market and industry sector conditions, current intent and ability
to hold securities, and various other subjective factors. Based on management’s judgment, securities determined to have an other-
than-temporary impairment in value are written down to fair value. See “Investments – Other-than-Temporary Impairment” in
Note 2 – “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for additional
information. The Company recorded $19.8 million, $43.2 million and $41.3 million in other-than-temporary investment
impairments in 2013, 2012 and 2011, respectively. The impairments in 2013, 2012 and 2011 were largely related to other-than-
temporary impairments in Subprime/Alt-A/Other structured securities, primarily related to commercial mortgage-backed
securities. In addition, other impairments in 2013, 2012 and 2011 are due to mortgage loan provisions and impairments on limited
partnerships. There were no impairment losses on equity securities in 2013. The impairment losses on equity securities of $3.0
million in 2012 and $4.1 million in 2011 are primarily due to the decline in fair value of securities issued by European financial
institutions. The impaired equity securities are hybrid securities that contain both debt and equity-like features. The table below
summarizes other-than-temporary impairments for 2013, 2012 and 2011 (dollars in thousands):
Subprime / Alt-A / Other structured securities
Corporate / Other fixed maturity securities
Equity securities
Other impairments (primarily mortgage loans and limited partnerships)
Total
2013
2012
2011
10,243
$
15,342
$
2,658
—
6,933
8,184
3,025
16,602
19,834
$
43,153
$
18,012
8,937
4,116
10,238
41,303
$
$
At December 31, 2013 and 2012, the Company had $324.6 million and $133.6 million, respectively, of gross unrealized
losses related to its fixed maturity and equity securities. The distribution of the gross unrealized losses related to these securities
is shown below:
Sector:
Corporate securities
Canadian and Canada provincial governments
Residential mortgage-backed securities
Asset-backed securities
Commercial mortgage-backed securities
U.S. Government and agencies
State and political subdivisions
Other foreign government, supranational and
foreign government-sponsored enterprises
Total
Industry:
Finance
Asset-backed
Industrial
Mortgage-backed
Government
Utility
Total
December 31, 2013
December 31, 2012
65.4%
30.4%
5.2
5.8
4.9
5.4
1.5
4.4
7.4
100.0%
20.3%
4.9
34.4
11.2
18.5
10.7
0.1
2.8
21.6
38.8
—
4.3
2.0
100.0%
18.0%
21.6
9.0
41.6
6.4
3.4
100.0%
100.0%
See “Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the
Notes to Consolidated Financial Statements for a table that presents the total gross unrealized losses for fixed maturity securities
64
and equity securities at December 31, 2013 and 2012, respectively, where the estimated fair value had declined and remained
below amortized cost by less than 20% or more than 20%.
The Company’s determination of whether a decline in value is other-than-temporary includes analysis of the underlying
credit and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining
whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect
all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the
amortized cost of the investment. In the Company’s impairment review process, the duration and severity of an unrealized loss
position for equity securities are given greater weight and consideration given the lack of contractual cash flows and the deferability
features of these securities. As of December 31, 2013 and 2012, there were immaterial gross unrealized losses on equity securities
greater than 20 percent of the amortized cost for more than 12 months.
See “Purchased Credit Impaired Fixed Maturity Securities Available-for-Sale” in Note 4 – “Investments” in the Notes
to Consolidated Financial Statements for tables that present information related to the Company’s purchases of credit impaired
securities in 2013 and 2012.
See “Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale” in Note 4 – “Investments” in the
Notes to Consolidated Financial Statements for tables that present the estimated fair values and gross unrealized losses, including
other-than-temporary impairment losses reported in AOCI, for fixed maturity and equity securities that have estimated fair values
below amortized cost, by class and grade security, as well as the length of time the related market value has remained below
amortized cost as of December 31, 2013 and 2012.
As of December 31, 2013 and 2012, respectively, the Company classified approximately 10.2% and 10.0% of its fixed
maturity securities in the Level 3 category (refer to Note 6 – “Fair Value of Assets and Liabilities” in the Notes to Consolidated
Financial Statements for additional information). These securities primarily consist of private placement corporate securities, bank
loans, below investment grade commercial and residential mortgage-backed securities and subprime asset-backed securities with
inactive trading markets.
See “Securities Borrowing and Other” in Note 4 – “Investments” in the Notes to Consolidated Financial Statements for
information related to the Company’s securities borrowing program and its repurchase/reverse repurchase program.
Mortgage Loans on Real Estate
Mortgage loans represented approximately 7.5% and 6.7% of the Company’s cash and invested assets as of December 31,
2013 and 2012, respectively. As of December 31, 2013, all mortgages were U.S. based with approximately 84.3% invested in
mortgages on commercial offices, industrial properties and retail locations. The Company’s largest mortgage loan is approximately
$100.0 million but most mortgage loans range in size up to $20.0 million, with the average mortgage loan investment as of
December 31, 2013 totaling approximately $7.6 million. The mortgage loan portfolio was diversified by geographic region and
property type as discussed further under “Mortgage Loans on Real Estate” in Note 4 - “Investments” in the Notes to Consolidated
Financial Statements.
Valuation allowances on mortgage loans are established based upon inherent losses expected by management to be
realized in connection with future dispositions or settlement of mortgage loans, including foreclosures. The valuation allowances
are established after management considers, among other things, the value of underlying collateral and payment capabilities of
debtors. Any subsequent adjustments to the valuation allowances will be treated as investment gains or losses.
See “Mortgage Loans on Real Estate” in Note 4 - “Investments” in the Notes to Consolidated Financial Statements for
information regarding for information regarding valuation allowances and impairments.
Policy Loans
Policy loans comprised approximately 3.7% of the Company’s cash and invested assets as of December 31, 2013 and
2012, substantially all of which are associated with one client. 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.
Funds Withheld at Interest
Funds withheld at interest comprised approximately 17.3% and 16.4% of the Company’s cash and invested assets as of
December 31, 2013 and 2012, respectively. The majority of the Company’s funds withheld at interest balances are associated
with its reinsurance of annuity contracts. The funds withheld receivable balance totaled $5.8 billion and $5.6 billion at December 31,
2013 and 2012, respectively, of which $4.1 billion and $3.9 billion at December 31, 2013 and 2012, respectively, were subject to
the general accounting principles for Derivatives and Hedging related to embedded derivatives for both periods. Under these
65
principles, the Company’s funds withheld receivable under certain reinsurance arrangements incorporate credit risk exposures
that are unrelated or only partially related to the creditworthiness of the obligor and include an embedded derivative feature that
is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value
on the consolidated balance sheets and changes in fair value reported in income. See “Embedded Derivatives” in Note 2 – “Summary
of Significant Accounting Policies” in the Notes to Consolidated Financial Statements for further discussion.
For reinsurance agreements written on a modified coinsurance basis and certain agreements written on a coinsurance
basis, assets equal to the net statutory reserves are withheld and legally owned and managed by the ceding company, and are
reflected as funds withheld at interest on the Company’s consolidated balance sheets. In the event of a ceding company’s insolvency,
the Company would need to assert a claim on the assets supporting its reserve liabilities. However, the risk of loss to the Company
is mitigated by its ability to offset amounts it owes the ceding company for claims or allowances with amounts owed by the ceding
company. Interest accrues to these assets at rates defined by the treaty terms and the Company estimated the yields were
approximately 9.68%, 6.97% and 6.87% for the years ended December 31, 2013, 2012 and 2011, respectively. Changes in these
estimated yields are affected by changes in the fair value of equity options held in the funds withheld portfolio associated with
EIAs. Additionally, under certain treaties the Company is subject to the investment performance on the withheld assets, although
it does not directly control them. These assets are primarily fixed maturity investment securities and pose risks similar to the fixed
maturity securities the Company owns. To mitigate this risk, the Company helps set the investment guidelines followed by the
ceding company and monitors compliance. Ceding companies with funds withheld at interest had an average rating of “A” at
December 31, 2013 and 2012. Certain ceding companies maintain segregated portfolios for the benefit of the Company.
Based on data provided by ceding companies at December 31, 2013 and 2012, funds withheld at interest were
approximately (dollars in thousands):
Underlying Security Type:
Segregated portfolios:
Investment grade corporate securities
Below investment grade corporate securities
Structured securities
U.S. government and agency debentures
Derivatives
(1)
Other
Total segregated portfolios
Non-segregated portfolios
Embedded derivatives
(2)
Total funds withheld at interest
Underlying Security Type:
Segregated portfolios:
Investment grade corporate securities
Below investment grade corporate securities
Structured securities
U.S. government and agency debentures
Derivatives
(1)
Other
Total segregated portfolios
Non-segregated portfolios
Embedded derivatives
(2)
Total funds withheld at interest
December 31, 2013
Book Value
Estimated Fair Value
% of Total Estimated
Fair Value
$
1,872,993
$
1,977,383
43.9%
2.4
20.3
10.6
2.4
20.4
100.0%
111,072
890,357
417,831
109,262
846,194
4,247,709
1,700,665
(176,907)
109,506
913,742
476,361
109,262
920,423
4,506,677
1,700,665
—
5,771,467
$
6,207,342
December 31, 2012
$
$
Book Value
Estimated Fair Value
% of Total Estimated
Fair Value
1,898,188
$
2,106,040
133,385
844,818
375,612
43,125
851,475
4,146,603
1,690,756
(243,177)
133,817
880,962
505,617
43,125
1,002,007
4,671,568
1,690,756
—
45.1%
2.9
18.9
10.8
0.9
21.4
100.0%
$
5,594,182
$
6,362,324
(1) Derivatives primarily consist of S&P 500 options which are used to hedge liabilities and interest credited for EIAs reinsured by the Company.
(2) Represents the fair value of embedded derivatives related to reinsurance written on a modco or funds withheld basis and subject to the general accounting
principles for Derivatives and Hedging related to embedded derivatives for the segregated portfolios. When the segregated portfolios are presented on a fair
value basis in the “Estimated Fair Value” column, the calculation of a separate embedded derivative is not applicable.
66
Based on data provided by the ceding companies at December 31, 2013, the maturity distribution of the segregated
portfolio portion of funds withheld at interest was approximately (dollars in thousands):
Maturity
Within one year
More than one, less than five years
More than five, less than ten years
Ten years or more
Subtotal
Less reverse repurchase agreements
Total all years
Other Invested Assets
December 31, 2013
Book Value
Estimated Fair Value
% of Total Estimated
Fair Value
$
$
137,320
$
425,943
1,020,718
2,952,768
4,536,749
(289,040)
4,247,709
$
137,876
468,085
1,079,639
3,110,116
4,795,716
(289,039)
4,506,677
2.9%
9.8
22.5
64.8
100.0%
Other invested assets include equity securities, limited partnership interests, joint ventures, structured loans, derivative
contracts and contractholder-directed investments supporting unit-linked variable annuity type liabilities, which do not qualify as
separate accounts. Other invested assets represented approximately 4.0% and 3.4% of the Company’s cash and invested assets as
of December 31, 2013 and 2012, respectively. See “Other Invested Assets” in Note 4 – “Investments” in the Notes to Consolidated
Financial Statements for a table that presents the carrying value of the Company’s other invested assets by type as of December 31,
2013 and 2012.
The Company recorded $4.8 million, $10.3 million and $4.1 million in other-than-temporary impairments on other
invested assets in 2013, 2012 and 2011, respectively.
The Company has utilized derivative financial instruments to protect the Company against possible changes in the fair
value of its investment portfolio as a result of interest rate changes, to hedge liabilities associated with the reinsurance of variable
annuities with guaranteed living benefits and to manage the portfolio’s effective yield, maturity and duration. In addition, the
Company has used derivative financial instruments to reduce the risk associated with fluctuations in foreign currency exchange
rates. The Company uses both exchange-traded and customized over-the-counter derivative financial instruments. The Company’s
use of derivative financial instruments historically has not been significant to its financial position.
See Note 5 – “Derivative Instruments” in the Notes to Consolidated Financial Statements for a table that presents the
notional amounts and fair value of investment related derivative instruments held at December 31, 2013 and 2012.
The Company may be exposed to credit-related losses in the event of non-performance by counterparties to derivative
financial instruments. Generally, the credit exposure of the Company’s derivative contracts is limited to the fair value at the
reporting date plus or minus any collateral posted or held by the Company. The Company had credit exposure related to its derivative
contracts, excluding futures, of $9.7 million and $7.1 million at December 31, 2013 and 2012, respectively.
The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with
creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a
single net payment to be made by one counterparty to another at each due date and upon termination. As exchange-traded futures
are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure
to credit-related losses in the event of nonperformance by counterparties. See Note 5 – “Derivative Instruments” in the Notes to
Consolidated Financial Statements for more information regarding the Company’s derivative instruments.
Enterprise Risk Management
RGA maintains an Enterprise Risk Management (“ERM”) program to consistently identify, assess, mitigate, monitor and
communicate all material risks facing the organization in order to effectively manage all risks, increasing protection of RGA’s
clients, shareholders, employees, and other stakeholders. RGA’s ERM framework provides a platform to assess the risk / return
profiles of risks throughout the organization, thereby enabling enhanced decision making. This includes development and
implementation of mitigation strategies to reduce exposures to these risks to acceptable levels. Risk management is an integral
part of the Company’s culture and is interwoven in day to day activities. It includes guidelines, risk appetites, risk targets, risk
limits, and other controls in areas such as mortality, morbidity, longevity, pricing, underwriting, currency, administration,
investments, asset liability management, counterparty exposure, geographic exposure, financing, asset leverage, regulatory change,
business continuity planning, human resources, liquidity, collateral, sovereign risks and information technology development.
The Chief Risk Officer (“CRO”), aided by the Risk Management Steering Committee (“RMSC”), Business Unit Chief
Risk Officers, Risk Management Officers and a dedicated ERM function, is responsible for ensuring, on an ongoing basis, that
67
objectives of the ERM framework are met; this includes ensuring proper risk controls are in place, risks are effectively identified,
assessed and managed, and key risks to which the Company is exposed are disclosed to appropriate stakeholders. For each Business
Unit and key risk, a Risk Management Officer is assigned. A Risk Officer is also assigned to take overall responsibility of a specific
risk across all markets to monitor and assess this risk consistently. In addition to this network of Risk Management Officers, the
Company also has risk focused committees such as the Business Continuity and Information Governance Steering Committee,
Consolidated Investment Committee, Derivatives Risk Oversight Committee, Asset and Liability Management Committee,
Hedging Oversight Committee, Collateral and Liquidity Committee, and the Currency Risk Management Committee. These
committees are comprised of various risk experts and have overlapping membership, enabling consistent and holistic management
of risks. These committees report directly or indirectly to the RMSC. The RMSC, which includes senior management executives,
including the Chief Executive Officer, the Chief Financial Officer ("CFO"), the Chief Operating Officer (“COO”) and the CRO,
is the primary risk management oversight for the Company.
The RMSC approves both targets and limits for each material risk and reviews these limits annually. Exposure to these
risks is calculated and presented to the RMSC at least quarterly. Any exception to established risk limits or waiver needs to be
approved by the RMSC.
The CRO, reports regularly to the Finance, Investment and Risk Management (“FIRM”) Committee, a sub-committee
of the board of directors responsible, among other duties, for overseeing the management of RGA’s ERM programs and policies.
An extensive ERM report is presented to the FIRM quarterly. The report contains information on all risks as well as qualitative
and quantitative assessments. A list of all breaches, exceptions and waivers is also included in the report. The board of directors
has other committees, such as the Audit Committee, whose responsibilities include aspects of risk management. The CRO reports
to the CFO and has direct access to the RGA board of directors, through the FIRM Committee.
The Company has devoted significant resources to develop its ERM program, and expects continuing to do so in the
future. Nonetheless, the Company’s policies and procedures to identify, manage and monitor risks may not be fully effective.
Many of the Company’s methods for managing risk are based on historical information, which may not be a good predictor of
future risk exposures, such as the risk of a pandemic causing a large number of deaths. Management of operational, legal and
regulatory risk rely on policies and procedures which may not be fully effective under all scenarios.
The Company categorizes its main risks as follows:
Insurance Risk
•
• Market Risk
• Credit Risk
• Operational Risk
Specific risk assessments and descriptions can be found below and in Item 1A – “Risk Factors”.
Insurance Risk
The risk of loss due to experience deviating adversely from expectations for mortality, morbidity, and policyholder
behavior or lost future profits due to treaty recapture by clients. This category is further divided into mortality, morbidity, longevity,
policyholder behavior, and client recapture. The Company uses multiple approaches to managing insurance risk: active insurance
risk assessment and pricing appropriately for the risks assumed, transferring undesired risks, and managing the retained exposure
prudently. These strategies are explained below.
Insurance Risk Assessment and Pricing
The Company has developed extensive expertise in assessing insurance risks which ultimately forms an integral part of
ensuring that it is compensated commensurately for the risks it assumes and that it does not overpay for the risks it transfers to
third parties. This expertise includes a vast array of market and product knowledge supported by a large information database of
historical experience which is closely monitored. Analysis and experience studies derived from this database help form the basis
for the Company’s pricing assumptions which are used in developing rates for new risks. If actual mortality or morbidity experience
is materially adverse, some reinsurance treaties allow for increases to future premium rates.
Misestimation of any key risk can threaten the long term viability of the enterprise. Further, the pricing process is a key
operational risk and significant effort is applied to ensuring the appropriateness of pricing assumptions. Some of the safeguards
the Company uses to ensure proper pricing are: experience studies, strict underwriting, sensitivity and scenario testing, pricing
guidelines and controls, authority limits and internal and external pricing reviews. In addition, the Global ERM function provides
additional pricing oversight which includes periodic pricing audits.
Risk Transfer
To minimize volatility in financial results and reduce the impact of large losses, the Company transfers some of its
insurance risk to third parties using vehicles such as retrocession and catastrophe coverage.
68
Retrocession
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 claims paid by ceding reinsurance to other insurance enterprises (or retrocessionaires) under excess coverage and
coinsurance contracts. In individual life markets, the Company retains a maximum of $8.0 million of coverage per individual life.
In certain limited situations the Company has retained more than $8.0 million per individual life. The Company enters into
agreements with other reinsurers to mitigate the residual risk related to the over-retained policies. Additionally, due to some lower
face amount reinsurance coverages provided by the Company in addition to individual life, such as group life, disability and health,
under certain circumstances, the Company could potentially incur claims totaling more than $8.0 million per individual life.
Catastrophe Coverage
The Company accesses the markets each year for annual catastrophic coverages and reviews current coverage and pricing
of current and alternate designs. Purchases vary from year to year based on the Company’s perceived value of such coverages.
The current policy covers events involving 10 or more insured deaths from a single occurrence and covers $100 million of claims
in excess of the Company’s $50 million deductible.
Mitigation of Retained Exposure
The Company retains most of the inbound insurance risk. The Company manages the retained exposure proactively using
various mitigating factors such as diversification and limits. Diversification is the primary mitigating factor of short term volatility
risk, but it also mitigates adverse impacts of changes in long term trends and catastrophic events. The Company’s insured populations
are dispersed globally, diversifying the insurance exposure because factors that cause actual experience to deviate materially from
expectations do not affect all areas uniformly and synchronously or in close sequence. A variety of limits mitigate retained insurance
risk. Examples of these limits include geographic exposure limits, which set the maximum amount of business that can be written
in a given locale, and jumbo limits, which prevent excessive coverage on a given individual.
In the event that mortality or morbidity experience develops in excess of expectations, some reinsurance treaties allow
for increases to future premium rates. Other treaties include experience refund provisions, which may also help reduce RGA’s
mortality risk.
Market Risk
Market risk is the risk that net asset and liability values or revenue will be affected adversely by changes in market
conditions such as market prices, exchange rates, and nominal interest rates. The Company is primarily exposed to interest rate,
foreign currency, inflation and equity risks.
Interest Rate Risk
Interest rate risk is the potential for loss, on a net asset and liability basis, due to changes in interest rates, including both
normal rate changes and credit spread changes. 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 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 effect of sudden and/or sustained
changes in interest rates on fair value, cash flows, and net interest income. The Company manages its exposure to interest rates
principally by matching floating rate liabilities with corresponding floating rate assets and by matching fixed rate liabilities with
corresponding fixed rate assets. On a limited basis, the Company uses equity options to minimize its exposure to movements in
equity markets that have a direct correlation with certain of its reinsurance products.
The following table presents the account values, the weighted average interest-crediting rates and minimum guaranteed
rate ranges for the contracts containing guaranteed rates by major class of interest-sensitive product as of December 31, 2013 and
2012 (dollars in thousands):
Account value
Current weighted-average
interest crediting rate
Interest sensitive contract liability
2013
2012
Traditional individual fixed annuities
$
5,457,947
$
5,955,867
Equity-indexed annuities
Individual variable annuity contracts
Guaranteed investment contracts
Universal life – type policies
4,753,635
4,827,592
5,766
597,324
5,714
500,056
1,940,791
1,877,674
2013
2.90%
4.76%
2.42%
1.52%
4.14%
2012
2.94%
3.17%
2.93%
1.53%
4.36%
Minimum guaranteed rate ranges
2013
2012
0.50 – 4.50%
0.50 – 4.50%
1.00 – 3.00%
1.00 – 3.00%
0.33 – 3.15%
0.33 – 4.35%
0.00 – 4.50%
0.00 – 4.50%
3.00 – 6.00%
3.00 – 6.00%
69
The following table presents the account values by each minimum guaranteed rate, rounded to the nearest percentage,
by class of interest-sensitive product as of December 31, 2013 and 2012 (dollars in thousands):
Interest sensitive contract liability
1%
2%
3%
4%
5%
6%
Total
Account Value as of December 31, 2013
Traditional individual fixed
annuities
Equity-indexed annuities
Individual variable annuity
contracts
Guaranteed investment contracts
357,283
149,557
Universal life – type policies
—
—
6
—
$
195,326
$
989,960
$
3,689,776
$
569,237
$
13,648
$
— $
5,457,947
693,990
2,944,734
1,114,911
—
—
65,174
1,809,329
—
—
25,310
60,359
—
—
—
4,753,635
5,766
597,324
24,756
1,940,791
5,760
—
46,347
Account Value as of December 31, 2012
Interest sensitive contract liability
1%
2%
3%
4%
5%
6%
Total
Traditional individual fixed
annuities
Equity-indexed annuities
Individual variable annuity
contracts
Guaranteed investment contracts
Universal life – type policies
$
266,300
$
1,054,383
$
3,962,683
$
658,343
$
14,158
$
— $
5,955,867
667,716
3,011,539
1,148,337
—
5
347,654
—
—
39,383
—
3,122
—
45,153
2,587
87,709
1,745,870
—
—
25,310
61,160
—
—
—
4,827,592
5,714
500,056
25,491
1,877,674
The spread profits on the Company’s fixed annuity and interest-sensitive whole life, universal life (“UL”) and fixed
portion of variable universal life (“VUL”) insurance policies are at risk if interest rates decline and remain relatively low for a
period of time, which has generally been the case in recent years. Should interest rates remain at current levels, which are significantly
lower than those existing prior to the declines of recent years, the average earned rate of return on the Company’s annuity and UL
investment portfolios will continue to decline. Declining portfolio yields may cause the spreads between investment portfolio
yields and the interest rate credited to contract holders to deteriorate as the Company’s ability to manage spreads can become
limited by minimum guaranteed rates on annuity and UL policies. In 2013 and 2012, minimum guaranteed rates on non-variable
annuity and UL policies generally ranged from 0.50% to 6.00%, with an average guaranteed rate of approximately 2.70%.
Interest rate spreads are managed for near term income through a combination of crediting rate actions and portfolio
management. Certain annuity products contain crediting rates that reset annually, of which $2,813.5 million and $2,658.2 million
of account balances are not subject to surrender charges, with 99.3% and 96.7% of these already at their minimum guaranteed
rates as of December 31, 2013 and 2012, respectively. As such, certain management monitoring processes are designed to minimize
the effect of sudden and/or sustained changes in interest rates on fair value, cash flows, and net interest income.
The Company’s exposure to interest rate price risk and interest rate cash flow risk is reviewed on a quarterly basis. Interest
rate price risk exposure is measured using interest rate sensitivity analysis to determine the change in fair value of the Company’s
financial instruments in the event of a hypothetical change in interest rates. Interest rate cash flow risk exposure is measured using
interest rate sensitivity analysis to determine the Company’s variability in cash flows in the event of a hypothetical change in
interest rates.
Interest rate sensitivity analysis is used to measure the Company’s interest rate price risk by computing estimated changes
in fair value of fixed rate assets and liabilities in the event of a hypothetical 10% change (increase or decrease) in market interest
rates. The Company does not have fixed rate instruments classified as trading securities. The Company’s projected loss in fair
value of financial instruments in the event of a 10% unfavorable change in market interest rates at its fiscal years ended December 31,
2013 and 2012 was $485.3 million and $283.7 million, respectively.
The calculation of fair value is based on the net present value of estimated discounted cash flows expected over the life
of the market risk sensitive instruments, using market prepayment assumptions and market rates of interest provided by independent
broker quotations and other public sources, with adjustments made to reflect the shift in the treasury yield curve as appropriate.
Interest rate sensitivity analysis is also used to measure the Company’s interest rate cash flow risk by computing estimated
changes in the cash flows expected in the near term attributable to floating rate assets and liabilities in the event of a range of
assumed changes in market interest rates. This analysis assesses the risk of loss in cash flows in the near term in market risk
sensitive floating rate instruments in the event of a hypothetical 10% change (increase or decrease) in market interest rates. The
Company does not have variable rate instruments classified as trading securities. The Company’s projected decrease in cash flows
in the near term associated with floating rate instruments in the event of a 10% unfavorable change in market interest rates at its
fiscal years ended December 31, 2013 and 2012 was $8.1 and $5.2 million, respectively.
70
Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, and mortgage prepayments, and should not be relied on as indicative of future results.
Further, the computations do not contemplate any actions management could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the computation of the estimated fair value of
fixed rate instruments and the estimated cash flows of floating rate instruments, which constitute forward-looking statements.
Actual values may differ materially from those projections presented due to a number of factors, including, without limitation,
market conditions varying from assumptions used in the calculation of the fair value. In the event of a change in interest rates,
prepayments could deviate significantly from those assumed in the calculation of fair value. Finally, the desire of many borrowers
to repay their fixed rate mortgage loans may decrease in the event of interest rate increases.
In order to reduce the exposure of changes in fair values from interest rate fluctuations, the Company has developed
strategies to manage the interest rate sensitivity of its asset base. From time to time, the Company has utilized the swap market to
manage the volatility of cash flows to interest rate fluctuations.
Foreign Currency Risk
The Company is subject to foreign currency translation, transaction, and net income exposure. The Company manages
its exposure to currency principally by matching invested assets with the underlying liabilities to the extent possible. The Company
has in place net investment hedges for a portion of its investments in its Canadian and Australian operations to reduce excess
exposure to these currencies. Translation differences resulting from translating foreign subsidiary balances to U.S. dollars are
reflected in stockholders’ equity on the consolidated balance sheets.
The Company generally does not hedge the foreign currency exposure of its subsidiaries transacting business in currencies
other than their functional currency (transaction exposure). However, the Company has entered into certain interest rate swaps in
which the cash flows are denominated in different currencies, commonly referred to as cross currency swaps. Those interest rate
swaps have been designated as cash flow hedges. The majority of the Company’s foreign currency transactions are denominated
in Australian dollars, British pounds, Canadian dollars, Euros, Japanese yen, Korean won, and the South African rand.
The maximum amount of assets held in a specific currency (with the exception of the U.S. Dollar) is measured relative
to risk targets and is monitored regularly.
Inflation Risk
The primary direct effect on the Company of inflation is the increase in operating expenses. A large portion of the
Company’s operating expenses consists of salaries, which are subject to wage increases at least partly affected by the rate of
inflation. The rate of inflation also has an indirect effect on the Company. To the extent that a government’s policies to control the
level of inflation result in changes in interest rates, the Company’s investment income is affected.
The Company reinsures annuities with benefits indexed to the cost of living. These benefits are hedged with a combination
of CPI swaps and indexed government bonds.
Equity Risk
Equity risk is the risk that net asset and liability (e.g. variable annuities or other equity linked exposures) values or
revenues will be affected adversely by changes in equity markets. The Company assumes equity risk from embedded derivatives
in alternative investments, fixed indexed annuities and variable annuities.
Alternative Investments
Alternative Investments are investments in non-traditional asset classes that are most commonly backing capital and
surplus and not liabilities. The Company generally restricts the alternative investments portfolio to non-liability supporting assets:
that is, free surplus. For (re)insurance companies, alternative investments generally encompass: hedge funds, owned commercial
real estate, emerging markets debt, distressed debt, commodities, infrastructure, tax credits, and equities, both public and private.
The Company mitigates its exposure to alternative investments by limiting the size of the alternative investments holding.
Fixed Indexed Annuities
Credits for fixed indexed annuities are affected by changes in equity markets. Thus the fair value of the benefit is a
function of primarily index returns and volatility. The Company hedges some of the underlying equity exposure.
Variable Annuities
The Company reinsures variable annuities including those with guaranteed minimum death benefits (“GMDB”),
guaranteed minimum income benefits (“GMIB”), guaranteed minimum accumulation benefits (“GMAB”) and guaranteed
minimum withdrawal benefits (“GMWB”). Strong equity markets, increases in interest rates and decreases in volatility will
71
generally decrease the fair value of the liabilities underlying the benefits. Conversely, a decrease in the equity markets along with
a decrease in interest rates and an increase in volatility will generally result in an increase in the fair value of the liabilities underlying
the benefits, which has the effect of increasing reserves and lowering earnings. The Company maintains a customized dynamic
hedging program that is designed to substantially mitigate the risks associated with income volatility around the change in reserves
on guaranteed benefits, ignoring the Company’s own credit risk assessment. However, the hedge positions may not fully offset
the changes in the carrying value of the guarantees due to, among other things, time lags, high levels of volatility in the equity
and derivative markets, extreme swings in interest rates, unexpected contract holder behavior, and divergence between the
performance of the underlying funds and hedging indices. These factors, individually or collectively, may have a material adverse
effect on the Company’s net income, financial condition or liquidity. The table below provides a summary of variable annuity
account values and the fair value of the guaranteed benefits as of December 31, 2013 and 2012.
(dollars in millions)
No guarantee minimum benefits
GMDB only
GMIB only
GMAB only
GMWB only
GMDB / WB
Other
Total variable annuity account values
Fair value of liabilities associated with living benefit riders
Credit Risk
December 31,
2013
2012
961
$
86
6
52
1,752
467
31
3,355
30
$
$
948
79
6
54
1,662
455
31
3,235
172
$
$
$
Credit risk is the risk of loss due to counterparty (obligor, client, retrocessionaire, or partner) credit deterioration or
unwillingness to meet its obligations. Credit risk has two forms: investment credit risk (asset default and credit migration) and
insurance counterparty risk.
Investment Credit Risk
Investment credit risk, which includes default risk, is risk of loss due to credit quality deterioration of an individual
financial investment, derivative or non-derivative contract or instrument. Credit quality deterioration may or may not be
accompanied by a ratings downgrade. Generally, the investment credit exposure is limited to the fair value, net of any collateral
received, at the reporting date.
The creditworthiness of Europe’s peripheral region is under ongoing stress and uncertainty due to high debt levels and
economic weakness. The Company does not have material exposure to sovereign fixed maturity securities, which includes global
government agencies, from Europe’s peripheral region and Cyprus. However, the Company does have exposure to non-sovereign
fixed maturity and equity securities issued from Europe’s peripheral region. The Company increased its exposure to fixed maturity
and equity securities in Europe’s peripheral region and Cyprus from an estimated fair value of $118.7 million at December 31,
2012 to $147.3 million as of December 31, 2013, primarily due to sovereign security investments in Ireland and Spain. The
Company believes it has adequately evaluated and is appropriately managing this additional risk. See “Investments” above for
additional information on the Company’s exposure related to investment securities.
The Company manages investment credit risk using per-issuer investments limits. In addition to per-issuer limits, the
Company also limits the total amounts of investments per rating category. An automated compliance system checks for compliance
for all investment positions and sends warning messages when there is a breach. The Company manages its credit risk related to
over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements
and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each
due date and upon termination. Because exchange-traded futures are affected through regulated exchanges, and positions are
marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by
counterparties to such derivative instruments.
The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in
connection with its derivative instruments. Collateral agreements contain attachment thresholds that vary depending on the posting
party’s financial strength ratings. Additionally, a decrease in the Company’s financial strength rating to a specified level results
in potential settlement of the derivative positions under the Company’s agreements with its counterparties. The Collateral and
Liquidity Committee sets rules, approves and oversees all deals requiring collateral. See “Credit Risk” in Note 5 – “Derivative
Instruments” in the Notes to Consolidated Financial Statements for additional information on credit risk related to derivatives.
72
Insurance Counterparty Risk
Insurance counterparty risk is the potential for the Company to incur losses due to a client, retrocessionaire, or partner
becoming distressed or insolvent. This includes run-on-the-bank risk and collection risk.
Run-on-the-Bank
The risk that a client’s in force block incurs substantial surrenders and/or lapses due to credit impairment, reputation
damage or other market changes affecting the counterparty. Severely higher than expected surrenders and/or lapses could result
in inadequate in force business to recover cash paid out for acquisition costs.
Collection Risk
For clients and retrocessionaires, this includes their inability to satisfy a reinsurance agreement because the right of offset
is disallowed by the receivership court; the reinsurance contract is rejected by the receiver, resulting in a premature termination
of the contract; and/or the security supporting the transaction becomes unavailable to RGA.
The Company manages insurance counterparty risk by limiting the total exposure to a single counterparty and by only
initiating contracts with creditworthy counterparties. In addition, some of the counterparties have set up trusts and letters of credit,
reducing the Company’s exposure to these counterparties.
Generally, RGA’s insurance subsidiaries retrocede amounts in excess of their retention to RGA Reinsurance, Parkway
Re, RGA Barbados, RGA Americas, Rockwood Re, Manor Re, RGA Worldwide or RGA Atlantic. External retrocessions are
arranged through the Company’s retrocession pools for amounts in excess of its retention. As of December 31, 2013, all retrocession
pool members in this excess retention pool rated by the A.M. Best Company were rated “A-” or better. A rating of “A-” is the
fourth highest rating out of fifteen possible ratings. For a majority of the retrocessionaires that were not rated, letters of credit or
trust assets have been given as additional security. In addition, the Company performs annual financial and in force reviews of its
retrocessionaires to evaluate financial stability and performance.
The Company has never experienced a material default in connection with retrocession arrangements, nor has it
experienced any material difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given
as to the future performance of such retrocessionaires or as to the recoverability of any such claims.
Aggregate Counterparty Limits
In addition to investment credit limits and insurance counterparty limits, there are aggregate counterparty risk limits
which include counterparty exposures from reinsurance, financing and investment activities at an aggregated level to control total
exposure to a single counterparty. Counterparty risk aggregation is important because it enables the Company to capture risk
exposures at a comprehensive level and under more extreme circumstances compared to analyzing the components individually.
All counterparty exposures are calculated on a quarterly basis, reviewed by management and monitored by the ERM
function.
Operational Risk
Operational risk is the risk of loss due to inadequate or failed internal processes, people or systems, or external events.
These risks are sometimes residual risks after insurance, market and credit risks have been identified. Operational risk is further
divided into: Process, Legal/Regulatory, Financial, and Intangibles. The Company's financial risk includes liquidity risk, which
is risk that cash resources are insufficient to meet the Company's cash demands without incurring unacceptable costs. Liquidity
demands come primarily from payment of claims, expenses and investment purchases, all of which are known or can be reasonably
forecasted. Contingent liquidity demands exist and require the Company to inventory and estimate likely and potential liquidity
demands stemming from stress scenarios.
The Company maintains cash, cash equivalents, credit facilities, and short-term liquid investments to support its current
and future anticipated liquidity requirements. The Company may also borrow via the reverse repo market, and holds a large pool
of unrestricted, FHLB-eligible collateral that may be pledged to support any FHLB advances needed to provide additional liquidity.
The amount of liquidity available both within 24 hours and within 72 hours is reviewed and reported at least weekly.
In order to effectively manage operational risks, management primarily relies on:
Risk Culture
Risk management is embedded in RGA’s business processes in accordance with RGA’s risk philosophy. As the cornerstone
of the ERM framework, risk culture plays a preeminent role in the effective management of risks assumed by RGA. At the heart
of RGA’s risk culture is prudent risk management. Senior management sets the tone for RGA risk culture, inculcating positive
risk attitudes so as to entrench sound risk management practices into day-to-day activities.
73
Structural Controls
Structural controls provide additional safeguards against undesired risk exposures. Examples of structural controls include:
pricing and underwriting reviews, standard treaty language, etc.
Risk Monitoring and Reporting
Proactive risk monitoring and reporting enable early detection and mitigation of emerging risks. For example, there is
elevated regulatory activity in the wake of the global financial crisis and RGA is actively monitoring regulatory proposals in order
to respond optimally. Risk escalation channels coupled with open communication lines enhance the mitigants explained above.
New Accounting Standards
See “New Accounting Pronouncements” in Note 2 — “Summary of Significant Accounting Policies” in the Notes to
Consolidated Financial Statements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by Item 7A is contained in Item 7 under the caption “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Market Risk”
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
74
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Assets
Fixed maturity securities:
Available-for-sale at fair value (amortized cost of $20,270,734 and $19,559,432)
$
21,474,136
$
22,291,614
December 31,
2013
December 31,
2012
(Dollars in thousands, except share data)
Mortgage loans on real estate (net of allowances of $10,106 and $11,580)
Policy loans
Funds withheld at interest
Short-term investments
Other invested assets
Total investments
Cash and cash equivalents
Accrued investment income
Premiums receivable and other reinsurance balances
Reinsurance ceded receivables
Deferred policy acquisition costs
Other assets
Total assets
Liabilities and Stockholders’ Equity
Future policy benefits
Interest-sensitive contract liabilities
Other policy claims and benefits
Other reinsurance balances
Deferred income taxes
Other liabilities
Long-term debt
Collateral finance facility
Total liabilities
Commitments and contingent liabilities (See Note 12)
Stockholders’ Equity:
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no shares issued or outstanding)
Common stock (par value $.01 per share; 140,000,000 shares authorized;
shares issued: 79,137,758 at December 31, 2013 and 2012)
Additional paid-in-capital
Retained earnings
Treasury stock, at cost - 8,369,540 and 5,210,427 shares
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
2,486,680
1,244,469
5,771,467
139,395
1,324,960
2,300,587
1,278,175
5,594,182
288,082
1,159,543
32,441,107
32,912,183
923,647
267,908
1,439,528
594,515
3,517,796
489,972
39,674,473
11,866,776
12,947,557
3,571,761
275,138
1,837,577
541,035
2,214,350
484,752
$
$
1,259,892
201,344
1,356,087
620,901
3,619,274
390,757
40,360,438
11,372,856
13,353,502
3,160,250
233,630
2,120,501
742,249
1,815,253
652,010
$
$
33,738,946
33,450,251
—
791
1,777,906
3,659,938
(508,715)
1,005,607
5,935,527
—
791
1,755,421
3,357,255
(312,182)
2,108,902
6,910,187
$
39,674,473
$
40,360,438
75
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Revenues
Net premiums
Investment income, net of related expenses
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity securities
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income
Other investment related gains (losses), net
Total investment related gains (losses), net
Other revenues
Total revenues
Benefits and expenses
Claims and other policy benefits
Interest credited
Policy acquisition costs and other insurance expenses
Other operating expenses
Interest expense
Collateral finance facility expense
Total benefits and expenses
Income before income taxes
Provision for income taxes
Net income
Earnings per share
Basic earnings per share
Diluted earnings per share
Dividends declared per share
For the years ended December 31,
2013
2012
2011
(Dollars in thousands, except per share data)
$
8,254,027
$
7,906,596
$
1,699,865
1,436,206
(12,654)
(247)
76,891
63,990
300,471
(15,908)
(7,618)
277,662
254,136
243,973
7,335,687
1,281,197
(30,873)
3,924
(9,107)
(36,056)
248,710
10,318,353
9,840,911
8,829,538
7,304,332
476,514
1,300,780
466,717
124,307
10,449
9,683,099
635,254
216,417
418,837
5.82
5.78
1.08
$
$
$
6,665,999
379,915
1,306,470
451,759
105,348
12,197
8,921,688
919,223
287,330
631,893
8.57
8.52
0.84
$
$
$
6,225,183
316,394
990,021
419,340
102,638
12,391
8,065,967
763,571
217,526
546,045
7.42
7.37
0.60
$
$
$
See accompanying notes to consolidated financial statements.
76
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Comprehensive income (loss)
Net Income
Other comprehensive income (loss), net of tax:
Change in foreign currency translation adjustments
Change in net unrealized gain on investments
Change in other-than-temporary impairment losses on fixed maturity securities
Changes in pension and other postretirement plan adjustments
Total other comprehensive income (loss), net of tax
Total comprehensive income (loss)
2013
2012
2011
$
418,837
$
631,893
$
546,045
(60,392)
(1,060,308)
2,896
14,509
(1,103,295)
37,680
451,905
6,434
(5,270)
490,749
(25,500)
769,105
(1,236)
(16,400)
725,969
$
(684,458) $
1,122,642
$
1,272,014
See accompanying notes to consolidated financial statements.
77
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Balance, January 1, 2011
Net income
Total other comprehensive income (loss)
Dividends to stockholders
Common stock issuance
Warrant redemption
Purchase of treasury stock
Reissuance of treasury stock
Balance, December 31, 2011
Net income
Total other comprehensive income (loss)
Dividends to stockholders
Purchase of treasury stock
Reissuance of treasury stock
Balance, December 31, 2012
Net income
Total other comprehensive income (loss)
Dividends to stockholders
Purchase of treasury stock
Reissuance of treasury stock
Balance, December 31, 2013
Common
Stock
Warrants
Additional
Paid In Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income
Total
$
734
$
66,912
$
1,478,398
$
2,327,473
$
(295) $
892,184
$
4,765,406
546,045
(44,229)
725,969
2
55
(66,912)
221,442
27,934
(10,860)
34,191
(380,345)
546,045
725,969
(44,229)
2
154,585
(380,345)
51,265
791
—
1,727,774
2,818,429
(346,449)
1,618,153
5,818,698
631,893
(61,945)
490,749
27,647
(31,122)
(6,924)
41,191
791
—
1,755,421
3,357,255
(312,182)
2,108,902
631,893
490,749
(61,945)
(6,924)
37,716
6,910,187
418,837
418,837
(77,642)
22,485
(38,512)
72,671
(269,204)
(1,103,295)
(1,103,295)
(77,642)
(269,204)
56,644
$
791
$
— $
1,777,906
$
3,659,938
$ (508,715) $
1,005,607
$
5,935,527
See accompanying notes to consolidated financial statements.
78
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
2013
2012
2011
(Dollars in thousands)
$
418,837
$
631,893
$
546,045
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Change in operating assets and liabilities:
Accrued investment income
Premiums receivable and other reinsurance balances
Deferred policy acquisition costs
Reinsurance ceded receivables
Future policy benefits, other policy claims and benefits, and
other reinsurance balances
Deferred income taxes
Other assets and other liabilities, net
Amortization of net investment premiums, discounts and other
Investment related (gains) losses, net
Gain on repurchase of collateral finance facility securities
Excess tax benefits from share-based payment arrangement
Other, net
Net cash provided by operating activities
Cash flows from investing activities
Sales of fixed maturity securities available-for-sale
Maturities of fixed maturity securities available-for-sale
Purchases of fixed maturity securities available-for-sale
Cash invested in mortgage loans
Cash invested in policy loans
Cash invested in funds withheld at interest
Principal payments on mortgage loans on real estate
Principal payments on policy loans
Purchase of a business, net of cash acquired of $9,709
Change in short-term investments
Change in other invested assets
Net cash used in investing activities
Cash flows from financing activities
Dividends to stockholders
Repurchase and repayment of collateral finance facility securities
Proceeds from long-term debt issuance
Debt issuance costs
Principal payments and repurchase of long-term debt
Proceeds from redemption and remarketing of trust preferred securities
Maturity of trust preferred securities
Purchases of treasury stock
Excess tax benefits from share-based payment arrangement
Exercise of stock options, net
Change in cash collateral for derivative positions and other arrangements
Deposits on universal life and other investment type
policies and contracts
Withdrawals on universal life and other investment type
policies and contracts
Net cash (used in) provided by financing activities
Effect of exchange rate changes on cash
Change in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplementary information:
$
Cash paid for interest
Cash paid for income taxes, net of refunds
Business purchase information - see Note 2 - "Summary of Significant Accounting Policies"
Non-cash supplementary information - see Note 4 - “Investments”
$
$
See accompanying notes to consolidated financial statements.
79
(69,875)
(106,136)
58,313
62,058
1,429,697
230,778
(186,978)
(95,547)
(63,990)
(46,506)
(3,125)
99,634
1,727,160
3,629,378
155,237
(4,766,275)
(613,413)
(18)
(90,707)
391,654
33,724
(2,805)
138,024
(209,900)
(1,335,101)
(77,642)
(119,255)
398,492
(3,400)
—
—
—
(269,204)
3,125
28,390
(73,338)
201,957
(770,338)
(681,213)
(47,091)
(336,245)
1,259,892
923,647
116,809
110,773
$
$
$
(12,088)
(285,193)
(65,050)
5,293
1,792,207
198,112
(37,831)
(83,787)
(254,136)
—
(416)
85,523
1,974,527
5,465,014
145,423
(6,818,378)
(491,466)
(58,240)
(107,289)
173,962
40,466
—
(101,214)
(216,274)
(1,967,996)
(61,945)
—
400,000
(6,255)
—
—
—
(6,924)
416
(3,087)
(132,933)
457,711
(365,044)
281,939
8,552
297,022
962,870
1,259,892
100,984
97,000
$
$
$
(17,426)
(83,650)
(241,903)
143,505
970,685
168,994
(104,423)
(172,688)
36,056
(65,565)
(4,933)
134,835
1,309,532
3,165,479
218,696
(4,011,985)
(209,194)
(61,073)
(37,721)
92,806
29,091
—
30,408
(122,288)
(905,781)
(44,229)
(130,798)
397,788
(3,400)
(200,000)
154,588
(159,473)
(380,345)
4,933
6,449
231,180
367,771
(142,469)
101,995
(6,537)
499,209
463,661
962,870
100,733
129,009
Reinsurance Group of America, Incorporated
Notes to consolidated financial statements
For the years ended December 31, 2013, 2012 and 2011
Note 1 BUSINESS AND BASIS OF PRESENTATION
Reinsurance Group of America, Incorporated (“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 Company
(“RGA Reinsurance”), Reinsurance Company of Missouri, Incorporated (“RCM”), RGA Reinsurance Company (Barbados) Ltd.
(“RGA Barbados”), RGA Americas Reinsurance Company, Ltd. (“RGA Americas”), RGA Atlantic Reinsurance Company, Ltd.
(“RGA Atlantic”), RGA Life Reinsurance Company of Canada (“RGA Canada”), RGA Reinsurance Company of Australia, Limited
(“RGA Australia”) and RGA International Reinsurance Company (“RGA International”) as well as other subsidiaries, all of which
are wholly owned (collectively, the “Company”).
The Company is primarily engaged in the reinsurance of individual and group coverages for traditional life and health, longevity,
disability, annuity and critical illness products, and financial reinsurance. Reinsurance is an arrangement under which an insurance
company, the reinsurer, agrees to indemnify another insurance company, the ceding company, for all or a portion of the insurance
risks underwritten by the ceding company. Reinsurance is designed to (i) reduce the net liability on individual risks, thereby
enabling the ceding company to increase the volume of business it can underwrite, as well as increase the maximum risk it can
underwrite on a single life or risk; (ii) stabilize operating results by leveling fluctuations in the ceding company’s loss experience;
(iii) assist the ceding company to meet applicable regulatory requirements; and (iv) enhance the ceding company’s financial
strength and surplus position.
Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. The most significant estimates include those used in determining deferred policy acquisition costs, premiums
receivable, future policy benefits, incurred but not reported claims, income taxes, valuation of investments and investment
impairments, and valuation of embedded derivatives. Actual results could differ materially from the estimates and assumptions
used by management.
The accompanying consolidated financial statements include the accounts of RGA and its subsidiaries, all of which are wholly
owned, and any variable interest entities where the Company is the primary beneficiary. Entities in which the Company has
significant influence over the operating and financing decisions but are not required to be consolidated are reported under the
equity method of accounting. The Company evaluates variable interest entities in accordance with the general accounting principles
for Consolidation. Intercompany balances and transactions have been eliminated.
There were no subsequent events, other than as disclosed in Note 20 - "Subsequent Event", that would require disclosure or
adjustments to the accompanying consolidated financial statements through the date the consolidated financial statements were
issued.
Reclassification
Certain amounts in prior years have been reclassified to conform to the current year presentation.
Note 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments
Fixed Maturity Securities
Fixed maturity securities available-for-sale are reported at fair value and are so classified based upon the possibility that such
securities could be sold prior to maturity if that action enables the Company to execute its investment philosophy and appropriately
match investment results to operating and liquidity needs.
Unrealized gains and losses on fixed maturity securities classified as available-for-sale, less applicable deferred income taxes as
well as related adjustments to deferred acquisition costs, if applicable, are reflected as a direct charge or credit to accumulated
other comprehensive income (“AOCI”) in stockholders’ equity on the consolidated balance sheets.
Investment income is recognized as it accrues or is legally due. Realized gains and losses on sales of investments are included in
investment related gains (losses), net, as are credit impairments that are other-than-temporary in nature. The cost of investments
sold is primarily determined based upon the specific identification method.
80
Mortgage Loans on Real Estate
Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and valuation
allowances. Interest income is accrued on the principal amount of the mortgage loan based on its contractual interest rate.
Amortization of premiums and discounts is recorded using the effective yield method. The Company accrues interest on loans
until it is probable the Company will not receive interest or the loan is 90 days past due. Interest income, amortization of premiums
and discounts and prepayment fees are reported in investment income, net of related expenses in the consolidated statements of
income.
A mortgage loan is considered to be impaired when, based on the current information and events, it is probable that the Company
will be unable to collect all amounts due according to the contractual terms of the mortgage agreement. Valuation allowances on
mortgage loans are established based upon inherent losses expected by management to be realized in connection with future
dispositions or settlement of mortgage loans, including foreclosures. The Company establishes valuation allowances for estimated
impairments on an individual loan basis as of the balance sheet date. Such valuation allowances are based on the excess carrying
value of the loan over the present value of expected future cash flows discounted at the loan’s original effective interest rate, the
value of the loan’s collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or the loan’s market
value if the loan is being sold. Non-specific valuation allowances are established for mortgage loans based upon several loan
factors, including the Company’s historical experience for loan losses, defaults and loss severity, loss expectations for loans with
similar risk characteristics and industry statistics. These evaluations are revised as conditions change and new information becomes
available. In addition to historical experience, management considers qualitative factors that include the impact of changing macro
economic conditions, which may not be currently reflected in the loan portfolio performance, and the quality of the loan portfolio
per internal credit quality ratings. Any interest accrued or received on the net carrying amount of the impaired loan will be included
in investment income or applied to the principal of the loan, depending on the assessment of the collectability of the loan. Mortgage
loans deemed to be uncollectible or that have been foreclosed are charged off against the valuation allowances and subsequent
recoveries, if any, are credited to the valuation allowances. Changes in valuation allowances are reported in investment related
gains (losses), net on the consolidated statements of income.
The Company evaluates whether a mortgage loan modification represents a troubled debt restructuring. In a troubled debt
restructuring, the Company grants concessions related to the borrower’s financial difficulties. Generally, the types of concessions
include: reduction of the contractual interest rate, extension of the maturity date at an interest rate lower than current market interest
rates and/or a reduction of accrued interest. The Company considers the amount, timing and extent of the concession granted in
determining any impairment or changes in the specific valuation allowance recorded in connection with the troubled debt
restructuring. Through the continuous monitoring process, the Company may have recorded a specific valuation allowance prior
to when the mortgage loan is modified in a troubled debt restructuring. Accordingly, the carrying value (after specific valuation
allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if
the expected recovery is higher than the pre-modification recovery assessment.
The Company’s internal credit quality rating model is used to estimate the probability of mortgage loan default and the likelihood
of loss upon default. The rating scale ranges from “high investment grade” to “in or near default” with high investment grade
being the highest quality and least likely to default and lose principal. Likewise, a rating of in or near default indicates the lowest
quality and the most likely to default or lose principal. All loans are assigned a rating at origination and ratings are updated at least
annually. Lower rated loans appear on the Company’s watch list and are re-evaluated more frequently. The debt service coverage
ratio and the loan to value ratio are the most heavily weighted factors in determining the loan rating. Other factors involved in
determining the final rating are loan amortization, tenant rollover, location and market stability, and borrowers’ financial condition
and experience.
Policy Loans
Policy loans are reported at the unpaid principal balance. Interest income on such loans is recorded as earned using the contractually
agreed upon interest rate. 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.
Funds Withheld at Interest
Funds withheld at interest represent amounts contractually withheld by ceding companies in accordance with reinsurance
agreements. For agreements written on a modified coinsurance basis and agreements written on a coinsurance funds withheld
basis, assets which support the net statutory reserves are withheld and legally owned by the ceding company. Interest, recorded
in investment income in the consolidated statements of income, accrues to these assets at calculated rates as defined by the treaty
terms.
81
Short-term Investments
Short-term investments represent investments with remaining maturities greater than three months but less than twelve months,
at the date of purchase, and are stated at estimated fair value or amortized cost, which approximates estimated fair value. Interest
on short-term investments is recorded in investment income in the consolidated statements of income.
Other Invested Assets
In addition to derivative contracts discussed below, other invested assets include equity securities, contractholder-directed
investments, limited partnership interests, real estate joint ventures, real estate-held-for-investment and structured loans. Equity
securities are primarily carried at fair value. The fair value option ("FVO") was elected for contractholder-directed investments
supporting unit-linked variable annuity type liabilities which do not qualify for presentation and reporting as separate accounts.
Changes in estimated fair value of these securities are included in investment related gains (losses), net. Limited partnership
interests and structured loans are primarily carried at cost. Based on the nature and structure of these investments, they do not
meet the characteristics of an equity security in accordance with applicable accounting standards. Real estate joint ventures and
certain limited partnerships are reported using the equity method of accounting.
Real estate held-for-investment, including related improvements, is stated at cost less accumulated depreciation. Depreciation is
calculated on a straight-line basis over the estimated useful life of the property. The Company’s real estate held-for-investment is
primarily acquired upon foreclosure of mortgage loans and is recorded at the lower of estimated fair value or the carrying value
of the respective mortgage loan, less cost to sell, at the date of foreclosure.
Other-than-Temporary Impairment
The Company identifies fixed maturity and equity securities that could potentially have credit impairments that are other-than-
temporary by monitoring market events that could impact issuers’ credit ratings, business climates, management changes, litigation,
government actions and other similar factors. The Company also monitors late payments, pricing levels, rating agency actions,
key financial ratios, financial statements, revenue forecasts and cash flow projections as indicators of credit issues.
The Company reviews all securities on a case-by-case basis to determine whether an other-than-temporary decline in value exists
and whether losses should be recognized. The Company considers relevant facts and circumstances in evaluating whether a credit
or interest rate-related impairment of a security is other-than-temporary. Relevant facts and circumstances considered include: (1)
the extent and length of time the fair value has been below cost; (2) the reasons for the decline in fair value; (3) the issuers financial
position and access to capital; and (4) for fixed maturity securities, the Company’s intent to sell a security or whether it is more
likely than not it will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend
to maturity and for equity securities, the Company’s ability and intent to hold the security for a period of time that allows for the
recovery in value. To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, an
impairment loss is recognized.
Impairment losses on equity securities are reported in investment related gains (losses), net on the consolidated statements of
income. Impairment losses on fixed maturity securities recognized in the financial statements are dependent on the facts and
circumstances related to the specific security. If the Company intends to sell a security or it is more likely than not that it would
be required to sell a security before the recovery of its amortized cost, less any recorded credit loss, it recognizes an other-than-
temporary impairment in investment related gains (losses), net on the consolidated statements of income for the difference between
amortized cost and fair value. If neither of these two conditions exists then the recognition of the other-than-temporary impairment
is bifurcated and the Company recognizes the credit loss portion in investment related gains (losses), net and the non-credit loss
portion in AOCI.
The Company estimates the amount of the credit loss component of a fixed maturity security impairment as the difference between
amortized cost and the present value of the expected cash flows of the security. The present value is determined using the best
estimate cash flows discounted at the effective interest rate implicit to the security at the date of purchase or the current yield to
accrete an asset-backed or floating rate security. The techniques and assumptions for establishing the best estimate cash flows
vary depending on the type of security. The asset-backed securities’ cash flow estimates are based on security-specific facts and
circumstances that may include collateral characteristics, expectations of delinquency and default rates, loss severity and
prepayment speeds and structural support, including subordination and guarantees. The corporate fixed maturity security cash
flow estimates are derived from scenario-based outcomes of expected corporate restructurings or the disposition of assets using
security specific facts and circumstances including timing, security interests and loss severity.
In periods after an other-than-temporary impairment loss is recognized on a fixed maturity security, the Company will report the
impaired security as if it had been purchased on the date it was impaired and will continue to estimate the present value of the
estimated cash flows of the security. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted into
net investment income over the remaining term of the fixed maturity security in a prospective manner based on the amount and
timing of estimated future cash flows.
82
The cost of other invested assets is adjusted for impairments in value deemed to be other-than-temporary in the period in which
the determination is made. These impairments are included within investment related gains (losses), net and the cost basis of the
investment securities is reduced accordingly. The Company does not change the revised cost basis for subsequent recoveries in
value.
The Company considers its cost method investments for other-than-temporary impairment when the carrying value of these
investments exceeds the net asset value. The Company takes into consideration the severity and duration of this excess when
deciding if the cost method investment is other-than-temporarily impaired. For equity method investments (including real estate
ventures), the Company considers financial and other information provided by the investee, other known information and inherent
risks in the underlying investments, as well as future capital commitments, in determining whether an impairment has occurred.
The Company periodically reviews its real estate held-for-investment for impairment and tests these investments for recoverability
whenever events or changes in circumstances indicate the carrying amount of the property may not be recoverable and the carrying
value of the property exceeds its estimated fair value. Properties for which carrying values are greater than their undiscounted
cash flows are written down to the estimated fair value.
Derivative Instruments
Overview
The Company utilizes a variety of derivative instruments including swaps, options, forwards and futures, primarily to manage or
hedge interest rate risk, credit risk, inflation risk, foreign currency risk, market volatility and various other market risks associated
with its business. The Company does not invest in derivatives for speculative purposes. It is the Company’s policy to enter into
derivative contracts primarily with highly rated parties. See Note 5 – “Derivative Instruments” for additional detail on the
Company’s derivative positions.
Accounting and Financial Statement Presentation of Derivatives
Derivatives are carried on the Company’s consolidated balance sheets in other invested assets or other liabilities, at fair value.
Certain derivatives are subject to master netting provisions and reported as a net asset or liability. On the date a derivative contract
is executed, the Company designates the derivative as (1) a fair value hedge, (2) a cash flow hedge, (3) a net investment hedge in
a foreign operation or (4) free-standing derivatives held for other risk management purposes, which primarily involve managing
asset or liability risks associated with the Company’s reinsurance treaties which do not qualify for hedge accounting.
Changes in the fair value of free-standing derivative instruments, which do not receive accounting hedge treatment, are reflected
in investment related gains (losses), net.
Hedge Documentation and Hedge Effectiveness
To qualify for hedge accounting, at the inception of the hedging relationship, the Company formally documents its risk management
objective and strategy for undertaking the hedging transaction, as well as its designation of the hedge as either (i) a fair value
hedge; (ii) a cash flow hedge; or (iii) a hedge of a net investment in a foreign operation. In this documentation, the Company sets
forth how the hedging instrument is expected to hedge the designated risks related to the hedged item and sets forth the method
that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method which will be
used to measure ineffectiveness. A derivative designated as a hedging instrument must be assessed as being highly effective in
offsetting the designated risk of the hedged item. Hedge effectiveness is formally assessed at inception and periodically throughout
the life of the designated hedging relationship.
Under a fair value hedge, changes in the fair value of the hedging derivative, including amounts measured as ineffective, and
changes in the fair value of the hedged item related to the designated risk being hedged, are reported within investment related
gains (losses), net. The fair values of the hedging derivatives are exclusive of any accruals that are separately reported in the
consolidated statement of income within interest income or interest expense to match the location of the hedged item.
Under a cash flow hedge, changes in the fair value of the hedging derivative measured as effective are reported within AOCI and
the deferred gains or losses on the derivative are reclassified into the consolidated statement of income when the Company’s
earnings are affected by the variability in cash flows of the hedged item. Changes in the fair value of the hedging instrument
measured as ineffective are reported within investment related gains (losses), net. The fair values of the hedging derivatives are
exclusive of any accruals that are separately reported in the consolidated statement of income within interest income or interest
expense to match the location of the hedged item.
In a hedge of a net investment in a foreign operation, changes in the fair value of the hedging derivative that are measured as
effective are reported within AOCI consistent with the translation adjustment for the hedged net investment in the foreign operation.
Changes in the fair value of the hedging instrument measured as ineffective are reported within investment related gains (losses),
net.
83
The Company discontinues hedge accounting prospectively when: (i) it is determined that the derivative is no longer highly
effective in offsetting changes in the estimated fair value or cash flows of a hedged item; (ii) the derivative expires, is sold,
terminated, or exercised; (iii) it is no longer probable that the hedged forecasted transaction will occur; or (iv) the derivative is
de-designated as a hedging instrument.
When hedge accounting is discontinued because it is determined that the derivative is not highly effective, the derivative continues
to be carried in the consolidated balance sheets at fair value, with changes in fair value recognized in investment related gains
(losses), net. The carrying value of the hedged asset or liability under a fair value hedge is no longer adjusted for changes in its
estimated fair value due to the hedged risk, and the cumulative adjustment to its carrying value is amortized into income over the
remaining life of the hedged item. Provided the hedged forecasted transaction occurrence is still probable, the changes in estimated
fair value of derivatives recorded in other comprehensive income (“OCI”) related to discontinued cash flow hedges are released
into the consolidated statement of income when the Company’s earnings are affected by the variability in cash flows of the hedged
item.
When hedge accounting is discontinued because it is no longer probable that the forecasted transactions will occur on the anticipated
date or within two months of that date, the derivative continues to be carried in the consolidated balance sheets at its estimated
fair value, with changes in estimated fair value recognized currently in investment related gains (losses), net. Deferred gains and
losses of a derivative recorded in OCI pursuant to the discontinued cash flow hedge of a forecasted transaction that is no longer
probable are recognized immediately in investment related gains (losses), net.
In all other situations in which hedge accounting is discontinued, the derivative is carried at its estimated fair value in the consolidated
balance sheets, with changes in its estimated fair value recognized in the current period as investment related gains (losses), net.
Embedded Derivatives
The Company reinsures certain annuity products that contain terms that are deemed to be embedded derivatives, primarily equity-
indexed annuities and variable annuities with guaranteed minimum benefits. The Company assesses reinsurance contract terms
to identify embedded derivatives which are required to be bifurcated under the general accounting principles for Derivatives and
Hedging. If the contract is not reported for in its entirety at fair value and it is determined that the terms of the embedded derivative
are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same
terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and accounted for
separately.
Such embedded derivatives are carried on the consolidated balance sheets at fair value in the same line item as the host contract.
Changes in the fair value of embedded derivatives associated with equity-indexed annuities are reflected in interest credited on
the consolidated statements of income and changes in the fair value of embedded derivatives associated with variable annuity
guaranteed minimum benefits are reflected in investment related gains (losses), net on the consolidated statements of income. See
“Interest-Sensitive Contract Liabilities” below for additional information on embedded derivatives related to equity-indexed and
variable annuities. The Company has implemented an economic hedging strategy to mitigate the volatility associated with its
reinsurance of variable annuity guaranteed minimum benefits. The hedging strategy is designed such that changes in the fair value
of the hedge contracts, primarily futures, swap contracts and options, move in the opposite direction of changes in the fair value
of the embedded derivatives. While the Company actively manages its hedging program, the hedges that are in place may not be
totally effective in offsetting the embedded derivative changes due to the many variables that must be managed. The Company
has elected not to assess this hedging strategy for hedge accounting treatment.
Additionally, reinsurance treaties written on a modified coinsurance or funds withheld basis are subject to the general accounting
principles for Derivatives and Hedging related to embedded derivatives. The Company’s funds withheld at interest balances are
primarily associated with its reinsurance treaties structured on a modified coinsurance or funds withheld basis, the majority of
which were subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. Management
believes the embedded derivative feature in each of these reinsurance treaties is similar to a total return swap on the assets held
by the ceding companies. The valuation of the embedded derivatives related to these reinsurance treaties is sensitive to the credit
spread environment. The calculation of the change in fair value of these embedded derivatives includes the effect associated with
the Company’s own credit risk. A decline in the Company’s credit ratings would result in a decrease in the embedded derivative
liability. The fair value of the embedded derivatives is included in the funds withheld at interest line item on the consolidated
balance sheets. The change in the fair value of the embedded derivatives is recorded in investment related gains (losses), net on
the consolidated statements of income.
The Company has entered into various financial reinsurance treaties on a funds withheld and modified coinsurance basis. These
treaties do not transfer significant insurance risk and are recorded on a deposit method of accounting with the Company earning
a net fee. As a result of the experience refund provisions contained in these treaties, the value of the embedded derivatives in these
contracts is currently considered immaterial. The Company monitors the performance of these treaties on a quarterly basis.
Significant adverse performance or losses on these treaties may result in a loss associated with the embedded derivative.
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Fair Value Measurements
General accounting principles for Fair Value Measurements and Disclosures define fair value, establish a framework for measuring
fair value, establish a fair value hierarchy based on the inputs used to measure fair value and enhance disclosure requirements for
fair value measurements. In compliance with these principles, the Company has categorized its financial instruments, based on
the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority
to quoted prices in active markets for identical assets or liabilities (Level 1), the second highest priority to quoted prices in markets
that are not active or inputs that are observable either directly or indirectly (Level 2) and the lowest priority to unobservable inputs
(Level 3).
If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority
level input that is significant to the fair value measurement of the instrument.
See Note 6 - “Fair Value of Assets and Liabilities” for further details on the Company’s assets and liabilities recorded at fair value.
Cash and Cash Equivalents
Cash and cash equivalents include cash on deposit and highly liquid debt instruments purchased with an original maturity of three
months or less.
Premiums Receivable
Premiums are accrued when due and in accordance with information received from the ceding company. When the Company
enters into a new reinsurance agreement, it records accruals based on the terms of the reinsurance treaty. Similarly, when a ceding
company fails to report information on a timely basis, the Company records accruals based on the terms of the reinsurance treaty
as well as historical experience. Other management estimates include adjustments for increased in force on existing treaties, lapsed
premiums given historical experience, the financial health of specific ceding companies, collateral value and the legal right of
offset on related amounts (i.e. allowances and claims) owed to the ceding company. Under the legal right of offset provisions in
its reinsurance treaties, the Company can withhold payments for allowances and claims from unpaid premiums. Based on its
review of these factors and historical experience, the Company did not believe a provision for doubtful accounts was necessary
as of December 31, 2013 or 2012.
Deferred Policy Acquisition Costs
Costs of acquiring new business, which vary with and are directly 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. Non-commission costs related to the acquisition of new
and renewal insurance contracts may be deferred only if they meet the following criteria:
•
•
Incremental direct costs of a successful contract acquisition
Portions of employees’ salaries and benefits directly related to time spent performing specified acquisition activities
for a contract that has been acquired or renewed
• Other costs directly related to the specified acquisition or renewal activities that would not have been incurred had
that acquisition contract transaction not occurred
The Company tests the recoverability for each year of business at issue before establishing additional deferred acquisition costs
(“DAC”). The Company also performs annual tests to establish that DAC are expected to remain recoverable, and if financial
performance significantly deteriorates to the point where a deficiency exists, a cumulative charge to current operations will be
recorded. No such adjustments related to DAC recoverability were made in 2013, 2012 or 2011.
DAC related to traditional life insurance contracts are amortized with interest over the premium-paying period of the related
policies in proportion to the ratio of individual period premium revenues to total anticipated premium revenues over the life of
the policy. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future
policy benefits.
DAC related to interest-sensitive life and investment-type policies are amortized over the lives of the policies, in proportion to
the gross profits realized from mortality, investment income less interest credited, and expense margins.
Other Reinsurance Balances
The Company assumes and retrocedes financial reinsurance contracts that do not expose it to a reasonable possibility of loss from
insurance risk. These contracts are reported as deposits and are included in other reinsurance assets/liabilities. The amount of
revenue reported in other revenues on these contracts represents fees and the cost of insurance under the terms of the reinsurance
agreement. Assets and liabilities are reported on a net or gross basis, depending on the specific details within each treaty. Reinsurance
agreements reported on a net basis, where a legal right of offset exists, are generally included in other reinsurance balances on the
consolidated balance sheets. Balances resulting from the assumption and/or subsequent transfer of benefits and obligations resulting
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from cash flows related to variable annuities have also been classified as other reinsurance balance assets and/or liabilities. Other
reinsurance assets are included in premiums receivable and other reinsurance balances while other reinsurance liabilities are
included in other reinsurance balances on the consolidated balance sheets.
Goodwill and Value of Business Acquired
Goodwill, reported in other assets, is not amortized into results of operations, but instead is reviewed at least annually for impairment
and written down only in the periods in which the recorded value of goodwill exceeds its fair value. Goodwill as of December 31,
2013 and 2012 totaled $7.0 million. The value of business acquired (“VOBA”) is amortized in proportion to the ratio of annual
premium revenues to total anticipated premium revenues or in relation to the present value of estimated profits. Anticipated
premium revenues have been estimated using assumptions consistent with those used in estimating reserves for future policy
benefits. The carrying value is reviewed at least annually for indicators of impairment in value. The VOBA was approximately
$5.5 million and $0.6 million, including accumulated amortization of $13.0 million and $24.8 million, as of December 31, 2013
and 2012, respectively. The VOBA amortization expense for the years ended December 31, 2013, 2012 and 2011 was $0.3 million,
$0.2 million, and $0.2 million, respectively. These amortized balances are included in other assets on the consolidated balance
sheets. Future amortization of the VOBA is not material.
The increase in the VOBA balance as of December 31, 2013 is related to acquisition of Leidsche Verzekeringen Maatschappij
N.V. On August 13, 2013, the Company completed its acquisition of the Dutch life insurance company for a total purchase price
of $12.5 million. The purchase price was allocated to $147.3 million of assets and $134.8 million of liabilities at the date of
acquisition. The purchased life insurance company primarily sells term life and unit-linked variable annuity policies. The
acquisition will allow the Company to better pursue additional reinsurance opportunities in the Dutch market.
Value of Distribution Agreements and Customer Relationships Acquired
Value of distribution agreements (“VODA”) is reported in other assets and represents the present value of future profits associated
with the expected future business derived from the distribution agreements. Value of customer relationships acquired (“VOCRA”)
is also reported in other assets and represents the present value of the expected future profits associated with the expected future
business acquired through existing customers of the acquired company or business. The Company’s VODA and VOCRA are
related to the acquisition of Reliastar Life Insurance Company’s U.S. and Canadian group life, accident and health reinsurance
business in 2010. The VODA is amortized over a useful life of 15 years and the VOCRA is also amortized over a 15 year period
in proportion to expected revenues generated. Such amortization is included in policy acquisition costs and other insurance expenses.
Each year the Company reviews VODA and VOCRA to determine the recoverability of these balances. VODA and VOCRA totaled
approximately $85.8 million and $95.9 million, including accumulated amortization of $34.9 million and $24.8 million, as of
December 31, 2013 and 2012, respectively. The VODA and VOCRA amortization expense for the years ended December 31,
2013, 2012 and 2011 was $10.1 million, $10.5 million and $10.9 million, respectively. Amortization of the VODA and VOCRA
is estimated to be $9.5 million, $9.4 million, $9.0 million, $8.7 million and $8.3 million during 2014, 2015, 2016, 2017 and 2018,
respectively.
Other Assets
In addition to the goodwill, VOBA, VODA and VOCRA, other assets primarily includes unamortized debt issuance costs, corporate-
owned life insurance, capitalized software, and other capitalized assets. Capitalized software is stated at cost, less accumulated
amortization. Purchased software costs, as well as internal and external costs incurred to develop internal-use computer software
during the application development stage, are capitalized. As of December 31, 2013 and 2012, the Company had unamortized
computer software costs of approximately $49.6 million and $43.2 million, respectively. During 2013, 2012 and 2011, the Company
amortized computer software costs of $6.9 million, $6.5 million, and $4.3 million, respectively. Amortization of software costs is
recorded on a straight-line basis over periods ranging from three to ten years. Carrying values are reviewed periodically for
indicators of impairment in value.
Future Policy Benefits
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 (lapse) 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 3.0% to 6.0%. The mortality and withdrawal assumptions are based on the Company’s experience
as well as industry experience and standards. In establishing reserves for future policy benefits, the Company assigns policy
liability assumptions to particular timeframes (eras) in such a manner as to be consistent with the underlying assumptions and
economic conditions at the time the risks are assumed. The Company maintains a consistent approach to setting the provision for
adverse deviation between eras.
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Liabilities for future benefits on longevity business are established in an amount adequate to meet the estimated future obligations
on policies in force. Liabilities for future benefits related to the longevity business have been calculated using expected mortality,
investment yields, 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. The mortality assumptions are
based on the Company’s experience as well as industry experience and standards. A deferred profit liability is established when
the gross premium exceeds the net premium.
The Company periodically reviews actual and anticipated experience compared to the assumptions used to establish policy benefits.
The Company establishes premium deficiency reserves if actual and anticipated experience indicates that existing policy liabilities
together with the present value of future gross premiums will not be sufficient to cover the present value of future benefits,
settlement and maintenance costs and to recover unamortized acquisition costs. Anticipated investment income is considered in
the calculation of premium deficiency losses for short duration contracts. The premium deficiency reserve is established by a
charge to income, as well as a reduction in unamortized acquisition costs and, to the extent there are no unamortized acquisition
costs, an increase in future policy benefits.
The reserving process includes normal periodic reviews of assumptions used and adjustments of reserves to incorporate the
refinement of the assumptions. Any such adjustments relate only to policies assumed in recent periods and the adjustments are
reflected by a cumulative charge or credit to current operations.
The Company reinsures disability products in various markets. Liabilities for future benefits on disability policies’ active lives
are established in an amount adequate to meet the estimated future obligations on policies in force. These reserves are the amounts
which, with the additional premiums to be received and interest thereon compounded annually at certain assumed rates, are
calculated to be sufficient to meet the various policy and contract obligations as they mature.
The Company establishes future policy benefits for guaranteed minimum death benefits (“GMDB”) relating to the reinsurance of
certain variable annuity contracts by estimating the expected value of death benefits in excess of the projected account balance
and recognizing the excess proportionally over the accumulation period based on total expected assessments. The Company
regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to claims and other
policy benefits, if actual experience or other evidence suggests that earlier assumptions should be revised. The assumptions used
in estimating the GMDB liabilities are consistent with those used for amortizing DAC, and are thus subject to the same variability
and risk. The Company’s GMDB liabilities at December 31, 2013 and 2012 were not material.
Interest-Sensitive Contract Liabilities
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. The Company reinsures asset-intensive products,
including annuities and corporate-owned life insurance. The investment portfolios for these products are segregated for management
purposes within the general account of RGA Reinsurance. The liabilities under asset-intensive reinsurance contracts reinsured on
a coinsurance basis are included in interest-sensitive contract liabilities on the consolidated balance sheets. Asset-intensive contracts
principally include traditional individual fixed annuities in the accumulation phase, single premium immediate annuities, equity-
indexed annuities and individual variable annuity contracts. Interest-sensitive contract liabilities are equal to (i) policy account
values, which consist of an accumulation of gross premium payments; (ii) credited interest less expenses, mortality charges, and
withdrawals; and (iii) fair value adjustments relating to business combinations. Liabilities for immediate annuities are calculated
as the present value of the expected cash flows, with the locked-in discount rate determined such that there is no gain or loss at
inception. Additionally, certain annuity contracts the Company reinsures contain terms, such as guaranteed minimum benefits and
equity participation options, which are deemed to be embedded derivatives and are accounted for based on the general accounting
principles for Derivatives and Hedging.
The Company establishes liabilities for guaranteed minimum living benefits relating to certain variable annuity products as follows:
Guaranteed minimum income benefits (“GMIB”) provide the contract holder, after a specified period of time determined at the
time of issuance of the variable annuity contract, with a minimum level of income (annuity) payments. Under the reinsurance
treaty, the Company makes a payment to the ceding company equal to the GMIB net amount-at-risk at the time of annuitization
and thus these contracts meet the net settlement criteria of the general accounting principles for Derivatives and Hedging and the
Company assumes no mortality risk. Accordingly, the GMIB is considered an embedded derivative, which is measured at fair
value separately from the host variable annuity product.
Guaranteed minimum withdrawal benefits (“GMWB”) guarantee the contract holder a return of their purchase payment via partial
withdrawals, even if the account value is reduced to zero, provided that the contract holder’s cumulative withdrawals in a contract
year do not exceed a certain limit. The initial guaranteed withdrawal amount is equal to the initial benefit base as defined in the
contract (typically, the initial purchase payments plus applicable bonus amounts). The GMWB is also an embedded derivative,
which is measured at fair value separately from the host variable annuity product.
Guaranteed minimum accumulation benefits (“GMAB”) provide the contract holder, after a specified period of time determined
at the time of issuance of the variable annuity contract, with a minimum accumulation of their purchase payments even if the
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account value is reduced to zero. The initial guaranteed accumulation amount is equal to the initial benefit base as defined in the
contract (typically, the initial purchase payments plus applicable bonus amounts). The GMAB is also an embedded derivative,
which is measured at fair value separately from the host variable annuity product.
For GMIB, GMWB and GMAB, the initial benefit base is increased by additional purchase payments made within a certain time
period and decreased by benefits paid and/or withdrawal amounts. After a specified period of time, the benefit base may also
increase as a result of an optional reset as defined in the contract.
The fair values of the GMIB, GMWB and GMAB embedded derivative liabilities are reflected in interest-sensitive contract
liabilities on the consolidated balance sheets and are calculated based on actuarial and capital market assumptions related to the
projected cash flows, including benefits and related contract charges over the lives of the contracts. These projected cash flows
incorporate expectations concerning policyholder behavior, such as lapses, withdrawals and benefit selections, and capital market
assumptions such as interest rates and equity market volatilities. In measuring the fair value of GMIBs, GMWBs and GMABs,
the Company attributes a portion of the fees collected from the policyholder equal to the present value of expected future guaranteed
minimum income, withdrawal and accumulation benefits (at inception). The changes in fair value are reported in investment related
gains (losses), net. Any additional fees represent “excess” fees and are reported in other revenues on the consolidated statements
of income. These variable annuity guaranteed living benefits may be more costly than expected in volatile or declining markets,
causing an increase in interest-sensitive contract liabilities, negatively affecting net income.
The Company reinsures equity-indexed annuity contracts. These contracts allow the contract holder to elect an interest rate return
or an equity market component where interest credited is based on the performance of common stock market indices, such as the
S&P 500 Index®, the Dow Jones Industrial Average, or the NASDAQ. The equity market option is considered an embedded
derivative, similar to a call option, which is reflected at fair value on the consolidated balance sheets in interest-sensitive contract
liabilities. The fair value of embedded derivatives is computed based on a projection of future equity option costs using a budget
methodology, discounted back to the balance sheet date using current market indicators of volatility and interest rates. Changes
in the fair value of the embedded derivatives are included as a component of interest credited on the consolidated statements of
income.
The Company reviews its estimates of actuarial liabilities for interest-sensitive contract liabilities and compares them with its
actual experience. Differences between actual experience and the assumptions used in pricing these guarantees and benefits and
in the establishment of the related liabilities result in variances in profit and could result in losses. The effects of changes in such
estimated liabilities are included in the results of operations in the period in which the changes occur.
Other Policy Claims and Benefits
Claims payable for incurred but not reported losses are determined using case-basis estimates and lag studies of past experience.
The time lag from the date of the claim or death to when the ceding company reports the claim to the Company can vary significantly
by ceding company, business segment and product type, but generally averages around 3.0 months. Incurred but not reported
claims are estimates on an undiscounted basis, using actuarial estimates of historical claims expense, adjusted for current trends
and conditions. These estimates are continually reviewed and the ultimate liability may vary significantly from the amount
recognized, which are reflected in claims and other policy benefits in the consolidated statements of income in the period in which
they are determined.
Other Liabilities
Other liabilities primarily include investments in transit, separate accounts, employee benefits and current federal income taxes
payable.
Income Taxes
RGA and its eligible subsidiaries file a consolidated federal income tax return. The U.S. consolidated tax return includes the
operations of RGA, RGA Americas, RGA Reinsurance, RGA Barbados, RGA Technology Partners, Inc., RCM, Timberlake
Reinsurance Company II (“Timberlake Re”), Reinsurance Partners, Inc., RGA Worldwide Reinsurance Company, Ltd. (“RGA
Worldwide”), Rockwood Reinsurance Company (“Rockwood Re”), Parkway Reinsurance Company (“Parkway Re”), Castlewood
Reinsurance Company (“Castlewood Re”) and RGA Capital LLC. The Company’s Australian, certain Barbadian, Bermudian,
Canadian, South African, Indian, Irish, Singaporean, Brazilian, United Arab Emirates, Dutch and United Kingdom subsidiaries
are taxed under applicable local statutes.
The Company provides for federal, state and foreign income taxes currently payable, as well as those deferred due to temporary
differences between the financial reporting and tax bases of assets and liabilities and are recognized in net income or in certain
cases in OCI. The Company’s accounting for income taxes represents management’s best estimate of various events and transactions
considering the laws enacted as of the reporting date.
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Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and
liabilities are measured at the balance sheet date using enacted tax rates in the relevant jurisdictions expected to apply to taxable
income in the years the temporary differences are expected to reverse.
The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward
periods under the tax law in the applicable tax jurisdiction. The Company has deferred tax assets related to net operating and
capital losses. The Company has projected its ability to utilize its U.S. and foreign net operating losses and has determined that
all of the U.S. losses are expected to be utilized prior to their expiration and established a valuation allowance on the portion of
the foreign deferred tax assets the Company believes more likely than not that deferred income tax assets will not be realized.
The Company will establish a valuation allowance if management determines, based on available information, that it is more likely
than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation
allowances should be established as well as the amount of such allowances. When making such a determination, consideration is
given to, among other things, the following:
(i)
(ii)
(iii)
(iv)
future taxable income exclusive of reversing temporary differences and carryforwards;
future reversals of existing taxable temporary differences;
taxable income in prior carryback years; and
tax planning strategies.
Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes
occur. The Company accounts for its total liability for uncertain tax positions considering the recognition and measurement
thresholds established in general accounting principles for income taxes. The tax effects of a position are recognized in the
consolidated statement of income only if it is more likely than not to be sustained upon examination by the appropriate taxing
authority. Unrecognized tax benefits due to tax uncertainties that do not meet the more likely than not criteria are included within
other liabilities and are charged to earnings in the period that such determination is made. The Company classifies interest related
to tax uncertainties as interest expense whereas penalties related to tax uncertainties are classified as a component of income tax.
Collateral Finance Facility
Collateral finance facility represents financing transactions to fund collateral requirements for regulatory reserves on specified
insurance policies reinsured by the Company’s regulated subsidiaries. The cost of the facility is reflected in collateral finance
facility expense. See Note 14 - "Collateral Finance Facility" for additional information.
Foreign Currency Translation
The translation of the foreign currency into U.S. dollars is performed for balance sheet accounts using current exchange rates in
effect at the balance sheet date and for revenue and expense accounts using weighted-average exchange rates during each year.
Gains or losses, net of applicable deferred income taxes, resulting from such translation are included in accumulated currency
translation adjustments, in AOCI on the consolidated balance sheets until the underlying functional currency operation is sold or
substantially liquidated. The Company’s material functional currencies are the U.S. dollar, Canadian dollar, British pound,
Australian dollar, Japanese yen, Korean won, Euro and South African rand.
Recognition of Revenues and Related Expenses
Life and health premiums are recognized as revenue when due from the insured, and are reported net of amounts retroceded.
Benefits and expenses are reported net of amounts retroceded and 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, fees associated with
financial reinsurance and policy changes on interest-sensitive and investment-type products that the Company reinsures. Any fees
that are collected in advance of the period benefited are deferred and recognized over the period benefited.
For certain reinsurance transactions involving in force blocks of business, the ceding company pays a premium equal to the initial
required reserve (future policy benefit). In such transactions, for income statement presentation, the Company nets the expense
associated with the establishment of the reserve on the consolidated balance sheets against the premiums from the transaction.
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. 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. Interest is credited to policyholder account balances according to terms of the policies or
contracts.
For each of its reinsurance contracts, the Company must determine if the contract provides indemnification against loss or liability
relating to insurance risk, in accordance with GAAP. The Company must review all contractual features, particularly those that
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may limit the amount of insurance risk to which the Company is subject or features that delay the timely reimbursement of claims.
If the Company determines that a contract does not expose it to a reasonable possibility of a significant loss from insurance risk,
the Company records the contract on a deposit method of accounting with any net amount receivable reflected as an asset within
premiums receivable and other reinsurance balances, and any net amount payable reflected as a liability within other reinsurance
balances on the consolidated balance sheets. Fees earned on the contracts are reflected as other revenues, rather than premiums,
on the consolidated statements of income.
Equity Based Compensation
The Company expenses the fair value of stock awards included in its incentive compensation plans. As of the date stock awards
are approved, the fair value of stock options is determined using a Black-Scholes options valuation methodology, and the fair
value of other stock awards is based upon the market value of the stock. The fair value of the awards is expensed over the
performance or service period, which generally corresponds to the vesting period, and is recognized as an increase to additional
paid-in-capital in stockholders’ equity. Stock-based compensation expense is reflected in other operating expenses in the
consolidated statements of income.
Earnings Per Share
Basic earnings per share exclude any dilutive effects of any outstanding options. Diluted earnings per share include the dilutive
effects assuming outstanding stock options were exercised.
New Accounting Pronouncements
Changes to the general accounting principles are established by the Financial Accounting Standards Board (“FASB”) in the form
of accounting standards updates to the FASB Accounting Standards CodificationTM. Accounting standards updates not listed below
were assessed and determined to be either not applicable or are expected to have minimal impact on the Company’s consolidated
financial statements.
Adoption of New Accounting Standards
Basis of Presentation
In December 2011, the FASB amended the general accounting principles for Balance Sheet as it relates to the disclosures about
offsetting assets and liabilities. The amendment requires disclosures about the Company’s rights of offset and related arrangements
associated with its financial instruments and derivative instruments. This amendment also requires the disclosure of both gross
and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions
subject to an agreement similar to a master netting arrangement. In January 2013, the FASB amended the general accounting
principles for Balance Sheet as it relates to the disclosures about offsetting assets and liabilities. This amendment clarifies that the
scope of the Balance Sheet amendment made in December 2011 applies only to derivatives, including bifurcated embedded
derivatives, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions that are either offset
or subject to an enforceable master netting agreement or a similar agreement. These amendments are effective for interim and
annual reporting periods beginning on or after January 1, 2013. The Company adopted these amendments and the required
disclosures are provided in Note 5 - “Derivative Instruments”.
Transfers and Servicing
In April 2011, the FASB amended the general accounting principles for Transfers and Servicing as it relates to the reconsideration
of effective control for repurchase agreements. This amendment removes from the assessment of effective control the criterion
requiring the transferor to have the ability to repurchase or redeem the financial assets and also removes the collateral maintenance
implementation guidance related to that criterion. The amendment is effective for interim and annual periods beginning after
December 15, 2011. The adoption of this amendment did not have an impact on the Company’s consolidated financial statements.
Fair Value Measurements and Disclosures
In May 2011, the FASB amended the general accounting principles for Fair Value Measurements and Disclosures as it relates to
the measurement and disclosure requirements about fair value measurements. This amendment clarifies the FASB’s intent about
the application of existing fair value measurement requirements. It also changes particular principles and requirements for
measuring fair value and for disclosing information about fair value measurements. The amendment is effective for interim and
annual periods beginning after December 15, 2011. The Company adopted this amendment and the required disclosures are
provided in Note 6 - “Fair Value of Assets and Liabilities.”
Deferred Policy Acquisition Costs
In October 2010, the FASB amended the general accounting principles for Financial Services – Insurance as it relates to accounting
for costs associated with acquiring or renewing insurance contracts. This amendment clarifies that only those costs that result
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directly from and are essential to the contract transaction and that would not have been incurred had the contract transaction not
occurred can be capitalized. It also defines acquisitions costs as costs that are related directly to the successful acquisitions of new
or renewal insurance contracts. The amendment is effective for fiscal years and interim periods beginning after December 15,
2011. The retrospective adoption of this amendment on January 1, 2012, resulted in a reduction in the Company’s deferred
acquisition cost asset and a corresponding reduction to equity, reflected in the financial statements. There will be a decrease in
amortization subsequent to adoption due to the reduced deferred acquisition cost asset. There has also been a reduction in the level
of future costs the Company defers; thereby increasing expenses incurred in future periods. The cumulative effect of the adoption
of this amendment was a decrease to total stockholders’ equity of $318.4 million and a decrease in the deferred policy acquisition
costs balance of $470.1 million on January 1, 2012.
Comprehensive Income
In February 2013, the FASB amended the general accounting principles for Comprehensive Income as it relates to the reporting
of amounts reclassified out of accumulated other comprehensive income. The amendment requires entities to provide information
about the amounts reclassified out of accumulated other comprehensive income by component. This amendment also requires
entities to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified
out of accumulated other comprehensive income by the respective line items of net income. However, this is only necessary if the
amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. The amendment is
effective for interim and annual reporting periods beginning after December 15, 2012. The Company adopted this amendment
and the required disclosures are provided in Note 18 - “Comprehensive Income.”
In June 2011, the FASB amended the general accounting principles for Comprehensive Income as it relates to the presentation of
comprehensive income. This amendment requires entities to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income in either a continuous statement of comprehensive income or in two
separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive
income. In December 2011, the FASB amended the general accounting principles for Comprehensive Income as it relates to the
presentation of comprehensive income. This amendment defers the requirement to present the effects of reclassifications out of
accumulated other comprehensive income on the Company’s consolidated statements of income, which was required in the
Comprehensive Income amendment made in June 2011. These amendments are effective for fiscal years, and interim periods
within those years, beginning after December 15, 2011. The Company adopted these amendments and the required presentation
is provided in the Consolidated Statements of Comprehensive Income.
Future Adoption of New Accounting Standards
Income Taxes
In July 2013, the FASB amended the general accounting principles for Income Taxes as it relates to the presentation of an
unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This
amendment clarifies that an unrecognized tax benefit should be presented in the financial statements as a reduction to a deferred
tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating
loss carryforward, a similar tax loss, or a tax credit carryforward is not available to settle any additional income taxes that would
result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and
the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the
financial statements as a liability and not combined with deferred tax assets. These amendments are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2013. The adoption of this amendment is not expected to have
an impact on the Company's consolidated financial statements.
Note 3 STOCK TRANSACTIONS
During 2013, in connection with the distribution of benefits due under its employee benefit plans, RGA issued 346,561 shares of
common stock from treasury and repurchased from recipients 125,829 of its common shares, at $64.13 per share, in settlement of
income tax withholding requirements incurred by recipients. Additionally, in 2013, non-employee directors were granted a total
of 14,200 shares of common stock.
In January 2013, RGA’s board of directors authorized a share repurchase program, with no expiration date, for up to $200.0 million
of RGA’s outstanding common stock. In April 2013, RGA’s board of directors authorized an increase of $100.0 million to the
share repurchase program previously authorized in January 2013. In July 2013, RGA’s board of directors authorized an additional
increase of $100.0 million to the share repurchase program previously authorized in January 2013. During 2013, RGA repurchased
4,151,312 shares of common stock under this program for $261.3 million. The common shares repurchased have been placed into
treasury to be used for general corporate purposes.
91
On February 20, 2014, RGA’s board of directors authorized a share repurchase program for up to $300.0 million of the RGA’s
outstanding common stock. The authorization is effective immediately and does not have an expiration date. In connection with
this new authorization, the board of directors terminated the stock repurchase authority granted in 2013.
In anticipation of the redemption and remarketing of the Company’s trust preferred securities discussed in Note 13 – “Debt,” the
Company purchased 3,000,000 shares of its outstanding common stock from MetLife, Inc. in February 2011, at a price of $61.14
per share, reflecting the most recent closing price of the Company’s common stock. The purchased common shares were placed
into treasury to be used for general corporate purposes.
In March 2011, approximately 4,402,078 of outstanding warrants were exercised at a price of $35.44 per warrant, resulting in the
issuance of 5,506,088 common shares. See Note 13 – “Debt,” for more information on the exercise of these warrants. Also in
March 2011, RGA entered into an accelerated share repurchase (“ASR”) agreement with a financial counterparty. Under the ASR
agreement, RGA purchased 2,500,000 shares of its outstanding common stock at an initial price of $59.76 per share and an aggregate
price of approximately $149.4 million. The purchase price was funded from cash on hand. The counterparty completed its purchases
during the second quarter of 2011 and as a result, RGA was required to pay $4.3 million to the counterparty for the final settlement
which resulted in a final price of $61.47 per share on the repurchased common stock. The common shares repurchased were placed
into treasury to be used for general corporate purposes.
RGA’s share repurchase transactions during 2011 were intended to substantially offset share dilution associated with the issuance
of 5,506,088 common shares from the exercise of warrants as discussed above.
At the beginning of 2011, RGA had $43.4 million remaining under its January 2002 board of directors approved stock repurchase
program. Under this repurchase program, RGA was authorized to purchase its common stock in the open market, pursuant to the
terms of a pre-set trading plan meeting the requirements of Rule 10b5-1 under the Exchange Act. During 2011, RGA repurchased
838,362 shares of common stock under this program for $43.1 million at an average price per share of $51.39. The common shares
repurchased have been placed into treasury to be used for general corporate purposes.
Note 4 INVESTMENTS
Fixed Maturity and Equity Securities Available-for-Sale
The following tables provide information relating to investments in fixed maturity and equity securities by sector as of December 31,
2013 and 2012 (dollars in thousands):
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
% of Total
$
11,697,394
$
616,147
$
202,786
$
12,110,755
56.4% $
2,728,111
669,762
16,848
3,381,025
15.7
December 31, 2013:
Available-for-sale:
Corporate securities
Canadian and Canadian provincial
governments
Residential mortgage-backed
securities
Asset-backed securities
Commercial mortgage-backed
securities
U.S. government and agencies
State and political subdivisions
Other foreign government,
supranational and foreign
government-sponsored enterprises
Total fixed maturity securities
Non-redeemable preferred stock
Other equity securities
Total equity securities
970,434
891,751
1,314,782
489,631
313,252
38,126
18,893
91,651
16,468
21,907
18,917
15,812
17,487
4,748
14,339
989,643
894,832
1,388,946
501,351
320,820
1,865,379
20,270,734
81,993
327,479
409,472
$
$
$
$
$
$
45,347
1,518,301
5,342
618
5,960
$
$
$
23,962
314,899
5,481
4,220
9,701
$
$
$
1,886,764
21,474,136
81,854
323,877
405,731
92
Other-than-
temporary
impairments
in AOCI
—
—
(300)
(2,259)
(1,609)
—
—
—
4.6
4.2
6.5
2.3
1.5
8.8
100.0% $
(4,168)
20.2%
79.8
100.0%
December 31, 2012:
Available-for-sale:
Corporate securities
Canadian and Canadian provincial
governments
Residential mortgage-backed
securities
Asset-backed securities
Commercial mortgage-backed
securities
U.S. government and agencies
State and political subdivisions
Other foreign government,
supranational and foreign government-
sponsored enterprises
Total fixed maturity securities
Non-redeemable preferred stock
Other equity securities
Total equity securities
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Estimated
Fair Value
% of Total
$
11,333,431
$
1,085,973
$
39,333
$
12,380,071
55.5% $
2,676,777
1,372,731
174
4,049,334
18.2
969,267
700,455
1,608,376
231,256
270,086
76,520
19,898
142,369
33,958
38,058
3,723
28,798
51,842
24
5,646
1,042,064
691,555
1,698,903
265,190
302,498
1,769,784
19,559,432
68,469
148,577
217,046
$
$
$
$
$
$
94,929
2,864,436
6,542
416
6,958
$
$
$
2,714
132,254
170
1,134
1,304
$
$
$
1,861,999
22,291,614
74,841
147,859
222,700
Other-than-
temporary
impairments
in AOCI
—
—
(241)
(2,259)
(6,125)
—
—
—
4.7
3.1
7.6
1.2
1.4
8.3
100.0% $
(8,625)
33.6%
66.4
100.0%
The Company enters into various collateral arrangements that require both the pledging and acceptance of fixed maturity securities
as collateral, which are excluded from the tables above. The Company pledged fixed maturity securities as collateral to derivative
and reinsurance counterparties with an amortized cost of $57.2 million and $16.9 million, and an estimated fair value of $58.0
million and $17.0 million, as of December 31, 2013 and 2012 respectively. The pledged fixed maturity securities are included in
fixed maturity securities, available-for-sale in the consolidated balance sheet as of December 31, 2013, and are included in other
invested assets in the consolidated balance sheet as of December 31, 2012.
The Company received fixed maturity securities as collateral from derivative and reinsurance counterparties with an estimated
fair value of $94.1 million and $95.6 million, as of December 31, 2013 and 2012, respectively. The collateral is held in separate
custodial accounts and is not recorded on the Company’s consolidated balance sheets. Subject to certain constraints, the Company
is permitted by contract to sell or re-pledge this collateral; however, as of December 31, 2013 and 2012, none of the collateral had
been sold or re-pledged.
As of December 31, 2013, the Company held securities with a fair value of $1,222.3 million that were guaranteed or issued by
the Canadian province of Ontario and $1,389.1 million that were guaranteed or issued by the Canadian province of Quebec, both
of which exceeded 10% of consolidated stockholders’ equity. As of December 31, 2012, the Company held securities with a fair
value of $1,400.0 million that were guaranteed or issued by the Canadian province of Ontario and $1,785.0 million that were
guaranteed or issued by the Canadian province of Quebec, both of which exceeded 10% of consolidated stockholders’ equity.
The amortized cost and estimated fair value of fixed maturity securities available-for-sale at December 31, 2013 are shown by
contractual maturity in the table below (dollars in thousands). 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. Asset and mortgage-
backed securities are shown separately in the table below, as they are not due at a single maturity date.
Available-for-sale:
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Asset and mortgage-backed securities
Total
Amortized
Cost
Fair
Value
$
$
551,195
$
3,570,831
7,090,140
5,881,601
3,176,967
20,270,734
$
557,981
3,743,631
7,295,566
6,603,537
3,273,421
21,474,136
93
Corporate Fixed Maturity Securities
The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of December 31, 2013
and 2012 (dollars in thousands):
December 31, 2013:
Finance
Industrial
Utility
Other
Total
December 31, 2012:
Finance
Industrial
Utility
Other
Total
Amortized Cost
Estimated
Fair Value
% of Total
3,838,716
$
5,943,353
1,904,100
11,225
11,697,394
$
3,983,623
6,138,150
1,978,218
10,764
12,110,755
Amortized Cost
Estimated
Fair Value
% of Total
3,619,455
$
5,881,967
1,799,658
32,351
11,333,431
$
3,900,152
6,443,846
2,002,611
33,462
12,380,071
32.9%
50.7
16.3
0.1
100.0%
31.5%
52.0
16.2
0.3
100.0%
$
$
$
$
Other-Than-Temporary Impairments—Fixed Maturity and Equity Securities
As discussed in Note 2 – “Summary of Significant Accounting Policies,” a portion of certain other-than-temporary impairment
(“OTTI”) losses on fixed maturity securities is recognized in AOCI. For these securities the net amount recognized in earnings
(“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its
projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining
difference between the fair value and amortized cost is recognized in AOCI. The following table sets forth the amount of pre-tax
credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the
OTTI loss was recognized in AOCI, and the corresponding changes in such amounts (dollars in thousands):
Balance, beginning of period
Initial impairments - credit loss OTTI recognized on securities not previously
impaired
Additional impairments - credit loss OTTI recognized on securities previously
impaired
Credit loss OTTI previously recognized on securities impaired to fair value during the
period
Credit loss previously recognized on securities which matured, paid down, prepaid or
were sold during the period
Balance, end of period
2013
2012
2011
$
16,675
$
63,947
$
47,291
—
134
1,962
10,186
(1,449)
(22,290)
$
(3,664)
11,696
$
(37,130)
16,675
$
8,349
9,059
—
(752)
63,947
Purchased Credit Impaired Fixed Maturity Securities Available-for-Sale
Securities acquired with evidence of credit quality deterioration since origination and for which it is probable at the acquisition
date that the Company will be unable to collect all contractually required payments are classified as purchased credit impaired
securities. For each security, the excess of the cash flows expected to be collected as of the acquisition date over its acquisition
date fair value is referred to as the accretable yield and is recognized as net investment income on an effective yield basis. At the
date of acquisition, the timing and amount of the cash flows expected to be collected was determined based on a best estimate
using key assumptions, such as interest rates, default rates and prepayment speeds. If subsequently, based on current information
and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash
flows are significantly greater than cash flows previously expected to be collected, the accretable yield is adjusted prospectively.
The excess of the contractually required payments (including interest) as of the acquisition date over the cash flows expected to
be collected as of the acquisition date is referred to as the nonaccretable difference, and this amount is not expected to be realized
as net investment income. Decreases in cash flows expected to be collected can result in OTTI.
94
The following tables present information on the Company’s purchased credit impaired securities, which are included in fixed
maturity securities available-for-sale (dollars in thousands):
Outstanding principal and interest balance(1)
Carrying value, including accrued interest(2)
December 31, 2013
December 31, 2012
$
$
192,644
148,822
$
$
108,831
84,765
(1) Represents the contractually required payments which is the sum of contractual principal, whether or not currently due, and accrued interest.
(2) Estimated fair value plus accrued interest.
The following table presents information about purchased credit impaired investments acquired during the periods, as of the
acquisition dates (dollars in thousands).
Contractually required payments (including interest)
Cash flows expected to be collected(1)
Fair value of investments acquired
December 31, 2013
December 31, 2012
$
$
$
161,975
130,578
87,643
$
$
$
152,988
125,449
85,298
(1) Represents undiscounted principal and interest cash flow expectations at the date of acquisition.
The following table presents activity for the accretable yield on purchased credit impaired securities for the years ended
December 31, 2013 and 2012 (dollars in thousands):
Balance, beginning of period
Investments purchased
Accretion
Disposals
Reclassification from nonaccretable difference
Balance, end of period
2013
2012
39,239
$
42,935
(7,755)
(3,564)
(1,386)
69,469
$
—
40,151
(1,388)
—
476
39,239
$
$
Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale
The following table presents the total gross unrealized losses for the 1,396 and 567 fixed maturity and equity securities at
December 31, 2013 and 2012, respectively, where the estimated fair value had declined and remained below amortized cost by
the indicated amount (dollars in thousands):
Less than 20%
20% or more for less than six months
20% or more for six months or greater
Total
December 31, 2013
December 31, 2012
Gross
Unrealized
Losses
% of Total
Gross
Unrealized
Losses
% of Total
$
$
296,731
6,444
21,425
324,600
91.4% $
2.0
6.6
100.0% $
54,951
734
77,873
133,558
41.2%
0.5
58.3
100.0%
The Company’s determination of whether a decline in value is other-than-temporary includes analysis of the underlying credit
and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining whether
the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all
amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the
amortized cost of the investment. In the Company’s impairment review process, the duration and severity of an unrealized loss
position for equity securities are given greater weight and consideration given the lack of contractual cash flows or deferability
features.
95
The following tables present the estimated fair values and gross unrealized losses, including other-than-temporary impairment
losses reported in AOCI, for 1,396 and 567 fixed maturity and equity securities that have estimated fair values below amortized
cost as of December 31, 2013 and 2012, respectively (dollars in thousands). These investments are presented by class and grade
of security, as well as the length of time the related fair value has remained below amortized cost.
December 31, 2013:
Investment grade securities:
Corporate securities
Canadian and Canadian provincial
governments
Residential mortgage-backed
securities
Asset-backed securities
Commercial mortgage-backed
securities
U.S. government and agencies
State and political subdivisions
Other foreign government,
supranational and foreign government-
sponsored enterprises
Total investment grade securities
Non-investment grade securities:
Corporate securities
Residential mortgage-backed
securities
Asset-backed securities
Commercial mortgage-backed
securities
Less than 12 months
12 months or greater
Total
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
$
3,141,179
$
148,895
$
301,303
$
40,548
$
3,442,482
$
189,443
188,491
283,967
255,656
219,110
133,697
120,193
14,419
15,900
4,916
3,725
4,469
9,723
665,313
5,007,606
21,075
223,122
283,603
62,146
28,670
15,762
9,451
1,075
415
81
40
12,029
23,068
56,668
20,068
4,406
15,202
36,212
468,956
38,256
3,945
32,392
10,980
2,429
1,688
4,983
5,745
279
4,616
2,847
63,135
3,892
254
5,498
7,936
200,520
307,035
312,324
239,178
138,103
135,395
16,848
17,588
9,899
9,470
4,748
14,339
701,525
5,476,562
23,922
286,257
321,859
13,343
66,091
61,062
26,742
1,329
5,913
8,017
—
—
9,403
40
Other foreign government,
supranational and foreign
government-sponsored enterprises
Total non-investment grade
securities
Total fixed maturity securities
Non-redeemable preferred stock
Other equity securities
Total equity securities
9,403
399,584
5,407,190
51,386
218,834
270,220
$
$
$
$
$
$
11,062
234,184
5,479
1,748
7,227
$
$
$
85,573
554,529
1
32,550
32,551
$
$
$
17,580
80,715
2
2,472
2,474
$
$
$
485,157
5,961,719
51,387
251,384
302,771
$
$
$
28,642
314,899
5,481
4,220
9,701
96
December 31, 2012:
Investment grade securities:
Corporate securities
Canadian and Canadian provincial
governments
Residential mortgage-backed
securities
Asset-backed securities
Commercial mortgage-backed
securities
U.S. government and agencies
State and political subdivisions
Other foreign government,
supranational and foreign government-
sponsored enterprises
Total investment grade securities
Non-investment grade securities:
Corporate securities
Residential mortgage-backed
securities
Asset-backed securities
Commercial mortgage-backed
securities
Total non-investment grade
securities
Total fixed maturity securities
Non-redeemable preferred stock
Other equity securities
Total equity securities
Less than 12 months
12 months or greater
Total
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
Estimated
Fair Value
Gross
Unrealized
Losses
$
786,203
$
13,276
$
108,187
$
17,386
$
894,390
$
30,662
12,349
22,288
59,119
89,507
7,272
20,602
244,817
1,242,157
174
97
449
797
24
1,514
1,953
18,284
181,168
3,170
15,199
3,421
3,317
203,105
1,445,262
5,577
85,374
90,951
$
$
$
$
$
$
80
26
764
4,040
22,324
52
1,134
1,186
$
$
$
—
19,394
96,179
29,181
—
11,736
7,435
272,112
39,123
2,633
31,938
68,405
142,099
414,211
5,679
—
5,679
$
$
$
—
3,199
9,508
7,974
—
4,132
12,349
41,682
155,298
118,688
7,272
32,338
761
42,960
252,252
1,514,269
5,501
220,291
347
18,815
42,307
66,970
109,930
118
—
118
17,832
35,359
71,722
345,204
1,859,473
11,256
85,374
96,630
$
$
$
$
$
$
174
3,296
9,957
8,771
24
5,646
2,714
61,244
8,671
427
18,841
43,071
71,010
132,254
170
1,134
1,304
As of December 31, 2013, the Company does not intend to sell these fixed maturity securities and does not believe it is more likely
than not that it will be required to sell these fixed maturity securities before the recovery of the fair value up to the current amortized
cost of the investment, which may be maturity. However, unforeseen facts and circumstances may cause the Company to sell fixed
maturity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality, asset-liability
management and liquidity guidelines.
As of December 31, 2013, the Company has the ability and intent to hold the equity securities until the recovery of the fair value
up to the current cost of the investment. However, unforeseen facts and circumstances may cause the Company to sell equity
securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.
Unrealized losses on non-investment grade securities are principally related to high-yield corporate securities due to interest rate
movements during 2013. Unrealized losses on non-investment grade securities related to asset and mortgage-backed securities
decreased significantly during 2013 driven principally by commercial mortgage-backed securities. During the year ended 2013,
commercial mortgage-backed securities benefited from improvement in delinquency rates and the Company sold several non-
investment grade commercial mortgage-backed securities.
97
Investment Income, Net of Related Expenses
Major categories of investment income, net of related expenses consist of the following (dollars in thousands):
2013
2012
2011
Fixed maturity securities available-for-sale
$
966,759
$
868,682
$
Mortgage loans on real estate
Policy loans
Funds withheld at interest
Short-term investments
Other invested assets
Investment income
Investment expense
121,476
57,099
545,550
2,236
58,771
1,751,891
(52,026)
96,901
62,855
393,586
4,173
49,199
1,475,396
(39,190)
Investment income, net of related expenses
$
1,699,865
$
1,436,206
$
Investment Related Gains (Losses), Net
Investment related gains (losses), net, consist of the following (dollars in thousands):
757,726
55,931
66,621
388,694
2,378
39,939
1,311,289
(30,092)
1,281,197
Fixed maturity and equity securities available for sale:
Other-than-temporary impairment losses on fixed maturities
$
(12,654) $
(15,908) $
(30,873)
2013
2012
2011
Portion of loss recognized in accumulated other comprehensive income
(before taxes)
Net other-than-temporary impairment losses on fixed maturity securities
recognized in earnings
Impairment losses on equity securities
Gain on investment activity
Loss on investment activity
Other impairment losses and change in mortgage loan provision
Derivatives and other, net
Total investment related gains (losses), net
(247)
(12,901)
—
82,744
(60,575)
(6,933)
61,655
(7,618)
(23,526)
(3,025)
145,268
(27,474)
(16,602)
179,495
$
63,990
$
254,136
$
3,924
(26,949)
(4,116)
132,045
(26,996)
(10,238)
(99,802)
(36,056)
The other-than-temporary impairment losses on fixed maturity securities and the increase on the losses on investment activity
during 2013 were primarily due to the decision to sell certain subordinated commercial mortgage-backed securities. The other-
than-temporary impairments in 2012 and 2011 were primarily due to a decline in value of structured securities with exposure to
commercial mortgages and general credit deterioration in select corporate and foreign securities. Investment gains decreased
during 2013 as the Company repositioned certain assets received from a large fixed annuity reinsurance transaction during 2012
while interest rates were at historic lows causing for elevated realized gains during 2012. The volatility in derivatives and other
is primarily due to changes in the fair value of embedded derivative liabilities associated with modified coinsurance and funds
withheld treaties and guaranteed minimum benefit riders.
At December 31, 2013 and 2012 the Company held non-income producing securities with amortized costs of $38.5 million and
$54.2 million, and estimated fair values of $47.6 million and $58.5 million, respectively. Generally, securities are non-income
producing when principal or interest is not paid primarily as a result of bankruptcies or credit defaults, but also include securities
where amortization has been discontinued. During 2013, 2012 and 2011 the Company sold fixed maturity and equity securities
with fair values of $1,104.0 million, $828.0 million, and $476.6 million, which were below amortized cost, at gross realized losses
of $60.6 million, $27.5 million and $27.0 million, respectively. The Company generally does not engage in short-term buying and
selling of securities.
Securities Borrowing and Other
The Company participates in a securities borrowing program whereby securities, which are not reflected on the Company’s
consolidated balance sheets, are borrowed from a third party. The Company is required to maintain a minimum of 100% of the
fair value of the borrowed securities as collateral. The Company had borrowed securities with an amortized cost of $93.0 million
and $87.5 million as of December 31, 2013 and 2012, respectively, which was equal to the fair value in both periods. The borrowed
securities are used to provide collateral under an affiliated reinsurance transaction.
The Company also participates in a repurchase/reverse repurchase program in which securities, reflected as investments on the
Company’s consolidated balance sheets, are pledged to a third party. In return, the Company receives securities from the third
party with an estimated fair value equal to a minimum of 100% of the securities pledged. The securities received are not reflected
98
on the Company’s consolidated balance sheets. As of December 31, 2013 the Company had pledged securities with an amortized
cost of $300.3 million and an estimated fair value of $310.8 million, in return the Company received securities with an estimated
fair value of $344.2 million. As of December 31, 2012 the Company had pledged securities with an amortized cost of $290.2
million and an estimated fair value of $305.9 million, in return the Company received securities with an estimated fair value of
$342.0 million.
Mortgage Loans on Real Estate
Mortgage loans represented approximately 7.7% and 7.0% of the Company’s invested assets as of December 31, 2013 and 2012,
respectively. 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 75% or less. The distribution
of mortgage loans, gross of valuation allowances, by property type is as follows as of December 31, 2013 and 2012 (dollars in
thousands):
Property type:
Apartment
Retail
Office building
Industrial
Other commercial
Total
2013
2012
Recorded
Investment
Percentage of
Total
Recorded
Investment
Percentage of
Total
$
289,394
748,731
917,284
439,890
101,487
11.6% $
30.0
36.7
17.6
4.1
229,266
669,958
825,406
455,682
131,855
9.9%
29.0
35.7
19.7
5.7
$
2,496,786
100.0% $
2,312,167
100.0%
As of December 31, 2013 and 2012, the Company’s mortgage loans, gross of valuation allowances, were distributed throughout
the United States as follows (dollars in thousands):
Pacific
South Atlantic
Mountain
Middle Atlantic
West North Central
East North Central
West South Central
East South Central
New England
Total
2013
2012
Recorded
Investment
Percentage of
Total
Recorded
Investment
Percentage of
Total
$
671,822
543,658
334,446
266,802
138,442
236,766
168,246
59,625
76,979
26.9% $
21.8
13.4
10.7
5.5
9.5
6.7
2.4
3.1
593,589
477,068
233,174
300,475
168,063
224,122
161,451
62,789
91,436
25.7%
20.5
10.1
13.0
7.3
9.7
7.0
2.7
4.0
$
2,496,786
100.0% $
2,312,167
100.0%
The maturities of the mortgage loans, gross of valuation allowances, as of December 31, 2013 and 2012 are as follows (dollars in
thousands):
Due within five years
Due after five years through ten years
Due after ten years
Total
2013
2012
$
$
987,109
$
984,289
525,388
2,496,786
$
1,187,387
776,655
348,125
2,312,167
99
Information regarding the Company’s credit quality indicators, as determined by the Company's internal evaluation methodology
for its recorded investment in mortgage loans, gross of valuation allowances, as of December 31, 2013 and 2012 are as follows
(dollars in thousands):
Internal credit quality grade:
High investment grade
Investment grade
Average
Watch list
In or near default
Total
2013
2012
1,437,244
$
1,235,605
827,993
155,914
49,404
26,231
834,494
132,607
76,463
32,998
2,496,786
$
2,312,167
$
$
The age analysis of the Company’s past due recorded investment in mortgage loans, gross of valuation allowances, as of
December 31, 2013 and 2012 are as follows (dollars in thousands):
31-60 days past due
61-90 days past due
Greater than 90 days
Total past due
Current
Total
2013
2012
$
$
— $
—
—
—
2,496,786
2,496,786
$
7,504
—
16,886
24,390
2,287,777
2,312,167
The following table presents the recorded investment in mortgage loans, by method of measuring impairment, and the related
valuation allowances, at (dollars in thousands):
Mortgage loans:
Individually measured for impairment
Collectively measured for impairment
Mortgage loans, gross of valuation allowances
Valuation allowances:
Individually measured for impairment
Collectively measured for impairment
Total valuation allowances
December 31,
2013
2012
$
37,841
$
2,458,945
2,496,786
3,211
6,895
10,106
39,956
2,272,211
2,312,167
6,980
4,600
11,580
Mortgage loans, net of valuation allowances
$
2,486,680
$
2,300,587
Information regarding the Company’s loan valuation allowances for mortgage loans as of December 31, 2013, 2012 and 2011 are
as follows (dollars in thousands):
Balance, beginning of period
Charge-offs
Provision
Balance, end of period
2013
2012
2011
$
$
11,580
$
11,793
$
(3,431)
1,957
(6,474)
6,261
10,106
$
11,580
$
6,239
(3,947)
9,501
11,793
Information regarding the portion of the Company’s mortgage loans that were impaired as of December 31, 2013 and 2012 is as
follows (dollars in thousands):
December 31, 2013:
Impaired mortgage loans with no valuation allowance recorded
Impaired mortgage loans with valuation allowance recorded
Total impaired mortgage loans
December 31, 2012:
Impaired mortgage loans with no valuation allowance recorded
Impaired mortgage loans with valuation allowance recorded
Total impaired mortgage loans
Unpaid
Principal
Balance
Recorded
Related
Investment
Allowance
Carrying
Value
$
$
$
$
21,698
16,772
38,470
13,039
27,527
40,566
$
$
$
$
100
21,100
16,741
37,841
12,496
27,460
39,956
$
$
$
$
— $
3,211
3,211
$
— $
6,980
6,980
$
21,100
13,530
34,630
12,496
20,480
32,976
The Company’s average investment balance of impaired mortgage loans and the related interest income are reflected in the table
below for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):
2013
2012
2011
Average
Investment
(1)
Interest
Income
Average
Investment
(1)
Interest
Income
Average
Investment
(1)
Interest
Income
Impaired mortgage loans with no valuation
allowance recorded
Impaired mortgage loans with valuation allowance
recorded
Total
$
$
15,023
$
852
$
15,549
$
1,244
$
14,877
$
630
22,818
951
34,434
425
27,712
37,841
$
1,803
$
49,983
$
1,669
$
42,589
$
418
1,048
(1) Average recorded investment represents the average loan balances as of the beginning of period and all subsequent quarterly end of period balances.
The Company did not acquire any impaired mortgage loans during the years ended December 31, 2013 and 2012. The Company
had no mortgage loans that were on a nonaccrual status at December 31, 2013, and $16.9 million of mortgage loans, gross of
valuation allowances, that were on a nonaccrual status at December 31, 2012.
Policy Loans
Policy loans comprised approximately 3.8% and 3.9% of the Company’s invested assets as of December 31, 2013 and 2012,
respectively, substantially all of which are associated with one client. These policy loans present no credit risk because the amount
of the loan cannot exceed the obligation due to 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. As 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.
Funds Withheld at Interest
Funds withheld at interest comprised approximately 17.8% and 17.0% of the Company’s invested assets as of December 31, 2013
and 2012, respectively. Of the $5.8 billion funds withheld at interest balance, net of embedded derivatives, as of December 31,
2013, $4.1 billion of the balance is associated with one client. For reinsurance agreements written on a modified coinsurance basis
and certain agreements written on a coinsurance funds withheld basis, assets equal to the net statutory reserves are withheld and
legally owned and managed by the ceding company and are reflected as funds withheld at interest on the Company’s consolidated
balance sheets. In the event of a ceding company’s insolvency, the Company would need to assert a claim on the assets supporting
its reserve liabilities. However, the risk of loss to the Company is mitigated by its ability to offset amounts it owes the ceding
company for claims or allowances with amounts owed to the Company from the ceding company. Interest accrues to these assets
at rates defined by the treaty terms and the Company estimates the yield was approximately 9.68%, 6.97% and 6.87% for the years
ended December 31, 2013, 2012 and 2011, respectively. Changes in these estimated yields are affected by equity options held in
the funds withheld portfolio associated with equity-indexed annuity treaties. The Company is subject to the investment performance
on the withheld assets, although it does not directly control them. These assets are primarily fixed maturity investment securities
and pose risks similar to the fixed maturity securities the Company owns. To mitigate this risk, the Company helps set the investment
guidelines followed by the ceding company and monitors compliance.
Other Invested Assets
Other invested assets include equity securities, limited partnership interests, real estate joint ventures, structured loans, derivative
contracts, FVO contractholder-directed unit-linked investments, Federal Home Loan Bank of Des Moines ("FHLB") common
stock (included in other), and real estate held-for-investment (included in other). The fair value option was elected for
contractholder-directed investments supporting unit-linked variable annuity type liabilities which do not qualify for presentation
and reporting as separate accounts. Other invested assets represented approximately 4.1% and 3.5% of the Company’s invested
assets as of December 31, 2013 and 2012, respectively. Carrying values of these assets as of December 31, 2013 and 2012 are as
follows (dollars in thousands):
Equity securities
Limited partnerships and real estate joint ventures
Structured loans
Derivatives
FVO contractholder-directed unit-linked investments
Other
Total other invested assets
101
December 31,
2013
2012
$
$
405,731
411,456
223,549
75,227
138,892
70,105
1,324,960
$
$
222,700
356,419
306,497
168,208
—
105,719
1,159,543
Cash and Investments Transferred to the Company
During the second quarter of 2012, the Company added a large fixed deferred annuity reinsurance transaction in its U.S. Asset-
Intensive segment. This transaction increased the Company’s invested asset base by approximately $5.4 billion which was reflected
on the condensed consolidated balance sheet as of June 30, 2012 as an investment receivable. In satisfaction of this investment
receivable, the Company received the following on July 31, 2012 and August 3, 2012 (dollars in thousands):
Fixed maturity securities – available for sale:
Corporate securities
Asset-backed securities
Commercial mortgage-backed securities
U.S. Government and agencies securities
State and political subdivision securities
Other foreign government, supranational, and foreign government-sponsored enterprises
Total fixed maturity securities – available for sale
Mortgage loans on real estate
Short-term investments
Cash and cash equivalents
Accrued interest
Total
Amortized Cost/
Recorded Investment
Estimated Fair Value
at Date of Transfer
$
2,585,095
$
2,606,816
137,251
703,313
240,952
27,297
56,776
3,750,684
1,009,454
101,428
501,593
43,739
$
5,406,898
$
138,918
704,065
256,168
27,555
55,437
3,788,959
1,021,661
101,338
501,593
43,739
5,457,290
The securities transferred to the Company related to the transaction are considered a non-cash transaction in the consolidated
statement of cash flows.
Note 5 DERIVATIVE INSTRUMENTS
Derivatives, except embedded derivatives, are carried on the Company’s consolidated balance sheets in other invested assets or
other liabilities, at fair value. Embedded derivative liabilities on modified coinsurance or funds withheld arrangements are included
on the consolidated balance sheets with the host contract in funds withheld at interest, at fair value. Embedded derivative liabilities
on indexed annuity and variable annuity products are included on the consolidated balance sheets with the host contract in interest-
sensitive contract liabilities, at fair value. Embedded derivative assets are included on the consolidated balance sheets in reinsurance
ceded receivables. The following table presents the notional amounts and gross fair value of derivative instruments prior to taking
into account the netting effects of master netting agreements as of December 31, 2013 and 2012 (dollars in thousands):
Synthetic guaranteed investment contracts
4,629,859
Derivatives not designated as hedging
instruments:
Interest rate swaps
Interest rate options
Financial futures
Foreign currency forwards
Consumer price index swaps
Credit default swaps
Equity options
Embedded derivatives in:
Modified coinsurance or funds withheld
arrangements
Indexed annuity products
Variable annuity products
Total non-hedging derivatives
Derivatives designated as hedging
instruments:
Interest rate swaps
Foreign currency swaps
Total hedging derivatives
Total derivatives
December 31, 2013
December 31, 2012
Notional
Amount
Carrying Value/Fair Value
Assets
Liabilities
Notional
Amount
Carrying Value/Fair Value
Assets
Liabilities
$
1,592,943
$
32,555
$
21,873
$
2,195,059
$
123,085
$
17,867
240,000
123,780
79,618
59,922
682,700
757,352
—
—
—
2,554
—
—
—
10,438
33,902
—
—
—
—
—
—
12,772
309
2,156
—
—
176,270
838,670
30,055
—
127,877
74,400
85,135
714,000
696,776
2,018,073
—
—
—
—
—
1,017
1,446
2,228
62,514
—
—
—
—
—
—
2,105
—
5,922
—
—
243,177
740,256
172,105
8,166,174
79,449
1,082,105
5,911,320
190,290
1,181,432
49,131
728,674
777,805
—
21,903
21,903
4,606
620
5,226
57,275
629,512
686,787
344
—
344
786
27,398
28,184
$
8,943,979
$
101,352
$
1,087,331
$
6,598,107
$
190,634
$
1,209,616
102
Netting Arrangements
Certain of the Company’s derivatives are subject to enforceable master netting arrangements and reported as a net asset or liability
in the consolidated balance sheets. The Company nets all derivatives that are subject to such arrangements.
The Company has elected to include all derivatives, except embedded derivatives, in the tables below, irrespective of whether
they are subject to an enforceable master netting arrangement or a similar agreement. See Note 4 – "Investments" for information
regarding the Company’s securities borrowing and repurchase/reverse repurchase programs. See “Embedded Derivatives” below
for information regarding the Company’s bifurcated embedded derivatives.
The following table provides information relating to the Company’s derivative instruments as of December 31, 2013 and
December 31, 2012 (dollars in thousands):
Gross Amounts
Recognized
Gross Amounts
Offset in the
Balance Sheet
Net Amounts
Presented in the
Balance Sheet
Financial
Instruments
Cash Collateral
Pledged/
Received
Net Amount
Gross Amounts Not
Offset in the Balance Sheet
December 31, 2013:
Derivative assets
Derivative liabilities
December 31, 2012:
Derivative assets
Derivative liabilities
$
$
101,352
$
(26,125) $
75,227
$
(11,095) $
(51,006) $
42,336
(26,125)
16,211
(18,081)
(8,033)
190,634
$
(22,426) $
168,208
$
(22,458) $
(136,414) $
54,078
(22,426)
31,652
(1,565)
(27,867)
13,126
(9,903)
9,336
2,220
Accounting for Derivative Instruments and Hedging Activities
The Company does not enter into derivative instruments for speculative purposes. As discussed below under “Non-qualifying
Derivatives and Derivatives for Purposes Other Than Hedging,” the Company uses various derivative instruments for risk
management purposes that either do not qualify or have not been qualified for hedge accounting treatment, including derivatives
used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with
guaranteed living benefits. As of December 31, 2013 and 2012, the Company held interest rate swaps that were designated and
qualified as cash flow hedges of interest rate risk, held foreign currency swaps that were designated and qualified as hedges of a
portion of its net investment in its foreign operations and had derivative instruments that were not designated as hedging instruments.
See Note 2 – “Summary of Significant Accounting Policies” for a detailed discussion of the accounting treatment for derivative
instruments, including embedded derivatives. Derivative instruments are carried at fair value and generally require an insignificant
amount of cash at inception of the contracts.
Fair Value Hedges
During the fourth quarter of 2011 the Company removed the fair value hedge designation for certain interest rate swaps. However,
prior to the fourth quarter of 2011 the Company designated and reported certain interest rate swaps that convert fixed rate investments
to floating rate investments as fair value hedges when they met the requirements of the general accounting principles for Derivatives
and Hedging. The gain or loss on the hedged item attributable to the hedged benchmark interest rate and the offsetting gain or
loss on the related interest rate swaps for the year ended December 31, 2011 was (dollars in thousands):
Type of Fair Value
Hedge
Hedged Item
For the year ended December 31, 2011:
Gains (Losses)
Recognized for
Derivatives
Gains (Losses)
Recognized for
Hedged Items
Ineffectiveness
Recognized in
Investment Related
Gains (Losses)
Interest rate swaps
Fixed rate fixed maturities
$
(785) $
1,402
$
617
A regression analysis was used, both at the inception of the hedge and on an ongoing basis, to determine whether each derivative
used in a hedge transaction is highly effective in offsetting changes in the hedged item. All components of each derivative’s gain
or loss were included in the assessment of hedge effectiveness.
Cash Flow Hedges
The Company designates and accounts for certain interest rate swaps, in which the cash flows are denominated in different
currencies, commonly referred to as cross-currency swaps, as cash flow hedges when they meet the requirements of the general
accounting principles for Derivatives and Hedging.
103
The following table presents the components of AOCI, before income tax, and the consolidated income statement classification
where the gain or loss is recognized related to cash flow hedges for the years ended December 31, 2013 and 2012 (dollars in
thousands):
Accumulated other comprehensive income (loss), balance beginning of year
Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow
hedges
Amounts reclassified to investment income
Accumulated other comprehensive income (loss), balance end of period
2013
2012
$
$
403
$
(3,969)
(1,012)
(4,578) $
(828)
2,613
(1,382)
403
As of December 31, 2013, the before-tax deferred net gains on derivative instruments recorded in AOCI that are expected to be
reclassified to earnings during the next twelve months are $0.6 million. This expectation is based on the anticipated interest
payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the
Company will recognize the deferred net gains (losses) as an adjustment to investment income over the term of the investment
cash flows. There were no hedged forecasted transactions, other than the receipt or payment of variable interest payments on
existing financial instruments, for the years ended December 31, 2013 and 2012.
The following table presents the effects of derivatives in cash flow hedging relationships on the consolidated statements of income
and the consolidated statements of stockholders’ equity for the years ended December 31, 2013 and 2012 (dollars in thousands):
Derivatives in Cash Flow
Hedging Relationships
Amount of Gains
(Losses) Deferred in
AOCI on Derivatives
Amount and Location of Gains (Losses)
Reclassified from AOCI into Income (Loss)
Amount and Location of Gains (Losses)
Recognized in Income (Loss) on Derivatives
(Effective Portion)
(Effective Portion)
(Ineffective Portion and Amounts Excluded
from Effectiveness Testing)
Investment Related
Gains (Losses)
Investment
Income
Investment Related
Gains (Losses)
Investment
Income
For the year ended December 31, 2013:
Interest rate swaps
$
(3,969) $
For the year ended December 31, 2012:
Interest rate swaps
$
2,613
$
— $
— $
1,012
1,382
$
$
6
$
(41) $
—
—
Hedges of Net Investments in Foreign Operations
The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign operations against adverse
movements in exchange rates. The following table illustrates the Company’s net investments in foreign operations (“NIFO”)
hedges for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):
Foreign currency swaps
Type of NIFO Hedge (1) (2)
Derivative Gains (Losses) Deferred in AOCI
For the year ended
2013
2012
2011
$
40,347
$
(20,470) $
4,858
(1) There were no sales or substantial liquidations of net investments in foreign operations that would have required the reclassification of gains or losses from
accumulated other comprehensive income (loss) into investment income during the periods presented.
(2) There was no ineffectiveness recognized for the Company’s hedges of net investments in foreign operations.
The cumulative foreign currency translation gain (loss) recorded in AOCI related to these hedges was $23.9 million and $(16.4)
million at December 31, 2013 and 2012, respectively. If a foreign operation was sold or substantially liquidated, the amounts in
AOCI would be reclassified to the consolidated statements of income. A pro rata portion would be reclassified upon partial sale
of a foreign operation.
Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company uses various other derivative instruments for risk management purposes that either do not qualify or have not been
qualified for hedge accounting treatment, including derivatives used to economically hedge changes in the fair value of liabilities
associated with the reinsurance of variable annuities with guaranteed living benefits. The gain or loss related to the change in fair
value for these derivative instruments is recognized in investment related gains (losses), in the consolidated statements of income,
104
except where otherwise noted. For the years ended December 31, 2013, 2012 and 2011, the Company recognized investment
related gains (losses) of $(177.3) million, $(61.4) million and $188.6 million, respectively, related to derivatives (not including
embedded derivatives) that do not qualify or have not been qualified for hedge accounting.
A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Company’s consolidated statements
of income for the years ended December 31, 2013, 2012 and 2011 is as follows (dollars in thousands):
Type of Non-hedging Derivative
Income Statement
Location of Gain (Loss)
2013
2012
2011
Gain (Loss) for the Years Ended December 31,
Interest rate swaps
Interest rate options
Financial futures
Foreign currency forwards
CPI swaps
Credit default swaps
Equity options
Embedded derivatives in:
Modified coinsurance or funds withheld
arrangements
Indexed annuity products
Indexed annuity products
Variable annuity products
Total non-hedging derivatives
Investment related gains (losses), net
$
(84,398) $
16,028
$
178,338
Investment related gains (losses), net
Investment related gains (losses), net
Investment related gains (losses), net
Investment related gains (losses), net
Investment related gains (losses), net
Investment related gains (losses), net
Investment related gains (losses), net
Policy acquisition costs and other
insurance expenses
Interest credited
Investment related gains (losses), net
(11,518)
(11,157)
(13,201)
(1,942)
24,188
(79,230)
70,177
—
(115,409)
142,050
—
(20,245)
(5,644)
(267)
18,359
(69,677)
115,009
(630)
(29,804)
104,613
$
(80,440) $
127,742
$
—
(945)
1,675
1,821
(63)
7,818
(87,236)
(24,551)
(90,370)
(224,184)
(237,697)
Types of Derivatives Used by the Company
Interest Rate Swaps
Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest
rate exposure arising from mismatches between assets and liabilities (duration mismatches). With an interest rate swap, the Company
agrees with another party to exchange, at specified intervals, the difference between two rates, which can be either fixed-rate or
floating-rate interest amounts, tied to an agreed-upon notional principal amount. These transactions are executed pursuant to master
agreements that provide for a single net payment or individual gross payments at each due date.
Interest Rate Options
Interest rate options, commonly referred to as swaptions, are used by the Company primarily to hedge living benefit guarantees
embedded in certain variable annuity products. A swaption, used to hedge against adverse changes in interest rates, is an option
to enter into a swap with a forward starting effective date. The Company pays an upfront premium for the right to exercise this
option in the future.
Financial Futures
Exchange-traded equity futures are used primarily to economically hedge liabilities embedded in certain variable annuity products.
With exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the
value of which is determined by the relevant stock indices, and to post variation margin on a daily basis in an amount equal to the
difference between the daily estimated fair values of those contracts. The Company enters into exchange-traded equity futures
with regulated futures commission merchants that are members of the exchange.
Equity Options
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity
products. To hedge against adverse changes in equity indices volatility, the Company buys put options. The contracts are net settled
in cash based on differentials in the indices at the time of exercise and the strike price.
Consumer Price Index Swaps
Consumer price index (“CPI”) swaps are used by the Company primarily to economically hedge liabilities embedded in certain
insurance products where 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
105
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.
Foreign Currency Swaps
Foreign currency swaps are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated
with its assets and liabilities denominated in foreign currencies. With a foreign currency swap transaction, the Company agrees
with another party to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate
calculated by reference to an agreed upon principal amount. The principal amount of each currency is exchanged at the termination
of the currency swap by each party. The Company uses foreign currency swaps to hedge a portion of its net investment in certain
foreign operations against adverse movements in exchange rates.
Foreign Currency Forwards
Foreign currency forwards are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates
associated with its assets and liabilities denominated in foreign currencies. With a foreign currency forward transaction, the
Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is
agreed upon at the time of the contract and payment for such a contract is made in a different currency at the specified future date.
Credit Default Swaps
The Company sells protection under single name credit default swaps and credit default swap index tranches to diversify its credit
risk exposure in certain portfolios and, in combination with purchasing securities, to replicate characteristics of similar investments
based on the credit quality and term of the credit default swap. Credit default triggers for indexed reference entities and single
name reference entities are defined in the contracts. The Company’s maximum exposure to credit loss equals the notional value
for credit default swaps. In the event of default of a referencing entity, the Company is typically required to pay the protection
holder the full notional value less a recovery amount determined at auction.
The following table presents the estimated fair value, maximum amount of future payments and weighted average years to maturity
of credit default swaps sold by the Company at December 31, 2013 and 2012 (dollars in thousands):
Rating Agency Designation of
Referenced Credit Obligations
(1)
AAA/AA-/A+/A/A-
Estimated Fair
Value of Credit
Default Swaps
December 31,
2013
Maximum
Amount of Future
Payments under
Credit Default
Swaps(2)
Weighted
Average
Years to
Maturity(3)
Estimated Fair
Value of Credit
Default Swaps
2012
Maximum
Amount of Future
Payments under
Credit Default
Swaps(2)
Weighted
Average
Years to
Maturity(3)
Single name credit default swaps
$
614
$
117,500
5.1
$
(2,077) $
124,500
Credit default swaps referencing
indices
Subtotal
BBB+/BBB/BBB-
Single name credit default swaps
Credit default swaps referencing
indices
Subtotal
BB+
Single name credit default swaps
Credit default swaps referencing
indices
Subtotal
Total
—
614
656
7,295
7,951
—
—
—
—
117,500
142,200
405,000
547,200
—
—
—
—
5.1
4.9
5.0
5.0
—
—
—
—
(2,077)
(2,345)
937
(1,408)
(222)
—
(222)
—
124,500
135,500
430,000
565,500
6,000
—
6,000
$
8,565
$
664,700
4.4
$
(3,707) $
696,000
5.9
—
5.9
5.5
5.0
5.1
4.5
—
4.5
5.2
(1) The rating agency designations are based on ratings from Standard and Poor’s (“S&P”).
(2) Assumes the value of the referenced credit obligations is zero.
(3) The weighted average years to maturity of the credit default swaps is calculated based on weighted average notional amounts.
The Company also purchases credit default swaps to reduce its risk against a drop in bond prices due to credit concerns of certain
bond issuers. If a credit event, as defined by the contract, occurs, the Company is able to put the bond back to the counterparty at
par.
106
Synthetic Guaranteed Investment Contracts
The Company sells fee-based synthetic guaranteed investment contracts which include investment-only, stable value contracts,
to retirement plans. The assets are owned by the trustees of such plans, who invest the assets under the terms of investment
guidelines agreed to with the Company. The contracts contain a guarantee of a minimum rate of return on participant balances
supported by the underlying assets, and a guarantee of liquidity to meet certain participant-initiated plan cash flow requirements.
These contracts are reported as derivatives, recorded at fair value and classified as interest rate derivatives.
Embedded Derivatives
The Company has certain embedded derivatives which are required to be separated from their host contracts and reported as
derivatives. Host contracts include reinsurance treaties structured on a modified coinsurance or funds withheld basis. Changes in
fair values of embedded derivatives on modified coinsurance or funds withheld treaties are net of an increase (decrease) in
investment related gains (losses), net of $(1.6) million, $(62.7) million and $23.1 million for the years ended December 31, 2013,
2012 and 2011, respectively, associated with the Company’s own credit risk. Additionally, the Company reinsures equity-indexed
annuity and variable annuity contracts with benefits that are considered embedded derivatives, including guaranteed minimum
withdrawal benefits, guaranteed minimum accumulation benefits, and guaranteed minimum income benefits. Changes in fair
values of embedded derivatives on variable annuity contracts are net of an increase (decrease) in investment related gains (losses),
net of $(12.5) million and $16.5 million for the years ended December 31, 2013 and 2012, respectively, associated with the
Company’s own credit risk. Changes in fair values of embedded derivatives on variable annuity contracts associated with the
Company’s own credit risk for the year ended December 31, 2011 was not material. The changes in fair values of embedded
derivatives on equity-indexed annuities described below relate to changes in the fair value associated with capital market and other
related assumptions. The related gains (losses) and the effect on net income after amortization of DAC and income taxes for the
years ended December 31, 2013, 2012 and 2011 are reflected in the following table (dollars in thousands):
Embedded derivatives in modified coinsurance or funds withheld arrangements
included in investment related gains
After the associated amortization of DAC and taxes, the related amounts included in
net income
Embedded derivatives in variable annuity contracts included in investment related
gains
After the associated amortization of DAC and taxes, the related amounts included in
net income
Amounts related to embedded derivatives in equity-indexed annuities included in
benefits and expenses
After the associated amortization of DAC and taxes, the related amounts included in
net income
2013
2012
2011
$
70,177
$
115,009
$
(87,236)
18,920
142,050
70,123
25,454
104,613
6,367
(7,599)
(224,184)
(30,230)
(115,409)
(30,434)
(114,921)
(106,792)
6,110
(55,915)
Credit Risk
The Company manages its credit risk related to over-the-counter ("OTC") derivatives by entering into transactions with creditworthy
counterparties, maintaining collateral arrangements and through the use of master netting agreements that provide for a single net
payment to be made by one counterparty to another at each due date and upon termination.
The credit exposure of the Company's OTC derivative transactions is represented by the contracts with a positive fair value (market
value) at the reporting date. To reduce credit exposures, the Company seeks to (i) enter into OTC derivative transactions pursuant
to master netting agreements that provide for a netting of payments and receipts with a single counterparty, and (ii) enter into
agreements that allow the use of credit support annexes, which are bilateral rating-sensitive agreements that require collateral
postings at established threshold levels. Certain of the Company's OTC derivatives are cleared derivatives, which are bilateral
transactions between the Company and a counterparty where the transactions are cleared through a clearinghouse, such that each
derivative counterparty is only exposed to the default of the clearinghouse. These cleared transactions require initial and daily
variation margin collateral postings and include certain interest rate swaps and credit default swaps entered into on or after June
10, 2013, related to new guidelines implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Also,
the Company enters into exchange-traded futures through regulated exchanges and these transactions are settled on a daily basis,
thereby reducing credit risk exposure in the event of non-performance by counterparties to such financial instruments.
The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection
with its derivative instruments. Collateral agreements contain attachment thresholds that may vary depending on the posting party’s
ratings. Additionally, a decline in the Company’s or the counterparty’s credit ratings to specified levels could result in potential
settlement of the derivative positions under the Company’s agreements with its counterparties. The Company also has exchange-
traded futures, which require the maintenance of a margin account. As exchange-traded futures are affected through regulated
107
exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the
event of nonperformance by counterparties.
The Company’s credit exposure related to derivative contracts is generally limited to the fair value at the reporting date plus or
minus any collateral posted or held by the Company. Information regarding the Company’s credit exposure related to its over-the-
counter derivative contracts and margin account for exchange-traded futures at December 31, 2013 and 2012 are reflected in the
following table (dollars in thousands):
Estimated fair value of derivatives in net asset position
Cash provided as collateral(1)
Securities pledged to counterparties as collateral(2)
Cash pledged from counterparties as collateral(3)
Securities pledged from counterparties as collateral(4)
Initial margin for cleared derivatives
Net credit exposure
Margin account related to exchange-traded futures(5)
December 31, 2013
December 31, 2012
$
$
$
59,016
$
8,033
18,081
(51,006)
(11,095)
(13,350)
9,679
2,566
$
$
136,558
27,867
1,565
(136,414)
(22,458)
—
7,118
5,605
(1) Consists of receivable from counterparty, included in other assets.
(2)
(3)
Included in other invested assets, primarily consists of U.S. Treasury securities.
Included in cash and cash equivalents, with obligation to return cash collateral recorded in other liabilities.
(4) Consists of U.S. Treasury securities.
(5)
Included in cash and cash equivalents.
Note 6 FAIR VALUE OF ASSETS AND LIABILITIES
Fair Value Measurement
General accounting principles for Fair Value Measurements and Disclosures define fair value as the exchange price that would
be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. These principles also establish a fair value
hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value and describes three levels of inputs that may be used to measure fair value:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities. Active markets are defined as having the
following characteristics for the measured asset/liability: (i) many transactions, (ii) current prices, (iii) price quotes not varying
substantially among market makers, (iv) narrow bid/ask spreads and (v) most information publicly available. The Company’s
Level 1 assets include investment securities that are traded in exchange markets.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or market standard valuation techniques and assumptions with significant inputs that are observable or can be
corroborated by observable market data for substantially the full term of the assets or liabilities. Such observable inputs include
benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields
and spreads in the market. The Company’s Level 2 assets and liabilities include investment securities with quoted prices that are
traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using market standard
valuation techniques. This category primarily includes corporate securities, Canadian and Canadian provincial government
securities, and residential and commercial mortgage-backed securities, among others. Level 2 valuations are generally obtained
from third party pricing services for identical or comparable assets or liabilities or through the use of valuation methodologies
using observable market inputs. Prices from servicers are validated through analytical reviews and assessment of current market
activity.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
related assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using market
standard valuation techniques described above. When observable inputs are not available, the market standard techniques for
determining the estimated fair value of certain securities that trade infrequently, and therefore have little transparency, rely on
inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally
from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment
or estimation and cannot be supported by reference to market activity. Even though unobservable, management believes these
inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants
would use when pricing similar assets and liabilities. For the Company’s invested assets, this category generally includes corporate
securities (primarily private placements and bank loans), asset-backed securities (including collateralized debt obligations and
those with exposure to subprime mortgages), and to a lesser extent, certain residential and commercial mortgage-backed securities,
108
among others. Prices are determined using valuation methodologies such as discounted cash flow models and other similar
techniques. Non-binding broker quotes, which are utilized when pricing service information is not available, are reviewed for
reasonableness based on the Company’s understanding of the market, and are generally considered Level 3. Under certain
circumstances, based on its observations of transactions in active markets, the Company may conclude the prices received from
independent third party pricing services or brokers are not reasonable or reflective of market activity. In those instances, the
Company would apply internally developed valuation techniques to the related assets or liabilities. Additionally, the Company’s
embedded derivatives, all of which are associated with reinsurance treaties, are classified in Level 3 since their values include
significant unobservable inputs.
When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement
is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a
Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore,
gains and losses for such assets and liabilities categorized within Level 3 may include changes in fair value that are attributable
to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
Assets and Liabilities by Hierarchy Level
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2013 and December 31, 2012 are summarized
below (dollars in thousands):
December 31, 2013:
Assets:
Fixed maturity securities – available-for-sale:
Total
Level 1
Level 2
Level 3
Fair Value Measurements Using:
Corporate securities
$
12,110,755
$
68,934
$
10,696,532
$
1,345,289
Canadian and Canadian provincial governments
Residential mortgage-backed securities
Asset-backed securities
Commercial mortgage-backed securities
U.S. government and agencies securities
State and political subdivision securities
Other foreign government, supranational and foreign
government-sponsored enterprises
Total fixed maturity securities – available-for-sale
Funds withheld at interest – embedded derivatives
Cash equivalents
Short-term investments
Other invested assets:
Non-redeemable preferred stock
Other equity securities
Derivatives:
Interest rate swaps
Financial futures
CPI swaps
Credit default swaps
Equity options
Foreign currency swaps
FVO contractholder-directed unit-linked investments
Other
Total other invested assets
3,381,025
989,643
894,832
1,388,946
501,351
320,820
1,886,764
21,474,136
(176,270)
371,345
111,572
81,854
323,877
9,904
2,554
(309)
7,926
33,869
21,283
138,892
9,142
628,992
—
—
—
—
396,092
—
304,487
769,513
—
371,345
105,649
74,220
323,877
—
—
—
—
—
—
132,643
9,142
539,882
3,381,025
836,138
422,984
1,287,161
64,340
277,044
1,544,280
18,509,504
—
—
5,923
2,672
—
9,904
2,554
(309)
7,926
33,869
21,283
6,249
—
84,148
—
153,505
471,848
101,785
40,919
43,776
37,997
2,195,119
(176,270)
—
—
4,962
—
—
—
—
—
—
—
—
—
4,962
Total
Liabilities:
Interest sensitive contract liabilities – embedded derivatives
$
$
22,409,775
868,725
$
$
1,786,389
$
18,599,575
$
2,023,811
— $
— $
868,725
Other liabilities:
Derivatives:
Interest rate swaps
Foreign currency forwards
Credit default swaps
Equity options
3,828
12,772
(356)
(33)
—
—
—
—
3,828
12,772
(356)
(33)
—
—
—
—
Total
$
884,936
$
— $
16,211
$
868,725
109
December 31, 2012:
Assets:
Fixed maturity securities – available-for-sale:
Corporate securities
Canadian and Canadian provincial governments
Residential mortgage-backed securities
Asset-backed securities
Commercial mortgage-backed securities
U.S. government and agencies securities
State and political subdivision securities
Other foreign government, supranational and foreign
government-sponsored enterprises
Total fixed maturity securities – available-for-sale
Funds withheld at interest – embedded derivatives
Cash equivalents
Short-term investments
Other invested assets:
Non-redeemable preferred stock
Other equity securities
Derivatives:
Interest rate swaps
Foreign currency forwards
CPI swaps
Credit default swaps
Equity options
Collateral
Other
Total other invested assets
Total
Liabilities:
Interest sensitive contract liabilities – embedded derivatives
Other liabilities:
Derivatives:
Interest rate swaps
Foreign currency forwards
Credit default swaps
Foreign currency swaps
Total
Total
Level 1
Level 2
Level 3
Fair Value Measurements Using:
$
12,380,071
$
43,544
$
10,667,964
$
1,668,563
4,049,334
1,042,064
691,555
1,698,903
265,190
302,498
1,861,999
22,291,614
(243,177)
575,864
239,131
74,841
147,859
104,972
1,017
1,446
(1,741)
62,514
17,002
11,951
419,861
23,283,293
912,361
$
$
$
$
—
—
—
—
192,780
—
297,025
533,349
—
575,864
178,923
64,268
147,859
—
—
—
—
—
1,323
11,951
225,401
4,049,334
948,133
459,164
1,531,897
67,872
259,286
1,536,694
19,520,344
—
—
38,177
10,573
—
104,972
1,017
1,446
(1,741)
62,514
15,679
—
194,460
—
93,931
232,391
167,006
4,538
43,212
28,280
2,237,921
(243,177)
—
22,031
—
—
—
—
—
—
—
—
—
—
1,513,537
$
19,752,981
$
2,016,775
— $
— $
912,361
196
2,105
1,953
27,398
—
—
—
—
196
2,105
1,953
27,398
—
—
—
—
$
944,013
$
— $
31,652
$
912,361
The Company may utilize information from third parties, such as pricing services and brokers, to assist in determining the fair
value for certain assets and liabilities; however, management is ultimately responsible for all fair values presented in the Company’s
financial statements. This includes responsibility for monitoring the fair value process, ensuring objective and reliable valuation
practices and pricing of financial instruments, and approving changes to valuation methodologies and pricing sources. The selection
of the valuation technique(s) to apply considers the definition of an exit price and the nature of the asset or liability being valued
and significant expertise and judgment is required.
The Company performs initial and ongoing analysis and review of the various techniques utilized in determining fair value to
ensure that the valuation approaches utilized are appropriate and consistently applied, and that the various assumptions are
reasonable. The Company also performs ongoing analysis and review of the information and prices received from third parties to
ensure that the prices represent a reasonable estimate of the fair value and to monitor controls around pricing, which includes
quantitative and qualitative analysis and is overseen by the Company’s investment and accounting personnel. Examples of
procedures performed include, but are not limited to, review of pricing trends, comparison of a sample of executed prices of
securities sold to the fair value estimates, comparison of fair value estimates to management’s knowledge of the current market,
and ongoing confirmation that third party pricing services use, wherever possible, market-based parameters for valuation. In
addition, the Company utilizes both internal and external cash flow models to analyze the reasonableness of fair values utilizing
credit spread and other market assumptions, where appropriate. As a result of the analysis, if the Company determines there is a
110
more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.
The Company also determines if the inputs used in estimated fair values received from pricing services are observable by assessing
whether these inputs can be corroborated by observable market data.
The fair value of embedded derivative liabilities, including those calculated by third parties, are monitored through the use of
attribution reports to quantify the effect of underlying sources of fair value change, including capital market inputs based on
policyholder account values, interest rates and short-term and long-term implied volatilities, from period to period. Actuarial
assumptions are based on experience studies performed internally in combination with available industry information and are
reviewed on a periodic basis, at least annually.
For assets and liabilities reported at fair value, the Company utilizes when available, fair values based on quoted prices in active
markets that are regularly and readily obtainable. Generally, these are very liquid investments and the valuation does not require
management judgment. When quoted prices in active markets are not available, fair value is based on market valuation techniques,
market comparable pricing and the income approach. The use of different techniques, assumptions and inputs may have a material
effect on the estimated fair values of the Company’s securities holdings. For the quarters ended December 31, 2013 and 2012, the
application of market standard valuation techniques applied to similar assets and liabilities has been consistent.
The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a
recurring basis are summarized below.
Fixed Maturity Securities – The fair values of the Company’s publicly-traded fixed maturity securities are generally based on
prices obtained from independent pricing services. Prices from pricing services are sourced from multiple vendors, and a vendor
hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company generally receives
prices from multiple pricing services for each security, but ultimately uses the price from the pricing service highest in the vendor
hierarchy based on the respective asset type. To validate reasonableness, prices are periodically reviewed as explained above.
Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally
reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs.
If the pricing information received from third party pricing services is not reflective of market activity or other inputs observable
in the market, the Company may challenge the price through a formal process with the pricing service.
If the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of
market activity, non-binding broker quotes are used, if available. If the Company concludes the values from both pricing services
and brokers are not reflective of market activity, it may override the information from the pricing service or broker with an internally
developed valuation; however, this occurs infrequently. Internally developed valuations or non-binding broker quotes are also
used to determine fair value in circumstances where vendor pricing is not available. These estimates may use significant
unobservable inputs, which reflect the Company’s assumptions about the inputs that market participants would use in pricing the
asset. Circumstances where observable market data are not available may include events such as market illiquidity and credit
events related to the security. Pricing service overrides, internally developed valuations and non-binding broker quotes are generally
based on significant unobservable inputs and are reflected as Level 3 in the valuation hierarchy.
The inputs used in the valuation of corporate and government securities include, but are not limited to standard market observable
inputs which are derived from, or corroborated by, market observable data including market yield curve, duration, call provisions,
observable prices and spreads for similar publicly traded or privately traded issues that incorporate the credit quality and industry
sector of the issuer. For structured securities, valuation is based primarily on matrix pricing or other similar techniques using
standard market inputs including spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds
and volumes, current and forecasted loss severity, rating, weighted average coupon, weighted average maturity, average delinquency
rates, geographic region, debt-service coverage ratios and issuance-specific information including, but not limited to: collateral
type, payment terms of the underlying assets, payment priority within the tranche, structure of the security, deal performance and
vintage of loans.
When observable inputs are not available, the market standard valuation techniques for determining the estimated fair value of
certain types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant
to the estimated fair value that are not observable in the market or cannot be derived principally from or corroborated by observable
market data. These unobservable inputs can be based in large part on management judgment or estimation, and cannot be supported
by reference to market activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the
circumstances and are believed to be consistent with what other market participants would use when pricing such securities.
The fair values of private placement securities are primarily determined using a discounted cash flow model. In certain cases these
models primarily use observable inputs with a discount rate based upon the average of spread surveys collected from private
market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the
credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these
securities have been reflected within Level 3. For certain private fixed maturities, the discounted cash flow model may also
incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants
111
would use in pricing the security. To the extent management determines that such unobservable inputs are not significant to the
price of a security, a Level 2 classification is made. Otherwise, a Level 3 classification is used.
Embedded Derivatives – For embedded derivative liabilities associated with the underlying products in reinsurance treaties,
primarily equity-indexed and variable annuity treaties, the Company utilizes a discounted cash flow model, which includes an
estimate of future equity option purchases and an adjustment for the Company’s own credit risk. The variable annuity embedded
derivative calculations are performed by third parties based on methodology and input assumptions provided by the Company. To
validate the reasonableness of the resulting fair value, the Company’s internal actuaries perform reviews and analytical procedures
on the results. The capital market inputs to the model, such as equity indexes, short-term equity volatility and interest rates, are
generally observable. The valuation also requires certain significant inputs, which are generally not observable and accordingly,
the valuation is considered Level 3 in the fair value hierarchy, see “Level 3 Measurements and Transfers” below for a description.
The fair value of embedded derivatives associated with funds withheld reinsurance treaties is determined based upon a total return
swap technique with reference to the fair value of the investments held by the ceding company that support the Company’s funds
withheld at interest asset with an adjustment for the Company’s own credit risk. The fair value of the underlying assets is generally
based on market observable inputs using industry standard valuation techniques. The valuation also requires certain significant
inputs, which are generally not observable and accordingly, the valuation is considered Level 3 in the fair value hierarchy, see
“Level 3 Measurements and Transfers” below for a description.
Company’s Own Credit Risk – The Company uses a structural default risk model to estimate its own credit risk. The input assumptions
are a combination of externally derived and published values (default threshold and uncertainty), market inputs (interest rate,
Company equity price per share, Company debt per share, Company equity price volatility) and insurance industry data (Loss
Given Default), adjusted for market recoverability.
Cash Equivalents and Short-Term Investments – Cash equivalents and short-term investments include money market instruments,
commercial paper and other highly liquid debt instruments. Money market instruments are generally valued using unadjusted
quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The fair value of
certain other short-term investments, such as floating rate notes and bonds with original maturities less than twelve months, are
based upon other market observable data and are typically classified as Level 2. However, certain short-term investments may
incorporate significant unobservable inputs resulting in a Level 3 classification. Various time deposits carried as cash equivalents
or short-term investments are not measured at estimated fair value and therefore are excluded from the tables presented.
Equity Securities – Equity securities consist principally of exchange-traded funds and preferred stock of publicly and privately
traded companies. The fair values of publicly traded equity securities are primarily based on quoted market prices in active markets
and are classified within Level 1 in the fair value hierarchy. The fair values of preferred equity securities, for which quoted market
prices are not readily available, are based on prices obtained from independent pricing services and these securities are generally
classified within Level 2 in the fair value hierarchy. Non-binding broker quotes for equity securities are generally based on
significant unobservable inputs and are reflected as Level 3 in the fair value hierarchy.
FVO Contractholder-Directed Unit-Linked Investments – FVO contractholder-directed investments supporting unit-linked variable
annuity type liabilities primarily consist of exchange-traded funds and, to a lesser extent, fixed maturity securities and cash and
cash equivalents. The fair values of the exchange-traded securities are primarily based on quoted market prices in active markets
and are classified within Level 1 of the hierarchy. The fair value of the fixed maturity contractholder-directed securities is determined
on a basis consistent with the methodologies described above for fixed maturity securities and are classified within Level 2 of the
hierarchy.
Derivative Assets and Derivative Liabilities – All of the derivative instruments utilized by the Company are classified within Level
2 on the fair value hierarchy. These derivatives are principally valued using an income approach. Valuations of interest rate contracts
are based on present value techniques, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves,
and repurchase rates. Valuations of foreign currency contracts are based on present value techniques, which utilize significant
inputs that may include the swap yield curve, LIBOR basis curves, currency spot rates, and cross currency basis curves. Valuations
of credit contracts, non-option-based, are based on present value techniques, which utilize significant inputs that may include the
swap yield curve, credit curves, and recovery rates. Valuations of equity market contracts, non-option-based, are based on present
value techniques, which utilize significant inputs that may include the swap yield curve, spot equity index levels, and dividend
yield curves. Valuations of equity market contracts, option-based, are based on option pricing models, which utilize significant
inputs that may include the swap yield curve, spot equity index levels, dividend yield curves, and equity volatility. The Company
does not currently have derivatives included in Level 3 measurement.
Level 3 Measurements and Transfers
As of December 31, 2013 and December 31, 2012, respectively, the Company classified approximately 10.2% and 10.0% of its
fixed maturity securities in the Level 3 category. These securities primarily consist of private placement corporate securities and
bank loans with inactive trading markets. Additionally, the Company has included asset-backed securities with subprime exposure
and mortgage-backed securities with below investment grade ratings in the Level 3 category due to market uncertainty associated
112
with these securities and the Company’s utilization of unobservable information from third parties for the valuation of these
securities.
The significant unobservable inputs used in the fair value measurement of the Company’s corporate, sovereign, government-
backed, and other political subdivision investments are probability of default, liquidity premium and subordination premium.
Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value
measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar
change in the assumptions used for the liquidity premium and subordination premium. For securities with a fair value derived
using the market comparable pricing valuation technique, liquidity premium is the only significant unobservable input.
The significant unobservable inputs used in the fair value measurement of the Company’s asset and mortgage-backed securities
are prepayment rates, probability of default, liquidity premium and loss severity in the event of default. Significant increases
(decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a
change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption
used for the liquidity premium and loss severity and a directionally opposite change in the assumption used for prepayment rates.
The actuarial assumptions used in the fair value of embedded derivatives which include assumptions related to lapses, withdrawals,
and mortality, are based on experience studies performed by the Company in combination with available industry information and
are reviewed on a periodic basis, at least annually. The significant unobservable inputs used in the fair value measurement of
embedded derivatives are assumptions associated with policyholder experience and selected capital market assumptions for equity-
indexed and variable annuities. The selected capital market assumptions, which include long-term implied volatilities, are
projections based on short-term historical information. Changes in interest rates, equity indices, equity volatility, the Company’s
own credit risk, and actuarial assumptions regarding policyholder experience may result in significant fluctuations in the value of
embedded derivatives.
Fair value measurements associated with funds withheld reinsurance treaties are generally not materially sensitive to changes in
unobservable inputs associated with policyholder experience. The primary drivers of change in these fair values are related to
movements of credit spreads, which are generally observable. Increases (decreases) in market credit spreads tend to decrease
(increase) the fair value of embedded derivatives. Increases (decreases) in the own credit assumption tend to decrease (increase)
the magnitude of the fair value of embedded derivatives.
Fair value measurements associated with variable annuity treaties are sensitive to both capital markets inputs and policyholder
experience inputs. Increases (decreases) in lapse rates tend to decrease (increase) the value of the embedded derivatives associated
with variable annuity treaties. Increases (decreases) in the long-term volatility assumption tend to increase (decrease) the fair value
of embedded derivatives. Increases (decreases) in the own credit assumption tend to decrease (increase) the magnitude of the fair
value of embedded derivatives.
The following table presents quantitative information about significant unobservable inputs used in Level 3 fair value measurements
that are developed by the Company, which does not include unobservable Level 3 asset and liability measurements provided by
third parties, as of December 31, 2013 and 2012 (dollars in thousands):
113
December 31, 2013:
Assets:
State and political subdivision securities
Corporate securities
U.S. Government and agencies securities
Valuation
Unobservable
Range
Fair Value
Technique(s)
Input
(Weighted Average)
$
29,024
312,887
37,539
Market comparable
securities
Market comparable
securities
Market comparable
securities
Liquidity premium
1%
Liquidity premium
0-2% (1%)
Liquidity premium
Funds withheld at interest- embedded derivatives
(176,270) Total return swap
Mortality
Lapse
Withdrawal
Own Credit
Crediting rate
Liabilities:
Interest sensitive contract liabilities- embedded
derivatives- indexed annuities
838,670 Discounted cash flow
Mortality
Interest sensitive contract liabilities- embedded
derivatives- variable annuities
30,055 Discounted cash flow
Mortality
Lapse
Withdrawal
Option budget projection
Lapse
Withdrawal
Own Credit
Long-term volatility
December 31, 2012:
Assets:
State and political subdivision securities
Corporate securities
Short-term investments
Valuation
Unobservable
Range
Fair Value
Technique(s)
Input
(Weighted Average)
$
5,451
450,177
22,031
Market comparable
securities
Market comparable
securities
Market comparable
securities
Liquidity premium
1%
Liquidity premium
0-2% (1%)
Liquidity premium
Funds withheld at interest- embedded derivatives
(243,177) Total return swap
Mortality
Lapse
Withdrawal
Own Credit
Crediting rate
Liabilities:
Interest sensitive contract liabilities- embedded
derivatives- indexed annuities
740,256 Discounted cash flow
Mortality
Interest sensitive contract liabilities- embedded
derivatives- variable annuities
172,105 Discounted cash flow
Mortality
Lapse
Withdrawal
Option budget projection
Lapse
Withdrawal
Own Credit
Long-term volatility
0-1% (1%)
0-100% (2%)
0-35% (7%)
0-5% (3%)
0-1% (1%)
2-4% (3%)
0-100% (2%)
0-35% (7%)
0-5% (3%)
2-4% (3%)
0-100% (2%)
0-25% (6%)
0-7% (3%)
0-1% (1%)
0-27% (10%)
1%
0-100% (1%)
0-35% (6%)
0-5% (3%)
0-1% (1%)
2-4% (3%)
0-100% (1%)
0-35% (6%)
0-5% (3%)
2-4% (3%)
0-100% (2%)
0-25% (5%)
0-7% (3%)
0-1% (1%)
0-27% (14%)
The Company recognizes transfers of financial instruments into and out of levels within the fair value hierarchy at the beginning
of the quarter in which the actual event or change in circumstances that caused the transfer occurs. Financial instruments transferred
114
into Level 3 are due to a lack of observable market transactions and price information. Financial instruments are transferred out
of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be
due to a significant increase in market activity for the financial instrument, a specific event, or one or more significant input(s)
becoming observable. Transfers out of Level 3 were primarily the result of the Company using observable pricing information or
a third party pricing quotation that appropriately reflects the fair value of those financial instruments, without the need for adjustment
based on the Company’s own assumptions regarding the characteristics of a specific financial instrument or the current liquidity
in the market. In addition, certain transfers out of Level 3 were also due to increased observations of market transactions and price
information for those financial instruments.
Transfers from Level 1 to Level 2 are due to the lack of observable market data when pricing these securities, while transfers from
Level 2 to Level 1 are due to an increase in the availability of market observable data in an active market. The following tables
present the transfers between Level 1 and Level 2 during the years ended December 31, 2013 and 2012 (dollars in thousands):
Twelve months ended December 31,
2013
2012
Transfers from
Level 1 to
Level 2
Transfers from
Level 2 to
Level 1
Transfers from
Level 1 to
Level 2
Transfers from
Level 2 to
Level 1
Fixed maturity securities - available-for-sale:
Corporate securities
U.S. government and agencies securities
State and political subdivision securities
Other foreign government, supranational and foreign government-
sponsored enterprises
Total fixed maturity securities
Non-redeemable preferred stock
Total
$
$
— $
30,599
$
14,773
$
—
—
—
—
—
—
—
—
30,599
—
—
12,794
3,222
30,789
9,646
— $
30,599
$
40,435
$
4
11,152
—
—
11,156
11,068
22,224
115
The tables below provide a summary of the changes in fair value of Level 3 assets and liabilities for the year ended December 31,
2013, as well as the portion of gains or losses included in income for the year ended December 31, 2013 attributable to unrealized
gains or losses related to those assets and liabilities still held at December 31, 2013 (dollars in thousands):
For the year ended December 31, 2013:
Fixed maturity securities - available-for-sale
Balance January 1, 2013
$
1,668,563
$
93,931
$
232,391
$
167,006
$
4,538
$
43,212
Corporate
securities
Residential
mortgage-
backed
securities
Asset-backed
securities
Commercial
mortgage-
backed
securities
U.S.
Government
and agencies
securities
State
and political
subdivision
securities
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related
expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
Included in other comprehensive income
Purchases(1)
Sales(1)
Settlements(1)
Transfers into Level 3
Transfers out of Level 3
Balance December 31, 2013
Unrealized gains and losses recorded in earnings
for the period relating to those Level 3 assets and
liabilities that were still held at the end of the
period
Included in earnings, net:
(8,194)
(1,078)
—
—
—
(44,299)
331,439
(271,402)
(285,586)
33,776
(77,930)
19
(294)
—
—
—
821
73,563
(7,146)
(26,661)
24,727
(5,455)
6,430
(1,131)
1,917
(16,704)
—
—
—
17,150
264,804
(26,005)
(20,872)
9,031
(9,950)
—
—
—
36,731
19,420
(83,974)
(7,970)
4,081
(18,722)
(156)
(175)
—
—
—
(639)
128
—
(2,633)
44,394
(4,538)
36
(16)
—
—
—
222
—
—
(657)
979
—
$
1,345,289
$
153,505
$
471,848
$
101,785
$
40,919
$
43,776
Investment income, net of related
expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
$
(7,885) $
(202)
—
—
—
47
—
—
—
—
$
6,425
$
1,741
$
(156) $
—
—
—
—
(10,243)
—
—
—
—
—
—
—
36
—
—
—
—
116
For the year ended December 31, 2013
(continued):
Fixed maturity
securities - available-
for-sale
Other foreign
government,
supranational and
foreign government-
sponsored enterprises
Funds withheld
at interest-
embedded
derivative
Short-term
investments
Other invested
assets - non-
redeemable
preferred stock
Interest
sensitive contract
liabilities
embedded
derivative
Balance January 1, 2013
$
28,280
$
(243,177) $
22,031
$
— $
(912,361)
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related
expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
Included in other comprehensive income
Purchases(1)
Sales(1)
Settlements(1)
Transfers into Level 3
Transfers out of Level 3
Balance December 31, 2013
Unrealized gains and losses recorded in earnings
for the period relating to those Level 3 assets and
liabilities that were still held at the end of the
period
Included in earnings, net:
Investment income, net of related
expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
$
$
(305)
—
—
—
—
(1,570)
—
—
(295)
11,887
—
—
66,907
—
—
—
—
—
—
—
—
—
(4)
—
—
—
—
(27)
—
—
(22,000)
—
—
—
—
—
—
—
323
—
—
—
4,639
—
—
142,050
—
(115,409)
—
—
(57,391)
—
74,386
—
—
37,997
$
(176,270) $
— $
4,962
$
(868,725)
(305) $
— $
(4) $
— $
—
—
—
—
66,907
—
—
—
—
—
—
—
—
—
—
—
—
138,683
—
(189,794)
—
(1) The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements)
based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward. The Company
had no issuances during the period.
The tables below provide a summary of the changes in fair value of Level 3 assets and liabilities for the year ended December 31,
2012, as well as the portion of gains or losses included in income for the year ended December 31, 2012 attributable to unrealized
gains or losses related to those assets and liabilities still held at December 31, 2012 (dollars in thousands).
117
For the year ended December 31, 2012:
Fixed maturity securities - available-for-sale
Balance January 1, 2012
$
974,169
$
81,655
$
193,492
$
115,976
$
— $
10,373
Corporate
securities
Residential
mortgage-
backed
securities
Asset-backed
securities
Commercial
mortgage-
backed
securities
U.S.
Government
and agencies
securities
State
and political
subdivision
securities
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related
expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
Included in other comprehensive income
Purchases(1)
Sales(1)
Settlements(1)
Transfers into Level 3
Transfers out of Level 3
Balance December 31, 2012
Unrealized gains and losses recorded in earnings
for the period relating to those Level 3 assets and
liabilities that were still held at the end of the
period
Included in earnings, net:
Investment income, net of related
expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
(6,839)
(2,884)
—
—
—
34,488
853,848
(60,224)
(144,667)
65,283
(44,611)
1,668,563
$
$
431
(311)
—
—
—
2,863
77,781
(48,828)
(8,541)
19,632
(30,751)
93,931
$
1,214
(516)
—
—
—
21,463
111,567
(13,140)
(16,235)
11,832
(77,286)
232,391
$
2,032
(9,503)
—
—
—
24,663
31,699
(14,060)
(813)
64,116
(47,104)
167,006
$
(89)
—
—
—
—
(12)
4,639
—
—
—
—
4,538
$
$
(6,852) $
295
$
1,156
$
2,032
$
(89) $
(1,329)
—
—
—
(269)
—
—
—
(849)
—
—
—
(14,163)
—
—
—
—
—
—
—
14
(16)
—
—
—
4,491
—
—
(413)
37,588
(8,825)
43,212
14
—
—
—
—
118
For the year ended December 31, 2012
(continued):
Fixed maturity
securities - available-
for-sale
Other foreign
government,
supranational and
foreign government-
sponsored enterprises
Funds with
held at
interest-
embedded
derivative
Short-term
investments
Other invested
assets - other
equity
securities
Reinsurance
ceded
receivable -
embedded
derivative
Interest
sensitive
contract
liabilities
embedded
derivative
Balance January 1, 2012
$
— $ (361,456) $
— $
11,489
$
4,945
$ (1,028,241)
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related
expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
Included in other comprehensive income
Purchases(1)
Sales(1)
Settlements(1)
Transfers into Level 3
Transfers out of Level 3
Balance December 31, 2012
Unrealized gains and losses recorded in earnings
for the period relating to those Level 3 assets and
liabilities that were still held at the end of the
period
Included in earnings, net:
Investment income, net of related
expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
$
$
(44)
—
—
—
—
(139)
28,463
—
—
—
—
—
118,279
—
—
—
—
—
—
—
—
—
(11)
—
—
—
—
28
22,014
—
—
—
—
—
1,098
—
—
—
843
108
(3,788)
—
—
(9,750)
—
—
—
—
(449)
—
—
—
—
104,613
770
(31,552)
—
—
(63,934)
—
(4,496)
105,983
—
—
—
—
28,280
$ (243,177) $
22,031
$
— $
— $ (912,361)
(44) $
— $
(11) $
—
—
—
—
118,279
—
—
—
—
—
—
—
— $
(183)
—
—
—
— $
—
—
—
—
97,216
56
(129,828)
(33)
—
(1) The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements)
based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward. The Company
had no issuances during the period.
119
The tables below provide a summary of the changes in fair value of Level 3 assets and liabilities for the year ended December 31,
2011, as well as the portion of gains or losses included in income for the year ended December 31, 2011 attributable to unrealized
gains or losses related to those assets and liabilities still held at December 31, 2011 (dollars in thousands).
For the year ended December 31, 2011:
Fixed maturity securities - available-for-sale
Corporate
securities
Residential
mortgage-
backed
securities
Asset-backed
securities
Commercial
mortgage-
backed
securities
State
and political
subdivision
securities
Other foreign
government,
supranational
and foreign
government -
sponsored
enterprises
Balance January 1, 2011
$
872,179
$
183,291
$
228,558
$
147,556
$
6,983
$
6,736
2
—
—
—
—
4
—
—
—
20
(6,762)
—
—
—
—
—
—
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related
expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
Included in other comprehensive income
Purchases(1)
Sales(1)
Settlements(1)
Transfers into Level 3
Transfers out of Level 3
Balance December 31, 2011
Unrealized gains and losses recorded in earnings
for the period relating to those Level 3 assets and
liabilities that were still held at the end of the
period
Included in earnings, net:
Investment income, net of related
expenses
218
1,863
—
—
—
21,011
305,401
(48,653)
(125,797)
80,302
836
(2,032)
1,686
(10,236)
2,321
(12,354)
—
—
—
4,580
6,478
(21,178)
(16,672)
30,159
—
—
—
3,902
65,467
(27,844)
(24,092)
45,984
(89,933)
—
—
—
8,060
7,683
—
(3,548)
76,955
(110,697)
361
(15)
—
—
—
3,390
2,334
—
(88)
48,469
(51,061)
(132,333)
(103,807)
$
974,191
$
81,655
$
193,492
$
115,976
$
10,373
$
$
162
$
816
$
1,595
$
2,307
$
361
$
Investment related gains (losses), net
(1,223)
(594)
(5,058)
(12,366)
Claims & other policy benefits
Interest credited
Policy acquisition costs and other
insurance expenses
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
120
Funds withheld
at interest-
embedded
derivative
Other invested
assets- non-
redeemable
preferred stock
Other invested
assets- other
equity securities
Reinsurance
ceded receivable-
embedded
derivative
Interest sensitive
contract liabilities
embedded
derivative
$
(274,220) $
420
$
16,416
$
75,431
$
(721,485)
—
(87,236)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(420)
—
—
—
—
3,504
—
—
—
(4,663)
797
(4,565)
—
—
—
—
—
—
—
9,421
—
6,201
—
(86,108)
—
—
—
(224,184)
(2,230)
(88,255)
—
—
(71,505)
—
79,418
—
—
$
(361,456) $
— $
11,489
$
4,945
$
(1,028,241)
For the year ended December 31, 2011 (continued):
Balance January 1, 2011
Total gains/losses (realized/unrealized)
Included in earnings, net:
Investment income, net of related expenses
Investment related gains (losses), net
Claims & other policy benefits
Interest credited
Policy acquisition costs and other insurance
expenses
Included in other comprehensive income
Purchases(1)
Sales(1)
Settlements(1)
Transfers into Level 3
Transfers out of Level 3
Balance December 31, 2011
Unrealized gains and losses recorded in earnings for
the period relating to those Level 3 assets and liabilities
that were still held at the end of the period
Included in earnings, net:
Investment income, net of related expenses
$
— $
— $
— $
— $
Investment related gains (losses), net
(87,236)
Claims & other policy benefits
Interest credited
Policy acquisition costs and other insurance
expenses
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(228,910)
(2,346)
(167,673)
18,589
—
(1) The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements)
based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward. The Company
had no issuances during the period.
Nonrecurring Fair Value Measurements
The following table presents information for assets measured at estimated fair value on a nonrecurring basis during the periods
presented; that is, they are not measured at fair value on a recurring basis but are subject to fair value adjustments only in certain
circumstances (for example, when there is evidence of impairment). The estimated fair values for these assets were determined
using significant unobservable inputs (Level 3).
Years Ended December 31,
2013
2012
Carrying Value
Prior to
Measurement
Estimated Fair
Value After
Measurement
Net
Investment
Gains (Losses)
Carrying Value
Prior to
Measurement
Estimated Fair
Value After
Measurement
Net
Investment
Gains (Losses)
$
9,620
$
10,330
$
710
$
24,295
$
20,480
$
11,615
12,672
8,952
10,508
(2,663)
(2,164)
25,191
6,593
16,944
4,500
(3,815)
(8,247)
(2,093)
Mortgage loans(1)
Limited partnership interests(2)
Real estate investments(3)
(1) Mortgage loans — The impaired mortgage loans presented above were written down to their estimated fair values at the date the impairments were recognized
and are reported as losses above. Subsequent improvements in estimated fair value on previously impaired loans recorded through a reduction in the previously
established valuation allowance are reported as gains above. Nonrecurring fair value adjustments on mortgage loans are based on the fair value of underlying
collateral or discounted cash flows.
(2) Limited partnership interests — The impaired limited partnership interests presented above were accounted for using the cost method. Impairments on these
cost method investments were recognized at estimated fair value determined using the net asset values of the Company’s ownership interest as provided in
the financial statements of the investees. The market for these investments has limited activity and price transparency.
(3) Real estate investments — The impaired real estate investments presented above were written down to their estimated fair value at the date of impairment
and are reported as losses above. The impairments were based on third-party appraisal values obtained and reviewed by the Company.
121
Fair Value of Financial Instruments
The Company is required by general accounting principles for Fair Value Measurements and Disclosures to disclose the fair value
of certain financial instruments including those that are not carried at fair value. The following table presents the carrying amounts
and estimated fair values of the Company’s financial instruments, which were not measured at fair value on a recurring basis, at
December 31, 2013 and December 31, 2012 (dollars in thousands):
Carrying Value
Value
Level 1
Level 2
Level 3
Estimated Fair
Fair Value Measurement Using:
December 31, 2013
Assets:
Mortgage loans on real estate
Policy loans
Funds withheld at interest(1)
Cash and cash equivalents(2)
Short-term investments(2)
Other invested assets(2)
Accrued investment income
$
2,486,680
$
2,489,721
$
1,244,469
5,948,374
552,302
27,823
491,545
267,908
1,244,469
6,207,342
552,302
27,823
534,442
267,908
Liabilities:
Interest-sensitive contract liabilities(1)
Long-term debt
Collateral finance facility
$
10,228,120
$
9,989,514
$
2,214,350
484,752
2,333,023
374,984
December 31, 2012
Assets:
Mortgage loans on real estate
Policy loans
Funds withheld at interest(1)
Cash and cash equivalents(2)
Short-term investments(2)
Other invested assets(2)
Accrued investment income
Liabilities:
$
2,300,587
$
2,426,688
$
1,278,175
5,837,359
684,028
48,951
596,336
201,344
1,278,175
6,362,324
684,028
48,951
626,358
201,344
— $
—
—
552,302
27,823
5,070
—
— $
—
—
— $
—
—
684,028
48,951
—
—
— $
2,489,721
1,244,469
—
—
—
33,886
267,908
— $
—
—
—
6,207,342
—
—
495,486
—
9,989,514
2,333,023
374,984
— $
2,426,688
1,278,175
—
—
—
32,250
201,344
—
6,362,324
—
—
594,108
—
Interest-sensitive contract liabilities(1)
Long-term debt
$
11,566,962
$
11,926,339
$
1,815,253
2,014,062
— $
—
— $
—
11,926,339
2,014,062
Collateral finance facility
456,050
(1) Carrying values presented herein differ from those presented in the consolidated balance sheets because certain items within the respective financial statement
652,010
456,050
—
—
caption are embedded derivatives and are measured at fair value on a recurring basis.
(2) Carrying values presented herein differ from those presented in the consolidated balance sheets because certain items within the respective financial statement
caption are measured at fair value on a recurring basis.
Mortgage Loans on Real Estate – The fair value of mortgage loans on real estate is estimated by discounting cash flows, both
principal and interest, using current interest rates for mortgage loans with similar credit ratings and similar remaining maturities.
As such, inputs include current treasury yields and spreads, which are based on the credit rating and average life of the loan,
corresponding to the market spreads. The valuation of mortgage loans on real estate is considered Level 3 in the fair value hierarchy.
Policy Loans – Policy loans typically carry an interest rate that is adjusted annually based on an observable market index and
therefore carrying value approximates fair value. The valuation of policy loans is considered Level 2 in the fair value hierarchy.
Funds Withheld at Interest – The carrying value of funds withheld at interest approximates fair value except where the funds
withheld are specifically identified in the agreement. When funds withheld are specifically identified in the agreement, the fair
value is based on the fair value of the underlying assets which are held by the ceding company. Ceding companies use a variety
of sources and pricing methodologies, which are not transparent to the Company and may include significant unobservable inputs,
to value the securities that are held in distinct portfolios, therefore the valuation of these funds withheld assets are considered
Level 3 in the fair value hierarchy.
Cash and Cash Equivalents and Short-term Investments – The carrying values of cash and cash equivalents and short-term
investments approximates fair values due to the short-term maturities of these instruments and are considered Level 1 in the fair
value hierarchy.
122
Other Invested Assets – This primarily includes limited partnership interests accounted for using the cost method, structured loans,
FHLB common stock and cash collateral. The fair value of limited partnerships and other investments accounted for using the
cost method is determined using the net asset values of the Company’s ownership interest as provided in the financial statements
of the investees. The valuation of these investments is considered Level 3 in the fair value hierarchy due to the limited activity
and price transparency inherent in the market for such investments. The fair value of structured loans is estimated based on a
discounted cash flow analysis using discount rates applicable to each structured loan, this is considered Level 3 in the fair value
hierarchy. The fair value of the Company’s common stock investment in the Federal Home Loan Bank of Des Moines is considered
to be the carrying value and it is considered Level 2 in the fair value hierarchy. The fair value of the Company's cash collateral
is considered to be the carrying value and considered to be Level 1 in the fair value hierarchy.
Accrued Investment Income – The carrying value for accrued investment income approximates fair value as there are no adjustments
made to the carrying value. This is considered Level 2 in the fair value hierarchy.
Interest-Sensitive Contract Liabilities – The carrying and fair values of interest-sensitive contract liabilities reflected in the table
above exclude contracts with significant mortality risk. The fair value of the Company’s interest-sensitive contract liabilities
utilizes a market standard technique with both capital market inputs and policyholder behavior assumptions, as well as cash values
adjusted for recapture fees. The capital market inputs to the model, such as interest rates, are generally observable. Policyholder
behavior assumptions are generally not observable and may require use of significant management judgment. The valuation of
interest-sensitive contract liabilities is considered Level 3 in the fair value hierarchy.
Long-term Debt and Collateral Finance Facility – The fair value of the Company’s long-term debt and collateral finance facility
is generally estimated by discounting future cash flows using market rates currently available for debt with similar remaining
maturities and reflecting the credit risk of the Company, including inputs when available, from actively traded debt of the Company
or other companies with similar credit quality. The valuation of long-term debt and collateral finance facility are generally obtained
from brokers and are considered Level 3 in the fair value hierarchy.
Note 7 REINSURANCE
The Company generally reports retrocession activity on a gross basis. Amounts paid or deemed to have been paid for reinsurance
are reflected in reinsurance ceded receivables. The cost of reinsurance related to long-duration contracts is recognized over the
terms of the reinsured policies on a basis consistent with the reporting of those policies.
Retrocession reinsurance treaties do not relieve the Company from its obligations to direct writing companies. Failure of
retrocessionaires to honor their obligations could result in losses to the Company. Consequently, allowances would be established
for amounts deemed uncollectible. At December 31, 2013 and 2012, no allowances were deemed necessary. The Company regularly
evaluates the financial condition of the insurance companies from which it assumes and to which it cedes reinsurance.
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.
In the individual life markets, the Company retains a maximum of $8.0 million of coverage per individual life. 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. In certain limited situations the Company has retained more than $8.0 million per individual
policy. The Company enters into agreements with other reinsurers to mitigate the residual risk related to the over-retained policies.
Additionally, due to some lower face amount reinsurance coverages provided by the Company in addition to individual life, such
as group life, disability and health, under certain circumstances, the Company could potentially incur net claims totaling more
than $8.0 million per individual life.
Retrocessions are arranged through the Company’s retrocession pools for amounts in excess of the Company’s retention limit. As
of December 31, 2013 and 2012, all rated retrocession pool participants followed by the A.M. Best Company were rated “A-
(excellent)” or better except one pool member that was rated “B++ (good)” in 2012. The Company verifies retrocession pool
participants’ ratings on a quarterly basis. For a majority of the retrocessionaires that were not rated, security in the form of letters
of credit or trust assets has been given as additional security. In addition, the Company performs annual financial reviews of its
retrocessionaires to evaluate financial stability and performance. In addition to its third party retrocessionaires, various RGA
reinsurance subsidiaries retrocede amounts in excess of their retention to RGA Reinsurance, Parkway Re, RGA Barbados, RGA
Americas, Rockwood Re, Manor Reinsurance, Ltd. (“Manor Re”), RGA Worldwide or RGA Atlantic.
At December 31, 2013, the Company had $594.5 million of ceded reinsurance receivables, of which $359.2 million, or 60.4%,
were with the Company’s four largest ceded reinsurers. Included in the December 31, 2013 total ceded reinsurance receivables
balance were $134.1 million of claims recoverable, of which $4.2 million were in excess of 90 days past due. At December 31,
2012, the Company had $620.9 million of ceded reinsurance receivables, of which $367.5 million, or 59.2%, were with the
Company’s four largest ceded reinsurers. Included in the December 31, 2012 total ceded reinsurance receivables balance were
$156.0 million of claims recoverable, of which $10.4 million were in excess of 90 days past due.
123
The effect of reinsurance on net premiums is as follows (dollars in thousands):
Years ended December 31,
Direct
Reinsurance assumed
Reinsurance ceded
Net premiums
2013
2012
2011
$
$
5,224
$
3,784
$
8,568,222
(319,419)
8,228,811
(325,999)
8,254,027
$
7,906,596
$
2,590
7,701,594
(368,497)
7,335,687
The effect of reinsurance on claims and other policy benefits as follows (dollars in thousands):
Years ended December 31,
Direct
Reinsurance assumed
Reinsurance ceded
Net claims and other policy benefits
2013
2012
2011
$
$
8,078
$
3,694
$
7,515,524
(219,270)
6,912,942
(250,637)
7,304,332
$
6,665,999
$
4,179
6,472,041
(251,037)
6,225,183
The effect of reinsurance on life insurance in force is shown in the following schedule (dollars in millions):
Life Insurance In Force:
December 31, 2013
December 31, 2012
December 31, 2011
Direct
Assumed
Ceded
Net Assumed/Net %
$
77
76
76
$
2,889,804
$
36,830
$
2,927,573
2,664,353
38,048
39,987
2,853,051
2,889,601
2,624,442
101.3%
101.3
101.5
At December 31, 2013 and 2012, respectively, the Company provided approximately $6.8 billion and $6.3 billion of financial
reinsurance, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures, to other insurance
companies under financial reinsurance transactions to assist ceding companies in meeting applicable regulatory requirements.
Generally, such financial reinsurance is provided by the Company committing cash or assuming insurance liabilities, which are
collateralized by future profits on the reinsured business. The Company earns a fee based on the amount of net outstanding financial
reinsurance.
Reinsurance agreements, whether facultative or automatic, may provide for recapture rights on the part of the ceding company.
Recapture rights permit the ceding company to reassume all or a portion of the risk formerly ceded to the reinsurer after an agreed-
upon period of time, generally 10 years, or in some cases due to changes in the financial condition or ratings of the reinsurer.
Recapture of business previously ceded does not affect premiums ceded prior to the recapture of such business, but would reduce
premiums in subsequent periods. Additionally, some treaties give the ceding company the right to request the Company to place
assets in trust for their benefit to support their reserve credits, in the event of a downgrade of the Company’s ratings to specified
levels, generally non-investment grade levels, or if minimum levels of financial condition are not maintained. As of December 31,
2013 and 2012, these treaties had approximately$1,552.3 million and $1,522.1 million, respectively, in statutory reserves. Assets
placed in trust continue to be owned by the Company, but their use is restricted based on the terms of the trust agreement. Securities
with an amortized cost of $2,124.7 million and $2,140.7 million were held in trust to satisfy collateral requirements for reinsurance
business for the benefit of certain RGA subsidiaries at December 31, 2013 and 2012, respectively. In addition, the Company’s
collateral finance facility has asset in trust requirements. See Note 14 – “Collateral Finance Facility” for additional information.
Securities with an amortized cost of $7,842.9 million and $7,549.0 million, as of December 31, 2013 and 2012, respectively, were
held in trust to satisfy collateral requirements under certain third-party reinsurance treaties. Under certain conditions, RGA may
be obligated to move reinsurance from one RGA subsidiary company to another or make payments under the treaty. These conditions
include change in control or ratings of the subsidiary, insolvency, nonperformance under a treaty, or loss of reinsurance license of
such subsidiary.
124
Note 8 DEFERRED POLICY ACQUISITION COSTS
The following reflects the amounts of policy acquisition costs deferred and amortized (dollars in thousands):
As of December 31,
Deferred policy acquisition costs:
Assumed
Retroceded
Net
Years ended December 31,
Balance, beginning of year
Capitalized
Assumed
Retroceded
Amortized (including interest):
Assumed
Allocated to change in value of embedded derivatives
Retroceded
Attributed to unrealized investment gains (losses)
Foreign currency changes
Balance, end of year
$
$
$
2013
2012
3,573,054
(55,258)
3,517,796
$
$
3,677,804
(58,530)
3,619,274
2013
2012
2011
3,619,274
$
3,543,925
$
3,314,715
862,767
(8,604)
(826,539)
(98,141)
11,877
16,181
(59,019)
1,081,599
(11,814)
(975,844)
(42,183)
14,970
(14,938)
23,559
947,014
(13,411)
(820,084)
114,877
14,084
(7,448)
(5,822)
$
3,517,796
$
3,619,274
$
3,543,925
Some reinsurance agreements involve reimbursing the ceding company for allowances and commissions in excess of first-year
premiums. These amounts represent acquisition costs and are capitalized to the extent deemed recoverable from the future premiums
and amortized against future profits of the business. This type of agreement presents a risk to the extent that the business lapses
faster than originally anticipated, resulting in future profits being insufficient to recover the Company’s investment.
Note 9 INCOME TAX
Pre-tax income for the years ended December 31, 2013, 2012 and 2011 consists of the following (dollars in thousands):
Pre-tax income - U.S.
Pre-tax income - foreign
Total pre-tax income
2013
2012
2011
$
$
473,223
162,031
635,254
$
$
644,219
275,004
919,223
$
$
400,278
363,293
763,571
The provision for income tax expense for the years ended December 31, 2013, 2012 and 2011 consists of the following (dollars
in thousands):
Current income tax expense (benefit):
U.S.
Foreign
Total current
Deferred income tax expense (benefit):
U.S.
Foreign
Total deferred
2013
2012
2011
$
(48,831) $
52,378
$
34,470
(14,361)
226,771
4,007
230,778
36,840
89,218
183,929
14,183
198,112
Total provision for income taxes
$
216,417
$
287,330
$
(1,606)
50,138
48,532
155,896
13,098
168,994
217,526
125
Provision for income tax expense 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 for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):
Tax provision at U.S. statutory rate
Increase (decrease) in income taxes resulting from:
Foreign tax rate differing from U.S. tax rate
Differences in tax basis in foreign jurisdictions
Deferred tax valuation allowance
Amounts related to tax audit contingencies
Corporate rate changes - Canada
Corporate rate changes - other
Subpart F
Foreign tax credits
Return to provision adjustments
Other, net
Total provision for income taxes
Effective tax rate
2013
2012
2011
$
222,339
$
321,728
$
267,250
(8,032)
(26,484)
26,507
9,034
(414)
(1,184)
8,255
(1,786)
(12,465)
647
(14,705)
(21,086)
635
2,260
1,374
(1,070)
13,571
(7,808)
(7,351)
(218)
(9,681)
(11,584)
4,147
5,562
(40,593)
(1,933)
9,340
(3,546)
(1,863)
427
$
216,417
$
287,330
$
217,526
34.1%
31.3%
28.5%
The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. The Act retroactively restored
several expired business tax provisions, including the active financing exception. Because a change in tax law is reflected in
operations in the period of enactment, the retroactive effect of the Act on the Company’s U.S. federal taxes for 2012 of a benefit
of $1.0 million was recognized in 2013.
In 2011, the Company recognized an income tax benefit associated with previously enacted reductions in federal statutory tax
rates and adjustments to various provincial statutory tax rates in Canada. This 2007 tax rate change enactment included phased in
effective dates through 2012. These adjustments in tax rates should have been recognized beginning in 2007, when the Canadian
tax legislation was enacted. The Company recorded a cumulative tax benefit adjustment of $30.7 million in 2011 in “Provision
for income taxes” to correct the deferred tax liabilities that were not properly recorded. If the impact of the tax rates had been
recorded in the prior years, the Company estimates that it would have recognized approximately $3.0 million, $6.0 million, $9.0
million and $12.0 million of tax benefit in the years ended 2007, 2008, 2009 and 2010, respectively.
Total income taxes for the years ended December 31, 2013, 2012 and 2011 were as follows (dollars in thousands):
Provision for income taxes
Income tax from OCI and additional paid-in-capital:
Net unrealized holding gain (loss) on debt and equity securities recognized for
financial reporting purposes
Exercise of stock options
Foreign currency translation
Unrealized pension and post retirement
Total income taxes provided
2013
2012
2011
216,417
$
287,330
$
217,526
(467,454)
(3,125)
12,330
7,640
246,682
(2,902)
(921)
(2,779)
(234,192) $
527,410
$
275,975
(4,934)
1,579
(8,581)
481,565
$
$
126
The tax effects of temporary differences that give rise to significant portions of the deferred income tax asset and liabilities at
December 31, 2013 and 2012, are presented in the following tables (dollars in thousands):
Deferred income tax assets:
Nondeductible accruals
Differences between tax and financial reporting amounts concerning certain reinsurance transactions
Differences in the tax basis of cash and invested assets
Investment income differences
Deferred acquisition costs capitalized for tax
Net operating loss carryforward
Differences in foreign currency translation
Capital loss and tax credit carryforwards
Subtotal
Valuation allowance
Total deferred income tax assets
Deferred income tax liabilities:
2013
2012
$
106,587
$
59,942
2,106
108,462
90,187
252,192
—
2,356
621,832
(102,228)
519,604
77,116
17,054
—
109,275
91,886
159,821
621
23,595
479,368
(10,100)
469,268
Deferred acquisition costs capitalized for financial reporting
1,066,351
1,082,394
Differences between tax and financial reporting amounts concerning certain reinsurance transactions
Differences in the tax basis of cash and invested assets
Investment income differences
Differences in foreign currency translation
Total deferred income tax liabilities
Net deferred income tax liabilities
Balance sheet presentation of net deferred income tax liabilities:
Included in other assets
Included in deferred income taxes
Net deferred income tax liabilities
906,197
310,332
12,959
19,704
2,315,543
1,795,939
41,638
1,837,577
1,795,939
$
$
$
637,002
832,940
12,719
—
2,565,055
2,095,787
24,714
2,120,501
2,095,787
$
$
$
As of December 31, 2013, a valuation allowance for deferred tax assets of approximately $102.2 million was provided on the total
deferred tax assets of RGA Holdings Limited, RGA Technology Partners, Inc. ("RTP") Canadian Branch, RTP UK Branch, RGA
International German Branch, RGA International Netherlands Branch, RGA International Poland Branch, Leidsche Verzekering
Maatschappij N.V., RGA Reinsurance Company New Zealand Branch, RGA Reinsurance Company of Australia New Zealand
Branch, RGA Capital Limited (U.K.), a portion of RGA Reinsurance Company of Australia's deferred tax assets and on RGA's
deferred tax asset related to share expense for foreign entities. As of December 31, 2012 a valuation allowance for deferred tax
assets of approximately $10.1 million was provided on the total deferred tax assets of RGA Holdings Limited, RTP Canadian
Branch, RTP UK Branch, RGA International German Branch, RGA International Netherlands Branch, RGA International Poland
Branch, and on RGA's deferred tax asset related to share expense for foreign entities. Of the total valuation allowance, $25.9
million if released will not result in a benefit to operations because the branches are taxed in multiple countries. Any dual tax is
reduced through a foreign tax credit and dual loss utilization is prohibited by the dual consolidated loss rules. The Company
utilizes valuation allowances when it believes, based on the weight of the available evidence, that it is more likely than not that
the deferred income taxes will not be realized.
The earnings of substantially all of the Company’s foreign subsidiaries have been indefinitely reinvested in foreign operations. A
provision of $4.2 million has been made for U.S. taxes on repatriation. No other provision has been made for U.S. tax or foreign
withholding taxes that may be applicable upon any repatriation or sale. The determination of the unrecognized deferred tax liability
for temporary differences related to investments in the Company’s foreign subsidiaries is not practicable. At December 31, 2013
and 2012, the financial reporting basis in excess of the tax basis for which no deferred taxes have been recognized was approximately
$1,154.4 million and $663.9 million, respectively.
During 2013, 2012 and 2011, the Company received federal and foreign income tax refunds of approximately $2.6 million, $16.2
million and $11.1 million, respectively. The Company made cash income tax payments of approximately $113.4 million, $113.2
million and $140.1 million in 2013, 2012 and 2011, respectively. At December 31, 2013 and 2012, the Company recognized gross
deferred tax assets associated with net operating losses of approximately $916.4 million and $555.4 million, respectively, $419.2
million of which will begin to expire in 2025. The remaining net operating losses have either a valuation allowance or indefinite
carryforward periods. However, these net operating losses, other than the net operating losses for which there is a valuation
allowance, are expected to be utilized in the normal course of business during the period allowed for carryforwards and in any
event, are not expected to be lost, due to the application of tax planning strategies that management would utilize.
127
The Company files income tax returns in the U.S. federal jurisdiction 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.
As of December 31, 2013, the Company’s total amount of unrecognized tax benefits was $279.8 million and the total amount of
unrecognized tax benefits that would affect the effective tax rate, if recognized, was $40.0 million. Management believes there
will be no material impact to the Company’s effective tax rate related to unrecognized tax benefits over the next 12 months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the years ended December 31, 2013, 2012
and 2011, is as follows (dollars in thousands):
Beginning balance, January 1
Additions for tax positions of prior years
Reductions for tax positions of prior years
Additions for tax positions of current year
Ending balance, December 31
Total Unrecognized Tax Benefits
2013
2012
2011
245,636
$
194,260
$
182,354
41,228
(10,401)
3,338
47,438
—
3,938
7,968
—
3,938
279,801
$
245,636
$
194,260
$
$
The Company recognized interest expense associated with uncertain tax positions in 2013, 2012 and 2011 of $7.6 million , $9.9
million and $7.1 million, respectively. As of December 31, 2013 and 2012, the Company had $57.3 million and $49.6 million,
respectively, of accrued interest related to unrecognized tax benefits.
Note 10 EMPLOYEE BENEFIT PLANS
Certain subsidiaries of the Company are sponsors or administrators of both qualified and non-qualified defined benefit pension
plans (“Pension Plans”). The largest of these plans is a non-contributory qualified defined benefit pension plan sponsored by RGA
Reinsurance that covers U.S. employees. The benefits under the Pension Plans are generally based on years of service and
compensation levels.
The Company also provides certain health care and life insurance benefits for retired employees. The health care benefits are
provided through a self-insured welfare benefit plan. Employees become eligible for these benefits if they meet minimum age and
service requirements. The retiree’s cost for health care benefits varies depending upon the credited years of service. The Company
recorded benefits expense of approximately $4.1 million, $3.6 million, and $2.5 million in 2013, 2012 and 2011, respectively that
are related to these postretirement plans. Virtually all retirees, or their beneficiaries, contribute a portion of the total cost of
postretirement health benefits. Prepaid benefit costs and accrued benefit liabilities are included in other assets and other liabilities,
respectively, in the Company’s consolidated balance sheets.
A December 31 measurement date is used for all of the defined benefit and postretirement plans. The status of these plans as of
December 31, 2013 and 2012 is summarized below (dollars in thousands):
December 31,
Pension Benefits
Other Benefits
2013
2012
2013
2012
Change in benefit obligation:
Benefit obligation at beginning of year
$
112,759
$
93,101
$
33,953
$
Service cost
Interest Cost
Participant contributions
Actuarial (gains) losses
Benefits paid
Foreign currency rate change effect
8,023
4,072
—
(8,957)
(3,347)
(1,355)
7,531
4,072
—
13,270
(5,776)
561
1,881
1,353
128
(5,949)
(607)
—
Benefit obligation at end of year
$
111,195
$
112,759
$
30,759
$
28,854
1,641
1,246
122
2,341
(251)
—
33,953
128
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Participant contributions
Benefits paid and expenses
Administrative expense
Fair value of plan assets at end of year
Funded status at end of year
December 31,
Pension Benefits
Other Benefits
2013
2012
2013
2012
$
$
$
49,516
$
41,300
$
— $
6,027
7,363
—
(3,347)
—
5,449
8,543
—
(5,776)
—
—
479
128
(607)
—
59,559
$
(51,636) $
49,516
$
(63,243) $
— $
(30,759) $
—
—
129
122
(251)
—
—
(33,953)
Aggregate fair value of plan assets
Aggregate projected benefit
obligations
Under funded
$
$
Qualified Plans
2013
2012
December 31,
Non-Qualified Plans(1)
2012
2013
Total
2013
2012
59,559
$
49,516
$
— $
— $
59,559
$
49,516
63,502
62,397
47,693
50,362
111,195
(3,943) $
(12,881) $
(47,693) $
(50,362) $
(51,636) $
112,759
(63,243)
(1) For non-qualified plans, there are no required funding levels.
December 31,
Pension Benefits
Other Benefits
2013
2012
2013
2012
Amounts recognized in accumulated other comprehensive
income:
Net actuarial loss
Net prior service cost
Total
$
$
22,507
1,981
24,488
$
$
37,314
2,506
39,820
$
$
8,655
—
8,655
$
$
15,472
—
15,472
The following table presents information for qualified and non-qualified pension plans with a projected benefit obligation in
excess of plan assets as of December 31, 2013 and 2012 (dollars in thousands):
Projected benefit obligation
Fair value of plan assets
2013
2012
$
111,195
$
59,559
112,759
49,516
The accumulated benefit obligations for all defined benefit pension plans were $107.7 million and $106.8 million at December 31,
2013 and 2012, respectively. The following table presents information for pension plans with an accumulated benefit obligation
in excess of plan assets as of December 31, 2013 and 2012 (dollars in thousands):
Accumulated benefit obligation
Fair value of plan assets
2013
2012
$
107,722
$
59,559
106,845
49,516
129
The components of net periodic benefit cost and other changes in plan assets and benefit obligations recognized in other
comprehensive income were as follows (dollars in thousands):
Pension Benefits
Other Benefits
2013
2012
2011
2013
2012
2011
Net periodic benefit cost:
Service cost
Interest cost
Expected return on plan assets
Amortization of prior actuarial losses
Amortization of prior service cost
Settlements
Net periodic benefit cost
Other changes in plan assets and benefit
obligations recognized in other
comprehensive income:
Net actuarial (gains) losses
Prior service cost
Amortization of actuarial (gains) losses
Amortization of prior service cost (credit)
Settlements
Foreign exchange translations and other
adjustments
Total recognized in other comprehensive
income
Total recognized in net periodic benefit
cost and other comprehensive income
$
8,023
$
7,531
$
5,985
$
1,881
$
1,641
$
4,072
(3,734)
3,270
373
—
4,072
(3,066)
3,439
376
841
12,004
13,193
(11,250)
—
(3,270)
(373)
—
(439)
10,888
—
(3,439)
(376)
(841)
219
3,916
(2,937)
980
399
—
8,343
18,561
—
(980)
(399)
—
(196)
1,353
1,246
—
868
—
—
—
743
—
—
1,116
1,035
—
353
—
—
4,102
3,630
2,504
(5,949)
—
(868)
—
—
—
2,341
—
(743)
—
—
—
8,348
—
(353)
—
—
—
(15,332)
6,451
16,986
(6,817)
1,598
7,995
$
(3,328) $
19,644
$
25,329
$
(2,715) $
5,228
$
10,499
The Company expects to contribute to the plans $5.7 million in pension benefits and $0.4 million in other benefits during 2014.
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (dollars in thousands):
2014
2015
2016
2017
2018
2019-2023
Pension Benefits
Other Benefits
$
$
5,730
5,860
8,500
7,148
7,936
47,544
431
502
594
685
776
5,388
The estimated net loss and prior service cost for the defined benefit pension plans and post-retirement plans that will be amortized
from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $1.7 million and $0.4
million, respectively.
Assumptions
Weighted average assumptions used to determine the accumulated benefit obligation and net benefit cost or income for the year
ended December 31:
Discount rate used to determine
benefit obligation
Discount rate used to determine net
benefit cost or income
Expected long-term rate of return on
plan assets
Rate of compensation increases
Pension Benefits
Other Benefits
2013
2012
2011
2013
2012
2011
4.45%
3.83%
7.35%
4.21%
3.80%
4.12%
7.75%
4.20%
4.48%
5.22%
7.75%
4.20%
5.05%
4.15%
—%
—%
4.15%
4.50%
—%
—%
4.50%
5.40%
—%
—%
The expected rate of return on plan assets is based on anticipated performance of the various asset sectors in which the plan invests,
weighted by target allocation percentages. Anticipated future performance is based on long-term historical returns of the plan
assets by sector, adjusted for the long-term expectations on the performance of the markets. While the precise expected return
130
derived using this approach may fluctuate from year to year, the policy is to hold this long-term assumption constant as long as it
remains within reasonable tolerance from the derived rate. This process is consistent for all plan assets as all the assets are invested
in mutual funds.
The assumed health care cost trend rates used in measuring the accumulated non-pension post-retirement benefit obligation were
as follows:
Pre-Medicare eligible claims
Medicare eligible claims
December 31,
2013
2012
9% down to 5% in 2017
9% down to 5% in 2016
9% down to 5% in 2017
9% down to 5% in 2015
Assumed health care cost trend rates may have a significant effect on the amounts reported for health care plans. A one-percentage
point change in assumed health care cost trend rates would have the following effects (dollars in thousands):
Effect on total of service and interest cost components
Effect on accumulated postretirement benefit obligation
Plan Assets
One Percent Increase
One Percent Decrease
$
$
869
6,813
$
$
(648)
(5,228)
Target allocations of assets are determined with the objective of maximizing returns and minimizing volatility of net assets through
adequate asset diversification and partial liability immunization. Adjustments are made to target allocations based on the Company’s
assessment of the effect of economic factors and market conditions. The target allocations for plan assets are 60% equity securities
and 40% debt securities as of December 31, 2013 and 2012. The Company’s plan assets are primarily invested in mutual funds.
The mutual funds include holdings of S&P 500 securities, large-cap securities, mid-cap securities, small-cap securities, international
securities, corporate debt securities, U.S. and other government securities, mortgage-related securities and cash.
Equity and debt securities are exposed to various risks, such as interest rate risk, credit risk, and overall market volatility. Due to
the level of risk associated with certain investment securities, changes in the values of investment securities will occur and any
change would affect the amounts reported in the financial statements.
The fair values of the Company’s pension plan assets as of December 31, 2013 and 2012 are summarized below (dollars in
thousands):
Mutual Funds(1)
Cash
Total
December 31, 2013
Fair Value Measurement Using:
Total
Level 1
Level 2
Level 3
$
$
59,485
74
59,559
$
$
59,485
74
59,559
$
$
— $
—
— $
—
—
—
(1) Mutual funds were invested 33% in U.S. equity funds, 26% in U.S. fixed income funds, 25% in non-U.S. equity funds and 16% in other.
Mutual Funds(2)
Cash
Total
December 31, 2012
Fair Value Measurement Using:
Total
Level 1
Level 2
Level 3
$
$
49,456
60
49,516
$
$
49,456
60
49,516
$
$
— $
—
— $
—
—
—
(2) Mutual funds were invested 42% in U.S. equity funds, 39% in U.S. fixed income funds, 16% in non-U.S. equity funds and 3% in other.
As of December 31, 2013 and 2012, the Company classified all of its pension plan assets in the Level 1 category as quoted prices
in active markets are available for these assets. See Note 6 – “Fair Value of Asset and Liabilities” for additional detail on the fair
value hierarchy.
Savings and Investment Plans
Certain subsidiaries of RGA also sponsor saving and investment plans under which a portion of employee contributions are
matched. Subsidiary contributions to these plans, which are partially tied to RGA’s financial results, were $7.3 million, $6.4 million
and $5.1 million in 2013, 2012 and 2011, respectively.
131
Note 11 FINANCIAL CONDITION AND NET INCOME ON A STATUTORY BASIS – SIGNIFICANT SUBSIDIARIES
The domestic and foreign insurance subsidiaries of RGA prepare their statutory financial statements in conformity with statutory
accounting practices prescribed or permitted by the applicable state insurance department or local regulatory authority, which vary
materially from statements prepared in accordance with GAAP. Prescribed statutory accounting practices in the U.S. include
publications of the National Association of Insurance Commissioners (“NAIC”), as well as state laws, local regulations and general
administrative rules. The differences between statutory financial statements and financial statements prepared in accordance with
GAAP vary between jurisdictions. The principal differences between GAAP and NAIC are that statutory financial statements do
not reflect deferred policy acquisition costs and limit deferred tax assets, life benefit reserves predominately use interest rate and
mortality assumptions prescribed by the NAIC and local regulatory agencies, bonds are generally carried at amortized cost and
reinsurance assets and liabilities are presented net of reinsurance.
Statutory net income, and capital and surplus of the Company’s insurance subsidiaries, determined in accordance with statutory
accounting practices prescribed by the applicable state insurance department or local regulatory authority are as follows (dollars
in thousands):
Statutory Capital & Surplus
Statutory Net Income (Loss)
2013
2012
2013
2012
2011
RGA Reinsurance (U.S.)
$
1,550,070
$
1,644,589
$
115,814
$
3,497
$
RCM (U.S.)
RGA Canada
RGA Barbados
RGA Australia
RGA Atlantic
RGA Americas
Other reinsurance subsidiaries
1,633,356
1,692,200
767,108
716,116
406,437
379,889
261,404
1,004,479
725,738
596,388
437,055
449,769
330,064
818,759
109,084
89,428
70,941
(36,548)
(27,159)
50,833
255,418
58,549
95,861
81,942
37,180
91,898
59,531
129,717
37,142
102,229
149,015
47,211
70,160
65,283
(428,049)
(439,625)
Each U.S. domestic insurance subsidiary’s state of domicile imposes minimum risk-based capital (“RBC”) requirements that were
developed by the NAIC. The formulas for determining the amount of RBC specify various weighting factors that are applied to
financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a
ratio of total adjusted capital, as defined by the NAIC, to authorized control level RBC, as defined by the NAIC. Companies below
specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. Each of
RGA’s U.S. domestic insurance subsidiaries exceeded the minimum RBC requirements for all periods presented herein. These
requirements do not represent a significant constraint for the payment of dividends by RGA’s U.S. domestic insurance companies.
The licensing orders of the Company’s special purpose companies stipulate a minimum amount of capital required based on the
purpose of the entity and the underlying business. These companies are subject to enhanced oversight by the regulator which
includes filing detailed plans of operations before commencing operations or making material changes to existing agreements or
entering into new agreements. Each of the Company’s Special Purpose Life Reinsurance Captives (“SPLRC”) exceeded the
minimum capital requirements for all periods presented herein, except for Timberlake Re in 2012. See Note 14 – “Collateral
Finance Facility” for additional information.
The Company’s foreign insurance subsidiaries prepare financial statements in accordance with local regulatory requirements. The
regulatory authorities in these foreign jurisdictions establish some form of minimum regulatory capital and surplus requirements.
All of the Company’s foreign insurance subsidiaries have regulatory capital and surplus that exceed the local minimum
requirements. These requirements do not represent a significant constraint for the payment of dividends by the Company’s foreign
insurance companies.
The state of domicile of certain of the Company’s SPLRCs follow prescribed accounting practices differing from NAIC statutory
accounting practices (“NAIC SAP”) applicable to their statutory financial statements. Specifically, these prescribed practices
require that surplus note interest accrued but not approved for payment be reported as a direct reduction of surplus and an addition
to the surplus note balance. Under NAIC SAP, surplus note interest is not to be reported until approved for payment and is reported
as a reduction of net investment income in the Summary of Operations. In addition, these prescribed practices allow the SPLRC
to reflect letters of credit issued for its benefit as an admitted asset and a direct credit to unassigned surplus. Under NAIC SAP,
letters of credit issued on behalf of the reporting company are not reported on the balance sheet.
132
A reconciliation of the Company’s surplus between NAIC SAP and practices prescribed by the state of domicile is shown below
(dollars in thousands):
Prescribed practice – surplus note
Prescribed practice – letters of credit
Surplus (deficit) – NAIC SAP
December 31,
2013
2012
$
$
343,780
$
(436,300)
(92,520) $
230,291
(488,000)
(257,709)
RCM and RGA Reinsurance are subject to Missouri statutory provisions that restrict the payment of dividends. They may not pay
dividends in any 12-month period in excess of the greater of the prior year’s statutory operating income or 10% of capital and
surplus at the preceding year-end, without regulatory approval. The applicable statutory provisions only permit an insurer to pay
a shareholder dividend from unassigned surplus. Any dividends paid by RGA Reinsurance would be paid to RCM, its parent
company, which in turn has restrictions related to its ability to pay dividends to RGA. The assets of RCM consist primarily of its
investment in RGA Reinsurance. As of January 1, 2014, RCM and RGA Reinsurance could pay maximum dividends, without
prior approval, of approximately $145.9 million and $155.0 million, respectively. The Missouri Department of Insurance, Financial
Institution and Professional Registration, allows RCM to pay a dividend to RGA to the extent RCM received the dividend from
RGA Reinsurance, without limitation related to the level of unassigned surplus. Dividend payments by other subsidiaries are
subject to regulations in the jurisdiction of domicile.
There are no regulatory restrictions that limit the payment of dividends by RGA, except those generally applicable to Missouri
corporations. Dividends are payable by Missouri corporations only under the circumstances specified in The General and Business
Corporation Law of Missouri. RGA would not be permitted to pay common stock dividends if there is any accrued and unpaid
interest on its 6.20% Subordinated Debentures due 2042 and its 6.75% Junior Subordinated Debentures due 2065. Furthermore,
the ability of RGA to pay dividends is dependent on business conditions, income, cash requirements of the Company, receipt of
dividends from its subsidiaries, financial covenant provisions and other relevant factors.
Note 12 COMMITMENTS AND CONTINGENT LIABILITIES
At December 31, 2013, the Company’s commitments to fund investments were $239.5 million in limited partnerships, $4.6 million
in commercial mortgage loans, $22.0 million in private placements and $37.0 million in bank loans, including revolving credit
agreements. At December 31, 2012, the Company’s commitments to fund investments were $176.7 million in limited partnerships,
$22.2 million in commercial mortgage loans and $68.5 million in bank loans, including revolving credit agreements. The Company
anticipates that the majority of its current commitments will be invested over the next five years; however, these commitments
could become due any time at the request of the counterparties. Investments in limited partnerships and private placements are
carried at cost or reported using the equity method and included in other invested assets in the consolidated balance sheets. Bank
loans are carried at fair value and included in fixed maturities available-for-sale.
The Company is subject to litigation in the normal course of its business. The Company currently has no material litigation. A
legal reserve is established when the Company is notified of an arbitration demand or litigation or is notified that an arbitration
demand or litigation is imminent, it is probable that the Company will incur a loss as a result and the amount of the probable loss
is reasonably capable of being estimated.
The Company has obtained bank letters of credit in favor of various affiliated and unaffiliated insurance companies from which
the Company assumes business. These letters of credit represent guarantees of performance under the reinsurance agreements and
allow ceding companies to take statutory reserve credits. Certain of these letters of credit contain financial covenant restrictions.
At December 31, 2013 and 2012, there were approximately $210.3 million and $45.4 million, respectively, of undrawn outstanding
bank letters of credit in favor of third parties. Additionally, the Company utilizes letters of credit primarily to secure reserve credits
when it retrocedes business to its subsidiaries, including Parkway Re, Rockwood Reinsurance Company (“Rockwood Re”),
Timberlake Financial, RGA Americas, RGA Barbados and RGA Atlantic. The Company cedes business to its affiliates to help
reduce the amount of regulatory capital required in certain jurisdictions such as the U.S. and the United Kingdom. As of
December 31, 2013 and 2012, $995.5 million and $763.5 million, respectively, in undrawn letters of credit from various banks
were outstanding, primarily backing reinsurance between the various subsidiaries of the Company. The banks providing letters of
credit to the Company are included on the NAIC list of approved banks.
133
The Company maintains seven credit facilities, a syndicated revolving credit facility with a capacity of $850.0 million and six
letter of credit facilities with a combined capacity of $880.9 million. The Company may borrow cash and obtain letters of credit
in multiple currencies under its syndicated revolving credit facility. The following table provides additional information on the
Company’s credit facilities as of December 31, 2013 and 2012 (dollars in millions):
Amount Utilized(1)
December 31,
Facility Capacity
Maturity Date
2013
2012
Basis of Fees
$
850.0 December 2015
$
67.6
$
200.0
September 2019
120.0 May 2016
270.0 November 2017
100.0
June 2017
58.4 November 2014
132.5 March 2019
200.0
85.1
270.0
89.4
58.4
132.5
402.9
200.0
100.0
Senior unsecured long-term debt rating
Fixed
Fixed
— Fixed
— Fixed
— Fixed
— Fixed
(1) Represents issued but undrawn letters of credit. There was no cash borrowed for the periods presented.
Fees associated with the Company’s other letters of credit are not fixed for periods in excess of one year and are based on the
Company’s ratings and the general availability of these instruments in the marketplace. Total fees expensed associated with the
Company’s letters of credit were $9.8 million, $7.3 million and $4.9 million for the years ended December 31, 2013, 2012 and
2011, respectively, and are included in policy acquisition costs and other insurance expenses.
RGA has issued guarantees to third parties on behalf of its subsidiaries for the payment of amounts due under certain reinsurance
treaties, securities borrowing arrangements, financing arrangements and office lease obligations, whereby if a subsidiary fails to
meet an obligation, RGA or one of its other subsidiaries will make a payment to fulfill the obligation. In limited circumstances,
treaty guarantees are granted to ceding companies in order to provide them additional security, particularly in cases where RGA’s
subsidiary is relatively new, unrated, or not of a significant size, relative to the ceding company. Liabilities supported by the treaty
guarantees, before consideration for any legally offsetting amounts due from the guaranteed party, totaled $826.9 million and
$686.0 million as of December 31, 2013 and 2012, respectively, and are reflected on the Company’s consolidated balance sheets
in future policy benefits. As of December 31, 2013 and 2012, the Company’s exposure related to treaty guarantees, net of assets
held in trust, was $647.9 million and $463.5 million, respectively. Potential guaranteed amounts of future payments will vary
depending on production levels and underwriting results. Guarantees related to borrowed securities provide additional security to
third parties should a subsidiary fail to return the borrowed securities when due. As of December 31, 2013 and 2012, RGA’s
obligation related to borrowed securities guarantees was $93.0 million and $87.5 million, respectively. There were no amounts
guaranteed under financing arrangements as of December 31, 2013 and 2012. RGA has issued payment guarantees on behalf of
two of its subsidiaries in the event the subsidiaries fail to make payment under their office lease obligations, the exposure of which
was $8.3 million and $10.1 million as of December 31, 2013 and 2012, respectively.
Manor Re has obtained $300.0 million of collateral financing through 2020 from an international bank which enabled Manor Re
to deposit assets in trust to support statutory reserve credit for an affiliated reinsurance transaction. The bank has recourse to RGA
should Manor Re fail to make payments or otherwise not perform its obligations under this financing.
RGA, through wholly-owned subsidiaries, has committed to provide statutory reserve support to third-parties through 2035, in
exchange for a fee, by funding loans if certain defined events occur. Such statutory reserves are required under the U.S. Valuation
of Life Policies Model Regulation (commonly referred to as Regulation XXX for term life insurance policies and Regulation A-
XXX for universal life secondary guarantees). The third-parties have recourse to RGA should the subsidiary fail to provide the
required funding, however, as of December 31, 2013, the Company does not believe that it will be required to provide any funding
under these commitments as the occurrence of the defined events is considered remote. The following table presents information
about these commitments (dollars in millions):
Commitment Period
2026
2033
2035
2036
Maximum Potential Obligation
2013
2012
$
500.0
$
1,350.0
—
1,250.0
—
—
560.0
—
In addition, the Company indemnifies its directors and officers as provided in its charters and by-laws. Since this indemnity
generally is not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine
the maximum potential amount due under this indemnity in the future.
134
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 along with associated sublease
income at December 31, 2013 are as follows (dollars in thousands):
2014
2015
2016
2017
2018
Thereafter
Operating
Leases
Sublease
Income
$
16,905
$
10,862
8,434
5,638
4,466
15,489
827
827
776
160
—
—
Rent expenses amounted to approximately $18.5 million, $19.5 million and $18.8 million for the years ended December 31, 2013,
2012 and 2011, respectively.
Note 13 DEBT
The Company’s long-term debt consists of the following (dollars in thousands):
$400 million 6.20% Subordinated Debentures due 2042
$400 million 6.75% Junior Subordinated Debentures due 2065
$400 million 4.70% Senior Notes due 2023
$400 million 5.00% Senior Notes due 2021
$400 million 6.45% Senior Notes due 2019
$300 million 5.625% Senior Notes due 2017
Long-term Debt
2013
2012
400,000
$
318,729
398,533
398,362
399,602
299,124
400,000
318,727
—
398,141
399,534
298,851
2,214,350
$
1,815,253
$
$
On September 19, 2013, RGA issued 4.70% Senior Notes due September 15, 2023 with a face amount of $400.0 million. These
senior notes have been registered with the Securities and Exchange Commission. The net proceeds from the offering were
approximately $395.1 million and will be used for general corporate purposes. Capitalized issue costs were approximately$3.4
million.
On August 21, 2012, RGA issued 6.20% Fixed-To-Floating Rate Subordinated Debentures due September 15, 2042 with a face
amount of $400.0 million. These subordinated debentures have been registered with the Securities and Exchange Commission.
The net proceeds from the offering were approximately $393.7 million and will be used for general corporate purposes. Capitalized
issue costs were approximately $6.3 million.
On March 4, 2011, RGA completed the remarketing of approximately 4.5 million trust preferred securities with an aggregate
accreted value of approximately $158.2 million that were initially issued as a component of its PIERS Units. When issued, each
PIERS Unit initially consisted of a preferred security and a warrant to purchase at any time prior to December 15, 2050, 1.2508
shares of RGA common stock. Approximately 4.4 million of the warrants were exercised on March 4, 2011, at a price of $35.44
per warrant, resulting in the issuance of approximately 5.5 million shares. The warrant exercise price was paid to RGA. Remaining
warrants were redeemed in cash at their redemption amount of $14.56 per warrant. As a result of the remarketing, the remarketed
preferred securities had a fixed accreted value of $35.44 per security with a fixed annual distribution rate of 2.375% and were
repaid on June 5, 2011, the revised maturity date. In the first quarter of 2011, RGA recorded a $4.4 million pre-tax loss, included
in other operating expenses, related to the recognition of the unamortized issuance costs of the original preferred securities.
On May 27, 2011, RGA issued 5.00% Senior Notes due June 1, 2021 with a face amount of $400.0 million. These senior notes
have been registered with the Securities and Exchange Commission. The net proceeds from the offering were approximately
$394.4 million and were used to fund the payment of the RGA’s $200.0 million senior notes that matured in December 2011 and
for general corporate purposes. Capitalized issue costs were approximately $3.4 million.
The Company may borrow up to $850.0 million in cash and obtain letters of credit in multiple currencies on its revolving credit
facility that expires in December 2015. As of December 31, 2013 and 2012, respectively, the Company had no cash borrowings
outstanding and $67.6 million and $402.9 million in issued, but undrawn, letters of credit under this facility. As of December 31,
2013 and 2012, the average interest rate on long-term debt outstanding was 5.76% and 5.99%, respectively.
Certain of the Company’s debt agreements contain financial covenant restrictions related to, among others, liens, the issuance and
disposition of stock of restricted subsidiaries, minimum requirements of consolidated net worth, maximum ratios of debt to
capitalization and change of control provisions. A material ongoing covenant default could require immediate payment of the
amount due, including principal, under the various agreements. Additionally, the Company’s debt agreements contain cross-default
135
covenants, which would make outstanding borrowings immediately payable in the event of a material uncured covenant default
under any of the agreements, including, but not limited to, non-payment of indebtedness when due for an amount in excess of
$100.0 million, bankruptcy proceedings, or any other event which results in the acceleration of the maturity of indebtedness. As
of December 31, 2013 and 2012, the Company had $2,214.4 million and $1,815.3 million, respectively, in outstanding borrowings
under its debt agreements and was in compliance with all covenants under those agreements. The ability of the Company to make
debt principal and interest payments depends on the earnings and surplus of subsidiaries, investment earnings on undeployed
capital proceeds, and the Company’s ability to raise additional funds. Repayments of debt due over the next five years total $300.0
million, due 2017.
Note 14 COLLATERAL FINANCE FACILITY
In June 2006, RGA’s subsidiary, Timberlake Financial L.L.C. (“Timberlake Financial”), issued $850.0 million of Series A Floating
Rate Insured Notes due June 2036 in a private placement. The notes were issued to fund the collateral requirements for statutory
reserves required by the U.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX) on specified
term life insurance policies reinsured by RGA Reinsurance and retroceded to Timberlake Re. Proceeds from the notes, along with
a $112.8 million direct investment by the Company, were deposited into a series of accounts that collateralize the notes and are
not available to satisfy the general obligations of the Company. As of December 31, 2013 and 2012, respectively, the Company
held assets in trust and in custody of $913.5 million and $909.2 million, of which $20.5 million and $33.2 million were held in a
Debt Service Coverage account to cover interest payments on the notes. Interest on the notes accrues at an annual rate of 1-month
LIBOR plus a base rate margin, payable monthly and totaled $5.1 million, $6.9 million and $7.1 million in 2013, 2012 and 2011,
respectively. The payment of interest and principal on the notes is insured through a financial guaranty insurance policy by a
monoline insurance company whose parent company emerged from Chapter 11 bankruptcy in 2013. The notes represent senior,
secured indebtedness of Timberlake Financial without legal recourse to RGA or its other subsidiaries.
Timberlake Financial relies primarily upon the receipt of interest and principal payments on a surplus note and dividend payments
from its wholly-owned subsidiary, Timberlake Re, a South Carolina captive insurance company, to make payments of interest and
principal on the notes. The ability of Timberlake Re to make interest and principal payments on the surplus note and dividend
payments to Timberlake Financial is contingent upon the South Carolina Department of Insurance’s regulatory approval. As of
December 31, 2013 and 2012, respectively, Timberlake Re’s capital and surplus totaled $51.5 million and $33.1 million. Timberlake
Re's capital and surplus is expected to remain above $35.0 million. Since Timberlake Re’s capital and surplus previously fell below
the minimum requirement in its licensing order of $35.0 million, it has been required, since the second quarter of 2011, to request
approval on a quarterly rather than annual basis and provide additional scenario testing results. Approval to pay interest on the
surplus note was granted through March 28, 2014.
During 2013, the Company repurchased $160.0 million face amount of the Timberlake Financial notes for $112.0 million, which
was the market value at the date of the purchase. The notes were purchased by RGA Reinsurance. As a result, the Company
recorded pre-tax gains of $46.5 million, after fees, in other revenues in 2013.
During 2011, the Company repurchased $198.5 million face amount of the Timberlake Financial notes for $130.8 million, which
was the market value at the date of the purchases. The notes were purchased by RGA Reinsurance. As a result, the Company
recorded pre-tax gains of $65.6 million, after fees, in other revenues in 2011.
The Company’s consolidated balance sheets include the assets of Timberlake Financial, a wholly-owned subsidiary, recorded as
fixed maturity investments and other invested assets, which consists of restricted cash and cash equivalents, with the liability for
the notes recorded as collateral finance facility. The Company’s consolidated statements of income include the investment return
of Timberlake Financial as investment income and the cost of the facility is reflected in collateral finance facility expense.
Note 15 SEGMENT INFORMATION
The Company has five geographic-based or function-based operational segments: U.S., Canada, Europe & South Africa, Asia
Pacific and Corporate and Other. The U.S. segment is further segmented into traditional and non-traditional businesses, with the
prior years reclassified to conform to the current year presentation. The U.S. operations provide individual life, long-term care,
group life and health reinsurance, annuity and financial reinsurance products. The Canada operations provide insurers with
reinsurance of individual life products as well as creditor reinsurance, group life and health reinsurance, non-guaranteed critical
illness products and longevity reinsurance. 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. Corporate and Other
includes results from, among others, RGA Technology Partners, Inc., a wholly-owned subsidiary that develops and markets
technology solutions for the insurance industry and the investment income and expense associated with the Company’s collateral
finance facility. The Company measures segment performance based on income before income taxes.
136
The accounting policies of the segments are the same as those described in Note 2 – “Summary of Significant Accounting Policies.”
The Company measures segment performance primarily based on profit or loss from operations before income taxes. There are
no intersegment reinsurance 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 allocates capital to its segments based on an internally developed economic 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 the Company’s businesses. As a result of the economic capital allocation
process, a portion of investment income and investment related gains and losses are attributed to the segments based on the level
of allocated capital. 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’s reportable segments are strategic business units that are primarily segregated by geographic region. Information
related to revenues, income (loss) before income taxes, interest expense, depreciation and amortization, and assets of the Company’s
operations are summarized below (dollars in thousands).
For the years ended December 31,
Revenues:
U.S. Traditional
U.S. Non-Traditional
Canada
Europe & South Africa
Asia Pacific
Corporate and Other
Total
For the years ended December 31,
Income (loss) before income taxes:
U.S. Traditional
U.S. Non-Traditional
Canada
Europe & South Africa
Asia Pacific
Corporate and Other
Total
Interest expense:
Corporate and Other
Total
For the years ended December 31,
Depreciation and amortization:
U.S. Traditional
U.S. Non-Traditional
Canada
Europe & South Africa
Asia Pacific
Corporate and Other
Total
$
$
$
$
$
2013
2012
2011
$
5,068,632
$
4,846,515
$
962,818
1,185,017
1,421,488
1,541,459
138,939
876,119
1,140,264
1,372,291
1,495,545
110,177
10,318,353
$
9,840,911
$
2013
2012
2011
371,563
$
368,095
$
245,649
164,318
89,122
(235,211)
(187)
268,315
186,971
73,947
45,378
(23,483)
$
635,254
$
919,223
$
4,522,751
392,304
1,056,031
1,249,859
1,430,414
178,179
8,829,538
363,964
61,673
164,953
83,102
42,234
47,645
763,571
124,307
124,307
$
$
105,348
105,348
$
$
102,638
102,638
2013
2012
2011
563,440
$
555,573
$
213,745
193,878
56,302
56,724
3,490
225,910
182,914
69,718
154,362
4,040
513,673
(46,407)
168,874
58,714
191,957
9,002
895,813
$
1,087,579
$
1,192,517
$
137
The loss before income taxes for the year ended December 31, 2013 in the Asia Pacific segment reflects an increase in Australian
group claims liabilities related to total and permanent disability coverage and disability income benefits as well as poor claims
experience in the Australian operation's individual lump sum and individual disability businesses.
For the years ended December 31,
2013
2012
2011
The table above includes amortization of deferred acquisition costs, including the effect from investment related gains and losses.
For the years ended December 31,
Assets:
U.S. Traditional
U.S. Non-Traditional
Canada
Europe & South Africa
Asia Pacific
Corporate and Other
Total
2013
2012
$
13,213,585
$
11,716,908
4,103,730
2,476,593
3,423,269
4,740,388
12,555,467
12,368,896
3,764,002
2,235,199
3,208,732
6,228,142
$
39,674,473
$
40,360,438
Companies in which RGA has significant influence over the operating and financing decisions but are not required to be
consolidated, are reported on the equity basis of accounting. The equity in the net income of such subsidiaries is not material to
the results of operations or financial position of individual segments or the Company taken as a whole. Capital expenditures of
each reporting segment were immaterial in the periods noted.
No individual client generated 10% or more of the Company’s total gross premiums on a consolidated basis in 2013, 2012 and
2011. For the purpose of this disclosure, companies that are within the same insurance holding company structure are combined.
Note 16 EQUITY BASED COMPENSATION
The Company adopted the RGA Flexible Stock Plan (the “Plan”) in February 1993, as amended, and the Flexible Stock Plan for
Directors (the “Directors Plan”) in January 1997, as amended, (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. As of December 31, 2013, shares authorized for the granting
of Benefits under the Plan and the Directors Plan totaled 13,360,077 and 212,500 respectively. The Company uses treasury shares
or shares made available from authorized but unissued shares to support the future exercise of options or settlement of awards
granted under its stock plans.
Equity-based compensation expense of $20.3 million, $28.5 million, and $23.1 million related to grants or awards under the Stock
Plans was recognized in 2013, 2012 and 2011, respectively. Equity-based compensation expense is principally related to the
issuance of stock options, performance contingent restricted units, stock appreciation rights and restricted stock.
In general, options granted under the Plan become exercisable over vesting periods ranging from one to five years while options
granted under the Directors Plan become exercisable after one year. Options are generally granted with an exercise price equal to
the stock’s fair value at the date of grant and expire 10 years after the date of grant. Information with respect to grants under the
Stock Plans follows.
Outstanding January 1, 2011
Granted
Exercised / Lapsed
Forfeited
Outstanding December 31, 2011
Granted
Exercised / Lapsed
Forfeited
Outstanding December 31, 2012
Granted
Exercised / Lapsed
Forfeited
Outstanding December 31, 2013
Options exercisable
Stock Options
Number of
Options
Weighted-Average
Exercise Price
Aggregate Intrinsic
Value (in millions)
Performance
Contingent Units
3,382,316
503,259
$
$
(736,452) $
(42,243) $
3,106,880
685,331
$
$
(287,485) $
(50,331) $
3,454,395
748,577
$
$
(811,684) $
(40,028) $
3,351,260
2,228,677
$
$
41.91
59.74
35.26
45.50
46.30
56.65
29.96
52.89
49.63
58.77
44.89
53.85
52.77
50.64
$
$
20.1
18.1
701,542
222,580
(146,638)
(21,818)
755,666
257,679
(282,035)
(25,980)
705,330
261,322
(224,377)
(29,934)
712,341
The intrinsic value of options exercised was $11.3 million, $11.2 million, and $12.5 million for 2013, 2012 and 2011, respectively.
138
Range of Exercise Prices
$25.00 - $34.99
$35.00 - $44.99
$45.00 - $54.99
$55.00 +
Totals
Options Outstanding
Options Exercisable
Number
Outstanding as
of 12/31/2013
Weighted-Average
Remaining
Contractual Life (years)
Weighted-
Average Exercise
Price
Number
Exercisable as of
12/31/2013
Weighted-Average
Exercise Price
430,897
726
621,030
2,298,607
3,351,260
5.0
$
— $
4.5
7.2
6.4
$
$
$
32.20
39.61
47.20
58.13
52.77
430,897
726
498,191
1,298,863
2,228,677
$
$
$
$
$
32.20
39.61
47.25
58.07
50.64
The Black-Scholes model was used to determine the fair value recognized in the financial statements of stock options that have
been granted. The Company used daily historical volatility when calculating stock option values. The benchmark rate is based on
observed interest rates for instruments with maturities similar to the expected term of the stock options. Dividend yield is determined
based on historical dividend distributions compared to the price of the underlying common stock as of the valuation date and held
constant over the life of the stock options. The Company estimated expected life using the historical average years to exercise or
cancellation. The per share weighted-average fair value of stock options granted during 2013, 2012 and 2011 was $18.58, $19.65
and $22.73 on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
2013-expected dividend yield of 1.63%, benchmark interest rate of 1.36%, expected life of 6.8 years, and an expected rate of
volatility of the stock of 35.4% over the expected life of the options; 2012—expected dividend yield of 1.27%, benchmark interest
rate of 1.38%, expected life of 6.7 years, and an expected rate of volatility of the stock of 37.2% over the expected life of the
options; and 2011- expected dividend yield of 0.80%, benchmark interest rate of 2.81%, expected life of 6.7 years, and an expected
rate of volatility of the stock of 35.0% over the expected life of the options.
During 2013, 2012 and 2011 the Company also issued 261,322, 257,679 and 222,580 performance contingent units (“PCUs”) to
key employees at a weighted average fair value per unit of $58.77, $56.65 and $59.74, respectively. As of December 31, 2013,
257,628, 247,147 and 207,566 PCUs were outstanding from the 2013, 2012 and 2011 grants, respectively. Each PCU represents
the right to receive up to two shares of Company common stock, depending on the results of certain performance measures over
a three-year period. The compensation expense related to the PCUs is recognized ratably over the requisite performance period.
In February 2013 and 2012, the board approved a 1.513 and 1.31 share payout for each PCU granted in 2010 and 2009, resulting
in the issuance of 339,483 and 362,642 shares of common stock from treasury, respectively.
As of December 31, 2013, the total compensation cost of non-vested awards not yet recognized in the financial statements was
$27.3 million. It is estimated that these costs will vest over a weighted average period of 1.9 years.
The majority of the awards granted each year under the board approved incentive compensation package and Directors Plan are
made in the first quarter of each year.
Note 17 EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share on net income (in thousands, except per
share information):
Earnings:
Net income (numerator for basic and diluted calculations)
Shares:
Weighted average outstanding shares (denominator for basic calculations)
Equivalent shares from outstanding stock options
Diluted shares (denominator for diluted calculations)
Earnings per share:
Basic
Diluted
2013
2012
2011
$
$
$
418,837
$
631,893
$
546,045
71,917
544
72,461
73,737
416
74,153
5.82
5.78
$
$
8.57
8.52
$
$
73,586
522
74,108
7.42
7.37
The calculation of common equivalent shares does not include the impact of options having a strike or conversion price that
exceeds the average stock price for the earnings period, as the result would be antidilutive. The calculation of common equivalent
shares also excludes the impact of outstanding performance contingent shares, as the conditions necessary for their issuance have
not been satisfied as of the end of the reporting period. During 2013, all outstanding options were included in the calculation of
common equivalent shares. Approximately 1.8 million and 1.1 million outstanding stock options were not included in the calculation
of common equivalent shares during 2012 and 2011, respectively. Approximately 0.7 million, 0.7 million and 0.8 million
performance contingent shares were excluded from the calculation of common equivalent shares during 2013, 2012 and 2011,
respectively.
139
Note 18 COMPREHENSIVE INCOME
The following table presents the components of the Company’s other comprehensive income (loss) for the years ended
December 31, 2013, 2012 and 2011 (dollars in thousands):
For the year ended December 31, 2013:
Foreign currency translation adjustments:
Change arising during year
Foreign currency swap
Net foreign currency translation adjustments
Unrealized gains on investments:(1)
Unrealized net holding gains arising during the year
Less: Reclassification adjustment for net gains realized in net income
Net unrealized gains
Change in unrealized other-than-temporary impairments on fixed maturity
securities
Unrealized pension and postretirement benefits:
Net prior service cost arising during the year
Net loss arising during the period
Unrealized pension and postretirement benefits, net
Other comprehensive income (loss)
For the year ended December 31, 2012:
Foreign currency translation adjustments:
Change arising during year
Foreign currency swap
Net foreign currency translation adjustments
Unrealized gains on investments:(1)
Unrealized net holding gains arising during the year
Less: Reclassification adjustment for net gains realized in net income
Net unrealized gains
Change in unrealized other-than-temporary impairments on fixed maturity
securities
Unrealized pension and postretirement benefits:
Net prior service cost arising during the year
Net loss arising during the period
Unrealized pension and postretirement benefits, net
Other comprehensive income
For the year ended December 31, 2011:
Foreign currency translation adjustments:
Change arising during year
Foreign currency swap
Net foreign currency translation adjustments
Unrealized gains on investments:(1)
Unrealized net holding gains arising during the year
Less: Reclassification adjustment for net gains realized in net income
Net unrealized gains
Change in unrealized other-than-temporary impairments on fixed maturity
securities
Unrealized pension and postretirement benefits:
Net prior service cost arising during the year
Net gain arising during the period
Unrealized pension and postretirement benefits, net
Other comprehensive income
$
$
$
$
$
$
Before-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
(88,409) $
40,347
(48,062)
1,791
$
(14,121)
(12,330)
(1,519,967)
9,355
(1,529,322)
4,456
525
21,624
22,149
465,740
(3,274)
469,014
(1,560)
(171)
(7,469)
(7,640)
(86,618)
26,226
(60,392)
(1,054,227)
6,081
(1,060,308)
2,896
354
14,155
14,509
(1,550,779) $
447,484
$
(1,103,295)
Before-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
57,229
$
(20,470)
36,759
(6,244) $
7,165
921
786,449
91,327
695,122
9,899
298
(8,347)
(8,049)
(275,181)
(31,964)
(243,217)
(3,465)
(95)
2,874
2,779
733,731
$
(242,982) $
50,985
(13,305)
37,680
511,268
59,363
451,905
6,434
203
(5,473)
(5,270)
490,749
Before-Tax Amount
Tax (Expense) Benefit
After-Tax Amount
(28,779) $
4,858
(23,921)
1,118,586
72,841
1,045,745
(1,901)
460
(25,441)
(24,981)
994,942
$
121
$
(1,700)
(1,579)
(302,134)
(25,494)
(276,640)
665
(185)
8,766
8,581
(268,973) $
(28,658)
3,158
(25,500)
816,452
47,347
769,105
(1,236)
275
(16,675)
(16,400)
725,969
(1)
Includes cash flow hedges. See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.
140
A summary of the components of net unrealized appreciation (depreciation) of balances carried at fair value is as follows (dollars
in thousands):
For the years ended December 31,
Change in net unrealized appreciation (depreciation) on:
Fixed maturity securities available-for-sale
Other investments(1)
Effect on unrealized appreciation on:
Deferred policy acquisition costs
Net unrealized appreciation (depreciation)
2013
2012
2011
$
$
(1,528,773) $
(12,274)
16,181
(1,524,866) $
713,778
$
6,181
(14,938)
705,021
$
1,058,505
(7,213)
(7,448)
1,043,844
(1)
Includes cash flow hedges. See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.
The balance of and changes in each component of AOCI were as follows (dollars in thousands):
Accumulated
Currency
Translation
Adjustments
Unrealized
Appreciation
(Depreciation)
of Investments
Pension and
Postretirement
Benefits
Accumulated
Other
Comprehensive
Income (Loss)
$
267,475
$
1,877,657
$
(36,230) $
—
—
—
11,577
2,932
2,108,902
(60,392)
(1,063,377)
2,896
11,577
6,001
(21,721) $
1,005,607
(30,960) $
1,618,153
—
—
—
(5,270)
37,680
451,905
6,434
(5,270)
(36,230) $
2,108,902
(14,560) $
—
—
—
892,184
(25,500)
769,105
(1,236)
(16,400)
(30,960) $
(16,400)
1,618,153
For the year ended December 31, 2013
Balance, beginning of year
Change in foreign currency translation adjustments
Unrealized gain (loss) on investments(1)
Change in other-than-temporary impairment losses on
fixed maturity securities
Changes in pension and other postretirement plan
adjustments
Amounts reclassified from AOCI
Balance, end of year
For the year ended December 31, 2012
Balance, beginning of year
Change in foreign currency translation adjustments
Unrealized gain on investments(1)
Change in other-than-temporary impairment losses on
fixed maturity securities
Changes in pension and other postretirement plan
adjustments
Balance, end of year
For the year ended December 31, 2011
Balance, beginning of year
Change in foreign currency translation adjustments
Unrealized gain on investments(1)
Change in other-than-temporary impairment losses on
fixed maturity securities
Changes in pension and other postretirement plan
adjustments
Balance, end of year
(60,392)
—
—
—
—
$
$
$
$
207,083
229,795
37,680
—
—
—
267,475
255,295
(25,500)
—
—
—
—
(1,063,377)
2,896
—
3,069
820,245
1,419,318
—
451,905
6,434
—
1,877,657
651,449
—
769,105
(1,236)
—
$
$
$
$
229,795
$
1,419,318
$
$
$
$
$
$
(1)
Includes cash flow hedges. See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.
141
The following table presents the amounts of AOCI reclassifications for the year ended December 31, 2013 (dollars in thousands):
Details about AOCI Components
Amount Reclassified from AOCI
Income
Affected Line Item in Statement of
Unrealized gains and losses on available-for-sale securities
Gains and losses on cash flow hedge - interest rate swap
Deferred policy acquisition costs attributed to unrealized gains and losses(1)
Amortization of unrealized pension and postretirement benefits:
Prior service cost(2)
Actuarial gains/(losses)(2)
Total reclassifications for the period
$
$
$
$
$
9,355
Investment related gains (losses),
net
1,012
Investment income
(16,181)
(5,814) Total before tax
2,745 Tax expense
(3,069) Net of tax
(373)
(4,138)
(4,511) Total before tax
1,579 Tax benefit
(2,932) Net of tax
(6,001) Net of tax
(1) This AOCI component is included in the computation of the deferred policy acquisition cost. See Note 8 – “Deferred Policy Acquisition Costs” for
additional details.
(2) These AOCI components are included in the computation of the net periodic pension cost. See Note 10 – “Employee Benefit Plans” for additional details.
Note 19 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Years Ended December 31,
(in thousands, except per share data)
2013
Total Revenues
Total benefits and expenses
Income before income taxes
Net Income
Earnings Per Share:
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Market price of common stock
Quarter end
Common stock price, high
Common stock price, low
Total outstanding common shares - end of period
2012
Total Revenues
Total benefits and expenses
Income before income taxes
Net Income
Earnings Per Share:
Basic earnings per share
Diluted earnings per share
Dividends declared per share
Market price of common stock
Quarter end
Common stock price, high
Common stock price, low
Total outstanding common shares—end of period
$
$
$
$
$
$
$
$
First
Second
Third
Fourth
2,601,102
$
2,590,642
$
2,389,815
$
2,322,275
278,827
185,535
2,665,400
(74,758)
(49,612)
2,188,120
201,695
137,955
2,736,794
2,507,304
229,490
144,959
$
$
$
2.51
2.49
0.24
59.67
61.86
54.33
73,301
(0.69) $
$
$
(0.69)
0.24
69.11
69.28
57.14
70,968
$
$
$
1.95
1.93
0.30
66.99
73.32
63.95
70,543
2.05
2.03
0.30
77.41
77.55
66.99
70,768
First
Second
Third
Fourth
2,292,975
$
2,375,753
$
2,449,081
$
2,112,212
180,763
123,318
2,159,861
215,892
141,111
2,247,602
201,479
144,475
2,723,102
2,402,013
321,089
222,989
$
$
$
1.68
1.67
0.18
59.47
59.97
51.19
73,712
$
$
$
1.91
1.91
0.18
53.21
59.87
48.80
73,722
$
$
$
1.96
1.95
0.24
57.87
60.69
52.75
73,852
3.02
3.00
0.24
53.52
60.20
48.36
73,927
Reinsurance Group of America, Incorporated common stock is traded on the New York Stock Exchange (NYSE) under the symbol “RGA”. There were 70,615
stockholders of record of RGA’s common stock on January 31, 2014.
142
Note 20 SUBSEQUENT EVENT
On February 20, 2014, RGA’s board of directors authorized a share repurchase program for up to $300.0 million of the RGA’s
outstanding common stock. The authorization is effective immediately and does not have an expiration date. Repurchases would
be made in accordance with applicable securities laws and would be made through market transactions, block trades, privately
negotiated transactions or other means or a combination of these methods, with the timing and number of shares repurchased
dependent on a variety of factors, including share price, corporate and regulatory requirements and market and business conditions.
Repurchases may be commenced or suspended from time to time without prior notice. In connection with this new authorization,
the board of directors terminated the stock repurchase authority granted in 2013.
143
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Reinsurance Group of America, Incorporated
Chesterfield, Missouri
We have audited the accompanying consolidated balance sheets of Reinsurance Group of America, Incorporated and subsidiaries
(the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. Our audits also included
the financial statement schedules listed in the Index at Item 15. These consolidated financial statements and financial statement
schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Reinsurance
Group of America, Incorporated and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2013, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth
therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control-
Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 27, 2014, expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
February 27, 2014
144
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the design and operation
of the Company’s disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) as of the end of the period covered
by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these disclosure
controls and procedures were effective.
There was no change in the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15
(f) during the quarter ended December 31, 2013, that has materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Reinsurance Group of America, Incorporated and subsidiaries (collectively, the “Company”) is
responsible for establishing and maintaining adequate internal control over financial reporting. In fulfilling this responsibility,
estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The
objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded
against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization
and recorded properly to permit the preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America.
Financial management has documented and evaluated the effectiveness of the internal control of the Company as of
December 31, 2013 pertaining to financial reporting in accordance with the criteria established in “Internal Control – Integrated
Framework (1992)" by the Committee of Sponsoring Organizations of the Treadway Commission.
In the opinion of management, the Company maintained effective internal control over financial reporting as of
December 31, 2013.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued an attestation report on the
effectiveness of the Company’s internal control over financial reporting.
145
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Reinsurance Group of America, Incorporated
Chesterfield, Missouri
We have audited the internal control over financial reporting of Reinsurance Group of America, Incorporated and subsidiaries (the
“Company”) as of December 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal
executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject
to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2013, based on the criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2013, of the
Company and our report dated February 27, 2014, expressed an unqualified opinion on those consolidated financial statements
and financial statement schedules.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
February 27, 2014
146
Item 9B. OTHER INFORMATION
None.
Part III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
Information with respect to Directors of the Company is incorporated by reference to the Proxy Statement under the
captions “Nominees and Continuing Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance”. The Proxy
Statement will be filed pursuant to Regulation 14A within 120 days of the end of the Company’s fiscal year.
Executive Officers
The following is certain additional information concerning each individual who is an executive officer of the Company
or its primary operating subsidiary, RGA Reinsurance Company.
Scott D. Cochran, 41, is Executive Vice President, Global Acquisitions and a member of RGA's Executive Council. He
is responsible for the oversight of RGA’s Global Acquisitions team, which provides support for risk, capital and strategic needs
to clients across all of RGA’s markets. Until January 2011, Mr. Cochran was RGA’s Chief Risk Officer, responsible globally for
enterprise risk management and various actuarial areas, and until April 2013, was also responsible for oversight of RGA’s Global
Financial Solutions team. Prior to joining the Company in 2005, Mr. Cochran served in numerous product development and
management roles for CNA/Swiss Re and other insurance and reinsurance organizations.
William L. Hutton, 54, is Executive Vice President, General Counsel and Secretary of the Company. He is responsible
for legal services provided throughout the RGA enterprise. Mr. Hutton joined the Company in 2001 and held several positions in
the legal function before becoming General Counsel in 2011. Prior to joining the Company, he served as counsel at General
American and was in private practice with two law firms in St. Louis, Missouri. Mr. Hutton also serves as an officer of several
RGA subsidiaries.
Donna H. Kinnaird, 62, is Senior Executive Vice President and Chief Operating Officer. She is responsible for RGA’s
Alternative Distribution and Global Accounts, Products and Research & Development. She also has responsibility for various
corporate functions such as Human Resources, Information Technology, Legal and Marketing and Communications. She is a
member of RGA’s Executive Council. Before coming to RGA in 2012, Ms. Kinnaird was President of Swiss Re Life and Health
America Inc. and President and Chief Executive Officer of its Reassure America Life Insurance Company. She has also held Chief
Financial Officer and Chief Operating Officer roles in life insurance companies.
Todd C. Larson, 50, is Executive Vice President, Corporate Finance and Treasurer. Mr. Larson previously was Assistant
Controller at Northwestern Mutual Life Insurance Company from 1994 through 1995 and prior to that position was an accountant
for KPMG LLP from 1985 through 1993. Mr. Larson also serves as a director and officer of several RGA subsidiaries.
Jack B. Lay, 59, is Senior Executive Vice President and Chief Financial Officer. Mr. Lay is responsible for the Company’s
financial and capital management as well as for its financial reporting and enterprise risk management functions. He is a member
of RGA's Executive Council. Prior to joining the Company in 1994, Mr. Lay served as Second Vice President and Associate
Controller at General American. In that position, he was responsible for all external financial reporting as well as merger and
acquisition support. Before joining General American in 1991, Mr. Lay was a partner in the financial services practice with the
St. Louis office of KPMG LLP. Mr. Lay also serves as a director and officer of several RGA subsidiaries.
Anna Manning, 55, is Executive Vice President and Head of U.S. and South/Latin American Markets. Ms. Manning is
responsible for all operations within the United States, South American and Latin American markets, including business
development, pricing, underwriting, medical, claims, and operations. She is a member of RGA’s Executive Council. Until January
2011, Ms. Manning was Executive Vice President and Chief Operating Officer for RGA International Corporation. Prior to joining
the Company in 2007, she was a senior consultant in the Toronto office of Towers Perrin’s Tillinghast insurance consulting practice,
where she provided consulting services to insurance companies in the areas of mergers and acquisitions, financial reporting, product
development, and value-added performance measurements. Before joining Tillinghast, Ms. Manning was with Manulife Financial.
Alain Néemeh, 46, is Executive Vice President, Canada and Australia Markets and a member of RGA’s Executive Council.
From 2006 to 2013, Mr. Neemeh was President and Chief Executive Officer of RGA Life Reinsurance Company of Canada, Head
of Global Mortality Markets and leader of the Company’s Global Pricing Integrity function. He served as Executive Vice President
of Operations, and Chief Financial Officer from 2001 until 2006. He joined the finance area at RGA Canada in 1997 from KPMG,
where he provided audit and other services to a variety of clients in the financial services, manufacturing and retail sectors.
147
Allan O'Bryant, 55, is Executive Vice President and Head of Asia Markets. He is a member of RGA’s Executive Council.
Prior to joining the Company in 2010, Mr. O’Bryant was President and Chief Executive Officer of Yunzei Capital, L.L.C., a private
equity firm based in both Seattle and Tokyo. He also served as a Senior Advisor to Lehman Brothers Inc. in Tokyo. Before then,
he served as President of Aflac International Inc., Deputy Chief Financial Officer of Aflac, Inc., and Chairman and Chief Executive
Officer of several of Aflac’s international subsidiaries.
Paul A. Schuster, 59, is Senior Executive Vice President and Head of Europe/Middle East/South Africa Markets. He is
a member of RGA’s Executive Council. From 2011 to 2013 he was Senior Executive Vice President, Global Products and responsible
for all of RGA’s global products. Before 2011, Mr. Schuster led RGA’s U.S. life, group, and health reinsurance businesses. He
served as Senior Vice President, U.S. Division from January 1997 to December 1998. Mr. Schuster was Reinsurance Actuarial
Vice President in 1995 and Senior Vice President & Chief Actuary of the Company in 1996. Prior to the formation of RGA, Mr.
Schuster served as Second Vice President and Reinsurance Actuary of General American. Prior to joining General American in
1991, he served as Vice President and Assistant Director of Reinsurance Operations of the ITT Lyndon Insurance Group from
1988 to 1991 and in a variety of actuarial positions with General Reassurance Corporation from 1976 to 1988.
A. Greig Woodring, 62, is President and Chief Executive Officer of the Company. Mr. Woodring also headed the
reinsurance business of General American Life Insurance Company from 1986 until the Company’s formation in December 1992.
He is a member of RGA's Executive Council. He also serves as a director and officer of a number of subsidiaries of the Company.
Corporate Governance
The Company has adopted a Principles of Ethical Business Conduct (the “Principles”), a Directors’ Code of Conduct
(the “Directors’ Code”), and a Financial Management Code of Professional Conduct (the “Financial Management Code”). The
Principles apply to all employees and officers of the Company and its subsidiaries. The Directors’ Code applies to directors of the
Company and its subsidiaries. The Financial Management Code applies to our chief executive officer, chief financial officer,
corporate controller, primary financial officers in each business unit, and all professionals in finance and finance-related
departments. The Company intends to satisfy its disclosure obligations under Item 10 of Form 8-K by posting on its website
information about amendments to, or waivers from a provision of the Financial Management Code that applies to the Company’s
chief executive officer, chief financial officer, and corporate controller. Each of the three Codes described above is available on
the Company’s website at www.rgare.com.
Also available on the Company’s website are the following other items: Corporate Governance Guidelines, Audit
Committee Charter, Compensation Committee Charter, Nominating and Governance Committee Charter and Finance, Investment
and Risk Management Committee Charter (collectively “Governance Documents”).
The Company will provide without charge upon written or oral request, a copy of any of the Codes of Conduct or
Governance Documents. Requests should be directed to Investor Relations, Reinsurance Group of America, Incorporated, 1370
Timberlake Manor Parkway, Chesterfield, MO 63017, by electronic mail (investrelations@rgare.com) or by telephone
(636-300-8873).
In accordance with the Securities Exchange Act of 1934, the Company’s board of directors has established a standing
audit committee. The board of directors has determined, in its judgment, that all of the members of the audit committee are
independent within the meaning of SEC regulations and the listing standards of the New York Stock Exchange (“NYSE”). The
board of directors has determined, in its judgment, that Messrs. Bartlett, Boot, Danahy, Tulin and Ms. Lomax are qualified as audit
committee financial experts within the meaning of SEC regulations and the board has determined that each of them has accounting
and related financial management expertise within the meaning of the listing standards of the NYSE. The audit committee charter
provides that members of the audit committee may not simultaneously serve on the audit committee of more than two other public
companies unless such member demonstrates that he or she has the ability to devote the time and attention that are required to
serve on multiple audit committees.
Additional information with respect to Directors and Executive Officers of the Company is incorporated by reference to
the Proxy Statement under the captions “Nominees and Continuing Directors”, “Board of Directors and Committees”, and “Section
16(a) Beneficial Ownership Reporting Compliance.”
148
Item 11. EXECUTIVE COMPENSATION
Information on this subject is found in the Proxy Statement under the captions “Compensation Discussion and Analysis”,
“Executive Compensation,” “Compensation Committee Report” and “Director Compensation” and is incorporated herein by
reference. The Proxy Statement will be filed pursuant to Regulation 14A within 120 days of the end of the Company’s fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
Information of this subject is found in the Proxy Statement under the captions “Securities Ownership of Directors,
Management and Certain Beneficial Owners”, and is incorporated herein by reference. The Proxy Statement will be filed pursuant
to Regulations 14A within 120 days of the end of the Company’s fiscal year.
The following table summarizes information regarding securities authorized for issuance under equity compensation
plans:
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
Weighted-average exercise
price of outstanding options,
warrants and rights
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a))
Plan Category
(a)
(b)
(c)
Equity compensation plans approved by
security holders
Equity compensation plans not approved by
security holders
Total
4,093,076
(1)
—
4,093,076
(1)
(2) (3)
$52.77
—
(2) (3)
$52.77
2,271,086
(4)
—
2,271,086
(4)
(1)
Includes the number of securities to be issued upon exercises under the following plans: Flexible Stock Plan - 4,063,601; Flexible Stock Plan for Directors
– 6,375; and Phantom Stock Plan for Directors – 23,100.
(2) Does not include 712,341 performance contingent units outstanding under the Flexible Stock Plan or 23,100 phantom units outstanding under the Phantom
Stock Plan for Directors because those securities do not have an exercise price (i.e. a unit is a hypothetical share of Company common stock with a value
equal to the fair market value of the common stock).
(3) Reflects the blended weighted-average exercise price of outstanding options under the Flexible Stock Plan $52.77.
(4)
Includes the number of securities remaining available for future issuance under the following plans: Flexible Stock Plan – 2,217,414; Flexible Stock Plan
for Directors – 37,453; and Phantom Stock Plan for Directors – 16,219.
In January 2013, RGA's board of directors authorized a share repurchase program for up to $200.0 million of RGA's
outstanding common stock. In April 2013, RGA's board of directors authorized an increase of $100.0 million to the share repurchase
program previously authorized in January 2013. In July 2013, RGA's board of directors authorized an additional increase of $100.0
million to the share repurchase program previously authorized in January 2013.
On February 20, 2014, RGA’s board of directors authorized a share repurchase program for up to $300.0 million of the
RGA’s outstanding common stock. The authorization is effective immediately and does not have an expiration date. In connection
with this new authorization, the board of directors terminated the stock repurchase authority granted in 2013.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information on this subject is found in the Proxy Statement under the captions “Certain Relationships and Related Person
Transactions” and “Director Independence” and incorporated herein by reference. The Proxy Statement will be filed pursuant to
Regulation 14A within 120 days of the end of the Company’s fiscal year.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information on this subject is found in the Proxy Statement under the caption “Ratification of Appointment of the
Independent Auditor” and incorporated herein by reference. The Proxy Statement will be filed pursuant to Regulation 14A within
120 days of the end of the Company’s fiscal year.
149
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The following consolidated statements are included within Item 8 under the following captions:
Index
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
2. Schedules, Reinsurance Group of America, Incorporated and Subsidiaries
Schedule
I
II
III
IV
V
Summary of Investments
Condensed Financial Information of the Registrant
Supplementary Insurance Information
Reinsurance
Valuation and Qualifying Accounts
Page
75
76
77
78
79
80-143
144
Page
151
152-153
154-155
156
157
All other schedules specified in Regulation S-X are omitted for the reason that they are not required, are not applicable,
or that equivalent information has been included in the consolidated financial statements, and notes thereto, appearing in Item 8.
3. Exhibits
See the Index to Exhibits on page 159.
150
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE I-SUMMARY OF INVESTMENTS-OTHER THAN
INVESTMENTS IN RELATED PARTIES
December 31, 2013
(in millions)
Type of Investment
Fixed maturity securities:
Bonds:
United States government and government agencies and authorities
$
State and political subdivisions
Foreign governments(2)
Public utilities
Mortgage-backed and asset-backed securities
All other corporate bonds
Total fixed maturity securities
Equity securities:
Non-redeemable preferred stock
Other equity securities
Total equity securities
Mortgage loans on real estate
Policy loans
Funds withheld at interest
Short-term investments
Other invested assets
Total investments
Cost
Fair Value
Amount at Which
Shown in the Balance
Sheets(1)
$
$
501
321
5,268
1,978
10,133
3,273
21,474
82
324
406
490
313
4,594
1,904
9,793
3,177
20,271
82
327
409
2,487
1,244
5,772
139
919
501
321
5,268
1,978
10,133
3,273
21,474
82
324
406
2,487
1,244
5,772
139
919
$
31,241
$
32,441
(1) Fixed maturity securities are classified as available-for-sale and carried at fair value.
(2)
Includes fixed maturities directly issued by foreign governments, supranational and foreign government-sponsored enterprises.
151
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
December 31,
(dollars in thousands)
2013
2012
2011
CONDENSED BALANCE SHEETS
Assets:
Fixed maturity securities available-for-sale, at fair value
Short-term and other investments
Cash and cash equivalents
Investment in subsidiaries
Loans to subsidiaries
Other assets
Total assets
Liabilities and stockholders’ equity:
Long-term debt - unaffiliated(1)
Long-term debt - affiliated(2)
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
CONDENSED STATEMENTS OF INCOME
Interest / dividend income(3)
Investment related gains (losses), net
Operating expenses
Interest expense
Income (loss) before income tax and undistributed earnings of subsidiaries
Income tax expense (benefit)
Net income (loss) before undistributed earnings of subsidiaries
Equity in undistributed earnings of subsidiaries
Net income
Other comprehensive income (loss)
Total comprehensive income
$
$
$
$
$
502,455
$
$
$
$
$
261,853
24,137
7,534,714
1,101,751
204,887
9,629,797
2,294,278
500,000
899,992
5,935,527
9,629,797
275,215
1,714
(21,164)
(162,212)
93,553
33,850
59,703
359,134
418,837
21,033
604,896
64,681
52,680
8,148,532
1,025,000
155,190
10,050,979
1,895,181
500,000
745,611
6,910,187
10,050,979
86,396
$
4,515
(26,431)
(143,260)
(78,780)
(9,566)
(69,214)
701,107
631,893
9,984
$
439,870
$
641,877
$
245,631
1,723
(32,550)
(111,600)
103,204
8,935
94,269
451,776
546,045
(12,265)
533,780
The condensed financial information of RGA (the “Parent Company”) should be read in conjunction with the consolidated financial statements of RGA and its
subsidiaries and the notes thereto (the “Consolidated Financial Statements”). These condensed unconsolidated financial statements reflect the results of operations,
financial position and cash flows for RGA. Investments in subsidiaries are accounted for using the equity method of accounting.
(1) Long-term debt - unaffiliated consists of the following:
$400 million 6.75% Junior Subordinated Debentures due 2065
$400 million 6.20% Subordinated Debentures due 2042
$400 million 4.70% Senior Notes due 2023
$400 million 5.00% Senior Notes due 2021
$400 million 6.45% Senior Notes due 2019
$300 million 5.625% Senior Notes due 2017
Total
2013
2012
398,657
$
400,000
398,533
398,362
399,602
299,124
398,727
400,000
—
398,141
399,534
298,851
2,294,278
$
1,895,253
$
$
Repayments of long-term debt—unaffiliated due over the next five years total $300,000, due 2017.
(2) Long-term debt—affiliated in 2013 and 2012 and consists of $500,000 of subordinated debt issued to various operating subsidiaries.
(3)
Interest/Dividend income includes $175,000 and $190,000 of cash dividends received from consolidated subsidiaries in 2013 and 2011, respectively. Cash
dividends received from consolidated subsidiaries in 2012 were not material.
152
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (continued)
December 31,
(dollars in thousands)
2013
2012
2011
CONDENSED STATEMENTS OF CASH FLOWS
Operating activities:
Net income
Equity in earnings of subsidiaries
Loss on retirement of trust preferred securities
Other, net
Net cash provided by operating activities
Investing activities:
Sales of fixed maturity securities available-for-sale
Purchases of fixed maturity securities available-for-sale
Purchases of subsidiary debt securities
Maturities of subsidiary debt securities
Purchase of a business, net of cash acquired of $9,709
Change in short-term investments
Change in other invested assets
Capital contributions to subsidiaries
Net cash used in investing activities
Financing activities:
Dividends to stockholders
Purchases of treasury stock
Excess tax benefits from share-based payment arrangement
Exercise of stock options, net
Principal payments on debt
Maturity of trust preferred securities
Proceeds from unaffiliated long-term debt issuance
Debt issuance costs
Proceeds from affiliated long-term debt issuance
Proceeds from redemption and remarketing of trust preferred securities
Net cash provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplementary information:
Cash paid for interest
Cash paid for income taxes, net of refunds
$
$
$
$
$
$
418,837
$
(359,134)
631,893
$
(701,107)
—
162,586
222,289
176,062
(103,566)
(76,751)
—
(2,805)
(96,967)
(79,023)
(144,459)
(327,509)
(77,642)
(269,204)
—
28,390
—
—
398,533
(3,400)
—
—
76,677
(28,543)
52,680
24,137
141,615
82,000
$
$
$
$
$
—
134,232
65,018
122,212
(213,548)
(250,000)
$
$
—
—
—
5,718
(70,431)
(406,049)
(61,945)
(6,924)
416
(3,087)
—
—
400,000
(6,255)
—
—
322,205
(18,826)
71,506
52,680
130,047
30,500
$
$
$
546,045
(453,806)
4,391
143,716
240,346
171,791
(116,010)
(475,000)
50,000
—
—
(2,055)
(105,575)
(476,849)
(44,229)
(380,345)
4,933
6,449
(200,000)
(159,473)
397,788
(3,400)
500,000
154,588
276,311
39,808
31,698
71,506
98,809
—
153
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION
(dollars in thousands)
Deferred Policy
Acquisition Costs
As of December 31,
Future Policy Benefits and
Interest-Sensitive Contract
Liabilities
Other Policy Claims and
Benefits Payable
Assumed
Ceded
Assumed
Ceded
Assumed
Ceded
2013
U.S. Traditional operations
$
1,621,623
$
(30,523) $
7,541,617
$
(244,897) $
1,260,329
$
(73,798)
U.S. Non-Traditional operations
Canada operations
Europe & South Africa operations
Asia Pacific operations
Corporate and Other
Total
2012
U.S. Traditional operations
U.S. Non-Traditional operations
Canada operations
Europe & South Africa operations
Asia Pacific operations
Corporate and Other
Total
$
$
884,377
259,575
311,499
495,980
—
3,573,054
1,559,482
1,039,180
271,656
332,780
474,705
—
$
$
—
(483)
(9,492)
(14,760)
—
11,240,138
2,963,561
1,093,285
1,675,887
299,845
(55,258) $
24,814,333
(32,453) $
7,033,889
—
(510)
(10,599)
(14,967)
—
11,784,670
3,007,476
887,404
1,712,908
300,011
$
$
—
(233,735)
(36,696)
(68,292)
—
16,045
206,245
831,974
1,244,298
12,870
(583,620) $
3,571,761
(231,383) $
1,194,461
—
(236,586)
(36,097)
(77,015)
(7)
17,646
210,334
712,392
1,015,119
10,298
$
$
—
(8,952)
(35,328)
(25,041)
(190)
(143,309)
(88,649)
—
(20,460)
(20,570)
(36,534)
(255)
$
3,677,803
$
(58,529) $
24,726,358
$
(581,088) $
3,160,250
$
(166,468)
154
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION (continued)
(dollars in thousands)
2013
U.S. Traditional operations
U.S. Non-Traditional operations
Canada operations
Europe & South Africa operations
Asia Pacific operations
Corporate and Other
Total
2012
U.S. Traditional operations
U.S. Non-Traditional operations
Canada operations
Europe & South Africa operations
Asia Pacific operations
Corporate and Other
Total
2011
U.S. Traditional operations
U.S. Non-Traditional operations
Canada operations
Europe & South Africa operations
Asia Pacific operations
Corporate and Other
Total
Premium Income
Net Investment
Income
Year ended December 31,
Policyholder
Benefits and
Interest Credited
Amortization of
DAC
Other Operating
Expenses
$
4,518,051
$
542,657
$
(3,981,276) $
(471,178) $
$
$
$
$
22,521
962,311
1,331,559
1,419,828
(243)
8,254,027
4,308,780
14,095
915,764
1,308,462
1,350,330
9,165
7,906,596
3,979,489
13,189
835,298
1,194,477
1,304,490
8,744
$
$
$
$
721,282
204,851
55,604
91,927
83,544
1,699,865
535,589
498,499
190,337
45,576
83,387
82,818
1,436,206
495,650
362,886
188,304
44,351
84,837
105,169
$
$
$
$
(443,393)
(758,565)
(1,165,432)
(1,431,373)
(807)
(185,396)
(178,566)
(41,628)
(36,035)
—
(7,780,846) $
(912,803) $
(3,788,384) $
(461,117) $
(335,581)
(706,744)
(1,134,219)
(1,081,010)
24
(193,492)
(167,614)
(50,174)
(130,660)
—
(7,045,914) $
(1,003,057) $
(3,518,170) $
(424,523) $
(269,631)
(673,105)
(1,001,921)
(1,077,982)
(768)
79,097
(146,680)
(35,833)
(162,926)
(258)
$
7,335,687
$
1,281,197
$
(6,541,577) $
(691,123) $
(244,614)
(88,380)
(83,569)
(125,306)
(309,262)
(138,319)
(989,450)
(228,919)
(78,731)
(78,935)
(113,951)
(238,497)
(133,684)
(872,717)
(216,094)
(140,097)
(71,293)
(129,003)
(147,272)
(129,508)
(833,267)
155
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE IV—REINSURANCE
(in millions)
As of or for the Year ended December 31,
Gross Amount
Ceded to Other
Companies
Assumed from
Other Companies
Net Amounts
Percentage of
Amount Assumed
to Net
2013
Life insurance in force
Premiums
U.S. Traditional operations
U.S. Non-Traditional operations
Canada operations
Europe & South Africa operations
Asia Pacific operations
Corporate and Other
Total
2012
Life insurance in force
Premiums
U.S. Traditional operations
U.S. Non-Traditional operations
Canada operations
Europe & South Africa operations
Asia Pacific operations
Corporate and Other
Total
2011
Life insurance in force
Premiums
U.S. Traditional operations
U.S. Non-Traditional operations
Canada operations
Europe & South Africa operations
Asia Pacific operations
Corporate and Other
Total
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
77
5.2
—
—
—
—
—
5.2
76
3.8
—
—
—
—
—
3.8
76
2.6
—
—
—
—
—
$
$
$
$
$
$
$
$
36,830
145.4
44.7
54.2
28.1
47.0
—
319.4
38,048
151.6
50.5
52.9
29.5
41.5
—
326.0
39,987
144.7
52.3
104.7
30.0
36.8
—
$
$
$
$
$
$
$
$
2,889,804
4,658.2
67.2
1,016.5
1,359.7
1,466.8
(0.2)
8,568.2
2,927,573
4,456.6
64.6
968.6
1,338.0
1,391.8
9.2
8,228.8
2,664,353
4,121.6
65.5
940.1
1,224.4
1,341.3
8.7
2.6
$
368.5
$
7,701.6
$
2,853,051
101.3%
4,518.0
22.5
962.3
1,331.6
1,419.8
(0.2)
8,254.0
103.1%
298.7
105.6
102.1
103.3
100.0
103.8%
2,889,601
101.3%
4,308.8
14.1
915.7
1,308.5
1,350.3
9.2
7,906.6
103.4%
458.2
105.8
102.3
103.1
100.0
104.1%
2,624,442
101.5%
3,979.5
13.2
835.3
1,194.5
1,304.5
8.7
7,335.7
103.6%
496.2
112.6
102.5
102.8
100.0
105.0%
156
REINSURANCE GROUP OF AMERICA, INCORPORATED
SCHEDULE V—VALUATION AND QUALIFYING ACCOUNTS
(in millions)
Description
2013
Allowance on income taxes
Valuation allowance for mortgage loans
2012
Allowance on income taxes
Valuation allowance for mortgage loans
2011
Allowance on income taxes
Valuation allowance for mortgage loans
$
$
$
Balance at
Beginning of
Period
Charges to Costs
and Expenses
Charged to Other
Accounts
Deductions
Balance at End of
Period
$
10.1
11.6
8.6
$
11.8
$
3.9
6.2
23.5
$
1.9
— $
6.3
— $
9.5
68.6
$
— $
—
1.6
—
5.4
—
$
$
3.4
0.1
6.5
0.7
3.9
$
$
102.2
10.1
10.1
11.6
8.6
11.8
157
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Reinsurance Group of America, Incorporated.
By:
/s/ A. Greig Woodring
A. Greig Woodring
President and Chief Executive Officer
Date: February 27, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons
on behalf of the registrant and in the capacities indicated on February 28, 2014.
Signatures
Title
/s/ J. Cliff Eason
J. Cliff Eason
February 27, 2014*
Chairman of the Board and Director
/s/ A. Greig Woodring
February 27, 2014
A. Greig Woodring
President, Chief Executive Officer,
and Director
(Principal Executive Officer)
/s/ William J. Bartlett
February 27, 2014*
Director
William J. Bartlett
/s/ Arnoud W.A. Boot
February 27, 2014*
Director
Arnoud W.A. Boot
/s/ John F. Danahy
John F. Danahy
February 27, 2014*
Director
/s/ Christine R. Detrick
February 27, 2014*
Director
Christine R. Detrick
/s/ Alan C. Henderson
February 27, 2014*
Director
Alan C. Henderson
/s/ Joyce A. Phillips
Joyce A. Phillips
February 27, 2014*
Director
/s/ Frederick J. Sievert
February 27, 2014*
Director
Frederick J. Sievert
/s/ Stanley B. Tulin
February 27, 2014*
Director
Stanley B. Tulin
/s/ Jack B. Lay
Jack B. Lay
February 27, 2014
Senior Executive Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
*
By: /s/ Jack B. Lay
February 27, 2014
Jack B. Lay Attorney-in-fact
158
Exhibit
Number
Index to Exhibits
Description
2.1
2.2
2.3
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Reinsurance Agreement, dated as of December 31, 1992 between General American Life Insurance
Company (“General American”) and General American Life Reinsurance Company of Canada
(“RGA Canada”), incorporated by reference to Exhibit 2.1 to Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993
Retrocession Agreement, dated as of July 1, 1990 between General American and The National
Reinsurance Company of Canada, as amended between RGA Canada and General American on
December 31, 1992, incorporated by reference to Exhibit 2.2 Amendment No. 1 to Registration
Statement on Form S-1 (File No. 33-58960), filed on April 14, 1993
Reinsurance Agreement, dated as of January 1, 1993 between RGA Reinsurance Company (formerly
“Saint Louis Reinsurance Company”) and General American, incorporated by reference to Exhibit
2.3 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-58960), filed on April
14, 1993
Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 of Current
Report on Form 8-K filed on November 25, 2008
Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 of Current Report on Form
8-K filed on November 25, 2008
Form of stock certificate for RGA’s common stock, incorporated by reference to Exhibit 4 to RGA’s
registration statement on Form 8-A filed on November 17, 2008
Form of Senior Indenture between RGA and The Bank of New York, as Trustee, incorporated by
reference to Exhibit 4.1 to the Registration Statements on Form S-3 (File Nos. 333-55304,
333-55304-01 and 333-55304-02), filed on February 9, 2001, as amended (the “Original S-3”)
Second Supplemental Senior Indenture, dated as of March 9, 2007, by and between RGA and The
Bank of New York Trust Company, N.A., as successor trustee to The Bank of New York,
incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated March 6, 2007 (File
No. 1-11848), filed March 12, 2007
Third Supplemental Senior Indenture, dated as of November 3, 2009, by and between RGA and the
Bank of New York Mellon Trust Company, N.A., as successor trustee to The Bank of New York,
incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated November 6, 2009
(File No. 1-11848), filed November 9, 2009
Fourth Supplemental Senior Indenture, dated as of May 27, 2011, by and between RGA and The
Bank of New York Mellon Trust Company, N.A., as successor trustee to The Bank of New York,
incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated May 27, 2011 (File
No. 1-11848), filed May 31, 2011
Indenture, dated as of August 21, 2012, between the Company and The Bank of New York Mellon
Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.1 to Current Report on Form
8-K dated August 21, 2012 (File No. 1-11848), filed August 21, 2012
First Supplemental Indenture, dated as of August 21, 2012, between the Company and The Bank of
New York Mellon Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.2 to
Current Report on Form 8-K dated August 21, 2012 (File No. 1-11848), filed August 21, 2012
159
4.8
4.9
4.10
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
Second Supplemental Indenture, dated as of September 24, 2013, between the Company and The
Bank of New York Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.2 to
Current Report on Form 8-K dated September 24, 2013 (File No. 1-11848), filed on September 24,
2013
Form of Junior Subordinated Indenture, incorporated by reference to Exhibit 4.3 of the Original S-3
Form of Second Supplemental Junior Subordinated Indenture between RGA and The Bank of New
York, as Trustee, relating to the 6 3/4 Junior Subordinated Debentures Due 2065, incorporated by
reference to Exhibit 4.2 to Form 8-K dated December 5, 2005 (File No. 1-11848), filed on
December 9, 2005
Management Agreement, dated as of January 1, 1993 between RGA Canada and General American,
incorporated by reference to Exhibit 10.7 to Amendment No. 1 to Registration Statement on Form S-1
(File No. 33-58960), filed on April 14, 1993*
Standard Form of General American Automatic Agreement, incorporated by reference to Exhibit
10.11 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-58960), filed on April
14, 1993
Standard Form of General American Facultative Agreement, incorporated by reference to Exhibit
10.12 to Amendment No. 1 to Registration Statement on Form S-1 (File No. 33-58960), filed on April
14, 1993
Standard Form of General American Automatic and Facultative YRT Agreement, incorporated by
reference to Exhibit 10.13 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-58960), filed on April 14, 1993
RGA Annual Bonus Plan, effective May 21, 2008, as amended and restated, incorporated by reference
to Exhibit 10.5 to Annual Report on Form 10-K for the period ended December 31, 2012 (file No.
1-11848), filed on March 1, 2013*
RGA Reinsurance Company Management Deferred Compensation Plan (ended January 1, 1995),
incorporated by reference to Exhibit 10.18 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-58960), filed on April 14, 1993*
RGA Reinsurance Company Executive Deferred Compensation Plan (ended January 1, 1995),
incorporated by reference to Exhibit 10.19 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-58960), filed on April 14, 1993*
RGA Reinsurance Company Executive Supplemental Retirement Plan (ended January 1, 1995),
incorporated by reference to Exhibit 10.20 to Amendment No. 1 to Registration Statement on Form
S-1 (File No. 33-58960), filed on April 14, 1993*
RGA Reinsurance Company Augmented Benefit Plan (ended January 1, 1995), incorporated by
reference to Exhibit 10.21 to Amendment No. 1 to Registration Statement on Form S-1 (File No.
33-58960), filed on April 14, 1993*
RGA Flexible Stock Plan as amended and restated effective July 1, 1998 and as further amended by
Amendment on March 16, 2000, Second Amendment on May 28, 2003, Third Amendment on May
26, 2004, Fourth Amendment on May 23, 2007, Fifth Amendment on May 21, 2008, Sixth
Amendment on May 8, 2011, and Seventh Amendment on May 18, 2011, incorporated by reference to
Exhibit 99.1 to Current Report on Form 8-K dated May 18, 2011 (File No. 1-11848), filed May 20,
2011*
160
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
12.1
21.1
23.1
24.1
31.1
Form of RGA Flexible Stock Plan Non-Qualified Stock Option Agreement, incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K dated September 10, 2004 (File No. 1-11848), filed on
September 10, 2004*
Form of RGA Flexible Stock Plan Performance Contingent Restricted Stock Agreement, incorporated
by reference to Exhibit 10.2 to Current Report on Form 8-K dated September 10, 2004 (File No.
1-11848), filed on September 10, 2004*
Form of RGA Flexible Stock Plan Performance Contingent Restricted Stock Agreement, incorporated
by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the period ended March 31, 2012
(File No. 1-11848), filed on May 7, 2012*
Form of Flexible Stock Plan Stock Appreciation Right Award Agreement, dated February 22, 2011,
incorporated by reference to Exhibit 10.1 of Current Report on Form 8-K filed February 25, 2011*
Form of Flexible Stock Plan Stock Appreciation Right Award Agreement, incorporated by reference
to Exhibit 10.1 to Quarterly Report on Form 10-Q for the period ended March 31, 2012 (File No.
1-11848), filed on May 7, 2012*
RGA Flexible Stock Plan for Directors, as amended and restated effective May 28, 2003, incorporated
by reference to Proxy Statement on Schedule 14A for the annual meeting of shareholders on May 28,
2003, filed on April 10, 2003*
RGA Phantom Stock Plan for Directors, as amended effective January 1, 2003, incorporated by
reference to Proxy Statement on Schedule 14A for the annual meeting of shareholders on May 28,
2003, filed on April 10, 2003*
Directors’ Compensation Summary Sheet, incorporated by reference to Exhibit 10.16 to Annual
Report on Form 10-K for the period ended December 31, 2011 (File No. 1-11848), filed on February
29, 2012*
Credit Agreement, dated as of December 15, 2011, by and among RGA, the lenders named therein,
Wells Fargo Bank, National Association, as Administrative Agent, Swing Line Lender and L/C Issuer,
Bank of America, N.A. and JPMorgan Chase Bank, N.A. as Joint Syndication Agents and The Bank
of Tokyo-Mitsubishi UFJ, Ltd., Barclays Bank PLC, Mizuho Corporate Bank, Ltd., and U.S. Bank,
National Association, as Co-Documentation Agents, incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K dated December 19, 2011 (File No. 1-11848), filed December 20, 2011
Form of Directors’ Indemnification Agreement, incorporated by reference to Exhibit 10.23 to Annual
Report on Form 10-K for the period ended December 31, 2010 (File No. 1-11848), filed on February
28, 2011*
Ratio of Earnings to Fixed Charges
Subsidiaries of RGA
Consent of Deloitte & Touche LLP
Powers of Attorney for Messrs. Bartlett, Boot, Danahy, Eason, Henderson, Sievert and Tulin and
Mses. Detrick and Phillips
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002
161
31.2
32.1
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
* Represents a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant
to Item 15 of this Report.
162
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Shareholder Information
Transfer Agent:
Computershare
P.O. Box 30170
College Station, TX 77842-3170
T 866-204-0209
http://www.computershare.com/investor
Independent Auditors:
Deloitte and Touche LLP
Annual Report on Form 10-K:
Reinsurance Group of America, Incorporated files with the
Securities and Exchange Commission an Annual Report
(Form 10-K).
Shareholders may obtain a copy of the Form 10-K without
charge by writing to:
Jack B. Lay
Chief Financial Officer
Reinsurance Group of America, Incorporated
1370 Timberlake Manor Parkway
Chesterfield, Missouri 63017-6039
U.S.A.
Shareholders may contact us through our Internet site at
http://www.rgare.com or may email us at
investrelations@rgare.com
Reinsurance Group of America, Incorporated ®
1370 Timberlake Manor Parkway
Chesterfield, Missouri 63017-6039 U.S.A.
www.rgare.com