REINSURANCE GROUP OF AMERICA INC - Quarter Report: 2010 September (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
OR
o | 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 | 43-1627032 | |
(State or other jurisdiction | (IRS employer | |
of incorporation or organization) | identification number) |
1370 Timberlake Manor Parkway
Chesterfield, Missouri 63017
(Address of principal executive offices)
Chesterfield, Missouri 63017
(Address of principal executive offices)
(636) 736-7000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
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 þ No o
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 the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o
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 þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of October 29, 2010, 73,226,465 shares of the registrants common stock were outstanding.
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
(Dollars in thousands, except share data) | ||||||||
Assets |
||||||||
Fixed maturity securities: |
||||||||
Available-for-sale at fair value (amortized cost of $12,933,116 and
$11,616,957 at September 30, 2010 and December 31, 2009, respectively) |
$ | 14,169,930 | $ | 11,763,358 | ||||
Mortgage loans on real estate (net of allowances of $13,268 and $5,784 at
at September 30, 2010 and December 31, 2009, respectively) |
863,873 | 791,668 | ||||||
Policy loans |
1,173,148 | 1,136,564 | ||||||
Funds withheld at interest |
5,276,511 | 4,895,356 | ||||||
Short-term investments |
84,091 | 121,060 | ||||||
Other invested assets |
738,830 | 516,086 | ||||||
Total investments |
22,306,383 | 19,224,092 | ||||||
Cash and cash equivalents |
634,075 | 512,027 | ||||||
Accrued investment income |
177,250 | 107,447 | ||||||
Premiums receivable and other reinsurance balances |
987,342 | 850,096 | ||||||
Reinsurance ceded receivables |
790,889 | 716,480 | ||||||
Deferred policy acquisition costs |
3,741,534 | 3,698,972 | ||||||
Other assets |
296,555 | 140,387 | ||||||
Total assets |
$ | 28,934,028 | $ | 25,249,501 | ||||
Liabilities and Stockholders Equity |
||||||||
Future policy benefits |
$ | 8,906,977 | $ | 7,748,480 | ||||
Interest-sensitive contract liabilities |
7,884,874 | 7,666,002 | ||||||
Other policy claims and benefits |
2,590,014 | 2,229,083 | ||||||
Other reinsurance balances |
134,066 | 106,706 | ||||||
Deferred income taxes |
1,064,726 | 613,222 | ||||||
Other liabilities |
1,129,848 | 792,775 | ||||||
Long-term debt |
1,216,320 | 1,216,052 | ||||||
Collateral finance facility |
850,026 | 850,037 | ||||||
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company |
159,368 | 159,217 | ||||||
Total liabilities |
23,936,219 | 21,381,574 | ||||||
Commitments and contingent liabilities (See Note 8) |
||||||||
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: 73,363,523 at September 30, 2010 and December 31, 2009) |
734 | 734 | ||||||
Warrants |
66,912 | 66,912 | ||||||
Additional paid-in-capital |
1,477,011 | 1,463,101 | ||||||
Retained earnings |
2,402,167 | 2,055,549 | ||||||
Treasury stock, at cost; 191,996 and 373,861 shares at
September 30, 2010 and December 31, 2009, respectively |
(8,774 | ) | (17,578 | ) | ||||
Accumulated other comprehensive income (loss): |
||||||||
Accumulated currency translation adjustment, net of income taxes |
242,686 | 210,878 | ||||||
Unrealized appreciation of securities, net of income taxes |
832,756 | 104,457 | ||||||
Pension and postretirement benefits, net of income taxes |
(15,683 | ) | (16,126 | ) | ||||
Total stockholders equity |
4,997,809 | 3,867,927 | ||||||
Total liabilities and stockholders equity |
$ | 28,934,028 | $ | 25,249,501 | ||||
See accompanying notes to condensed consolidated financial statements (unaudited).
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(Dollars in thousands, except per share data) | ||||||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 1,647,300 | $ | 1,405,179 | $ | 4,857,781 | $ | 4,126,407 | ||||||||
Investment income, net of related expenses |
287,504 | 299,471 | 883,433 | 807,303 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(4,904 | ) | (16,945 | ) | (15,823 | ) | (88,282 | ) | ||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
26 | (4,000 | ) | 2,231 | 12,135 | |||||||||||
Other investment related gains (losses), net |
(11,902 | ) | 63,304 | 150,989 | 124,432 | |||||||||||
Total investment related gains (losses), net |
(16,780 | ) | 42,359 | 137,397 | 48,285 | |||||||||||
Other revenues |
37,515 | 31,972 | 108,990 | 140,992 | ||||||||||||
Total revenues |
1,955,539 | 1,778,981 | 5,987,601 | 5,122,987 | ||||||||||||
Benefits and Expenses: |
||||||||||||||||
Claims and other policy benefits |
1,393,891 | 1,155,811 | 4,076,310 | 3,449,251 | ||||||||||||
Interest credited |
94,776 | 85,153 | 230,879 | 194,959 | ||||||||||||
Policy acquisition costs and other insurance expenses |
157,058 | 271,789 | 760,509 | 778,993 | ||||||||||||
Other operating expenses |
85,409 | 76,403 | 259,755 | 214,247 | ||||||||||||
Interest expense |
25,191 | 5,243 | 65,781 | 46,955 | ||||||||||||
Collateral finance facility expense |
2,041 | 2,031 | 5,807 | 6,402 | ||||||||||||
Total benefits and expenses |
1,758,366 | 1,596,430 | 5,399,041 | 4,690,807 | ||||||||||||
Income before income taxes |
197,173 | 182,551 | 588,560 | 432,180 | ||||||||||||
Provision for income taxes |
68,941 | 64,343 | 210,870 | 137,503 | ||||||||||||
Net income |
$ | 128,232 | $ | 118,208 | $ | 377,690 | $ | 294,677 | ||||||||
Earnings per share: |
||||||||||||||||
Basic earnings per share |
$ | 1.75 | $ | 1.62 | $ | 5.17 | $ | 4.05 | ||||||||
Diluted earnings per share |
$ | 1.72 | $ | 1.61 | $ | 5.06 | $ | 4.03 | ||||||||
Dividends declared per share |
$ | 0.12 | $ | 0.09 | $ | 0.36 | $ | 0.27 |
See accompanying notes to condensed consolidated financial statements (unaudited).
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30, | ||||||||
2010 | 2009 | |||||||
(Dollars in thousands) | ||||||||
Cash Flows from Operating Activities: |
||||||||
Net income |
$ | 377,690 | $ | 294,677 | ||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||
Change in operating assets and liabilities: |
||||||||
Accrued investment income |
(68,755 | ) | (61,137 | ) | ||||
Premiums receivable and other reinsurance balances |
(98,274 | ) | (94,650 | ) | ||||
Deferred policy acquisition costs |
(45,525 | ) | 84,861 | |||||
Reinsurance ceded balances |
(74,410 | ) | 20,394 | |||||
Future policy benefits, other policy claims and benefits, and
other reinsurance balances |
1,385,629 | 682,234 | ||||||
Deferred income taxes |
14,579 | (46,756 | ) | |||||
Other assets and other liabilities, net |
38,453 | 182,090 | ||||||
Amortization of net investment premiums, discounts and other |
(104,878 | ) | (93,359 | ) | ||||
Investment related gains, net |
(137,397 | ) | (48,285 | ) | ||||
Gain on repurchase of long-term debt |
| (38,875 | ) | |||||
Excess tax benefits from share-based payment arrangement |
(1,379 | ) | (1,491 | ) | ||||
Other, net |
44,546 | 23,235 | ||||||
Net cash provided by operating activities |
1,330,279 | 902,938 | ||||||
Cash Flows from Investing Activities: |
||||||||
Sales of fixed maturity securities available-for-sale |
2,533,344 | 2,081,979 | ||||||
Maturities of fixed maturity securities available-for-sale |
107,648 | 61,180 | ||||||
Purchases of fixed maturity securities available-for-sale |
(3,664,819 | ) | (3,019,892 | ) | ||||
Cash invested in mortgage loans |
(97,947 | ) | (72 | ) | ||||
Cash invested in policy loans |
(38,996 | ) | (9,508 | ) | ||||
Cash invested in funds withheld at interest |
(90,282 | ) | (59,486 | ) | ||||
Principal payments on mortgage loans on real estate |
18,923 | 29,036 | ||||||
Principal payments on policy loans |
2,412 | 27,170 | ||||||
Change in short-term investments and other invested assets |
20,334 | (35,343 | ) | |||||
Net cash used in investing activities |
(1,209,383 | ) | (924,936 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Dividends to stockholders |
(26,340 | ) | (19,635 | ) | ||||
Repurchase of long-term debt |
| (39,960 | ) | |||||
Net repayments under credit agreements |
| (22,539 | ) | |||||
Purchases of treasury stock |
(718 | ) | (1,607 | ) | ||||
Excess tax benefits from share-based payment arrangement |
1,379 | 1,491 | ||||||
Exercise of stock options, net |
8,804 | 963 | ||||||
Change in cash collateral for derivative positions |
121,054 | (137,418 | ) | |||||
Net withdrawals on universal life and
other investment type policies and contracts |
(117,346 | ) | (104,694 | ) | ||||
Net cash used in financing activities |
(13,167 | ) | (323,399 | ) | ||||
Effect of exchange rate changes on cash |
14,319 | 16,876 | ||||||
Change in cash and cash equivalents |
122,048 | (328,521 | ) | |||||
Cash and cash equivalents, beginning of period |
512,027 | 875,403 | ||||||
Cash and cash equivalents, end of period |
$ | 634,075 | $ | 546,882 | ||||
Supplementary information: |
||||||||
Cash paid for interest |
$ | 61,327 | $ | 49,193 | ||||
Cash paid for income taxes, net of refunds |
$ | 41,368 | $ | 21,491 |
See accompanying notes to condensed consolidated financial statements (unaudited).
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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
Reinsurance Group of America, Incorporated (RGA) is an insurance holding company that was formed
on December 31, 1992. The accompanying unaudited condensed consolidated financial statements of
RGA and its subsidiaries (collectively, the Company) have been prepared in conformity with
accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Operating results for the three and nine
months ended September 30, 2010 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2010. The Company has determined that there were no subsequent
events that would require disclosure or adjustments to the accompanying condensed consolidated
financial statements through the date the financial statements were issued. These unaudited
condensed consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Companys 2009 Annual Report on Form 10-K
(2009 Annual Report) filed with the Securities and Exchange Commission on March 2, 2010.
The accompanying unaudited condensed consolidated financial statements include the accounts of RGA
and its subsidiaries. All intercompany accounts and transactions have been eliminated.
2. 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):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Earnings: |
||||||||||||||||
Net income (numerator for basic and diluted calculations) |
$ | 128,232 | $ | 118,208 | $ | 377,690 | $ | 294,677 | ||||||||
Shares: |
||||||||||||||||
Weighted average outstanding shares (denominator for
basic calculation) |
73,162 | 72,781 | 73,117 | 72,754 | ||||||||||||
Equivalent shares from outstanding stock options(1) |
1,258 | 505 | 1,457 | 283 | ||||||||||||
Denominator for diluted calculation |
74,420 | 73,286 | 74,574 | 73,037 | ||||||||||||
Earnings per share: |
||||||||||||||||
Basic |
$ | 1.75 | $ | 1.62 | $ | 5.17 | $ | 4.05 | ||||||||
Diluted |
$ | 1.72 | $ | 1.61 | $ | 5.06 | $ | 4.03 |
(1) | Year-to-date amounts are weighted average of the individual quarterly amounts. |
The calculation of common equivalent shares does not include the impact of options or warrants
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. For the three months ended
September 30, 2010, approximately 1.7 million stock options and approximately 0.7 million
performance contingent shares were excluded from the calculation. For the three months ended
September 30, 2009, approximately 1.2 million stock options and approximately 0.6 million
performance contingent shares were excluded from the calculation.
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3. Comprehensive Income
The following table presents the components of the Companys other comprehensive income (loss)
(dollars in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income |
$ | 128,232 | $ | 118,208 | $ | 377,690 | $ | 294,677 | ||||||||
Other comprehensive income (loss), net of income tax: |
||||||||||||||||
Unrealized investment gains, net of reclassification
adjustment for gains included in net income |
362,408 | 475,230 | 729,749 | 710,903 | ||||||||||||
Reclassification adjustment for other-than-temporary
impairments |
(17 | ) | 2,600 | (1,450 | ) | (7,888 | ) | |||||||||
Currency translation adjustments |
68,701 | 79,939 | 31,808 | 165,776 | ||||||||||||
Unrealized pension and postretirement benefit adjustment |
325 | 1,019 | 443 | 1,304 | ||||||||||||
Comprehensive income |
$ | 559,649 | $ | 676,996 | $ | 1,138,240 | $ | 1,164,772 | ||||||||
The balance of and changes in each component of accumulated other comprehensive income (loss) for the nine months ended September 30, 2010 are as
follows (dollars in thousands):
Accumulated Other Comprehensive Income (Loss), Net of Income Tax | ||||||||||||||||
Accumulated | ||||||||||||||||
Currency | Unrealized | Pension and | ||||||||||||||
Translation | Appreciation | Postretirement | ||||||||||||||
Adjustments | of Securities | Benefits | Total | |||||||||||||
Balance, December 31, 2009 |
$ | 210,878 | $ | 104,457 | $ | (16,126 | ) | $ | 299,209 | |||||||
Change in component during the period |
31,808 | 728,299 | 443 | 760,550 | ||||||||||||
Balance, September 30, 2010 |
$ | 242,686 | $ | 832,756 | $ | (15,683 | ) | $ | 1,059,759 | |||||||
4. Investments
The Company had total cash and invested assets of $22.9 billion and $19.7 billion at September 30,
2010 and December 31, 2009, respectively, as illustrated below (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Fixed maturity securities, available-for-sale |
$ | 14,169,930 | $ | 11,763,358 | ||||
Mortgage loans on real estate |
863,873 | 791,668 | ||||||
Policy loans |
1,173,148 | 1,136,564 | ||||||
Funds withheld at interest |
5,276,511 | 4,895,356 | ||||||
Short-term investments |
84,091 | 121,060 | ||||||
Other invested assets |
738,830 | 516,086 | ||||||
Cash and cash equivalents |
634,075 | 512,027 | ||||||
Total cash and invested assets |
$ | 22,940,458 | $ | 19,736,119 | ||||
All investments held by the Company are monitored for conformance to the qualitative and
quantitative limits prescribed by the applicable jurisdictions insurance laws and regulations. In
addition, the operating companies boards of directors periodically review their respective
investment portfolios. The Companys investment strategy is to maintain a predominantly
investment-grade, fixed maturity securities portfolio, which will provide adequate liquidity for
expected reinsurance obligations and maximize total return through prudent asset management. The
Companys asset/liability duration matching differs between operating segments. The average
duration for all the Companys portfolios, when consolidated, ranges between eight and ten years.
However, based on Canadian reserve requirements, the Canadian liabilities are matched with
long-duration Canadian assets, and therefore, the duration of the Canadian portfolio exceeds twenty
years.
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Investment Income, Net of Related Expenses
Major categories of investment income, net of related expenses consist of the following (dollars in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Fixed maturity securities available-for-sale |
$ | 179,130 | $ | 153,752 | $ | 532,259 | $ | 443,849 | ||||||||
Mortgage loans on real estate |
13,406 | 11,323 | 37,567 | 34,279 | ||||||||||||
Policy loans |
18,271 | 17,298 | 56,150 | 50,647 | ||||||||||||
Funds withheld at interest |
69,677 | 114,731 | 245,249 | 267,717 | ||||||||||||
Short-term investments |
1,142 | 1,205 | 3,520 | 3,206 | ||||||||||||
Other invested assets |
11,926 | 5,902 | 26,694 | 21,067 | ||||||||||||
Investment revenue |
293,552 | 304,211 | 901,439 | 820,765 | ||||||||||||
Investment expense |
(6,048 | ) | (4,740 | ) | (18,006 | ) | (13,462 | ) | ||||||||
Investment income, net of related expenses |
$ | 287,504 | $ | 299,471 | $ | 883,433 | $ | 807,303 | ||||||||
Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Fixed maturity and equity securities available for sale: |
||||||||||||||||
Other-than-temporary impairment losses on fixed maturities |
$ | (4,904 | ) | $ | (16,945 | ) | $ | (15,823 | ) | $ | (88,282 | ) | ||||
Portion of loss recognized in accumulated other
comprehensive income (before taxes) |
26 | (4,000 | ) | 2,231 | 12,135 | |||||||||||
Net other-than-temporary impairment losses on fixed
maturities recognized in earnings |
(4,878 | ) | (20,945 | ) | (13,592 | ) | (76,147 | ) | ||||||||
Impairment losses on equity securities |
| | (32 | ) | (5,430 | ) | ||||||||||
Gain on investment activity |
39,371 | 31,823 | 74,833 | 69,334 | ||||||||||||
Loss on investment activity |
(7,773 | ) | (23,782 | ) | (21,967 | ) | (62,259 | ) | ||||||||
Other impairment losses |
(5,087 | ) | (4,790 | ) | (7,482 | ) | (7,755 | ) | ||||||||
Derivatives and other, net |
(38,413 | ) | 60,053 | 105,637 | 130,542 | |||||||||||
Net gains (losses) |
$ | (16,780 | ) | $ | 42,359 | $ | 137,397 | $ | 48,285 | |||||||
The net other-than-temporary impairment losses on fixed maturity securities recognized in
earnings of $4.9 million and $13.6 million in the third quarter and first nine months of 2010,
respectively, were primarily due to a decline in value of structured securities with exposure to
commercial mortgages. The much larger other-than-temporary impairments in 2009 were primarily due
to the turmoil in the U.S. and global financial markets. That condition had moderated considerably
by the beginning of 2010. 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.
During the three months ended September 30, 2010 and 2009, the Company sold fixed maturity
securities and equity securities with fair values of $97.6 million and $191.7 million at gross
losses of $7.8 million and $23.8 million, respectively, or at 92.6% and 89.0% of amortized cost,
respectively. During the nine months ended September 30, 2010 and 2009, the Company sold fixed
maturity securities and equity securities with fair values of $497.0 million and $514.3 million at
gross losses of $22.0 million and $62.3 million, respectively, or at 95.8% and 89.2% of amortized
cost, respectively. The Company generally does not engage in short-term buying and selling of
securities.
Other-Than-Temporary Impairments
The Company has a process in place to identify fixed maturity and equity securities that could
potentially have credit impairments that are other-than-temporary. This process involves
monitoring market events that could impact issuers credit ratings, business climates, management
changes, litigation, government actions and other similar factors. This process also involves
monitoring 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 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
8
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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 Companys 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, its 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.
On April 1, 2009, (Date of Adoption), the Company adopted the amended general accounting
principles for Investments as it relates to the recognition and presentation of
other-than-temporary impairments. See Note 12 New Accounting Standards for further discussion
of the adoption. The amended recognition provisions apply only to fixed maturity securities
classified as available-for-sale and held-to-maturity, while the presentation and disclosure
requirements apply to both fixed maturity and equity securities.
Impairment losses on equity securities are recognized in net income. Recognition of impairment
losses on fixed maturity securities is dependent on the facts and circumstances related to a
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, it recognizes an
other-than-temporary impairment in net income for the difference between amortized cost and fair
value. If the Company does not expect to recover the amortized cost basis, it does not plan to
sell the security and if it is not more likely than not that it would be required to sell a
security before the recovery of its amortized cost, the recognition of the other-than-temporary
impairment is bifurcated. The Company recognizes the credit loss portion in net income and the
non-credit loss portion in accumulated other comprehensive income (AOCI).
For the three and nine months ended September 30, 2010, the Company recognized $4.9 million and
$13.6 million, respectively, of credit related losses, primarily in various mortgage-backed
securities and to a lesser extent, U.S. corporate securities. For the three months ended September
30, 2009, the Company recognized $20.9 million of credit related losses in various asset-backed and
U.S. corporate securities. For the six-month period between the Date of Adoption and September 30,
2009, the Company recognized $41.8 million of credit related losses in mortgage-backed securities
and U.S. corporate securities combined. 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.
The following tables set forth the amount of credit loss impairments on fixed maturity securities
held by the Company as of the dates indicated, for which a portion of the other-than-temporary
impairment (OTTI) loss was recognized in AOCI, and the corresponding changes in such amounts
(dollars in thousands):
Three months ended September 30, | ||||||||
2010 | 2009 | |||||||
Balance, beginning of period |
$ | (53,348 | ) | $ | (23,936 | ) | ||
Initial impairments credit loss OTTI recognized on securities not previously impaired |
(2,296 | ) | | |||||
Additional impairments credit loss OTTI recognized on securities previously impaired |
(2,571 | ) | (13,935 | ) | ||||
Credit loss impairments previously recognized on securities which were sold during the period |
10,360 | | ||||||
Balance, end of period |
$ | (47,855 | ) | $ | (37,871 | ) | ||
Nine months ended | Six months ended | |||||||
September 30, 2010 | September 30, 2009 (1) | |||||||
Balance, beginning of period |
$ | (47,905 | ) | $ | (17,132 | ) | ||
Initial impairments credit loss OTTI recognized on securities not previously impaired |
(5,020 | ) | (3,242 | ) | ||||
Additional impairments credit loss OTTI recognized on securities previously impaired |
(7,975 | ) | (17,497 | ) | ||||
Credit loss impairments previously recognized on securities which were sold during the period |
13,045 | | ||||||
Balance, end of period |
$ | (47,855 | ) | $ | (37,871 | ) | ||
(1) | Shortened period due to adoption of amended general accounting principles on April 1, 2009. |
9
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Fixed Maturity and Equity Securities Available-for-Sale
As mentioned above, the amended general accounting principles for Investments changed how an entity
recognizes an other-than-temporary impairment for a fixed maturity security by separating the
other-than-temporary impairment loss between the amount representing the credit loss and the amount
relating to other factors, such as an increase in interest rates, if the Company does not have the
intent to sell or it more likely than not will not be required to sell prior to recovery of the
amortized cost less any current period credit loss. Credit losses are recognized in net income and
losses relating to other non-credit factors are recognized in AOCI and included in unrealized
losses in the tables below. The following tables provide information relating to investments in
fixed maturity securities and equity securities by sector as of September 30, 2010 and December 31,
2009 (dollars in thousands):
Other-than- | ||||||||||||||||||||||||
Estimated | temporary | |||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | % of | impairments | |||||||||||||||||||
September 30, 2010: | Cost | Gains | Losses | Value | Total | in AOCI | ||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 4,499,821 | $ | 433,193 | $ | 81,964 | $ | 4,851,050 | 34.3 | % | $ | | ||||||||||||
Canadian and Canadian provincial governments |
2,206,641 | 727,257 | 260 | 2,933,638 | 20.7 | | ||||||||||||||||||
Residential mortgage-backed securities |
1,520,269 | 63,274 | 22,255 | 1,561,288 | 11.0 | (1,902 | ) | |||||||||||||||||
Foreign corporate securities |
2,158,647 | 170,202 | 12,797 | 2,316,052 | 16.3 | | ||||||||||||||||||
Asset-backed securities |
457,047 | 13,697 | 56,229 | 414,515 | 2.9 | (5,203 | ) | |||||||||||||||||
Commercial mortgage-backed securities |
1,257,835 | 87,145 | 109,131 | 1,235,849 | 8.7 | (9,493 | ) | |||||||||||||||||
U.S. government and agencies |
233,512 | 21,787 | 10 | 255,289 | 1.8 | | ||||||||||||||||||
State and political subdivisions |
133,955 | 1,211 | 7,718 | 127,448 | 0.9 | | ||||||||||||||||||
Other foreign government securities |
465,389 | 12,309 | 2,897 | 474,801 | 3.4 | | ||||||||||||||||||
Total fixed maturity securities |
$ | 12,933,116 | $ | 1,530,075 | $ | 293,261 | $ | 14,169,930 | 100.0 | % | $ | (16,598 | ) | |||||||||||
Non-redeemable preferred stock |
$ | 109,416 | $ | 5,394 | $ | 4,507 | $ | 110,303 | 73.3 | % | ||||||||||||||
Other equity securities |
34,397 | 6,217 | 536 | 40,078 | 26.7 | |||||||||||||||||||
Total equity securities |
$ | 143,813 | $ | 11,611 | $ | 5,043 | $ | 150,381 | 100.0 | % | ||||||||||||||
Other-than- | ||||||||||||||||||||||||
Estimated | temporary | |||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | % of | impairments | |||||||||||||||||||
December 31, 2009: | Cost | Gains | Losses | Value | Total | in AOCI | ||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 3,689,797 | $ | 180,635 | $ | 147,384 | $ | 3,723,048 | 31.7 | % | $ | | ||||||||||||
Canadian and Canadian provincial |
||||||||||||||||||||||||
governments |
1,984,475 | 394,498 | 25,746 | 2,353,227 | 20.0 | | ||||||||||||||||||
Residential mortgage-backed securities |
1,494,021 | 32,538 | 70,015 | 1,456,544 | 12.4 | (7,018 | ) | |||||||||||||||||
Foreign corporate securities |
1,627,806 | 77,340 | 33,398 | 1,671,748 | 14.2 | | ||||||||||||||||||
Asset-backed securities |
522,760 | 9,307 | 80,131 | 451,936 | 3.8 | (2,194 | ) | |||||||||||||||||
Commercial mortgage-backed securities |
1,177,621 | 20,670 | 169,427 | 1,028,864 | 8.7 | (13,690 | ) | |||||||||||||||||
U.S. government and agencies |
540,001 | 1,085 | 15,027 | 526,059 | 4.5 | | ||||||||||||||||||
State and political subdivisions |
107,233 | 273 | 17,744 | 89,762 | 0.8 | | ||||||||||||||||||
Other foreign government securities |
473,243 | 2,198 | 13,271 | 462,170 | 3.9 | | ||||||||||||||||||
Total fixed maturity securities |
$ | 11,616,957 | $ | 718,544 | $ | 572,143 | $ | 11,763,358 | 100.0 | % | $ | (22,902 | ) | |||||||||||
Non-redeemable preferred stock |
$ | 123,648 | $ | 1,878 | $ | 12,328 | $ | 113,198 | 66.0 | % | ||||||||||||||
Other equity securities |
58,008 | 760 | 409 | 58,359 | 34.0 | |||||||||||||||||||
Total equity securities |
$ | 181,656 | $ | 2,638 | $ | 12,737 | $ | 171,557 | 100.0 | % | ||||||||||||||
As of September 30, 2010, the Company held securities with a fair value of $912.7 million that
were issued by the Canadian province of Ontario and $842.7 million in one entity that were
guaranteed by the Canadian province of Quebec, all of which exceeded 10% of consolidated
stockholders equity. As of December 31, 2009, the Company held securities with a fair value of
$448.3 million issued by the Federal National Mortgage Corporation, $482.6 million that were issued
by the United States
10
Table of Contents
Treasury,
$895.7 million that were issued by the Canadian province of Ontario,
and $679.9 million in one entity that were guaranteed by the Canadian province of Quebec, all of which exceeded 10% of consolidated
stockholders equity.
The amortized cost and estimated fair value of fixed maturity securities available-for-sale at
September 30, 2010 are shown by contractual maturity for all securities except certain U.S.
government agency securities, which are distributed by maturity year based on the Companys
estimate of the rate of future prepayments of principal over the remaining lives of the securities.
These estimates are derived from prepayment rates experienced at the interest rate levels
projected for the applicable underlying collateral and can be expected to vary from actual
experience. Actual maturities can differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalties. At September 30, 2010, the
contractual maturities of investments in fixed maturity securities were as follows (dollars in
thousands):
Amortized | Fair | |||||||
Cost | Value | |||||||
Available-for-sale: |
||||||||
Due in one year or less |
$ | 271,991 | $ | 276,720 | ||||
Due after one year through five years |
1,728,457 | 1,801,620 | ||||||
Due after five year through ten years |
3,269,967 | 3,612,154 | ||||||
Due after ten years |
4,427,550 | 5,267,784 | ||||||
Asset and mortgage-backed securities |
3,235,151 | 3,211,652 | ||||||
Total |
$ | 12,933,116 | $ | 14,169,930 | ||||
The table below includes major industry types and weighted average credit ratings of the
Companys U.S. and foreign corporate fixed maturity holdings as of September 30, 2010 and December
31, 2009 (dollars in thousands):
Estimated | Average Credit | |||||||||||||||
September 30, 2010: | Amortized Cost | Fair Value | % of Total | Ratings | ||||||||||||
Finance |
$ | 1,554,491 | $ | 1,613,466 | 22.5 | % | A- | |||||||||
Industrial |
2,253,731 | 2,475,680 | 34.5 | BBB+ | ||||||||||||
Foreign (1) |
2,158,647 | 2,316,052 | 32.3 | A+ | ||||||||||||
Utility |
688,293 | 758,115 | 10.6 | BBB+ | ||||||||||||
Other |
3,306 | 3,789 | 0.1 | AA- | ||||||||||||
Total |
$ | 6,658,468 | $ | 7,167,102 | 100.0 | % | A- | |||||||||
Estimated | Average Credit | |||||||||||||||
December 31, 2009: | Amortized Cost | Fair Value | % of Total | Ratings | ||||||||||||
Finance |
$ | 1,411,464 | $ | 1,358,925 | 25.2 | % | A- | |||||||||
Industrial |
1,670,610 | 1,735,522 | 32.2 | BBB+ | ||||||||||||
Foreign (1) |
1,627,352 | 1,671,090 | 30.9 | A | ||||||||||||
Utility |
603,958 | 624,710 | 11.6 | BBB+ | ||||||||||||
Other |
4,219 | 4,549 | 0.1 | A | ||||||||||||
Total |
$ | 5,317,603 | $ | 5,394,796 | 100.0 | % | A- | |||||||||
(1) | Includes U.S. dollar-denominated debt obligations of foreign obligors and other foreign investments. |
11
Table of Contents
At September 30, 2010 and December 31, 2009, the Company had $298.3 million and $584.9
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.
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Sector: |
||||||||
U.S. corporate securities |
29 | % | 26 | % | ||||
Canadian and Canada provincial governments |
| 4 | ||||||
Residential mortgage-backed securities |
7 | 12 | ||||||
Foreign corporate securities |
4 | 7 | ||||||
Asset-backed securities |
19 | 14 | ||||||
Commercial mortgage-backed securities |
37 | 29 | ||||||
State and political subdivisions |
3 | 3 | ||||||
U.S. government and agencies |
| 3 | ||||||
Other foreign government securities |
1 | 2 | ||||||
Total |
100 | % | 100 | % | ||||
Industry: |
||||||||
Finance |
24 | % | 25 | % | ||||
Asset-backed |
19 | 13 | ||||||
Industrial |
8 | 7 | ||||||
Mortgage-backed |
44 | 41 | ||||||
Government |
4 | 12 | ||||||
Utility |
1 | 2 | ||||||
Total |
100 | % | 100 | % | ||||
The following table presents total gross unrealized losses, including other-than-temporary
impairment losses reported in AOCI, for 601 and 1,316 fixed maturity securities and equity
securities as of September 30, 2010 and December 31, 2009, respectively, where the estimated fair
value had declined and remained below amortized cost by the indicated amount (dollars in
thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Number of | Unrealized | Number of | Unrealized | |||||||||||||||||||||
Securities | Losses | % of Total | Securities | Losses | % of Total | |||||||||||||||||||
Less than 20% |
482 | $ | 89,690 | 30.1 | % | 1,112 | $ | 254,075 | 43.4 | % | ||||||||||||||
20% or more for less than six months |
101 | 166,714 | 55.9 | 38 | 69,322 | 11.9 | ||||||||||||||||||
20% or more for six months or greater |
18 | 41,900 | 14.0 | 166 | 261,483 | 44.7 | ||||||||||||||||||
Total |
601 | $ | 298,304 | 100.0 | % | 1,316 | $ | 584,880 | 100.0 | % | ||||||||||||||
As of September 30, 2010 and December 31, 2009, respectively, 55.8% and 71.4% of these gross
unrealized losses were associated with securities that were investment grade. The Company has
experienced a significant recovery of market value since December 31, 2009. The amount of the
unrealized loss on these securities was primarily attributable to a widening of credit default
spreads since the time securities were purchased.
While all of these securities are monitored for potential impairment, the Company believes due to
fluctuating market conditions and liquidity concerns, and the relatively recent high levels of
price volatility, the extent and duration of a decline in value have become less indicative of when
there has been credit deterioration with respect to an issuer. The Companys 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 Companys 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. The Company continues to consider valuation declines as a
potential indicator of credit deterioration.
The following tables present the estimated fair values and gross unrealized losses, including
other-than-temporary impairment losses reported in AOCI, for the 601 and 1,316 fixed maturity
securities and equity securities that have estimated fair values below amortized cost as of
September 30, 2010 and December 31, 2009, respectively (dollars in thousands). These investments
are presented by class and grade of security, as well as the length of time the related market
value has remained below amortized cost.
12
Table of Contents
Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
September 30, 2010: | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 78,777 | $ | 19,484 | $ | 276,688 | $ | 45,918 | $ | 355,465 | $ | 65,402 | ||||||||||||
Canadian and Canadian provincial |
||||||||||||||||||||||||
governments |
61,724 | 243 | 4,526 | 17 | 66,250 | 260 | ||||||||||||||||||
Residential mortgage-backed securities |
193,986 | 6,315 | 120,680 | 6,346 | 314,666 | 12,661 | ||||||||||||||||||
Foreign corporate securities |
165,983 | 170 | 147,561 | 9,219 | 313,544 | 9,389 | ||||||||||||||||||
Asset-backed securities |
18,695 | 1,408 | 147,091 | 29,488 | 165,786 | 30,896 | ||||||||||||||||||
Commercial mortgage-backed securities |
78,393 | 9,221 | 113,820 | 27,037 | 192,213 | 36,258 | ||||||||||||||||||
U.S. government and agencies |
1,817 | 10 | | | 1,817 | 10 | ||||||||||||||||||
State and political subdivisions |
13,319 | 635 | 30,221 | 4,873 | 43,540 | 5,508 | ||||||||||||||||||
Other foreign government securities |
69,996 | 183 | 43,042 | 2,714 | 113,038 | 2,897 | ||||||||||||||||||
Total investment grade securities |
682,690 | 37,669 | 883,629 | 125,612 | 1,566,319 | 163,281 | ||||||||||||||||||
Non-investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
29,322 | 6,987 | 107,501 | 9,575 | 136,823 | 16,562 | ||||||||||||||||||
Asset-backed securities |
2,388 | 6,192 | 26,243 | 19,141 | 28,631 | 25,333 | ||||||||||||||||||
Foreign corporate securities |
1,762 | 3,408 | | | 1,762 | 3,408 | ||||||||||||||||||
Residential mortgage-backed securities |
51 | 11 | 51,812 | 9,583 | 51,863 | 9,594 | ||||||||||||||||||
Commercial mortgage-backed securities |
| | 70,162 | 72,873 | 70,162 | 72,873 | ||||||||||||||||||
State and political subdivisions |
| | 5,914 | 2,210 | 5,914 | 2,210 | ||||||||||||||||||
Total non-investment grade securities |
33,523 | 16,598 | 261,632 | 113,382 | 295,155 | 129,980 | ||||||||||||||||||
Total fixed maturity securities |
$ | 716,213 | $ | 54,267 | $ | 1,145,261 | $ | 238,994 | $ | 1,861,474 | $ | 293,261 | ||||||||||||
Non-redeemable preferred stock |
$ | 11,396 | $ | 513 | $ | 29,019 | $ | 3,994 | $ | 40,415 | $ | 4,507 | ||||||||||||
Other equity securities |
6,606 | 271 | 1,044 | 265 | 7,650 | 536 | ||||||||||||||||||
Total equity securities |
$ | 18,002 | $ | 784 | $ | 30,063 | $ | 4,259 | $ | 48,065 | $ | 5,043 | ||||||||||||
Total number of securities in an |
||||||||||||||||||||||||
unrealized loss position |
203 | 398 | 601 | |||||||||||||||||||||
Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
December 31, 2010: | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 373,049 | $ | 27,625 | $ | 679,908 | $ | 89,711 | $ | 1,052,957 | $ | 117,336 | ||||||||||||
Canadian and Canadian provincial governments |
494,718 | 15,374 | 135,315 | 10,372 | 630,033 | 25,746 | ||||||||||||||||||
Residential mortgage-backed securities |
402,642 | 23,671 | 197,320 | 20,185 | 599,962 | 43,856 | ||||||||||||||||||
Foreign corporate securities |
362,406 | 5,262 | 182,300 | 24,693 | 544,706 | 29,955 | ||||||||||||||||||
Asset-backed securities |
48,651 | 1,927 | 166,603 | 57,262 | 215,254 | 59,189 | ||||||||||||||||||
Commercial mortgage-backed securities |
177,360 | 10,312 | 425,793 | 79,297 | 603,153 | 89,609 | ||||||||||||||||||
U.S. government and agencies |
496,514 | 15,027 | | | 496,514 | 15,027 | ||||||||||||||||||
State and political subdivisions |
34,612 | 3,397 | 40,945 | 11,437 | 75,557 | 14,834 | ||||||||||||||||||
Other foreign government securities |
240,216 | 8,370 | 30,321 | 4,901 | 270,537 | 13,271 | ||||||||||||||||||
Total investment grade securities |
2,630,168 | 110,965 | 1,858,505 | 297,858 | 4,488,673 | 408,823 | ||||||||||||||||||
Non-investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
35,477 | 11,293 | 168,375 | 18,755 | 203,852 | 30,048 | ||||||||||||||||||
Asset-backed securities |
6,738 | 3,256 | 24,408 | 17,686 | 31,146 | 20,942 | ||||||||||||||||||
Foreign corporate securities |
1,755 | 17 | 3,771 | 3,426 | 5,526 | 3,443 | ||||||||||||||||||
Residential mortgage-backed securities |
10,657 | 1,909 | 66,756 | 24,250 | 77,413 | 26,159 | ||||||||||||||||||
Commercial mortgage-backed securities |
| | 57,179 | 79,818 | 57,179 | 79,818 | ||||||||||||||||||
State and political subdivisions |
| | 5,170 | 2,910 | 5,170 | 2,910 | ||||||||||||||||||
Total non-investment grade securities |
54,627 | 16,475 | 325,659 | 146,845 | 380,286 | 163,320 | ||||||||||||||||||
Total fixed maturity securities |
$ | 2,684,795 | $ | 127,440 | $ | 2,184,164 | $ | 444,703 | $ | 4,868,959 | $ | 572,143 | ||||||||||||
Non-redeemable preferred stock |
$ | 8,320 | $ | 1,263 | $ | 68,037 | $ | 11,065 | $ | 76,357 | $ | 12,328 | ||||||||||||
Other equity securities |
5 | 15 | 7,950 | 394 | 7,955 | 409 | ||||||||||||||||||
Total equity securities |
$ | 8,325 | $ | 1,278 | $ | 75,987 | $ | 11,459 | $ | 84,312 | $ | 12,737 | ||||||||||||
Total number of securities in an |
||||||||||||||||||||||||
unrealized loss position |
582 | 734 | 1,316 | |||||||||||||||||||||
13
Table of Contents
As of September 30, 2010, 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, as facts and circumstances change, the Company may
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 September 30, 2010, 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, from time
to time, if facts and circumstances change, the Company may sell equity securities in the ordinary
course of managing its portfolio to meet certain diversification, credit quality and liquidity
guidelines.
5. Derivative Instruments
The following table presents the notional amounts and fair value of derivative instruments as of
September 30, 2010 and December 31, 2009 (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Notional | Carrying Value/Fair Value | Notional | Carrying Value/Fair Value | |||||||||||||||||||||
Amount | Assets | Liabilities | Amount | Assets | Liabilities | |||||||||||||||||||
Derivatives not designated as
hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps(1) |
$ | 2,371,716 | $ | 128,233 | $ | 24,210 | $ | 1,388,570 | $ | 17,962 | $ | 47,061 | ||||||||||||
Financial futures(1) |
267,639 | | | 200,436 | | | ||||||||||||||||||
Foreign currency forwards(1) |
40,500 | 4,696 | | 40,500 | 2,200 | | ||||||||||||||||||
Consumer Price index (CPI) swaps(1) |
133,266 | 1,332 | | 124,034 | 1,631 | | ||||||||||||||||||
Credit default swaps(1) |
367,500 | 858 | 2,051 | 367,500 | 2,363 | 249 | ||||||||||||||||||
Equity options(1) |
33,041 | 7,445 | | | | | ||||||||||||||||||
Embedded derivatives in: |
||||||||||||||||||||||||
Modified coinsurance or funds
withheld arrangements(2) |
| | 318,000 | | | 434,494 | ||||||||||||||||||
Indexed annuity products(3) |
| 72,623 | 646,159 | | 68,873 | 584,906 | ||||||||||||||||||
Variable annuity products(3) |
| | 173,743 | | | 23,748 | ||||||||||||||||||
Total non-hedging derivatives |
3,213,662 | 215,187 | 1,164,163 | 2,121,040 | 93,029 | 1,090,458 | ||||||||||||||||||
Derivatives designated as
hedging instruments: |
||||||||||||||||||||||||
Interest rate swaps(1) |
21,783 | | 2,560 | 21,783 | | 677 | ||||||||||||||||||
Foreign currency swaps(1) |
615,323 | | 19,654 | 226,715 | | 9,008 | ||||||||||||||||||
Total hedging derivatives |
637,106 | | 22,214 | 248,498 | | 9,685 | ||||||||||||||||||
Total derivatives |
$ | 3,850,768 | $ | 215,187 | $ | 1,186,377 | $ | 2,369,538 | $ | 93,029 | $ | 1,100,143 | ||||||||||||
(1) | Carried on the Companys condensed consolidated balance sheets in other invested assets or other liabilities, at fair value. | |
(2) | Embedded liability is included on the condensed consolidated balance sheets with the host contract in funds withheld at interest, at fair value. | |
(3) | Embedded liability is included on the condensed consolidated balance sheets with the host contract in interest-sensitive contract liabilities, at fair value. Embedded asset is included on the condensed consolidated balance sheets in reinsurance ceded receivables. |
Accounting for Derivative Instruments and Hedging Activities
The Company does not enter into derivative instruments for speculative purposes. As of September
30, 2010 and December 31, 2009, the Company held interest rate swaps that were designated and
qualified as fair value hedges of interest rate risk. As of September 30, 2010 and December 31,
2009, the Company held foreign currency swaps that were designated and qualified as fair value
hedges of a portion of its net investment in its foreign operations. Gains of $50.0 million
related to foreign currency swaps terminated in 2009 continue to be reflected in AOCI. As of
September 30, 2010 and December 31, 2009, the Company also had derivative instruments that were not
designated as hedging instruments. See Note 2 Summary of Significant Accounting Policies of
the Companys 2009 annual report on Form 10-K 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.
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Fair Value Hedges
The Company designates and accounts for certain interest rate swaps that convert fixed rate
investments to floating rate investments as fair value hedges when they meet 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 three and nine months ended September 30, 2010 and 2009 were (dollars
in thousands):
Derivative Gain | Hedge Gain (Loss) | Hedged Item Gain | Hedged Item Gain | |||||||||||||||||
Type of Fair Value Hedge | (Loss) Location | Recognized | Hedged Item | (Loss) Location | (Loss) Recognized | |||||||||||||||
For the three months ended September 30, 2010: | ||||||||||||||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | (683 | ) | Fixed rate fixed maturity securities |
Investment related gains (losses), net |
$ | 922 | ||||||||||||
For the three months ended September 30, 2009: | ||||||||||||||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | (346 | ) | Fixed rate fixed maturity securities |
Investment related gains (losses), net |
$ | 498 | ||||||||||||
For the nine months ended September 30, 2010: | ||||||||||||||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | (1,883 | ) | Fixed rate fixed maturity securities |
Investment related gains (losses), net |
$ | 2,422 | ||||||||||||
For the nine months ended September 30, 2009: | ||||||||||||||||||||
Interest rate swaps |
Investment related gains (losses), net | $ | 1,119 | Fixed rate fixed maturity securities |
Investment related gains (losses), net |
$ | (958 | ) |
The Companys investment related gains (losses), net representing the ineffective portion of
all fair value hedges was immaterial for the three and nine months ended September 30, 2010 and
2009.
All components of each derivatives gain or loss were included in the assessment of hedge
effectiveness. There were no instances in which the Company discontinued fair value hedge
accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
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
Companys net investments in foreign operations (NIFO) hedges for the three and nine months ended
September 30, 2010 and 2009 (dollars in thousands):
Location of Gain | Gain (Loss) | Income Statement | ||||||||||||||||||
Derivative Gain | (Loss) Reclassified | Reclassified from | Location of Gain | Ineffective Gain | ||||||||||||||||
Type of NIFO Hedge | (Loss) in OCI | From AOCI | AOCI into income | (Loss) | (Loss) in Income | |||||||||||||||
For the three months ended September 30, 2010: | ||||||||||||||||||||
Foreign currency
swaps |
$ | (21,957 | ) | None | $ | | Investment income | $ | | |||||||||||
For the three months ended September 30, 2009: | ||||||||||||||||||||
Foreign currency
swaps |
$ | (4,000 | ) | None | $ | | Investment income | $ | | |||||||||||
For the nine months ended September 30, 2010: | ||||||||||||||||||||
Foreign currency
swaps |
$ | (13,191 | ) | None | $ | | Investment income | $ | | |||||||||||
For the nine months ended September 30, 2009: | ||||||||||||||||||||
Foreign currency
swaps |
$ | (2,356 | ) | None | $ | | Investment income | $ | |
Ineffectiveness on the foreign currency swaps is based upon the change in forward rates.
There was no ineffectiveness recorded in the periods presented herein.
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The Companys other comprehensive income for the three months ended September 30, 2010 and 2009,
includes losses of $22.0 million and $4.0 million, respectively, and $13.2 million and $2.4 million
for the nine months ended September 30,
2010 and 2009, respectively, related to foreign currency swaps used to hedge a portion of its net
investment in its foreign operations. The cumulative foreign currency translation gain recorded in
AOCI related to these hedges was $27.3 million and $40.5 million at September 30, 2010 and December
31, 2009, 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, except where otherwise noted. For the three months ended
September 30, 2010 and 2009, the Company recognized investment related gains (losses) of $11.6
million and ($5.7) million, respectively, and $129.6 million and ($162.0) million for the nine
months ended September 30, 2010 and 2009, respectively, related to derivatives (not including
embedded derivatives) that do not qualify or have not been qualified for hedge accounting.
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 fixed-rate and 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.
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.
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 inception and termination of the currency swap by each party. The
Company may also use foreign currency swaps to economically hedge the foreign currency risk
associated with certain of its net investments in foreign operations.
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.
CPI Swaps
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
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.
Credit Default Swaps
The Company invests in credit default swaps to diversify its credit risk exposure in certain
portfolios. These credit default swaps are over-the-counter instruments in which the Company
receives payments at specified intervals to insure credit risk
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on a portfolio of 125 U.S. investment-grade securities. Generally, if a credit event, as defined by the contract, occurs, the
contract will require the swap to be settled gross by the delivery of par quantities or value of
the referenced investment securities equal to the specified swap notional amount in exchange for the payment of cash amounts
by the Company equal to the par value of the investment security surrendered.
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.
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 enters into contracts to sell the equity index options within a limited time at a
contracted price. The contracts are net settled in cash based on differentials in the indices at
the time of exercise and the strike price.
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. 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. The related gains (losses) for the three and nine months ended
September 30, 2010 and 2009 are reflected in the following table (dollars in thousands):
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Embedded derivatives in modified coinsurance or funds withheld
arrangements and variable annuity contracts included in investment
related gains (losses) |
$ | (54,885 | ) | $ | 61,581 | $ | (33,501 | ) | $ | 281,943 | ||||||
After the associated amortization of DAC and taxes, the related
amounts included in net income |
(17,604 | ) | 11,173 | (4,197 | ) | (21,423 | ) | |||||||||
Amounts related to embedded derivatives in equity-indexed annuities
included in benefits and expenses |
(24,105 | ) | (23,144 | ) | (27,326 | ) | (11,680 | ) | ||||||||
After the associated amortization of DAC and taxes, the related
amounts included in net income |
864 | (17,305 | ) | (4,320 | ) | (18,058 | ) |
Non-hedging Derivatives
A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Companys income statement for the three and nine months ended September
30, 2010 and 2009 is as follows (dollars in thousands):
Gain (Loss) for the Three Months Ended | ||||||||||
September 30, | ||||||||||
Type of Non-hedging Derivative | Income Statement Location of Gain (Loss) | 2010 | 2009 | |||||||
Interest rate swaps |
Investment related gains (losses), net | $ | 49,825 | $ | 26,378 | |||||
Financial futures |
Investment related gains (losses), net | (42,270 | ) | (36,951 | ) | |||||
Foreign currency forwards |
Investment related gains (losses), net | 1,543 | 1,910 | |||||||
CPI swaps |
Investment related gains (losses), net | (508 | ) | 61 | ||||||
Credit default swaps |
Investment related gains (losses), net | 3,730 | 2,919 | |||||||
Equity options |
Investment related gains (losses), net | (731 | ) | | ||||||
Embedded derivatives in: |
||||||||||
Modified coinsurance or funds withheld arrangements |
Investment related gains (losses), net | (38,653 | ) | 51,454 | ||||||
Indexed annuity products |
Policy acquisition costs and other insurance expenses | 1,806 | 1,001 | |||||||
Indexed annuity products |
Interest credited | (25,911 | ) | (24,145 | ) | |||||
Variable annuity products |
Investment related gains (losses), net | (16,232 | ) | 10,127 | ||||||
Total non-hedging derivatives |
$ | (67,401 | ) | $ | 32,754 | |||||
Interest rate swaps |
Investment related gains (losses), net | $ | 148,280 | $ | (111,502 | ) | ||||
Financial futures |
Investment related gains (losses), net | (21,192 | ) | (62,699 | ) | |||||
Foreign currency forwards |
Investment related gains (losses), net | 2,161 | 1,032 | |||||||
CPI swaps |
Investment related gains (losses), net | 524 | 915 | |||||||
Credit default swaps |
Investment related gains (losses), net | 446 | 10,296 | |||||||
Equity options |
Investment related gains (losses), net | (604 | ) | | ||||||
Embedded derivatives in: |
||||||||||
Modified coinsurance or funds withheld arrangements |
Investment related gains (losses), net | 116,494 | 75,366 | |||||||
Indexed annuity products |
Policy acquisition costs and other insurance expenses | 2,968 | (1,495 | ) | ||||||
Indexed annuity products |
Interest credited | (30,293 | ) | (10,185 | ) | |||||
Variable annuity products |
Investment related gains (losses), net | (149,995 | ) | 206,577 | ||||||
Total non-hedging derivatives |
$ | 68,789 | $ | 108,305 | ||||||
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Credit Risk
The Company may be exposed to credit-related losses in the event of nonperformance by
counterparties to derivative financial instruments. Generally, the current credit exposure of the
Companys derivative contracts is limited to the fair value at the reporting date. The credit
exposure of the Companys derivative transactions is represented by the fair value of contracts
after consideration of any collateral received with a net positive fair value at the reporting
date.
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 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 partys financial strength
ratings. Additionally, a decrease in the Companys financial strength rating to a specified level
results in potential settlement of the derivative positions under the Companys agreements with its
counterparties. As of September 30, 2010, the Company held cash collateral under its control of
$105.0 million. This unrestricted cash collateral is included in cash and cash equivalents and the
obligation to return it is included in other liabilities in the condensed consolidated balance
sheets. No cash collateral was held as of December 31, 2009. As of September 30, 2010 the Company
had no cash collateral pledged to counterparties. As of December 31, 2009, the Company had
pledged collateral to counterparties on swaps of $16.0 million. The receivable related to cash
collateral is included in other assets, in the condensed consolidated balance sheets. From time to
time, the Company has both accepted and posted collateral consisting of various securities. As of
September 30, 2010, the Company posted a U.S. Treasury security as collateral to a counterparty
with a book value and market value of $18.0 million and $19.7 million, respectively, which is
included in other invested assets. There were no securities posted as collateral at December 31,
2009. There were no securities held as collateral as of September 30, 2010 and December 31, 2009.
In addition, the Company has exchange-traded futures, which require the maintenance of a margin
account, which is included in cash and cash equivalents. The Companys margin account totaled
$22.7 million and $17.1 million as of September 30, 2010 and December 31, 2009, respectively.
6. Fair Value of Financial Instruments
Fair values of financial instruments have been determined by using available market information and
the valuation techniques described below. Considerable judgment is often required in interpreting
market data to develop estimates of fair value. Accordingly, the estimates presented herein may
not necessarily be indicative of amounts that could be realized in a current market exchange. The
use of different assumptions or valuation techniques may have a material effect on the estimated
fair value amounts. The following table presents the carrying amounts and estimated fair values of
the Companys financial instruments at September 30, 2010 and December 31, 2009 (dollars in
thousands).
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September 30, 2010 | December 31, 2009 | |||||||||||||||
Estimated Fair | Estimated Fair | |||||||||||||||
Carrying Value | Value | Carrying Value | Value | |||||||||||||
Assets: |
||||||||||||||||
Fixed maturity securities |
$ | 14,169,930 | $ | 14,169,930 | $ | 11,763,358 | $ | 11,763,358 | ||||||||
Mortgage loans on real estate |
863,873 | 939,488 | 791,668 | 792,331 | ||||||||||||
Policy loans |
1,173,148 | 1,173,148 | 1,136,564 | 1,136,564 | ||||||||||||
Funds withheld at interest |
5,276,511 | 5,805,819 | 4,895,356 | 5,201,569 | ||||||||||||
Short-term investments |
84,091 | 84,091 | 121,060 | 121,060 | ||||||||||||
Other invested assets |
738,830 | 733,606 | 516,086 | 509,618 | ||||||||||||
Cash and cash equivalents |
634,075 | 634,075 | 512,027 | 512,027 | ||||||||||||
Accrued investment income |
177,250 | 177,250 | 107,447 | 107,447 | ||||||||||||
Reinsurance ceded receivables |
101,599 | 67,063 | 106,396 | 173,309 | ||||||||||||
Liabilities: |
||||||||||||||||
Interest-sensitive contract liabilities |
$ | 5,853,970 | $ | 5,662,556 | $ | 5,929,134 | $ | 6,196,420 | ||||||||
Long-term and short-term debt |
1,216,320 | 1,241,791 | 1,216,052 | 1,180,712 | ||||||||||||
Collateral finance facility |
850,026 | 514,250 | 850,037 | 510,000 | ||||||||||||
Company-obligated mandatorily
redeemable preferred securities |
159,368 | 240,688 | 159,217 | 205,655 |
Publicly traded fixed maturity securities are valued based upon quoted market prices or
estimates from independent pricing services, independent broker quotes and pricing matrices.
Private placement fixed maturity securities are valued based on the credit quality and duration of
marketable securities deemed comparable by the Companys investment advisor, which may be of
another issuer. The fair value of mortgage loans on real estate is estimated using discounted cash
flows. Policy loans typically carry an interest rate that is adjusted annually based on a market
index and therefore carrying value approximates fair value. 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. The
carrying values of cash and cash equivalents and short-term investments approximates fair values
due to the short-term maturities of these instruments. Common and preferred equity investments and
derivative financial instruments included in other invested assets are reflected at fair value on
the condensed consolidated balance sheets based primarily on quoted market prices, while limited
partnership interests are carried at cost. The fair value of limited partnerships is based on net
asset values. The carrying value for accrued investment income approximates fair value.
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 Companys
interest-sensitive contract liabilities and related reinsurance ceded receivables is based on the
cash surrender value of the liabilities, adjusted for recapture fees. The fair value of the
Companys long-term debt is estimated based on either quoted market prices or quoted market prices
for the debt of corporations with similar credit quality. The fair values of the Companys
collateral finance facility and company-obligated mandatorily redeemable preferred securities are
estimated using discounted cash flows.
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. In accordance with these principles,
valuation techniques utilized by management for invested assets and embedded derivatives reported
at fair value are generally categorized into three types:
Market Approach. Market approach valuation techniques use prices and other relevant information
from market transactions involving identical or comparable assets or liabilities. Valuation
techniques consistent with the market approach include comparables and matrix pricing. Comparables
use market multiples, which might lie in ranges with a different multiple for each comparable. The
selection of where within the range the appropriate multiple falls requires judgment, considering
both quantitative and qualitative factors specific to the measurement. Matrix pricing is a
mathematical technique used principally to value certain securities without relying exclusively on
quoted prices for the specific securities but comparing the securities to benchmark or comparable
securities.
Income Approach. Income approach valuation techniques convert future amounts, such as cash flows
or earnings, to a single present amount, or a discounted amount. These techniques rely on current
expectations of future amounts. Examples of income approach valuation techniques include present
value techniques, option-pricing models and binomial or lattice models that incorporate present
value techniques.
Cost Approach. Cost approach valuation techniques are based upon the amount that, at present,
would be required to replace
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the service capacity of an asset, or the current replacement cost.
That is, from the perspective of a market participant (seller),
the price that would be received for the asset is determined based on the cost to a market
participant (buyer) to acquire or construct a substitute asset of comparable utility.
The three approaches described above are consistent with generally accepted valuation techniques.
While all three approaches are not applicable to all assets or liabilities reported at fair value,
where appropriate and possible, one or more valuation techniques may be used. 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 regular 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 utilizes information from third parties,
such as pricing services and brokers, to assist in determining fair values for certain assets and
liabilities; however, management is ultimately responsible for all fair values presented in the
Companys financial statements. The Company performs 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. This process involves quantitative and qualitative analysis and is overseen by the
Companys investment and accounting personnel. Examples of procedures performed include, but are
not limited to, initial and ongoing review of third party pricing services and techniques, review
of pricing trends and monitoring of recent trade information. 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 more appropriate fair value based upon the available market data, the
price received from the third party is adjusted accordingly.
For invested assets 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 the market valuation techniques
described above, primarily a combination of the market approach, including matrix pricing and the
income approach. The assumptions and inputs used by management in applying these techniques
include, but are not limited to: interest rates, credit standing of the issuer or counterparty,
industry sector of the issuer, coupon rate, call provisions, sinking fund requirements, maturity,
estimated duration and assumptions regarding liquidity and future cash flows.
The significant inputs to the market standard valuation techniques for certain types of securities
with reasonable levels of price transparency are inputs that are observable in the market or can be
derived principally from or corroborated by observable market data. 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.
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 use of different techniques, assumptions and inputs may have a material effect on the estimated
fair values of the Companys securities holdings.
For embedded derivative liabilities associated with the underlying products in reinsurance
treaties, primarily equity-indexed and variable annuity treaties, the Company utilizes a market
standard technique, which includes an estimate of future equity option purchases and an adjustment
for the Companys own credit risk that takes into consideration the Companys financial strength
rating, also commonly referred to as a claims paying rating. The capital market inputs to the
model, such as equity indexes, equity volatility, interest rates and the Companys credit
adjustment, are generally observable. However, the valuation models also use inputs requiring
certain actuarial assumptions such as future interest margins, policyholder behavior, including
future equity participation rates, and explicit risk margins related to non-capital market inputs,
that are generally not observable and may require use of significant management judgment. Changes
in interest rates, equity indices, equity volatility, the Companys own credit risk, and actuarial
assumptions regarding policyholder behavior may result in significant fluctuations in the value of
embedded derivatives liabilities associated with equity-indexed annuity reinsurance treaties.
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 Companys funds withheld at interest asset.
The fair value of the underlying assets is generally based on market observable inputs using
market standard valuation techniques. However, the valuation also requires certain significant
inputs based on actuarial assumptions about policyholder behavior, which are generally not
observable.
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For the quarter ended September 30, 2010, the application of market standard valuation techniques
applied to similar assets and liabilities has been consistent.
General accounting principles for Fair Value Measurements and Disclosures 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. The standard describes three levels of
inputs that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities. The Companys Level 1 assets and liabilities include investment securities and derivative contracts that are traded in exchange markets. | |
Level 1 | 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 Companys 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 U.S. and foreign 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 services 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 Companys invested assets, this category generally includes U.S. and foreign corporate securities (primarily private placements), asset-backed securities (including those with exposure to subprime mortgages), and to a lesser extent, certain residential and commercial mortgage-backed securities, 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 Companys 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 Companys embedded derivatives, all of which are associated with reinsurance treaties, are classified in Level 3 since their values include significant unobservable inputs associated with actuarial assumptions regarding policyholder behavior. Embedded derivatives are reported with the host instruments on the condensed consolidated balance sheet. |
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 priority 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 measured at fair value on a recurring basis
as of September 30, 2010 and December 31, 2009 are summarized below (dollars in thousands).
21
Table of Contents
Fair Value Measurements Using: | ||||||||||||||||
September 30, 2010: | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||
U.S. corporate securities |
$ | 4,851,050 | $ | | $ | 4,042,673 | $ | 808,377 | ||||||||
Canadian and Canadian provincial governments |
2,933,638 | | 2,933,638 | | ||||||||||||
Residential mortgage-backed securities |
1,561,288 | | 1,397,956 | 163,332 | ||||||||||||
Foreign corporate securities |
2,316,052 | 16,261 | 2,193,841 | 105,950 | ||||||||||||
Asset-backed securities |
414,515 | | 184,621 | 229,894 | ||||||||||||
Commercial mortgage-backed securities |
1,235,849 | | 1,080,467 | 155,382 | ||||||||||||
U.S. government and agencies securities |
255,289 | 216,501 | 38,788 | | ||||||||||||
State and political subdivision securities |
127,448 | 7,357 | 71,739 | 48,352 | ||||||||||||
Other foreign government securities |
474,801 | 5,426 | 462,614 | 6,761 | ||||||||||||
Total fixed maturity securities available-for-sale |
14,169,930 | 245,545 | 12,406,337 | 1,518,048 | ||||||||||||
Funds withheld at interest embedded derivatives |
(318,000 | ) | | | (318,000 | ) | ||||||||||
Short-term investments |
6,446 | 5,832 | | 614 | ||||||||||||
Other invested assets non-redeemable preferred stock |
110,303 | 83,150 | 25,227 | 1,926 | ||||||||||||
Other invested assets other equity securities |
40,078 | 2,821 | 21,050 | 16,207 | ||||||||||||
Other invested assets derivatives |
142,564 | | 142,564 | | ||||||||||||
Other invested assets collateral |
19,668 | 19,668 | | | ||||||||||||
Reinsurance ceded receivable embedded derivatives |
72,623 | | | 72,623 | ||||||||||||
Total |
$ | 14,243,612 | $ | 357,016 | $ | 12,595,178 | $ | 1,291,418 | ||||||||
Liabilities: |
||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | (819,902 | ) | $ | | $ | | $ | (819,902 | ) | ||||||
Other liabilities derivatives |
(48,475 | ) | | (48,475 | ) | | ||||||||||
Total |
$ | (868,377 | ) | $ | | $ | (48,475 | ) | $ | (819,902 | ) | |||||
Fair Value Measurements Using: | ||||||||||||||||
December 31, 2009: | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||
U.S. corporate securities |
$ | 3,723,048 | $ | | $ | 2,901,535 | $ | 821,513 | ||||||||
Canadian and Canadian provincial governments |
2,353,227 | | 2,353,227 | | ||||||||||||
Residential mortgage-backed securities |
1,456,544 | | 1,312,087 | 144,457 | ||||||||||||
Foreign corporate securities |
1,671,748 | 5,447 | 1,450,923 | 215,378 | ||||||||||||
Asset-backed securities |
451,936 | | 189,169 | 262,767 | ||||||||||||
Commercial mortgage-backed securities |
1,028,864 | | 699,304 | 329,560 | ||||||||||||
U.S. government and agencies securities |
526,059 | 517,929 | 8,130 | | ||||||||||||
State and political subdivision securities |
89,762 | 6,251 | 71,431 | 12,080 | ||||||||||||
Other foreign government securities |
462,170 | 1,079 | 443,788 | 17,303 | ||||||||||||
Total fixed maturity securities available-for-sale |
11,763,358 | 530,706 | 9,429,594 | 1,803,058 | ||||||||||||
Funds withheld at interest embedded derivatives |
(434,494 | ) | | | (434,494 | ) | ||||||||||
Short-term investments |
12,937 | 2,714 | 9,780 | 443 | ||||||||||||
Other invested assets non-redeemable preferred stock |
113,198 | 85,016 | 21,407 | 6,775 | ||||||||||||
Other invested assets other equity securities |
58,359 | 17,523 | 30,400 | 10,436 | ||||||||||||
Other invested assets derivatives |
24,156 | | 24,156 | | ||||||||||||
Reinsurance ceded receivable embedded derivatives |
68,873 | | | 68,873 | ||||||||||||
Total |
$ | 11,606,387 | $ | 635,959 | $ | 9,515,337 | $ | 1,455,091 | ||||||||
Liabilities: |
||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | (608,654 | ) | $ | | $ | | $ | (608,654 | ) | ||||||
Other liabilities derivatives |
(56,995 | ) | | (56,995 | ) | | ||||||||||
Total |
$ | (665,649 | ) | $ | | $ | (56,995 | ) | $ | (608,654 | ) | |||||
22
Table of Contents
As of September 30, 2010 and December 31, 2009, respectively, the Company classified
approximately 10.7% and 15.3% of its fixed maturity securities in the Level 3 category. These
securities primarily consist of private placement corporate securities with an inactive trading
market. Additionally, the Company has included asset-backed securities with sub-prime exposure in
the Level 3 category due to the current market uncertainty associated with these securities and the
Companys utilization of information from third parties for the valuation of these securities.
Other invested assets derivatives and other liabilities derivatives include amounts with fair
values included in Level 2 at September 30, 2010 and December 31, 2009. See Note 5 Derivative
Instruments for additional information regarding these derivatives.
The tables below present reconciliations for all assets and liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended
September 30, 2010 and 2009 (dollars in thousands). The amount reported within purchases, sales,
issuances and settlements is the purchase/issuance price (for purchases and issuances) and the
sales/settlement proceeds (for sales and settlements) based upon the actual date purchased/issued
or sold/settled. Items purchased/issued and sold/settled in the same period are excluded from the
rollforward. The Companys policy is to recognize transfers 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. Transfers into Level 3, in the amounts of $59.2
million and $276.4 million for the three and nine months ended September 30, 2010, respectively,
are due to a lack of observable market data for these securities or, in accordance with company
policy, when the ratings of certain asset classes fall below investment grade. Transfers out of
Level 3, in the amounts of $121.4 million and $731.4 million for the three and nine months ended
September 30, 2010, respectively, are due to an increase in observable market data or when the
underlying inputs are evaluated and determined to be market observable. Transfers between Level 1
and Level 2 were not significant for the three and nine months ended September 30, 2010 and 2009.
Total gains/losses | Purchases, | |||||||||||||||||||||||
(realized/unrealized) included in: | sales, | |||||||||||||||||||||||
Balance | Other | issuances | Transfers in | Balance | ||||||||||||||||||||
For the three months ended | July 1, | Earnings, | comprehensive | and | and/or out of | September 30, | ||||||||||||||||||
September 30, 2010: | 2010 | net | income | settlements | Level 3 | 2010 | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 813,040 | $ | 388 | $ | 19,064 | $ | 3,696 | $ | (27,811 | ) | $ | 808,377 | |||||||||||
Residential mortgage-backed securities |
212,781 | (353 | ) | 10,503 | (26,923 | ) | (32,676 | ) | 163,332 | |||||||||||||||
Foreign corporate securities |
75,929 | 94 | 2,582 | 14,146 | 13,199 | 105,950 | ||||||||||||||||||
Asset-backed securities |
229,433 | (5,081 | ) | 8,243 | (15,144 | ) | 12,443 | 229,894 | ||||||||||||||||
Commercial mortgage-backed securities |
150,706 | (1,605 | ) | 10,694 | 22,271 | (26,684 | ) | 155,382 | ||||||||||||||||
State and political subdivision securities |
12,517 | 96 | 837 | 34,902 | | 48,352 | ||||||||||||||||||
Other foreign government securities |
6,303 | 1 | 322 | 135 | | 6,761 | ||||||||||||||||||
Sub-total |
1,500,709 | (6,460 | ) | 52,245 | 33,083 | (61,529 | ) | 1,518,048 | ||||||||||||||||
Funds withheld at interest
embedded derivatives |
(279,348 | ) | (38,652 | ) | | | | (318,000 | ) | |||||||||||||||
Short-term investments |
1,266 | | 1 | (1 | ) | (652 | ) | 614 | ||||||||||||||||
Other invested assets
non-redeemable preferred stock |
1,626 | | 300 | | | 1,926 | ||||||||||||||||||
Other invested assets other equity securities |
16,400 | | (700 | ) | 507 | | 16,207 | |||||||||||||||||
Reinsurance ceded receivable
embedded derivatives |
70,154 | 2,701 | | (232 | ) | | 72,623 | |||||||||||||||||
Total |
$ | 1,310,807 | $ | (42,411 | ) | $ | 51,846 | $ | 33,357 | $ | (62,181 | ) | $ | 1,291,418 | ||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities
embedded derivatives |
$ | (759,604 | ) | $ | (43,678 | ) | $ | | $ | (16,620 | ) | $ | | $ | (819,902 | ) | ||||||||
Total |
$ | (759,604 | ) | $ | (43,678 | ) | $ | | $ | (16,620 | ) | $ | | $ | (819,902 | ) | ||||||||
23
Table of Contents
Total gains/losses | Purchases, | |||||||||||||||||||||||
(realized/unrealized) included in: | sales, | |||||||||||||||||||||||
Balance | Other | issuances | Transfers in | Balance | ||||||||||||||||||||
For the three months ended | July 1, | Earnings, | comprehensive | and | and/or out of | September 30, | ||||||||||||||||||
September 30, 2009: | 2009 | net | income | settlements | Level 3 | 2009 | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 845,525 | $ | (554 | ) | $ | 74,775 | $ | (22,374 | ) | $ | 5,227 | $ | 902,599 | ||||||||||
Canadian and Canadian provincial
governments |
5,190 | 62 | 134 | (3,079 | ) | 7,041 | 9,348 | |||||||||||||||||
Residential mortgage-backed securities |
53,653 | (4,157 | ) | 9,858 | 20,855 | 20,862 | 101,071 | |||||||||||||||||
Foreign corporate securities |
294,711 | (1,018 | ) | 11,971 | 71,183 | 1,302 | 378,149 | |||||||||||||||||
Asset-backed securities |
227,777 | (10,087 | ) | 24,976 | 27,278 | 36,420 | 306,364 | |||||||||||||||||
Commercial mortgage-backed securities |
110,822 | (1,223 | ) | 6,776 | (1,261 | ) | (43,627 | ) | 71,487 | |||||||||||||||
State and political subdivision securities |
84,333 | 4 | 4,313 | 1,584 | (3,939 | ) | 86,295 | |||||||||||||||||
Other foreign government securities |
145,133 | 71 | 399 | (25,386 | ) | (4,706 | ) | 115,511 | ||||||||||||||||
Sub-total |
1,767,144 | (16,902 | ) | 133,202 | 68,800 | 18,580 | 1,970,824 | |||||||||||||||||
Funds withheld at interest
embedded derivatives |
(488,977 | ) | 51,454 | | 1 | | (437,522 | ) | ||||||||||||||||
Short-term investments |
688 | (14 | ) | 97 | (242 | ) | | 529 | ||||||||||||||||
Other invested assets
non-redeemable preferred stock |
9,348 | 2 | (143 | ) | 3,412 | (1,053 | ) | 11,566 | ||||||||||||||||
Other invested assets other equity securities |
13,267 | | 958 | | | 14,225 | ||||||||||||||||||
Reinsurance ceded receivable
embedded derivatives |
60,075 | 2,369 | | (2,302 | ) | | 60,142 | |||||||||||||||||
Total |
$ | 1,361,545 | $ | 36,909 | $ | 134,114 | $ | 69,669 | $ | 17,527 | $ | 1,619,764 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities
embedded derivatives |
$ | (575,225 | ) | $ | (16,363 | ) | $ | | $ | 6,757 | $ | | $ | (584,831 | ) | |||||||||
Total |
$ | (575,225 | ) | $ | (16,363 | ) | $ | | $ | 6,757 | $ | | $ | (584,831 | ) | |||||||||
Total gains/losses | Purchases, | |||||||||||||||||||||||
(realized/unrealized) included in: | sales, | |||||||||||||||||||||||
Balance | Other | issuances | Transfers in | Balance | ||||||||||||||||||||
For the nine months ended | January 1, | Earnings, | comprehensive | and | and/or out of | September 30, | ||||||||||||||||||
September 30, 2010: | 2010 | net | income | settlements | Level 3 | 2010 | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 821,513 | $ | 325 | $ | 47,469 | $ | 49,882 | $ | (110,812 | ) | $ | 808,377 | |||||||||||
Canadian and Canadian provincial |
||||||||||||||||||||||||
Residential mortgage-backed securities |
144,457 | (5,155 | ) | 25,029 | (34,372 | ) | 33,373 | 163,332 | ||||||||||||||||
Foreign corporate securities |
215,378 | 402 | 3,943 | 5,176 | (118,949 | ) | 105,950 | |||||||||||||||||
Asset-backed securities |
262,767 | (4,060 | ) | 27,519 | (29,066 | ) | (27,266 | ) | 229,894 | |||||||||||||||
Commercial mortgage-backed securities |
329,560 | (3,821 | ) | 20,969 | 26,499 | (217,825 | ) | 155,382 | ||||||||||||||||
State and political subdivision securities |
12,080 | 112 | 1,337 | 34,862 | (39 | ) | 48,352 | |||||||||||||||||
Other foreign government securities |
17,303 | (9 | ) | 352 | 1,393 | (12,278 | ) | 6,761 | ||||||||||||||||
Sub-total |
1,803,058 | (12,206 | ) | 126,618 | 54,374 | (453,796 | ) | 1,518,048 | ||||||||||||||||
Funds withheld at interest
embedded derivatives |
(434,494 | ) | 116,494 | | | | (318,000 | ) | ||||||||||||||||
Short-term investments |
443 | | | 995 | (824 | ) | 614 | |||||||||||||||||
Other invested assets
non-redeemable preferred stock |
6,775 | 550 | 160 | (5,146 | ) | (413 | ) | 1,926 | ||||||||||||||||
Other invested assets other equity securities |
10,436 | | 4,639 | 1,132 | | 16,207 | ||||||||||||||||||
Reinsurance ceded receivable
embedded derivatives |
68,873 | 4,259 | | (509 | ) | | 72,623 | |||||||||||||||||
Total |
$ | 1,455,091 | $ | 109,097 | $ | 131,417 | $ | 50,846 | $ | (455,033 | ) | $ | 1,291,418 | |||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities
embedded derivatives |
$ | (608,654 | ) | $ | (182,504 | ) | $ | | $ | (28,744 | ) | $ | | $ | (819,902 | ) | ||||||||
Total |
$ | (608,654 | ) | $ | (182,504 | ) | $ | | $ | (28,744 | ) | $ | | $ | (819,902 | ) | ||||||||
24
Table of Contents
Total gains/losses | Purchases, | |||||||||||||||||||||||
(realized/unrealized) included in: | sales, | |||||||||||||||||||||||
Balance | Other | issuances | Transfers in | Balance | ||||||||||||||||||||
For the nine months ended | January 1, | Earnings, | comprehensive | and | and/or out of | September 30, | ||||||||||||||||||
September 30, 2009: | 2009 | net | income | settlements | Level 3 | 2009 | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 816,285 | $ | (28,355 | ) | $ | 146,109 | $ | (26,971 | ) | $ | (4,469 | ) | $ | 902,599 | |||||||||
Canadian and Canadian provincial
governments |
9,965 | 62 | 100 | 1,242 | (2,021 | ) | 9,348 | |||||||||||||||||
Residential mortgage-backed securities |
30,424 | (14,466 | ) | 22,053 | 9,412 | 53,648 | 101,071 | |||||||||||||||||
Foreign corporate securities |
176,608 | (3,131 | ) | 14,326 | 214,304 | (23,958 | ) | 378,149 | ||||||||||||||||
Asset-backed securities |
231,869 | (22,765 | ) | 16,327 | 38,964 | 41,969 | 306,364 | |||||||||||||||||
Commercial mortgage-backed securities |
59,041 | (1,170 | ) | 25,963 | (11,148 | ) | (1,199 | ) | 71,487 | |||||||||||||||
State and political subdivision securities |
32,487 | 23 | 14,338 | 3,266 | 36,181 | 86,295 | ||||||||||||||||||
Other foreign government securities |
105,439 | 1,348 | (4,179 | ) | 31,400 | (18,497 | ) | 115,511 | ||||||||||||||||
Sub-total |
1,462,118 | (68,454 | ) | 235,037 | 260,469 | 81,654 | 1,970,824 | |||||||||||||||||
Funds withheld at interest
embedded derivatives |
(512,888 | ) | 75,366 | | | | (437,522 | ) | ||||||||||||||||
Short-term investments |
352 | (471 | ) | 709 | (61 | ) | | 529 | ||||||||||||||||
Other invested assets
non-redeemable preferred stock |
5,393 | (4,786 | ) | 7,305 | 2,481 | 1,173 | 11,566 | |||||||||||||||||
Other invested assets other equity securities |
12,056 | (564 | ) | 737 | 1,901 | 95 | 14,225 | |||||||||||||||||
Reinsurance ceded receivable
embedded derivatives |
66,716 | 1,778 | | (8,352 | ) | | 60,142 | |||||||||||||||||
Total |
$ | 1,033,747 | $ | 2,869 | $ | 243,788 | $ | 256,438 | $ | 82,922 | $ | 1,619,764 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities
embedded derivatives |
$ | (807,431 | ) | $ | 190,781 | $ | | $ | 31,819 | $ | | $ | (584,831 | ) | ||||||||||
Total |
$ | (807,431 | ) | $ | 190,781 | $ | | $ | 31,819 | $ | | $ | (584,831 | ) | ||||||||||
The tables below summarize gains and losses due to changes in fair value, including both
realized and unrealized gains and losses, recorded in earnings for Level 3 assets and liabilities
for the three and nine months ended September 30, 2010 and 2009 (dollars in thousands).
Policy | ||||||||||||||||||||||||
acquisition | ||||||||||||||||||||||||
Investment | costs and | |||||||||||||||||||||||
income, net of | Investment | Claims & | other | |||||||||||||||||||||
related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
For the three months ended September 30, 2010: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 43 | $ | 345 | $ | | $ | | $ | | $ | 388 | ||||||||||||
Residential mortgage-backed securities |
603 | (956 | ) | | | | (353 | ) | ||||||||||||||||
Foreign corporate securities |
89 | 5 | | | | 94 | ||||||||||||||||||
Asset-backed securities |
610 | (5,691 | ) | | | | (5,081 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
966 | (2,571 | ) | | | | (1,605 | ) | ||||||||||||||||
State and political subdivision securities |
100 | (4 | ) | | | | 96 | |||||||||||||||||
Other foreign government securities |
1 | | | | | 1 | ||||||||||||||||||
Sub-total |
2,412 | (8,872 | ) | | | | (6,460 | ) | ||||||||||||||||
Funds withheld at interest embedded derivatives |
| (38,652 | ) | | | | (38,652 | ) | ||||||||||||||||
Reinsurance ceded receivable embedded derivatives |
| | | | 2,701 | 2,701 | ||||||||||||||||||
Total |
$ | 2,412 | $ | (47,524 | ) | $ | | $ | | $ | 2,701 | $ | (42,411 | ) | ||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | | $ | (16,232 | ) | $ | (1,681 | ) | $ | (25,765 | ) | $ | | $ | (43,678 | ) | ||||||||
Total |
$ | | $ | (16,232 | ) | $ | (1,681 | ) | $ | (25,765 | ) | $ | | $ | (43,678 | ) | ||||||||
25
Table of Contents
Policy | ||||||||||||||||||||||||
acquisition | ||||||||||||||||||||||||
Investment | costs and | |||||||||||||||||||||||
income, net | Investment | Claims & | other | |||||||||||||||||||||
of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
For the three months ended September 30, 2009: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 595 | $ | (1,149 | ) | $ | | $ | | $ | | $ | (554 | ) | ||||||||||
Canadian and Canadian provincial governments |
(3 | ) | 65 | | | | 62 | |||||||||||||||||
Residential mortgage-backed securities |
428 | (4,585 | ) | | | | (4,157 | ) | ||||||||||||||||
Foreign corporate securities |
93 | (1,111 | ) | | | | (1,018 | ) | ||||||||||||||||
Asset-backed securities |
366 | (10,453 | ) | | | | (10,087 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
121 | (1,344 | ) | | | | (1,223 | ) | ||||||||||||||||
State and political subdivision securities |
7 | (3 | ) | | | | 4 | |||||||||||||||||
Other foreign government securities |
(435 | ) | 506 | | | | 71 | |||||||||||||||||
Sub-total |
1,172 | (18,074 | ) | | | | (16,902 | ) | ||||||||||||||||
Funds withheld at interest embedded derivatives |
| 51,454 | | | | 51,454 | ||||||||||||||||||
Short-term investments |
(88 | ) | 74 | | | | (14 | ) | ||||||||||||||||
Other invested assets non-redeemable preferred stock |
2 | | | | | 2 | ||||||||||||||||||
Reinsurance ceded receivable embedded derivatives |
| | | | 2,369 | 2,369 | ||||||||||||||||||
Total |
$ | 1,086 | $ | 33,454 | $ | | $ | | $ | 2,369 | $ | 36,909 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | | $ | 10,127 | $ | (1,299 | ) | $ | (25,191 | ) | $ | | $ | (16,363 | ) | |||||||||
Total |
$ | | $ | 10,127 | $ | (1,299 | ) | $ | (25,191 | ) | $ | | $ | (16,363 | ) | |||||||||
Policy | ||||||||||||||||||||||||
acquisition | ||||||||||||||||||||||||
Investment | costs and | |||||||||||||||||||||||
income, net | Investment | Claims & | other | |||||||||||||||||||||
of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
For the nine months ended September 30, 2010: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 287 | $ | 38 | $ | | $ | | $ | | $ | 325 | ||||||||||||
Residential mortgage-backed securities |
1,509 | (6,664 | ) | | | | (5,155 | ) | ||||||||||||||||
Foreign corporate securities |
241 | 161 | | | | 402 | ||||||||||||||||||
Asset-backed securities |
2,144 | (6,204 | ) | | | | (4,060 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
2,743 | (6,564 | ) | | | | (3,821 | ) | ||||||||||||||||
State and political subdivision securities |
123 | (11 | ) | | | | 112 | |||||||||||||||||
Other foreign government securities |
3 | (12 | ) | | | | (9 | ) | ||||||||||||||||
Sub-total |
7,050 | (19,256 | ) | | | | (12,206 | ) | ||||||||||||||||
Funds withheld at interest embedded derivatives |
| 116,494 | | | | 116,494 | ||||||||||||||||||
Other invested assets non-redeemable preferred stock |
| 550 | | | | 550 | ||||||||||||||||||
Reinsurance ceded receivable embedded derivatives |
| | | | 4,259 | 4,259 | ||||||||||||||||||
Total |
$ | 7,050 | $ | 97,788 | $ | | $ | | $ | 4,259 | $ | 109,097 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | | $ | (149,995 | ) | $ | (1,795 | ) | $ | (30,714 | ) | $ | | $ | (182,504 | ) | ||||||||
Total |
$ | | $ | (149,995 | ) | $ | (1,795 | ) | $ | (30,714 | ) | $ | | $ | (182,504 | ) | ||||||||
26
Table of Contents
Policy | ||||||||||||||||||||||||
acquisition | ||||||||||||||||||||||||
Investment | costs and | |||||||||||||||||||||||
income, net | Investment | Claims & | other | |||||||||||||||||||||
of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
For the nine months ended September 30, 2009: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 1,408 | $ | (29,763 | ) | $ | | $ | | $ | | $ | (28,355 | ) | ||||||||||
Canadian and Canadian provincial governments |
(3 | ) | 65 | | | | 62 | |||||||||||||||||
Residential mortgage-backed securities |
868 | (15,334 | ) | | | | (14,466 | ) | ||||||||||||||||
Foreign corporate securities |
183 | (3,314 | ) | | | | (3,131 | ) | ||||||||||||||||
Asset-backed securities |
3,368 | (26,133 | ) | | | | (22,765 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
278 | (1,448 | ) | | | | (1,170 | ) | ||||||||||||||||
State and political subdivision securities |
28 | (5 | ) | | | | 23 | |||||||||||||||||
Other foreign government securities |
(737 | ) | 2,085 | | | | 1,348 | |||||||||||||||||
Sub-total |
5,393 | (73,847 | ) | | | | (68,454 | ) | ||||||||||||||||
Funds withheld at interest embedded derivatives |
| 75,366 | | | | 75,366 | ||||||||||||||||||
Short-term investments |
152 | (623 | ) | | | | (471 | ) | ||||||||||||||||
Other invested assets non-redeemable preferred stock |
(58 | ) | (4,728 | ) | | | | (4,786 | ) | |||||||||||||||
Other invested assets other equity securities |
(142 | ) | (422 | ) | | | | (564 | ) | |||||||||||||||
Reinsurance ceded receivable embedded derivatives |
| | | | 1,778 | 1,778 | ||||||||||||||||||
Total |
$ | 5,345 | $ | (4,254 | ) | $ | | $ | | $ | 1,778 | $ | 2,869 | |||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | | $ | 206,577 | $ | (2,260 | ) | $ | (13,536 | ) | $ | | $ | 190,781 | ||||||||||
Total |
$ | | $ | 206,577 | $ | (2,260 | ) | $ | (13,536 | ) | $ | | $ | 190,781 | ||||||||||
The tables below summarize changes in unrealized gains or losses recorded in earnings for the
three and nine months ended September 30, 2010 and 2009 for Level 3 assets and liabilities that
were still held at September 30, 2010 and 2009 (dollars in thousands).
Policy | ||||||||||||||||||||||||
acquisition | ||||||||||||||||||||||||
Investment | costs and | |||||||||||||||||||||||
income, net | Investment | Claims & | other | |||||||||||||||||||||
of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
For the three months ended September 30, 2010: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 45 | $ | (8 | ) | $ | | $ | | $ | | $ | 37 | |||||||||||
Residential mortgage-backed securities |
503 | | | | | 503 | ||||||||||||||||||
Foreign corporate securities |
89 | | | | | 89 | ||||||||||||||||||
Asset-backed securities |
606 | (2,296 | ) | | | | (1,690 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
966 | (2,571 | ) | | | | (1,605 | ) | ||||||||||||||||
State and political subdivision securities |
100 | | | | | 100 | ||||||||||||||||||
Other foreign government securities |
1 | | | | | 1 | ||||||||||||||||||
Sub-total |
2,310 | (4,875 | ) | | | | (2,565 | ) | ||||||||||||||||
Funds withheld at interest embedded derivatives |
| (38,652 | ) | | | | (38,652 | ) | ||||||||||||||||
Reinsurance ceded receivable embedded derivatives |
| | | | 5,624 | 5,624 | ||||||||||||||||||
Total |
$ | 2,310 | $ | (43,527 | ) | $ | | $ | | $ | 5,624 | $ | (35,593 | ) | ||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | | $ | (16,232 | ) | $ | (3,216 | ) | $ | (39,402 | ) | $ | | $ | (58,850 | ) | ||||||||
Total |
$ | | $ | (16,232 | ) | $ | (3,216 | ) | $ | (39,402 | ) | $ | | $ | (58,850 | ) | ||||||||
27
Table of Contents
Policy | ||||||||||||||||||||||||
acquisition | ||||||||||||||||||||||||
Investment | costs and | |||||||||||||||||||||||
income, net | Investment | Claims & | other | |||||||||||||||||||||
of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
For the three months ended September 30, 2009: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 564 | $ | (914 | ) | $ | | $ | | $ | | $ | (350 | ) | ||||||||||
Canadian and Canadian provincial governments |
(4 | ) | | | | | (4 | ) | ||||||||||||||||
Residential mortgage-backed securities |
412 | (4,290 | ) | | | | (3,878 | ) | ||||||||||||||||
Foreign corporate securities |
87 | (967 | ) | | | | (880 | ) | ||||||||||||||||
Asset-backed securities |
130 | (8,968 | ) | | | | (8,838 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
123 | (2,646 | ) | | | | (2,523 | ) | ||||||||||||||||
State and political subdivision securities |
7 | | | | | 7 | ||||||||||||||||||
Other foreign government securities |
(312 | ) | | | | | (312 | ) | ||||||||||||||||
Sub-total |
1,007 | (17,785 | ) | | | | (16,778 | ) | ||||||||||||||||
Funds withheld at interest embedded derivatives |
| 51,454 | | | | 51,454 | ||||||||||||||||||
Short-term investments |
3 | | | | | 3 | ||||||||||||||||||
Other invested assets non-redeemable preferred stock |
2 | | | | | 2 | ||||||||||||||||||
Reinsurance ceded receivable embedded derivatives |
| | | | 4,706 | 4,706 | ||||||||||||||||||
Total |
$ | 1,012 | $ | 33,669 | $ | | $ | | $ | 4,706 | $ | 39,387 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | | $ | 10,127 | $ | (2,915 | ) | $ | (35,710 | ) | $ | | $ | (28,498 | ) | |||||||||
Total |
$ | | $ | 10,127 | $ | (2,915 | ) | $ | (35,710 | ) | $ | | $ | (28,498 | ) | |||||||||
Policy | ||||||||||||||||||||||||
acquisition | ||||||||||||||||||||||||
Investment | costs and | |||||||||||||||||||||||
income, net | Investment | Claims & | other | |||||||||||||||||||||
of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
For the nine months ended September 30, 2010: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 231 | $ | (594 | ) | $ | | $ | | $ | | $ | (363 | ) | ||||||||||
Residential mortgage-backed securities |
1,339 | (3,684 | ) | | | | (2,345 | ) | ||||||||||||||||
Foreign corporate securities |
196 | | | | | 196 | ||||||||||||||||||
Asset-backed securities |
2,128 | (2,748 | ) | | | | (620 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
2,725 | (6,563 | ) | | | | (3,838 | ) | ||||||||||||||||
State and political subdivision securities |
123 | | | | | 123 | ||||||||||||||||||
Other foreign government securities |
3 | | | | | 3 | ||||||||||||||||||
Sub-total |
6,745 | (13,589 | ) | | | | (6,844 | ) | ||||||||||||||||
Funds withheld at interest embedded derivatives |
| 116,494 | | | | 116,494 | ||||||||||||||||||
Other invested assets non-redeemable preferred stock |
(1 | ) | (3 | ) | | | | (4 | ) | |||||||||||||||
Reinsurance ceded receivable embedded derivatives |
| | | | 10,528 | 10,528 | ||||||||||||||||||
Total |
$ | 6,744 | $ | 102,902 | $ | | $ | | $ | 10,528 | $ | 120,174 | ||||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | | $ | (149,995 | ) | $ | (3,966 | ) | $ | (64,732 | ) | $ | | $ | (218,693 | ) | ||||||||
Total |
$ | | $ | (149,995 | ) | $ | (3,966 | ) | $ | (64,732 | ) | $ | | $ | (218,693 | ) | ||||||||
28
Table of Contents
Policy | ||||||||||||||||||||||||
acquisition | ||||||||||||||||||||||||
Investment | costs and | |||||||||||||||||||||||
income, net | Investment | Claims & | other | |||||||||||||||||||||
of related | related gains | other policy | Interest | insurance | ||||||||||||||||||||
For the nine months ended September 30, 2009: | expenses | (losses), net | benefits | credited | expenses | Total | ||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Fixed maturity securities available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 1,341 | $ | (20,769 | ) | $ | | $ | | $ | | $ | (19,428 | ) | ||||||||||
Canadian and Canadian provincial governments |
(3 | ) | | | | | (3 | ) | ||||||||||||||||
Residential mortgage-backed securities |
851 | (17,271 | ) | | | | (16,420 | ) | ||||||||||||||||
Foreign corporate securities |
173 | (2,272 | ) | | | | (2,099 | ) | ||||||||||||||||
Asset-backed securities |
2,680 | (29,803 | ) | | | | (27,123 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
292 | (2,873 | ) | | | | (2,581 | ) | ||||||||||||||||
State and political subdivision securities |
28 | | | | | 28 | ||||||||||||||||||
Other foreign government securities |
(583 | ) | | | | | (583 | ) | ||||||||||||||||
Sub-total |
4,779 | (72,988 | ) | | | | (68,209 | ) | ||||||||||||||||
Funds withheld at interest embedded derivatives |
| 75,366 | | | | 75,366 | ||||||||||||||||||
Short-term investments |
244 | (409 | ) | | | | (165 | ) | ||||||||||||||||
Other invested assets non-redeemable preferred stock |
(58 | ) | (3,858 | ) | | | | (3,916 | ) | |||||||||||||||
Other invested assets other equity securities |
(142 | ) | (425 | ) | | | | (567 | ) | |||||||||||||||
Reinsurance ceded receivable embedded derivatives |
| | | | 9,205 | 9,205 | ||||||||||||||||||
Total |
$ | 4,823 | $ | (2,314 | ) | $ | | $ | | $ | 9,205 | $ | 11,714 | |||||||||||
Liabilities: |
||||||||||||||||||||||||
Interest sensitive contract liabilities embedded derivatives |
$ | | $ | 206,577 | $ | (7,872 | ) | $ | (43,076 | ) | $ | | $ | 155,629 | ||||||||||
Total |
$ | | $ | 206,577 | $ | (7,872 | ) | $ | (43,076 | ) | $ | | $ | 155,629 | ||||||||||
7. Segment Information
The accounting policies of the segments are the same as those described in the Summary of
Significant Accounting Policies in Note 2 of the consolidated financial statements accompanying the
2009 Annual Report. 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 Companys businesses. As a result of the economic capital allocation
process, a portion of investment income and investment related gains and losses are credited to the
segments based on the level of allocated 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. Information related to total revenues, income
before income taxes, and total assets of the Company for each reportable segment are summarized
below (dollars in thousands).
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Total revenues: |
||||||||||||||||
U.S. |
$ | 1,125,706 | $ | 1,082,838 | $ | 3,599,408 | $ | 3,094,496 | ||||||||
Canada |
253,894 | 186,246 | 727,921 | 551,793 | ||||||||||||
Europe & South Africa |
244,206 | 213,041 | 690,730 | 582,389 | ||||||||||||
Asia Pacific |
299,655 | 265,900 | 891,692 | 778,120 | ||||||||||||
Corporate and Other |
32,078 | 30,956 | 77,850 | 116,189 | ||||||||||||
Total |
$ | 1,955,539 | $ | 1,778,981 | $ | 5,987,601 | $ | 5,122,987 | ||||||||
Income before income taxes: |
||||||||||||||||
U.S. |
$ | 111,786 | $ | 104,406 | $ | 364,133 | $ | 223,481 | ||||||||
Canada |
33,468 | 18,847 | 86,189 | 60,547 | ||||||||||||
Europe & South Africa |
17,494 | 6,981 | 50,477 | 27,879 | ||||||||||||
Asia Pacific |
28,483 | 30,925 | 78,689 | 60,018 | ||||||||||||
Corporate and Other |
5,942 | 21,392 | 9,072 | 60,255 | ||||||||||||
Total |
$ | 197,173 | $ | 182,551 | $ | 588,560 | $ | 432,180 | ||||||||
29
Table of Contents
Total Assets: | September 30, 2010 | December 31, 2009 | ||||||
U.S. |
$ | 17,911,750 | $ | 15,569,263 | ||||
Canada |
3,323,448 | 3,026,515 | ||||||
Europe & South Africa |
1,492,574 | 1,400,580 | ||||||
Asia Pacific |
2,245,034 | 2,060,425 | ||||||
Corporate and Other |
3,961,222 | 3,192,718 | ||||||
Total |
$ | 28,934,028 | $ | 25,249,501 | ||||
8. Commitments and Contingent Liabilities
The Company had commitments to fund investments in limited partnerships, commercial mortgage loans
and private placement investments in the amounts of $153.1 million, $19.0 million and $2.5 million,
respectively, at September 30, 2010. The Company had commitments to fund investments in limited
partnerships, commercial mortgage loans and private placement investments in the amounts of $86.6
million, $12.6 million and $7.0 million, respectively, at December 31, 2009. 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 are primarily carried at cost and included in other invested
assets in the condensed consolidated balance sheets.
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 is subject to litigation in the normal course of its business. The
Company currently has no material litigation. However, if such material litigation did arise, it
is possible that an adverse outcome on any particular arbitration or litigation situation could
have a material adverse effect on the Companys condensed consolidated financial position and/or
net income in a particular reporting period.
The Company has obtained letters of credit, issued by banks, 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. At September 30, 2010 and December 31, 2009, there were
approximately $16.9 million and $21.4 million, respectively, of outstanding bank letters of credit
in favor of third parties. Additionally, the Company utilizes letters of credit to secure reserve
credits when it retrocedes business to its subsidiaries, including Parkway Reinsurance Company,
Timberlake Financial, L.L.C., RGA Americas Reinsurance Company, Ltd., RGA Reinsurance Company
(Barbados) Ltd. and RGA Atlantic Reinsurance Company, Ltd. 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. 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 September 30, 2010 and December
31, 2009, $523.8 million and $617.5 million, respectively, in letters of credit from various banks
were outstanding, backing reinsurance between various subsidiaries of the Company. The banks
providing letters of credit to the Company are included on the National Association of Insurance
Commissioners (NAIC) list of approved banks. The Company maintains a syndicated revolving credit
facility with an overall capacity of $750.0 million, which is scheduled to mature in September
2012. The Company may borrow cash and obtain letters of credit in multiple currencies under this
facility. As of September 30, 2010, the Company had $278.6 million in issued, but undrawn, letters
of credit under this facility, which is included in the total above. Applicable letter of credit
fees and fees payable for the credit facility depend upon the Companys senior unsecured long-term
debt rating. The Company also maintains a $200.0 million letter of credit facility which is
scheduled to mature in September 2019. This letter of credit is expected to be fully utilized
though 2016 and then amortize to zero by 2019. As of September 30, 2010, the Company had $200.0
million in issued, but undrawn, letters of credit under this facility, which is included in the
total above. Letter of credit fees for this facility are fixed for the term of the facility. Fees
associated with the Companys other letters of credit are not fixed for periods in excess of one
year and are based on the Companys ratings and the general availability of these instruments in
the marketplace.
RGA has issued guarantees to third parties on behalf of its subsidiaries for the payment of amounts
due under certain credit facilities, reinsurance treaties 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 RGAs
subsidiary is relatively new, unrated, or not of a significant size. Liabilities supported by the
treaty guarantees, before consideration for any legally offsetting amounts due from the guaranteed
party, totaled $353.9 million and $330.3 million as of September 30, 2010 and December 31, 2009,
respectively, and are reflected on the Companys condensed consolidated balance sheets in future
policy
30
Table of Contents
benefits. Potential guaranteed amounts of future payments will vary depending on production
levels and underwriting results. Guarantees related to trust preferred securities and credit
facilities provide additional security to third parties should a subsidiary fail to make principal
and/or interest payments when due. As of September 30, 2010, RGAs exposure related to these
guarantees was $159.4 million.
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.
9. Income Tax
A reconciliation of the beginning and ending amount of unrecognized tax benefits for the nine
months ended September 30, 2010 and 2009 are as follows (dollars in thousands):
Total Unrecognized | Unrecognized Tax Benefits That, If Recognized, | |||||||||||||||
Tax Benefits | Would Affect The Effective Tax Rate | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance, beginning of year |
$ | 221,040 | $ | 206,665 | $ | 17,332 | $ | 28,106 | ||||||||
Additions for tax positions of prior years |
| 25,148 | | | ||||||||||||
Reductions for tax positions of prior years |
(42,628 | ) | (14,711 | ) | | (14,711 | ) | |||||||||
Additions for tax positions of current year |
2,957 | 2,953 | 2,957 | 2,953 | ||||||||||||
Reductions for tax positions of current year |
| | | | ||||||||||||
Settlements with tax authorities |
| | | | ||||||||||||
Balance, end of period |
$ | 181,369 | $ | 220,055 | $ | 20,289 | $ | 16,348 | ||||||||
During the first quarter of 2010, the Company reduced its accrual for uncertain tax positions
that are timing in nature and have no impact on the Companys effective tax rate by approximately
$47.7 million, including after-tax interest. The Company also increased its uncertain tax
positions that would impact the effective tax rate by approximately $1.0 million and $3.0 million
during the third quarter and first nine months of 2010, respectively.
During the second quarter of 2009, the Company recognized a tax benefit of approximately $12.0
million, including after-tax interest, related to the release of an uncertain tax position.
Following the evaluation of new information the Company believed this position to be highly
certain.
During the third quarter of 2009, the Company recognized tax benefits associated with uncertain tax
positions that are effectively settled of approximately $3.8 million, including after-tax interest.
The Company also increased its accrual by approximately $25.1 million for unrecognized tax
benefits that are timing in nature and have no impact on the Companys effective tax rate.
10. Employee Benefit Plans
The components of net periodic benefit costs for the three and nine months ended September 30, 2010
and 2009 were as follows (dollars in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net periodic pension benefit cost: |
||||||||||||||||
Service cost |
$ | 1,288 | $ | 1,349 | $ | 3,780 | $ | 3,173 | ||||||||
Interest Cost |
862 | 1,149 | 2,585 | 2,639 | ||||||||||||
Expected return on plan assets |
(644 | ) | (364 | ) | (1,933 | ) | (1,459 | ) | ||||||||
Amortization of prior service cost |
7 | 7 | 22 | 22 | ||||||||||||
Amortization of prior actuarial gain |
188 | 1,068 | 563 | 1,317 | ||||||||||||
Total |
$ | 1,701 | $ | 3,209 | $ | 5,017 | $ | 5,692 | ||||||||
Net periodic other benefits cost: |
||||||||||||||||
Service cost |
$ | 337 | $ | 158 | $ | 635 | $ | 474 | ||||||||
Interest Cost |
324 | 159 | 661 | 478 | ||||||||||||
Expected return on plan assets |
| | | | ||||||||||||
Amortization of prior service cost |
| | | | ||||||||||||
Amortization of prior actuarial gain |
167 | 23 | 177 | 69 | ||||||||||||
Total |
$ | 828 | $ | 340 | $ | 1,473 | $ | 1,021 | ||||||||
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The Company made pension contributions in the amount of $1.5 million during the second quarter
of 2010, and expects to make total pension contributions of $2.3 million in 2010.
11. Equity Based Compensation
Equity compensation expense was $3.1 million and $2.6 million in the third quarter of 2010 and
2009, respectively, and $13.0 million and $9.1 million in the first nine months of 2010 and 2009,
respectively. In the first quarter of 2010, the Company granted 0.5 million stock options at
$47.10 weighted average per share and 0.3 million performance contingent units to employees.
Additionally, non-employee directors were granted a total of 10,600 shares of common stock. As of
September 30, 2010, 1.8 million share options at $39.11 weighted average per share were vested and
exercisable with a remaining weighted average exercise period of 3.3 years. As of September 30,
2010, the total compensation cost of non-vested awards not yet recognized in the financial
statements was $22.3 million. It is estimated that these costs will vest over a weighted average
period of 2.5 years.
12. New Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Effective
July 1, 2009, FASB Accounting Standards Codification (Codification) has become the source of
authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the Securities and Exchange Commission for public companies. This statement is
effective for financial statements issued for interim and annual periods ending after September 15,
2009. The Company adopted Codification on September 30, 2009 and has updated all disclosures to
reference Codification herein.
Changes to the general accounting principles are established by the FASB in the form of accounting
standards updates to the FASBs Codification. Accounting standards updates not listed below were
assessed and determined to be either not applicable or are expected to have minimal impact on the
Companys condensed consolidated financial statements.
Consolidation and Business Combinations
In February 2010, the FASB amended the general accounting principles for Consolidation as it
relates to the assessment of a variable interest entity for potential consolidation. The amendment
defers the effective date of the Consolidation amendment made in June 2009 for certain variable
interest entities. This update also clarifies how a related partys interest should be considered
when evaluating variable interests. The amendment is effective for fiscal years and interim periods
beginning after January 31, 2010. The adoption of this amendment did not have an impact on the
Companys condensed consolidated financial statements.
In January 2010, the FASB amended the general accounting principles for Consolidation as it relates
to decreases in ownership of a subsidiary. This amendment clarifies the scope of the decrease in
ownership provisions. This amendment also requires additional disclosures about the deconsolidation
of a subsidiary or derecognition of a group of assets. The amendment is effective for fiscal years
and interim periods beginning after December 15, 2009. The adoption of this amendment did not have
an impact on the Companys condensed consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Consolidation as it relates to
the assessment of a variable interest entity for potential consolidation. This amendment also
requires additional disclosures to provide transparent information regarding the involvement in a
variable interest entity. The amendment is effective for fiscal years and interim periods beginning
after November 15, 2009. The adoption of this amendment did not have a material impact on the
Companys condensed consolidated financial statements.
In December 2007, the FASB amended the general accounting principles for Business Combinations.
This amendment establishes principles and requirements for how an acquirer recognizes and measures
certain items in a business combination, as well as disclosures about the nature and financial
effects of a business combination. The FASB also amended the general accounting principles for
Consolidation as it relates to noncontrolling interests in consolidated financial statements. This
amendment establishes accounting and reporting standards surrounding noncontrolling interest, or
minority interests, which are the portions of equity in a subsidiary not attributable, directly or
indirectly, to a parent. The amendments are effective for fiscal years beginning on or after
December 15, 2008 and apply prospectively to business combinations. Presentation and disclosure
requirements related to noncontrolling interests must be retrospectively applied. The adoption of
these amendments did not have a material impact on the Companys condensed consolidated financial
statements.
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Investments
In July 2010, the FASB amended the general accounting principles for Receivables as it relates to
the disclosures about the credit quality of financing receivables and the allowance for credit
losses. This amendment requires additional disclosures that provide a greater level of
disaggregated information about the credit quality of financing receivables and the allowance for
credit losses. It also requires the disclosure of credit quality indicators, past due information,
and modifications of financing receivables. The amendment is effective for interim and annual
reporting periods ending on or after December 15, 2010, except for disclosures about activity that
occurs during the reporting period. Those disclosures are effective for interim and annual
reporting periods beginning after December 15, 2010. The Company is currently evaluating the impact
of this amendment on its condensed consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Investments as it relates to
the recognition and presentation of other-than-temporary impairments. This amendment updates the
other-than-temporary impairment guidance for fixed maturity securities to make it more operational
and to improve the presentation and disclosure of other-than-temporary impairments (OTTI) on
fixed maturity and equity securities in the financial statements. The recognition provisions apply
only to fixed maturity securities classified as available-for-sale and held-to-maturity, while the
presentation and disclosure requirements apply to both fixed maturity and equity securities. An
impaired fixed maturity security will be considered other-than-temporarily impaired if the Company
has the intent to sell or it more likely than not will be required to sell prior to recovery of the
amortized cost. If the holder of a fixed maturity security does not expect recovery of the entire
cost basis, even if there is no intention to sell the security, an OTTI has occurred. This
amendment also changes how an entity recognizes an OTTI for a fixed maturity security by separating
the loss between the amount representing the credit loss and the amount relating to other factors,
if the Company does not have the intent to sell or it more likely than not will not be required to
sell prior to recovery of the amortized cost less any current period credit loss. Credit losses
will be recognized in net income and losses relating to other factors will be recognized in
accumulated other comprehensive income (AOCI). If the Company has the intent to sell or it more
likely than not will be required to sell before its recovery of amortized cost less any current
period credit loss, the entire OTTI will be recognized in net income. This amendment is effective
for interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment
resulted in a net after-tax increase to retained earnings and a decrease to accumulated other
comprehensive income of $4.4 million, as of April 1, 2009. The required disclosures are provided in
Note 4 Investments.
Transfers and Servicing
In June 2009, the FASB amended the general accounting principles for Transfers and Servicing as it
relates to the transfers of financial assets. This amendment also requires additional disclosures
to address concerns regarding the transparency of transfers of financial assets. The amendment is
effective for fiscal years and interim periods beginning after November 15, 2009. The adoption of
this amendment did not have a material impact on the Companys condensed consolidated financial
statements.
In February 2008, the FASB amended the general accounting principles for Transfers and Servicing as
it relates to the accounting for transfers of financial assets and repurchase financing
transactions. This amendment provides guidance for evaluating whether to account for a transfer of
a financial asset and repurchase financing as a single transaction or as two separate transactions.
The amendment is effective prospectively for financial statements issued for fiscal years beginning
after November 15, 2008. The adoption of this amendment did not have a material impact on the
Companys condensed consolidated financial statements.
Derivatives and Hedging
In March 2010, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to embedded derivatives. This amendment clarifies the scope exception for embedded credit
derivative features related to the transfer of credit risk in the form of subordination of a
financial instrument to another. The amendment is effective for financial statements issued for
fiscal years and interim periods beginning after June 15, 2010. The adoption of this amendment did
not have a material impact on the Companys condensed consolidated financial statements.
In March 2008, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to the disclosures about derivative instruments and hedging activities. This amendment
requires enhanced qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. The amendment is effective for financial statements issued for fiscal years and interim
periods beginning after November 15,
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2008. The Company adopted this amendment in the first quarter of 2009. The required disclosures are
provided in Note 5 Derivative Instruments.
Fair Value Measurements and Disclosures
In January 2010, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to the disclosures about fair value measurements. This amendment requires
new disclosures about the transfers in and out of Level 1 and 2 measurements and also enhances
disclosures about the activity within the Level 3 measurements. It also clarifies the required
level of disaggregation and the disclosures regarding valuation techniques and inputs to fair value
measurements. The amendment is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the enhanced Level 3 disclosures. Those disclosures are effective for
interim and annual reporting periods beginning after December 15, 2010. The Company adopted the
effective portions of this amendment in the first quarter of 2010 and is evaluating the impact of
the enhanced Level 3 disclosures. The required disclosures are provided in Note 6 Fair Value of
Financial Instruments.
In September 2009, the FASB amended the general accounting principles for Fair Value Measurements
and Disclosures as it relates to the fair value measurement of investments in certain entities that
calculate net asset value per share. This amendment allows the fair value of certain investments to
be measured on the basis of the net asset value. It also requires disclosure, by major category
type, of the attributes of those investments, such as the nature of any restrictions on redemption,
any unfunded commitments, and the investment strategies of the investees. The amendment is
effective for interim and annual reporting periods ending after December 15, 2009. The adoption of
this amendment did not have a material impact on the Companys condensed consolidated financial
statements.
In August 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to measuring liabilities at fair value. This amendment provides guidance
for measuring liabilities at fair value when a quoted price in an active market for the identical
liability is not available. It also clarifies that the inclusion of a separate input, used in the
fair value measurement, relating to the existence of a restriction that prevents the transfer of a
liability is not necessary. The amendment is effective for interim and annual reporting beginning
after issuance. The adoption of this amendment did not have a material impact on the Companys
condensed consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining fair value when the volume and level of activity for asset
or liability have significantly decreased and identifying transactions that are not orderly. This
amendment provides additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased in relation to normal market
activity for the asset or liability and clarifies that the use of multiple valuation techniques may
be appropriate. It also provides additional guidance on circumstances that may indicate a
transaction is not orderly. Further, it requires additional disclosures about fair value
measurements in annual and interim reporting periods. This amendment is effective prospectively for
interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment did
not have a material impact on the Companys condensed consolidated financial statements. The
required disclosures are provided in Note 6 Fair Value of Financial Instruments.
In October 2008, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining the fair value of a financial asset when the market for
that asset is not active. This amendment clarifies the application of fair value in a market that
is not active and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not active. The amendment
was effective upon issuance on October 10, 2008, including prior periods for which financial
statements had not been issued. The Company did not consider it necessary to change any valuation
techniques as a result of the amendment. The Company also adopted an amendment that delayed the
effective date of fair value measurement for certain nonfinancial assets and liabilities that are
recorded at fair value on a nonrecurring basis. The effective date was delayed until January 1,
2009 and impacts balance sheet items including nonfinancial assets and liabilities in a business
combination and the impairment testing of goodwill and long-lived assets. The adoption of this
amendment did not have a material impact on the Companys condensed consolidated financial
statements.
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 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
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successful acquisitions of new or renewal insurance contracts. The amendment is effective for
fiscal years and interim periods beginning after December 15, 2011. The Company is currently
evaluating the impact of this amendment on its condensed consolidated financial statements.
Compensation
In April 2010, the FASB amended the general accounting principles for Compensation as it relates to
stock compensation. This amendment clarifies that an employee share-based payment award with an
exercise price denominated in the currency of a market in which a substantial portion of the
entitys equity securities trades should not be considered to contain a condition that is not a
market, performance, or service condition. Therefore, such an award should not be classified as a
liability if it otherwise qualifies as equity. The amendment is effective for fiscal years and
interim periods beginning after December 15, 2010. The adoption of this amendment is not expected
to have an impact on the Companys condensed consolidated financial statements.
In December 2008, the FASB amended the general accounting principles for Compensation as it relates
to employers disclosures about postretirement benefit plan assets. This amendment provides guidance
for disclosure of the types of assets and associated risks in retirement plans. The new disclosures
are designed to provide additional insight into the major categories of plan assets, the inputs and
valuation techniques used to measure the fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in plan assets for the period,
significant concentrations of risk within plan assets and how investment decisions are made,
including factors necessary to understanding investment policies and strategies. The disclosures
about plan assets required by this amendment is effective for financial statements with fiscal
years ending after December 15, 2009. The adoption of this amendment did not have a material impact
on the Companys condensed consolidated financial statements.
Debt
In October 2009, the FASB amended the general accounting principles for Debt as it relates to the
accounting for own-share lending arrangements entered into in contemplation of a convertible debt
issuance or other financing. This amendment provides accounting and disclosure guidance for
own-share lending arrangements issued in contemplation of convertible debt issuance. The amendment
is effective for fiscal years and interim periods beginning after December 15, 2009. The adoption
of this amendment did not have an impact on the Companys condensed consolidated financial
statements.
Equity
In January 2010, the FASB amended the general accounting principles for Equity as it relates to
distributions to shareholders with components of stock and cash. This amendment clarifies that the
stock portion of a distribution to shareholders, which allows them to elect to receive cash or
stock with a limitation on the total amount of cash that shareholders can receive, is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
The amendment is effective for fiscal years and interim periods beginning after December 15, 2009.
The adoption of this amendment did not have an impact on the Companys condensed consolidated
financial statements.
13. Business Acquisition
Effective January 1, 2010, the Company completed its acquisition of ReliaStar Life Insurance
Companys U.S. and Canadian group life, accident and health reinsurance business. ReliaStar Life
Insurance Company is a subsidiary of ING Groep N.V. The acquisition was structured as an indemnity
coinsurance agreement and resulted in an intangible asset of $129 million, which is reported in
other assets in the condensed consolidated balance sheets. The acquisition is expected to enhance
the Companys expertise and product offerings in the North American market, but is expected to
contribute less than five percent to the Companys consolidated assets, liabilities and income in
2010.
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ITEM 2. MANAGEMENTS 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 Companys liquidity, access to capital
and cost of capital, (2) the impairment of other financial institutions and its effect on the
Companys business, (3) requirements to post collateral or make payments due to declines in market
value of assets subject to the Companys collateral arrangements, (4) the fact that the
determination of allowances and impairments taken on the Companys investments is highly
subjective, (5) adverse changes in mortality, morbidity, lapsation or claims experience, (6)
changes in the Companys financial strength and credit ratings and the effect of such changes on
the Companys 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 Companys 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 Companys investment securities or
result in the impairment of all or a portion of the value of certain of the Companys investment
securities, that in turn could affect regulatory capital, (11) market or economic conditions that
adversely affect the Companys ability to make timely sales of investment securities, (12) risks
inherent in the Companys 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, (17) competitive factors and competitors responses to the Companys initiatives, (18)
the success of the Companys clients, (19) successful execution of the Companys entry into new
markets, (20) successful development and introduction of new products and distribution
opportunities, (21) the Companys ability to successfully integrate and operate reinsurance
business that the Company acquires, (22) regulatory action that may be taken by state Departments
of Insurance with respect to the Company, (23) the Companys 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 Companys 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 Companys
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 Companys 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 Companys 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 in the 2009 Annual Report.
Overview
RGA, an insurance holding company that was formed on December 31, 1992, is primarily engaged in the
life reinsurance business, 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 surrenders of underlying
policies, deaths of policyholders, and the exercise of recapture options by ceding companies.
The Company derives revenues primarily from renewal premiums from existing reinsurance treaties,
new business premiums from existing or new reinsurance treaties, income earned on invested assets,
and fees earned from financial reinsurance
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transactions. The Company believes that industry trends have not changed materially from those
discussed in its 2009 Annual Report.
The Companys long-term profitability primarily depends on the volume and amount of claims incurred
and its ability to adequately price the risks it assumes. While claims are reasonably predictable
over a period of 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 can be up to $8 million. Claims in excess of this
retention amount are retroceded to retrocessionaires; however, the Company remains fully liable to
the ceding company for the entire amount of risk it assumes. The Company believes its sources of
liquidity are sufficient to cover potential claims payments on both a short-term and long-term
basis.
The Company measures performance based on income or loss before income taxes for each of its five
segments. The Companys U.S., Canada, Europe & South Africa and Asia Pacific operations provide
traditional life reinsurance to clients. The Companys U.S. operations also provide long-term
care, group life and health reinsurance, annuity and financial reinsurance products. The Company
also provides insurers with critical illness reinsurance in its Canada, Europe & South Africa and
Asia Pacific operations. Additionally, Canada and Europe & South Africa operations provide
longevity reinsurance and Asia Pacific operations provide financial reinsurance. The Corporate and
Other segment results include among other things, the corporate investment activity, general
corporate expenses, interest expense of RGA, operations of RGA Technology Partners, Inc., a
wholly-owned subsidiary that develops and markets technology solutions for the insurance industry,
investment income and expense associated with the Companys collateral finance facility and the
provision for 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 basis upon
which capital is deployed. The economic capital model considers the unique and specific nature of
the risks inherent in the Companys businesses. As a result of the economic capital allocation
process, a portion of investment income and investment related gains and losses are credited to the
segments based on the level of allocated 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.
Results of Operations
Consolidated
Consolidated income before income taxes increased $14.6 million, or 8.0%, and $156.4 million, or
36.2%, for the three and nine months ended September 30, 2010, as compared to the same periods in
2009. The increase in the third quarter is primarily due to a decrease in investment impairments
and increased net premiums offset by an unfavorable change in the value of embedded derivatives
within the U.S. segment. The increase for the first nine months is primarily due to a decrease in
investment impairments, increased net premiums and investment income, partially offset by the
recognition of a gain on the repurchase of long-term debt of $38.9 million, recorded in other
revenues in 2009. Foreign currency fluctuations relative to the prior year favorably affected
income before income taxes by approximately $2.4 million and $18.9 million for the third quarter
and first nine months of 2010, respectively, as compared to the same periods in 2009.
The Company recognizes in consolidated income, changes in the value of embedded derivatives on
modified coinsurance or funds withheld treaties, equity-indexed annuity treaties (EIAs) and
variable annuity products. The change in the value of embedded derivatives related to 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 unrealized
gains and losses associated with these embedded derivatives, after adjustment for deferred
acquisition costs, affected income before income taxes unfavorably by $32.6 million and $4.3
million in the third quarter and first nine months of 2010, respectively, as compared to the same
periods in 2009. 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, adversely affected income before income taxes by $15.0 million
and $19.3 million in the third quarter and first nine months of 2010, respectively, as compared to
the same periods in 2009. The change in the Companys 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, affected income before income taxes
unfavorably by $11.7 million in the third quarter and favorably by $30.8 million in the first nine
months of 2010, respectively, as compared to the same periods in 2009.
The combined changes in these three types of embedded derivatives, after adjustment for deferred
acquisition costs and retrocession, resulted in a decrease of approximately $59.3 million and an
increase of approximately $7.2 million in consolidated income before income taxes in the third
quarter and first nine months of 2010, respectively, as compared to the same periods in 2009.
These fluctuations do not affect current cash flows, crediting rates or spread performance on the
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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.
Consolidated net premiums increased $242.1 million, or 17.2%, and $731.4 million, or 17.7%, for the
three and nine months ended September 30, 2010, as compared to the same periods in 2009, primarily
due to growth in life reinsurance in force and the acquisition of Reliastar Life Insurance
Companys group life and health reinsurance business, effective January 1, 2010. Foreign currency
fluctuations favorably affected net premiums by approximately $15.4 million and $159.9 million for
the three and nine months ended September 30, 2010, as compared to the same periods in 2009.
Consolidated assumed insurance in force increased to $2,478.9 billion as of September 30, 2010 from
$2,274.6 billion as of September 30, 2009 due to new business production. The Company added new
business production, measured by face amount of insurance in force, of $77.4 billion and $70.3
billion during the third quarter of 2010 and 2009, respectively, and $246.5 billion and $216.9
billion during the first nine months of 2010 and 2009, 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, decreased $12.0 million, or 4.0%, and
increased $76.1 million, or 9.4%, for the three and nine months ended September 30, 2010, as
compared to the same periods in 2009. The decrease in the third quarter was largely due to a $55.1
million decrease from market value changes related to the Companys funds withheld at interest
investment associated with the reinsurance of certain EIAs, which are substantially offset by a
corresponding change in interest credited to policyholder account balances resulting in an
insignificant effect on net income. This decrease was largely offset by increased investment
income from a larger average invested asset base. The increase in the first nine months was
primarily due to a larger average invested asset base offset by a lower effective investment
portfolio yield and a $47.2 million decrease from market value changes related to the Companys
funds withheld at interest investment associated with the reinsurance of certain EIAs, which are
substantially offset by a corresponding change in interest credited to policyholder account
balances resulting in an insignificant effect on net income. Average invested assets at amortized
cost at September 30, 2010 totaled $15.2 billion, an 18.6% increase over September 30, 2009. The
average yield earned on investments, excluding funds withheld, decreased to 5.66%, for the third
quarter of 2010 from 5.71% for the third quarter of 2009. The average yield earned on investments,
excluding funds withheld, decreased to 5.67% for the first nine months of 2010 from 5.71% for the
first nine months of 2009. The average yield will vary from quarter to quarter and 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. A continued low interest rate environment in
the U.S. is expected to put downward pressure on this yield in future reporting periods.
Total investment related gains (losses), net reflect an unfavorable change of $59.1 million and a
favorable change of $89.1 million, for the three and nine months ended September 30, 2010, as
compared to the same periods in 2009. The unfavorable change for the third quarter was primarily
due to unfavorable changes in the embedded derivatives related to guaranteed minimum living
benefits of $26.4 million and reinsurance treaties written on a modified coinsurance or funds
withheld basis of $90.1 million, largely offset by an increase in net hedging gains related to the
liabilities associated with guaranteed minimum living benefits of $24.5 million and a decrease in
investment impairments, net of non-credit related adjustments, of $16.1 million. The improvement
for the first nine months is primarily due to an increase in net hedging gains related to the
liabilities associated with guaranteed minimum living benefits of $302.1 million, favorable changes
in the value of embedded derivatives associated with reinsurance treaties written on a modified
coinsurance or funds withheld basis of $41.1 million, a decrease in investment impairments, net of
non-credit related adjustments, of $62.6 million, largely offset by unfavorable changes in the
embedded derivatives related to guaranteed minimum living benefits of $356.6 million. See Note 4
Investments and Note 5 Derivative Instruments in the Notes to Condensed Consolidated
Financial Statements for additional information on the impairment losses 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 effective tax rate on a consolidated basis was 35.0% and 35.3% for the third quarter of 2010
and 2009, respectively, and 35.8% and 31.8% for the first nine months of 2010 and 2009,
respectively. The third quarter and first nine months of 2010 effective tax rates were affected by
the expiration of the active financing exception tax rules on December 31, 2009. Since the U.S.
Congress did not pass an extender package by September 30, 2010, the Company reflected an
additional tax provision for the third quarter and first nine months of 2010 of approximately $5.0
million and $14.9 million, respectively. It is possible that the U.S. Congress will pass the
extender package during 2010, at which time the Company would reverse these accruals. The 2009
effective tax rates were affected by the reduction of an account liability for a previously
uncertain tax position and by the 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.
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Critical Accounting Policies
The Companys accounting policies are described in the Summary of Significant Accounting Policies
in Note 2 of the consolidated financial statements accompanying the 2009 Annual Report. The
Company believes its most critical accounting policies include the capitalization and amortization
of deferred acquisition costs (DAC); the establishment of liabilities for future policy benefits,
other policy claims and benefits, including incurred but not reported claims; the valuation of
fixed maturity investments and investment impairments, if any; embedded derivatives; accounting for
income taxes; and the establishment of arbitration or litigation reserves. The balances of these
accounts require extensive use of assumptions and estimates, particularly related to the future
performance of the underlying business.
Additionally, for each of the Companys reinsurance contracts, it must determine if the contract
provides indemnification against loss or liability relating to insurance risk, in accordance with
applicable accounting standards. The Company must review all contractual features, particularly
those that 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 the possibility of a
significant loss from insurance risk will occur only under remote circumstances, it records the
contract under a deposit method of accounting with the net amount receivable or payable reflected
in premiums receivable and other reinsurance balances or other reinsurance liabilities on the
condensed consolidated balance sheets. Fees earned on the contracts are reflected as other
revenues, as opposed to net premiums, on the condensed consolidated statements of income.
Differences in experience compared with the assumptions and estimates utilized in 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 Companys results of operations and financial condition.
Deferred Acquisition Costs (DAC)
Costs of acquiring new business, which vary with and are primarily related to the production of new
business, have been deferred to the extent that such costs are deemed recoverable from future
premiums or gross profits. DAC amounts reflect the Companys expectations about the future
experience of the business in force and include commissions and allowances as well as certain costs
of policy issuance and underwriting. Some of the factors that can affect the carrying value of DAC
include mortality assumptions, interest spreads and policy lapse rates. For traditional life and
related coverages, the Company performs periodic tests to determine that DAC remains recoverable at
all times, including at issue, and the cumulative amortization is re-estimated and, if necessary,
adjusted by a cumulative charge to current operations. For its asset-intensive business, the
Company updates the estimated gross profits with actual gross profits each reporting period,
resulting in an increase or decrease to DAC to reflect the difference in the actual gross profits
versus the previously estimated gross profits.
Liabilities for Future Policy Benefits and Other Policy Liabilities
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 established by the Company 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
Companys 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 Companys
reinsurance contracts, the reserving process, while based on actuarial science, is inherently
uncertain. If the Companys 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.
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Other policy claims and benefits include claims payable for incurred but not reported losses, which
are determined using case-basis estimates and lag studies of past experience. These estimates are
periodically reviewed and any adjustments to such estimates, if necessary, are reflected in current
operations. 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
and business segment. The Company updates its analysis of incurred but not reported claims,
including lag studies, on a periodic basis and adjusts its claim liabilities accordingly. The
adjustments in a given period are generally not significant relative to the overall policy
liabilities.
Valuation of Fixed Maturity Securities
The Company primarily invests in fixed maturity securities, including bonds and redeemable
preferred stocks. These securities are classified as available-for-sale and accordingly are
carried at fair value on the condensed consolidated balance sheets. The difference between
amortized cost and fair value is reflected as an unrealized gain or loss, less applicable deferred
taxes as well as related adjustments to deferred acquisition costs, if applicable, in accumulated
other comprehensive income (AOCI) in stockholders equity. The determinations of fair value may
require extensive use of assumptions and inputs. In addition, other-than-temporary impairment
losses related to non-credit factors are recognized in AOCI.
The Company performs regular analysis and review of the various techniques, assumptions and inputs
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
utilizes information from third parties, such as pricing services and brokers, to assist in
determining fair values for certain assets and liabilities; however, management is ultimately
responsible for all fair values presented in the Companys financial statements. The Company
performs 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. This process involves
quantitative and qualitative analysis and is overseen by the Companys investment and accounting
personnel. Examples of procedures performed include, but are not limited to, initial and ongoing
review of third party pricing services and techniques, review of pricing trends and monitoring of
recent trade information. 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
more appropriate fair value based upon the available market data, the price received from the third
party is adjusted accordingly.
When available, fair values are 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 standard valuation techniques, primarily a combination of a market approach,
including matrix pricing and an income approach. The assumptions and inputs used by management in
applying these techniques include, but are not limited to: interest rates, credit standing of the
issuer or counterparty, industry sector of the issuer, coupon rate, call provisions, sinking fund
requirements, maturity, estimated duration and assumptions regarding liquidity and future cash
flows.
The significant inputs to the market standard valuation techniques for certain types of securities
with reasonable levels of price transparency are inputs that are observable in the market or can be
derived principally from or corroborated by observable market data. 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.
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 use of different techniques, assumptions and inputs may have a material effect on the estimated
fair values of the Companys securities holdings.
Additionally, the Company evaluates its intent to sell fixed maturity securities and whether it is
more likely than not that it will be required to sell fixed maturity securities, along with factors
such as the financial condition of the issuer, payment performance, the extent to which the market
value has been below amortized cost, compliance with covenants, general market and industry sector
conditions, and various other factors. Securities, based on managements judgments, with an
other-than-temporary impairment in value are written down to managements estimate of fair value.
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Valuation of Embedded Derivatives
The Company reinsures certain annuity products that contain terms that are deemed to be embedded
derivatives, primarily EIAs 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 accounted 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 reported separately.
Such embedded derivatives are carried on the condensed consolidated balance sheets at fair value
with the host contract.
The valuation of the various embedded derivatives requires complex calculations based on actuarial
and capital market inputs assumptions related to estimates of future cash flows. Such assumptions
include, but are not limited to, equity market performance, equity market volatility, interest
rates, credit spreads, benefits and related contract charges, mortality, lapses, withdrawals,
benefit selections and non-performance risk. These assumptions have a significant impact on the
value of the embedded derivatives. For example, independent future decreases in equity market
returns, future decreases in interest rates and future increases in equity market volatilities
would increase the value of the embedded liability derivative associated with guaranteed minimum
withdrawal benefits on variable annuities, resulting in an increase in investment related losses.
See Market Risk disclosures in Managements Discussion and Analysis of Financial Condition and
Results of Operations for additional information.
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 Companys 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 these embedded derivatives is
sensitive to the credit spread environment. Decreases or increases in credit spreads result in an
increase or decrease in value of the embedded derivative and therefore an increase in investment
related gains or losses, respectively. See Managements Discussion and Analysis of Financial
Condition and Results of Operations for the U.S. Asset-Intensive Segment for additional
information.
Income Taxes
Income taxes represent the net amount of income taxes that the Company expects to pay to or receive
from various taxing jurisdictions in connection with its operations. 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. The
Companys accounting for income taxes represents managements best estimate of various events and
transactions.
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 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 significant deferred tax assets related to net operating and capital losses. Most
of the Companys exposure related to its deferred tax assets are within legal entities that file a
consolidated United States federal income tax return. The Company has projected its ability to
utilize its net operating losses and has determined that all of these losses are expected to be
utilized prior to their expiration. The Company has also done analysis of its capital losses and
has determined that sufficient unrealized capital gains exist within its investment portfolios that
should offset any capital loss realized. It is also the Companys intention to hold all unrealized
loss securities until maturity or until their market value recovers.
The Company will establish a valuation allowance when 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) | future taxable income exclusive of reversing temporary differences and carryforwards; | |
(ii) | future reversals of existing taxable temporary differences; | |
(iii) | taxable income in prior carryback years; and | |
(iv) | tax planning strategies. |
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The Company may be required to change its provision for income taxes in certain circumstances.
Examples of such circumstances include when the ultimate deductibility of certain items is
challenged by taxing authorities, when it becomes clear that certain items will not be challenged,
or when estimates used in determining valuation allowances on deferred tax assets significantly
change or when receipt of new information indicates the need for adjustment in valuation
allowances. Additionally, future events such as changes in tax legislation could have an impact on
the provision for income tax and the effective tax rate. Any such changes could significantly
affect the amounts reported in the condensed consolidated financial statements in the period these
changes occur.
Arbitration and Litigation Reserves
The Company at times is a party to various litigation and arbitrations. The Company cannot predict
or determine the ultimate outcome of any pending litigation or arbitrations or even provide useful
ranges of potential losses. 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. However, it is possible that an adverse
outcome on any particular arbitration or litigation situation could have a material adverse effect
on the Companys consolidated financial position and/or net income in a particular reporting
period.
Further discussion and analysis of the results for 2010 compared to 2009 are presented by segment.
U.S. Operations
U.S. operations consist of two major sub-segments: Traditional and Non-Traditional. The
Traditional sub-segment primarily specializes in individual mortality-risk reinsurance and to a
lesser extent, group, health and long-term care reinsurance. The Non-Traditional sub-segment
consists of Asset-Intensive and Financial Reinsurance.
Non-Traditional | ||||||||||||||||
For the three months ended September 30, 2010 | Financial | Total | ||||||||||||||
(dollars in thousands) | Traditional | Asset-Intensive | Reinsurance | U.S. | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 930,070 | $ | 2,724 | $ | | $ | 932,794 | ||||||||
Investment income, net of related expenses |
124,596 | 67,347 | 154 | 192,097 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
| (2,623 | ) | | (2,623 | ) | ||||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
| 849 | | 849 | ||||||||||||
Other investment related gains (losses), net |
13,009 | (36,017 | ) | (44 | ) | (23,052 | ) | |||||||||
Total investment related gains (losses), net |
13,009 | (37,791 | ) | (44 | ) | (24,826 | ) | |||||||||
Other revenues |
428 | 19,605 | 5,608 | 25,641 | ||||||||||||
Total revenues |
1,068,103 | 51,885 | 5,718 | 1,125,706 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
793,270 | (318 | ) | | 792,952 | |||||||||||
Interest credited |
16,698 | 78,078 | | 94,776 | ||||||||||||
Policy acquisition costs and other insurance expenses (income) |
125,526 | (21,682 | ) | 461 | 104,305 | |||||||||||
Other operating expenses |
18,534 | 2,413 | 940 | 21,887 | ||||||||||||
Total benefits and expenses |
954,028 | 58,491 | 1,401 | 1,013,920 | ||||||||||||
Income (loss) before income taxes |
$ | 114,075 | $ | (6,606 | ) | $ | 4,317 | $ | 111,786 | |||||||
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Non-Traditional | ||||||||||||||||
For the three months ended September 30, 2009 | Financial | Total | ||||||||||||||
(dollars in thousands) | Traditional | Asset-Intensive | Reinsurance | U.S. | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 801,406 | $ | 1,744 | $ | | $ | 803,150 | ||||||||
Investment income (loss), net of related expenses |
107,088 | 115,777 | (56 | ) | 222,809 | |||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(13,246 | ) | (745 | ) | (37 | ) | (14,028 | ) | ||||||||
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
(3,484 | ) | (183 | ) | (9 | ) | (3,676 | ) | ||||||||
Other investment related gains (losses), net |
(4,150 | ) | 54,776 | 48 | 50,674 | |||||||||||
Total investment related gains (losses), net |
(20,880 | ) | 53,848 | 2 | 32,970 | |||||||||||
Other revenues |
586 | 19,452 | 3,871 | 23,909 | ||||||||||||
Total revenues |
888,200 | 190,821 | 3,817 | 1,082,838 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
686,057 | 872 | | 686,929 | ||||||||||||
Interest credited |
15,983 | 69,170 | | 85,153 | ||||||||||||
Policy acquisition costs and other insurance expenses |
108,685 | 80,368 | 289 | 189,342 | ||||||||||||
Other operating expenses |
13,692 | 2,537 | 779 | 17,008 | ||||||||||||
Total benefits and expenses |
824,417 | 152,947 | 1,068 | 978,432 | ||||||||||||
Income before income taxes |
$ | 63,783 | $ | 37,874 | $ | 2,749 | $ | 104,406 | ||||||||
Non-Traditional | ||||||||||||||||
For the nine months ended September 30, 2010 | Financial | Total | ||||||||||||||
(dollars in thousands) | Traditional | Asset-Intensive | Reinsurance | U.S. | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 2,766,193 | $ | 17,729 | $ | | $ | 2,783,922 | ||||||||
Investment income, net of related expenses |
358,839 | 246,675 | 210 | 605,724 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(930 | ) | (2,668 | ) | | (3,598 | ) | |||||||||
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
620 | 284 | | 904 | ||||||||||||
Other investment related gains (losses), net |
18,888 | 113,495 | (63) | 132,320 | ||||||||||||
Total investment related gains (losses), net |
18,578 | 111,111 | (63) | 129,626 | ||||||||||||
Other revenues |
1,216 | 62,442 | 16,478 | 80,136 | ||||||||||||
Total revenues |
3,144,826 | 437,957 | 16,625 | 3,599,408 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
2,372,001 | 12,142 | | 2,384,143 | ||||||||||||
Interest credited |
49,646 | 181,220 | | 230,866 | ||||||||||||
Policy acquisition costs and other insurance expenses |
388,769 | 161,062 | 1,567 | 551,398 | ||||||||||||
Other operating expenses |
57,696 | 8,016 | 3,156 | 68,868 | ||||||||||||
Total benefits and expenses |
2,868,112 | 362,440 | 4,723 | 3,235,275 | ||||||||||||
Income before income taxes |
$ | 276,714 | $ | 75,517 | $ | 11,902 | $ | 364,133 | ||||||||
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Non-Traditional | ||||||||||||||||
For the nine months ended September 30, 2009 | Financial | Total | ||||||||||||||
(dollars in thousands) | Traditional | Asset-Intensive | Reinsurance | U.S. | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 2,395,335 | $ | 5,092 | $ | | $ | 2,400,427 | ||||||||
Investment income (loss), net of related expenses |
314,265 | 276,771 | (220 | ) | 590,816 | |||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(65,195 | ) | (6,532 | ) | (166 | ) | (71,893 | ) | ||||||||
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
9,860 | 861 | 22 | 10,743 | ||||||||||||
Other investment related gains (losses), net |
(20,707 | ) | 116,721 | 216 | 96,230 | |||||||||||
Total investment related gains (losses), net |
(76,042 | ) | 111,050 | 72 | 35,080 | |||||||||||
Other revenues |
2,076 | 51,537 | 14,560 | 68,173 | ||||||||||||
Total revenues |
2,635,634 | 444,450 | 14,412 | 3,094,496 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
2,050,859 | 1,805 | | 2,052,664 | ||||||||||||
Interest credited |
46,917 | 147,967 | | 194,884 | ||||||||||||
Policy acquisition costs and other insurance expenses |
315,543 | 256,181 | 889 | 572,613 | ||||||||||||
Other operating expenses |
40,895 | 7,700 | 2,259 | 50,854 | ||||||||||||
Total benefits and expenses |
2,454,214 | 413,653 | 3,148 | 2,871,015 | ||||||||||||
Income before income taxes |
$ | 181,420 | $ | 30,797 | $ | 11,264 | $ | 223,481 | ||||||||
Income before income taxes for the U.S. operations segment increased by $7.4 million, or 7.1%,
and $140.7 million, or 62.9%, for the three and nine months ended September 30, 2010, as compared
to the same periods in 2009. Contributing to the increase in income in both periods was the
acquisition of the Reliastar Life Insurance Companys group life and health reinsurance business,
effective January 1, 2010. In addition to the acquisition, the increase in income before income
taxes for the third quarter reflects a decrease in investment impairments compared to the same
period in 2009, offset by decreases in investment income and other investment related gains. The
increase in income in the first nine months of 2010 was primarily due to increased investment
income and other investment related gains combined with lower investment impairments compared to
the same period in 2009. Included in other investment related gains (losses) is the effect that
changes in credit spreads have on the fair value of embedded derivatives associated with treaties
written on a modified coinsurance or funds withheld basis, which unfavorably affected the third
quarter and favorably affected the first nine months of income as compared to the same periods in
2009. Decreases or increases in credit spreads result in an increase or decrease in value of the
embedded derivatives, and therefore, an increase or decrease in investment related gains or losses,
respectively. For additional information on impairment losses, see the discussion of Investments
in the Liquidity and Capital Resources section of Managements Discussion and Analysis.
Traditional Reinsurance
The U.S. Traditional sub-segment provides individual life reinsurance, and to a lesser extent,
group, health and long-term care reinsurance, to domestic clients for a variety of life products
through yearly renewable term, coinsurance and modified coinsurance agreements. These reinsurance
arrangements may involve either facultative or automatic agreements. This sub-segment added new
business production, measured by face amount of insurance in force, of $30.3 billion and $31.2
billion during the third quarters, and $114.9 billion and $92.5 billion during the first nine
months of 2010 and 2009, 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.
Income before income taxes for the U.S. Traditional sub-segment increased by $50.3 million and
$95.3 million for the three and nine months ended September 30, 2010, as compared to the same
periods in 2009. The increase in the third quarter and first nine months was primarily due to
increases in net investment related gains of $33.9 million and $94.6 million, respectively, and
income generated from the newly acquired group life and health business as compared to the same
periods in 2009.
Net premiums for the U.S. Traditional sub-segment increased $128.7 million, or 16.1%, and $370.9
million, or 15.5% for the three and nine months ended September 30, 2010, as compared to the same
periods in 2009. These increases in net premiums were driven primarily by the growth of total U.S.
Traditional business in force. Most notably was the acquisition of ReliaStar Life Insurance
Companys group life and health reinsurance business, which contributed $77.1 million and $216.2
million of premium, in the third quarter and first nine months of 2010, respectively. At September
30, 2010, total face amount of life insurance for the U.S. Traditional sub-segment was $1,333.8
million compared to $1,276.6 million at September 30, 2009.
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Net investment income increased $17.5 million, or 16.3%, and $44.6 million, or 14.2%, for the
three and nine months ended September 30, 2010, as compared to the same periods in 2009, primarily
due to growth in the invested asset base. Investment related gains increased $33.9 million and
$94.6 million for the three and nine months ended September 30, 2010, as compared to the same
periods in 2009. The increase in investment related gains year over year was largely due to a
higher level of investment impairments recognized in 2009, combined with higher investment related
gains.
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 85.3% and
85.6% for the third quarter of 2010 and 2009, respectively, and 85.7% and 85.6% for the nine months
ended September 30, 2010 and 2009, respectively. Although reasonably predictable over a period of
years, death claims can be volatile over short-term periods.
Interest credited expense increased $0.7 million, or 4.5%, and $2.7 million, or 5.8%, for the three
and nine months ended September 30, 2010, as compared to the same periods in 2009. These increases
were driven by a treaty with a minor increase in asset base and a constant credited loan rate of
5.6%. Also contributing to the increases was the addition of a new treaty in 2010. Interest
credited in this sub-segment relates to amounts credited on cash value products which also have a
significant mortality component.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 13.5%
and 13.6% for the third quarter of 2010 and 2009, respectively, and 14.1% and 13.2% for the nine
months ended September 30, 2010 and 2009, 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 $4.8 million, or 35.4%, and $16.8 million, or 41.1%, for the
three and nine months ended September 30, 2010, as compared to the same periods in 2009. The
increase in expenses is primarily due to the acquisition of ReliaStar Life Insurance Companys
group life and health reinsurance business. Other operating expenses as a percentage of net
premiums were 2.0% and 1.7% for the third quarter of 2010 and 2009, respectively, and 2.1% and 1.7%
for the nine months ended September 30, 2010 and 2009, respectively.
Asset-Intensive Reinsurance
The U.S. Asset-Intensive sub-segment assumes primarily investment risk within underlying annuities
and corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance
with funds withheld or modified coinsurance 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.
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 modified coinsurance (Modco) basis or funds withheld basis, as well as embedded derivatives
associated with the Companys reinsurance of equity-indexed annuities and variable annuities with
guaranteed minimum benefit riders. The following table summarizes the asset-intensive results and
quantifies the impact of these embedded derivatives for the periods presented.
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Table of Contents
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues: |
||||||||||||||||
Total revenues |
$ | 51,885 | $ | 190,821 | $ | 437,957 | $ | 444,450 | ||||||||
Less: |
||||||||||||||||
Embedded derivatives Modco/Funds withheld treaties |
(38,652 | ) | 51,454 | 116,494 | 75,366 | |||||||||||
Guaranteed minimum benefit riders and related free standing derivatives |
(167 | ) | 1,676 | (7,619 | ) | 46,845 | ||||||||||
Revenues before certain derivatives |
90,704 | 137,691 | 329,082 | 322,239 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Total benefits and expenses |
58,491 | 152,947 | 362,440 | 413,653 | ||||||||||||
Less: |
||||||||||||||||
Embedded derivatives Modco/Funds withheld treaties |
(25,388 | ) | 32,090 | 84,668 | 39,209 | |||||||||||
Guaranteed minimum benefit riders and related free standing derivatives |
2,761 | 5,113 | (3,390 | ) | 81,444 | |||||||||||
Equity-indexed annuities |
13,449 | (1,579 | ) | 12,517 | (6,800 | ) | ||||||||||
Benefits and expenses before certain derivatives |
67,669 | 117,323 | 268,645 | 299,800 | ||||||||||||
Income (loss) before income taxes: |
||||||||||||||||
Income (loss) before income taxes |
(6,606 | ) | 37,874 | 75,517 | 30,797 | |||||||||||
Less: |
||||||||||||||||
Embedded derivatives Modco/Funds withheld treaties |
(13,264 | ) | 19,364 | 31,826 | 36,157 | |||||||||||
Guaranteed minimum benefit riders and related free standing derivatives |
(2,928 | ) | (3,437 | ) | (4,229 | ) | (34,599 | ) | ||||||||
Equity-indexed annuities |
(13,449 | ) | 1,579 | (12,517 | ) | 6,800 | ||||||||||
Income before income taxes and certain derivatives |
23,035 | 20,368 | 60,437 | 22,439 | ||||||||||||
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 modified coinsurance or funds
withheld basis, allowing for deferred acquisition expenses. Changes in the fair value of the
embedded derivative are driven by changes in investment credit spreads, including the Companys own
credit spread. Generally, an increase in investment credit spreads, ignoring changes in the
Companys own credit spread, will have a negative impact on the fair value of the embedded
derivative (decrease in income).
In the third quarter of 2010, the change in fair value of the embedded derivative decreased
revenues by $38.7 million and related deferred acquisition expenses decreased benefits and expenses
by $25.4 million, for a net negative pre-tax income impact of $13.3 million, primarily due to an
increase in investment credit spreads. During the third quarter of 2009, the change in fair value
of the embedded derivative increased revenues by $51.5 million and related deferred acquisition
expenses increased benefits and expenses by $32.1 million, for a net positive pre-tax income impact
of $19.4 million, primarily due to a decrease in investment credit spreads. In the first nine
months of 2010, the change in fair value of the embedded derivative increased revenues by $116.5
million and related deferred acquisition expenses decreased benefits and expenses by $84.7 million,
for a positive pre-tax income impact of $31.8 million, primarily due to a decrease in investment
credit spreads. During the first nine months of 2009, the change in fair value of the embedded
derivative increased revenues by $75.4 million and related deferred acquisition expenses increased
benefits and expenses by $39.2 million, for a positive pre-tax income impact of $36.2 million,
primarily due to a decrease in investment credit spreads.
Guaranteed Minimum Benefit Riders Represents the impact related to guaranteed minimum benefits
associated with variable annuities. The fair value changes of the guaranteed minimum benefits
along with the changes in fair value of the free standing derivatives designed to hedge the
liability are reflected in revenues, while the related impact on deferred acquisition expenses is
reflected in benefits and expenses. In the third quarter of 2010, the change in the fair value of
the guaranteed minimum benefits, after allowing for changes in the associated free standing
derivatives, decreased revenues by $0.2 million and related deferred acquisition expenses increased
benefits and expenses by $2.8 million for a negative pre-tax income impact of $2.9 million. In the
third quarter of 2009, the change in the fair value of the guaranteed minimum benefits after
allowing for changes in the associated hedge instruments increased revenues by $1.7 million and
related deferred acquisition expenses increased benefits and expenses by $5.1 million for a
negative pre-tax income impact of $3.4 million. In the first nine months of 2010, the change in
the fair value of the guaranteed minimum benefits, after allowing for changes in the associated
free standing derivatives, reduced revenues by $7.6 million and related deferred acquisition
expenses reduced benefits and expenses by $3.4 million for a negative pre-tax income impact of $4.2
million. In the first nine months of 2009, the change in the fair value of the guaranteed minimum
benefits after allowing for changes in the associated hedge instruments increased revenues by $46.8
million and related deferred acquisition expenses increased benefits and expenses by $81.4 million
for a negative pre-tax income impact of $34.6 million.
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Equity-Indexed
Annuities Represents the impact of changes in the risk-free rate on the calculation
of the fair value of embedded derivative liabilities associated with EIAs, after adjustments for
related deferred acquisition expenses and retrocession. In the third quarter of 2010 and 2009,
benefits and expenses increased $13.4 million and decreased $1.6 million, respectively. In the
first nine months of 2010 and 2009, benefits and expenses increased $12.5 million and decreased
$6.8 million, respectively.
The changes in derivatives discussed above do not affect current cash flows, crediting rates or
spread performance on the underlying treaties. 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, and interest credited.
Discussion and analysis before certain derivatives:
Income before income taxes and certain derivatives increased by $2.7 million and $38.0 million for
the three and nine months ended September 30, 2010, as compared to the same periods in 2009,
primarily due to improvement in the broader U.S. financial markets and related favorable impacts on
the underlying annuity account values. Also contributing to the positive variance was an increase
in capital gains in both the funds withheld and coinsurance portfolios. These investment gains
increased approximately $4.7 million and $20.6 million, before deferred acquisition costs, for the
three and nine months ended September 30, 2010, as compared to the same periods in 2009. Higher
fee income earned on the variable annuity transactions also contributed to the increased income in
2010.
Revenue before certain derivatives decreased by $47.0 million and increased by $6.8 million for the
three and nine months ended September 30, 2010, as compared to the same periods in 2009. These
variances were driven by changes in investment income related to equity options held in a funds
withheld portfolio associated with equity-indexed annuity treaties. Increases and decreases in
investment income related to equity options were mostly offset by corresponding increases and
decreases in interest credited expense. Also affecting revenue were capital gains in both the
funds withheld and coinsurance portfolios which increased approximately $4.7 million and $20.6
million, before deferred acquisition costs, for the three and nine months ended September 30, 2010,
as compared to the same periods in 2009.
The average invested asset base supporting this sub-segment increased to $5.6 billion in the third
quarter of 2010 from $5.1 billion in the third quarter of 2009. The growth in the asset base was
driven primarily by new business written on existing equity-indexed treaties. As of September 30,
2010, $3.9 billion of the invested assets were funds withheld at interest, of which 92.8% is
associated with one client.
Benefits and expenses before certain derivatives decreased by $49.7 million and decreased by $31.2
million for the three and nine months ended September 30, 2010, as compared to the same periods in
2009, primarily due to a change in the interest credited expense related to equity option income on
funds withheld equity-indexed annuity treaties. These changes were mostly offset by corresponding
changes in investment income.
Financial Reinsurance
U.S. Financial Reinsurance sub-segment income consists primarily of net fees earned on financial
reinsurance transactions. The majority of the financial reinsurance risks are retroceded to other
insurance companies or 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 $1.6 million, or 57.0%, and decreased $0.6 million, or 5.7%
for the three and nine months ended September 30, 2010, as compared to the same periods in 2009.
The increase in the three months ended September 30, 2010 was attributed to new treaties effective
at the end of 2009. The decrease in the first nine months of 2010 was primarily related to the
absence of a one-time fee received at inception of a new treaty signed in 2009. At September 30,
2010 and 2009, the amount of reinsurance provided, as measured by pre-tax statutory surplus, was
$1.1 billion and $0.9 billion, respectively. These pre-tax statutory surplus amounts include all
business assumed or brokered by the Company in the U.S. 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 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
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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 traditional life insurance. During the quarter,
the Company completed its first longevity reinsurance transaction, a new line of business for the
Canada Operations.
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 205,552 | $ | 153,430 | $ | 591,281 | $ | 446,348 | ||||||||
Investment income, net of related expenses |
41,170 | 34,412 | 123,604 | 96,887 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
| (31 | ) | | (107 | ) | ||||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
| (8 | ) | | 12 | |||||||||||
Other investment related gains (losses), net |
6,369 | (1,488 | ) | 11,949 | 7,643 | |||||||||||
Total investment related gains (losses), net |
6,369 | (1,527 | ) | 11,949 | 7,548 | |||||||||||
Other revenues |
803 | (69 | ) | 1,087 | 1,010 | |||||||||||
Total revenues |
253,894 | 186,246 | 727,921 | 551,793 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
186,554 | 123,357 | 504,320 | 367,304 | ||||||||||||
Interest credited |
| | | 75 | ||||||||||||
Policy acquisition costs and other insurance expenses |
26,901 | 38,244 | 116,606 | 107,678 | ||||||||||||
Other operating expenses |
6,971 | 5,798 | 20,806 | 16,189 | ||||||||||||
Total benefits and expenses |
220,426 | 167,399 | 641,732 | 491,246 | ||||||||||||
Income before income taxes |
$ | 33,468 | $ | 18,847 | $ | 86,189 | $ | 60,547 | ||||||||
Income before income taxes increased $14.6 million, or 77.6%, and $25.6 million, or 42.4%, for
the three and nine months ended September 30, 2010, as compared to the same periods in 2009. The
increase in income in the third quarter and first nine months of 2010 is primarily due to increases
in investment income and net investment related gains compared to the same periods in 2009. A
stronger Canadian dollar resulted in an increase in income before income taxes of approximately
$0.3 million and $6.7 million in the third quarter and first nine months of 2010, respectively.
Net premiums increased $52.1 million, or 34.0%, and $144.9 million, or 32.5%, for the three and
nine months ended September 30, 2010, as compared to the same periods in 2009. During the quarter,
the Company completed its first longevity reinsurance transaction and reported related premiums of
$55.2 million, of which $43.3 represents a one-time advance premium for which the Company
established a deferred profit liability. In addition, a stronger Canadian dollar contributed to an
increase in net premiums of approximately $10.2 million and $64.5 million in the third quarter and
first nine months of 2010 compared to 2009. 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 $6.8 million, or 19.6%, and $26.7 million, or 27.6%, for the three
and nine months ended September 30, 2010, as compared to the same periods in 2009. A stronger
Canadian dollar resulted in an increase in net investment income of approximately $1.0 million and
$10.6 million in the third quarter and first nine months of 2010 compared to 2009. 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 increase in investment income, excluding the impact of foreign
exchange, was primarily the result of an increase in the allocated asset base due to growth in the
underlying business volume.
Loss ratios for this segment were 90.8% and 80.4% for the third quarter of 2010 and 2009,
respectively, and 85.3% and 82.3% for the nine months ended September 30, 2010 and 2009,
respectively. The higher loss ratios in 2010 are primarily the result of adverse mortality
experience compared to prior-year periods and the longevity reinsurance transaction completed in
the third quarter of 2010. Claims and other policy benefits, as a percentage of net premiums and
investment income were 75.6% and 65.7% in the third quarter of 2010 and 2009, respectively, and
70.5% and 67.6% for the nine months ended September 30, 2010 and 2009, respectively.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 13.1%
and 24.9% for the third quarter of 2010 and 2009, respectively, and 19.7% and 24.1% for the nine
months ended September 30, 2010 and 2009, respectively. The
decreases were largely due to the effect of increased net premiums
related to the longevity reinsurance transaction completed in the third quarter of 2010.
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Policy acquisition costs and other insurance expenses as a percentage of net premiums for
traditional individual life business were 12.5% and 14.6% for the third quarter of 2010 and 2009,
respectively, and 11.9% and 13.2% for the nine months ended September 30, 2010 and 2009,
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 by $1.2 million, or 20.2%, and $4.6 million, or 28.5%, for the
three and nine months ended September 30, 2010, as compared to the same periods in 2009. A
stronger Canadian dollar contributed approximately $0.3 million and $1.9 million to the increase in
operating expenses in the third quarter and first nine months of 2010, respectively. Other
operating expenses as a percentage of net premiums were 3.4% and 3.8% for the third quarter of 2010
and 2009, respectively, and 3.5% and 3.6% for the nine months ended September 30, 2010 and 2009,
respectively.
Europe & South Africa Operations
The Europe & South Africa segment has operations in France, Germany, India, Italy, Mexico, the
Netherlands, Poland, Spain, South Africa and the United Kingdom (UK). The segment provides life
reinsurance for a variety of products through yearly renewable term and coinsurance agreements, and
reinsurance of critical illness coverage and to a lesser extent, the reinsurance of longevity risk
on payout annuities. Reinsurance agreements may be either facultative or automatic agreements
covering primarily individual risks and in some markets, group risks.
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 232,962 | $ | 204,169 | $ | 660,533 | $ | 557,442 | ||||||||
Investment income, net of related expenses |
8,579 | 8,502 | 24,780 | 23,371 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
| (676 | ) | | (2,533 | ) | ||||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
| (135 | ) | | 361 | |||||||||||
Other investment related gains (losses), net |
1,808 | 1,079 | 3,614 | 2,848 | ||||||||||||
Total investment related gains (losses), net |
1,808 | 268 | 3,614 | 676 | ||||||||||||
Other revenues |
857 | 102 | 1,803 | 900 | ||||||||||||
Total revenues |
244,206 | 213,041 | 690,730 | 582,389 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
193,377 | 164,118 | 539,220 | 455,354 | ||||||||||||
Policy acquisition costs and other insurance expenses |
12,137 | 21,277 | 35,808 | 42,463 | ||||||||||||
Other operating expenses |
21,198 | 20,665 | 65,225 | 56,693 | ||||||||||||
Total benefits and expenses |
226,712 | 206,060 | 640,253 | 554,510 | ||||||||||||
Income before income taxes |
$ | 17,494 | $ | 6,981 | $ | 50,477 | $ | 27,879 | ||||||||
Income before income taxes increased $10.5 million, or 150.6% and $22.6 million, or 81.1%, for
the three and nine months ended September 30, 2010, as compared to the same periods in 2009. The
increase in income before income taxes for the third quarter and first nine months was primarily
due to decreases in policy acquisition costs and other insurance expenses and investment
impairments. Unfavorable foreign currency exchange fluctuations contributed to a decrease to
income before income taxes totaling approximately $1.3 million and $2.1 million for the third
quarter and first nine months of 2010, respectively.
Net premiums increased $28.8 million, or 14.1%, and $103.1 million, or 18.5%, for the three and
nine months ended September 30, 2010, as compared to the same periods in 2009. Unfavorable foreign
currency exchange fluctuations, particularly related to the British pound and the euro, decreased
net premiums by approximately $12.5 million in the third quarter of 2010 compared to 2009. For the
nine months ended September 30, 2010 as compared to the same period in 2009, favorable foreign
currency exchange fluctuations, particularly with the South African rand, increased net premiums by
approximately $1.5 million. In addition, net premiums increased as a result of new business from
both new and existing treaties including an increase for the third quarter and first nine months of
2010 of $17.2 million and $45.6 million, respectively, associated with reinsurance of longevity
risk in the UK.
A significant portion of the net premiums relates to 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 $57.3 million and $54.2 million in the
third quarter of 2010 and 2009, respectively, and $166.0 million and $153.2 million for the
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Table of Contents
nine months ended September 30, 2010 and 2009, 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.
Net investment income increased $0.1 million, or 0.9%, and $1.4 million, or 6.0%, for the three and
nine months ended September 30, 2010, as compared to the same periods in 2009. These increases can
be primarily attributed to growth in the 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.
Loss ratios were 83.0% and 80.4% for the third quarter of 2010 and 2009, respectively, and 81.6%
and 81.7% for the nine months ended September 30, 2010 and 2009, respectively. The increase for
the third quarter was due primarily to adverse claims experience in South Africa. The decrease for
the first nine months of 2010 was due to favorable claims experience, primarily in the UK in 2010,
and unfavorable claims experience in 2009. Although reasonably predictable over a period of years,
death claims can be volatile over shorter periods. Management views recent experience as normal
short-term volatility that is inherent in the business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 5.2% and
10.4% for the third quarter of 2010 and 2009, respectively, and 5.4% and 7.6% for the nine months
ended September 30, 2010 and 2009, respectively. The decrease in 2010 policy acquisition costs and
other insurance expenses 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 being reinsured 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 increased $0.5 million, or 2.6%, and $8.5 million, or 15.0%, for the three
and nine months ended September 30, 2010, as compared to the same periods in 2009. These increases
were due to higher costs associated with maintaining and supporting the segments increase in
business over the past several years and the Companys recent expansion into central Europe. Other
operating expenses as a percentage of net premiums totaled 9.1% and 10.1% for the third quarter of
2010 and 2009, respectively, and 9.9% and 10.2% for the nine months ended September 30, 2010 and
2009, respectively. The Company believes that sustained growth in net premiums should lessen the
burden of start-up expenses and expansion costs over time.
Asia Pacific Operations
The Asia Pacific segment has operations in Australia, Hong Kong, Japan, Malaysia, Singapore, New
Zealand, South Korea, Taiwan and mainland China. The principal types of reinsurance for this
segment are life, critical illness, disability income, 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 three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 273,825 | $ | 242,350 | $ | 816,521 | $ | 715,508 | ||||||||
Investment income, net of related expenses |
17,042 | 15,654 | 51,555 | 43,228 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
| (691 | ) | | (4,642 | ) | ||||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
| (370 | ) | | 462 | |||||||||||
Other investment related gains (losses), net |
1,326 | 4,015 | 3,839 | 4,422 | ||||||||||||
Total investment related gains (losses), net |
1,326 | 2,954 | 3,839 | 242 | ||||||||||||
Other revenues |
7,462 | 4,942 | 19,777 | 19,142 | ||||||||||||
Total revenues |
299,655 | 265,900 | 891,692 | 778,120 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
220,867 | 182,070 | 648,457 | 574,040 | ||||||||||||
Policy acquisition costs and other insurance expenses |
27,373 | 31,833 | 96,964 | 88,788 | ||||||||||||
Other operating expenses |
22,932 | 21,072 | 67,582 | 55,274 | ||||||||||||
Total benefits and expenses |
271,172 | 234,975 | 813,003 | 718,102 | ||||||||||||
Income before income taxes |
$ | 28,483 | $ | 30,925 | $ | 78,689 | $ | 60,018 | ||||||||
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Income before income taxes decreased $2.4 million, or 7.9%, and increased $18.7 million, or
31.1%, for the three and nine months ended September 30, 2010, as compared to the same periods in
2009. The decrease in income before income taxes for the third quarter is primarily due to more
favorable segment-wide mortality experience in the prior year. The increase in the first nine
months of 2010 is primarily due to an increase in premiums in all markets within the segment except
Korea, compared to the same period in 2009. Foreign currency exchange fluctuations resulted in
increases to income before income taxes totaling approximately $1.1 million and $7.2 million for
the third quarter and first nine months of 2010, respectively.
Net premiums increased $31.5 million, or 13.0%, and $101.0 million, or 14.1%, for the three and
nine months ended September 30, 2010, as compared to the same periods in 2009. Premiums in the
third quarter of 2010 increased by $33.3 million, collectively, in Australia, Southeast Asia, Japan
and Taiwan and were partially offset by decreased premiums of $3.2 million in Korea and Hong Kong,
as compared to the same period in 2009. Premiums in the first nine months of 2010 increased by
$107.0 million, collectively, in Australia, New Zealand, Southeast Asia, Japan and Taiwan and were
partially offset by decreased premiums of $6.7 million in Korea, as compared to the same period in
2009.
Foreign currencies in certain significant markets, particularly the Australian dollar, New Zealand
dollar, Korean won and Japanese yen, have strengthened against the U.S. dollar during 2010 compared
to 2009. The overall effect of changes in Asia Pacific segment currencies was an increase in net
premiums of approximately $17.7 million and $94.0 million for the third quarter and first nine
months of 2010, respectively.
A portion of the net premiums 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 earned from this coverage totaled $46.0 million and $45.5 million in the
third quarter of 2010 and 2009, respectively and $133.9 million and $128.8 million for the first
nine months of 2010 and 2009, respectively. Premium levels can be significantly influenced by
currency fluctuations, large transactions and reporting practices of ceding companies and can
fluctuate from period to period.
Net investment income increased $1.4 million, or 8.9%, and $8.3 million, or 19.3%, for the three
and nine months ended September 30, 2010, as compared to the same periods in 2009. These increases
were primarily related to growth in the invested asset base. Also contributing to the increases
were favorable changes in foreign currency exchange fluctuations of $0.4 million and $3.3 million
in the third quarter and first nine months of 2010, 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.
Other revenues increased $2.5 million, or 51.0%, and increased $0.6 million, or 3.3%, for the three
and nine months ended September 30, 2010, as compared to the same periods in 2009. The primary
source of other revenues is fees from financial reinsurance treaties in Japan. At September 30,
2010 and 2009, the amount of reinsurance assumed from client companies, as measured by pre-tax
statutory surplus, was $380.8 million and $505.5 million, respectively. 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 80.7% and 75.1% for the third quarter of 2010 and 2009,
respectively, and 79.4% and 80.2% for the nine months ended September 30, 2010 and 2009,
respectively. The increase in the loss ratio for the third quarter of 2010 was primarily
attributable to an increase in claims and other policy benefits in Australia, Japan and Taiwan when
compared to the more favorable results for the same period in 2009. Offsetting the increase in the
third quarter of 2010 loss ratio were lower claims and other policy benefits in New Zealand and
Hong Kong compared to the same period in 2009. The decrease in the loss ratio for the first nine
months of 2010 is primarily attributable to lower claims and other policy benefits in New Zealand
and Hong Kong compared to the same period in 2009. Although reasonably predictable over a period
of years, death claims can be volatile over shorter periods. Management views recent experience as
normal short-term volatility that is inherent in the business. Loss ratios will fluctuate due to
timing of client company reporting, variations in the mixture of business and the relative maturity
of the business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 10.0%
and 13.1% for the third quarter of 2010 and 2009, respectively, and 11.9% and 12.4% for the nine
months ended September 30, 2010 and 2009, respectively. 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 timing of client company
reporting and variations in the mixture of business.
Other operating expenses increased $1.9 million, or 8.8%, and $12.3 million, or 22.3%, for the
three and nine months ended September 30, 2010, as compared to the same periods in 2009. Foreign
currency exchange fluctuations contributed approximately $0.8 million and $3.4 million to the
increase in operating expenses in the third quarter and first nine months of 2010, respectively.
Other operating expenses as a percentage of net premiums totaled 8.4% and 8.7% for the third
quarter of
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2010 and 2009, respectively and 8.3% and 7.7% for the nine months ended September 30, 2010 and
2009, respectively. The timing of premium flows and the level of costs associated with the
entrance into and development of new markets in the growing Asia Pacific segment may cause other
operating expenses as a percentage of net premiums to fluctuate over time.
Corporate and Other
Corporate and Other revenues include investment income from invested assets not allocated to
support segment operations and undeployed proceeds from the Companys capital raising efforts, in
addition to unallocated investment related gains and 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 to debt and trust preferred securities. Additionally, 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 Companys collateral finance facility.
For the three months ended | For the nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Revenues: |
||||||||||||||||
Net premiums |
$ | 2,167 | $ | 2,080 | $ | 5,524 | $ | 6,682 | ||||||||
Investment income, net of related expenses |
28,616 | 18,094 | 77,770 | 53,001 | ||||||||||||
Investment related gains (losses), net: |
||||||||||||||||
Other-than-temporary impairments on fixed maturity securities |
(2,281 | ) | (1,519 | ) | (12,225 | ) | (9,107 | ) | ||||||||
Other-than-temporary impairments on fixed maturity securities
transferred to (from) accumulated other comprehensive income |
(823 | ) | 189 | 1,327 | 557 | |||||||||||
Other investment related gains (losses), net |
1,647 | 9,024 | (733 | ) | 13,289 | |||||||||||
Total investment related gains (losses), net |
(1,457 | ) | 7,694 | (11,631 | ) | 4,739 | ||||||||||
Other revenues |
2,752 | 3,088 | 6,187 | 51,767 | ||||||||||||
Total revenues |
32,078 | 30,956 | 77,850 | 116,189 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Claims and other policy benefits |
141 | (663 | ) | 170 | (111 | ) | ||||||||||
Interest credited |
| | 13 | | ||||||||||||
Policy acquisition costs and other insurance expenses (income) |
(13,658 | ) | (8,907 | ) | (40,267 | ) | (32,549 | ) | ||||||||
Other operating expenses |
12,421 | 11,860 | 37,274 | 35,237 | ||||||||||||
Interest expenses |
25,191 | 5,243 | 65,781 | 46,955 | ||||||||||||
Collateral finance facility expense |
2,041 | 2,031 | 5,807 | 6,402 | ||||||||||||
Total benefits and expenses |
26,136 | 9,564 | 68,778 | 55,934 | ||||||||||||
Income before income taxes |
$ | 5,942 | $ | 21,392 | $ | 9,072 | $ | 60,255 | ||||||||
Income before income taxes decreased $15.5 million, or 72.2%, and $51.2 million, or 84.9%, for
the three and nine months ended September 30, 2010, as compared to the same periods in 2009. The
decrease for the third quarter was primarily due to increased interest expense related to higher
interest provisions for income taxes related to uncertain tax positions. The decrease for the
first nine months is primarily due to the absence of the recognition of a gain on the repurchase of
long-term debt of $38.9 million and a $4.8 million foreign exchange gain on the repayment of debt,
recorded in other revenues in 2009 and increased interest expense related to higher interest
provisions for income taxes related to uncertain tax positions partially offset by a $24.8 million
increase in investment income.
Total revenues increased $1.1 million, or 3.6%, and decreased $38.3 million, or 33.0%, for the
three and nine months ended September 30, 2010, as compared to the same periods in 2009. The
increase for the third quarter was due to increased investment income somewhat offset by a
reduction in investment related gains. The decrease for the first nine months was largely due to a
decrease in other revenues associated with the absence in 2010 of gains from the debt repurchase
and repayment, as described above. The decrease for the first nine months was partially offset by
an increase in investment income largely due to an increase in invested assets, related to the
issuance of $400.0 million of senior notes in the fourth quarter of 2009.
Total benefits and expenses increased $16.6 million, or 173.3%, and $12.8 million, or 23.0%, for
the three and nine months ended September 30, 2010, as compared to the same periods in 2009. These
increases were primarily due to increased interest expense related to higher interest provisions
for income taxes related to uncertain tax positions and interest expense on the aforementioned
senior notes issued in 2009. These increases were partially offset by lower policy acquisition
costs and other insurance expenses in 2010, primarily due to increased charges to the operating
segments for the use of capital.
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Liquidity and Capital Resources
Current Market Environment
The U.S. and global financial markets have improved since the third quarter of 2009. Throughout
the first half of 2009, the capital and credit markets experienced volatility and disruption. This
environment was driven by, among other things, heightened concerns over conditions in the U.S.
housing and mortgage markets, the availability and cost of credit, the health of U.S. and global
financial institutions, a decline in business and consumer confidence and increased unemployment.
Turmoil in the U.S. and global financial markets resulted in bankruptcies, credit defaults,
consolidations and government interventions.
Results of operations in the first nine months of 2010 reflect a favorable change in the value of
embedded derivatives as credit spreads have tightened during the year. Gross unrealized losses in
the Companys fixed maturity and equity securities available-for-sale have improved from $687.2
million at September 30, 2009 to $298.3 million at September 30, 2010. Likewise, gross unrealized
gains have also improved.
The Company continues to be in a position to hold its investment securities until recovery,
provided it remains comfortable with the credit of the issuer. The Company does not rely on
short-term funding or commercial paper, and therefore, to date, it has experienced no liquidity
pressure, nor does it anticipate such pressure in the foreseeable future. The Company has
selectively reduced its exposure to distressed security issuers through security sales. Although
management believes the Companys 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 a holding company whose primary uses of liquidity include, but are not limited to, the
immediate capital needs of its operating companies, dividends paid to shareholders and interest
payments on indebtedness. The primary sources of RGAs liquidity include proceeds from capital
raising efforts, interest income on undeployed corporate investments, interest income received on
surplus notes with two operating subsidiaries, and dividends from operating subsidiaries. As the
Company continues its expansion efforts, RGA will continue to be dependent on these sources of
liquidity.
The Company believes that it has sufficient liquidity 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, capital securities or
common equity and, if necessary, the sale of invested assets.
Cash Flows
The Companys net cash flows provided by operating activities for the nine months ended September
30, 2010 and 2009 were $1,330.3 million and $902.9 million, respectively. Cash flows from
operating activities are affected by the timing of premiums received, claims paid, and working
capital changes. The $427.4 million net increase in operating cash flows during the nine months of
2010 compared to the same period in 2009 was primarily a result of cash inflows related to premiums
and investment income increasing more than cash outflows related to claims, acquisition costs,
income taxes and other operating expenses. Cash from premiums and investment income increased
$703.3 million and $68.5 million, respectively, and was offset by higher cash outlays of $344.4
million for the current nine month period. The Company believes the short-term cash requirements
of its business operations will be sufficiently met by the positive cash flows generated.
Additionally, the Company believes it maintains a high quality fixed maturity portfolio that can be
sold, if necessary, to meet the Companys short- and long-term obligations.
Net cash used in investing activities for the nine months ended September 30, 2010 and 2009 was
$1,209.4 million and $924.9 million, respectively. The sales and purchases of fixed maturity
securities are related to the management of the Companys investment portfolios and the investment
of excess cash generated by operating and financing activities.
Net cash used in financing activities for the nine months ended September 30, 2010 and 2009 was
$13.2 million and $323.4 million, respectively. The decrease in cash used in financing activities
was primarily due to a $258.5 million increase in the cash collateral received under derivative
contracts due to a change in the value of the underlying derivatives and a $62.5 million decrease
related to the repurchase and repayment of long-term debt reflected in 2009.
Debt and Preferred Securities
As of September 30, 2010 and December 31, 2009, the Company had $1,216.3 million and $1,216.1
million, respectively, in outstanding borrowings under its debt agreements and was in compliance
with all covenants under those agreements.
The Company maintains three revolving credit facilities, including a syndicated credit facility
with an overall capacity of
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$750.0 million that expires in September 2012. The Company may borrow cash and may obtain letters
of credit in multiple currencies under this facility. As of September 30, 2010, the Company had no
cash borrowings outstanding and $278.6 million in issued, but undrawn, letters of credit under this
facility. The Companys other credit facilities consist of a £15.0 million credit facility that
expires in May 2012, and an A$50.0 million Australian credit facility that expires in March 2011,
with no outstanding balances as of September 30, 2010.
As of September 30, 2010, the average interest rate on all long-term and short-term debt
outstanding, excluding the Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Company (Trust Preferred
Securities), was 6.38%. Interest is expensed on the face amount, or $225 million, of the Trust
Preferred Securities at a rate of 5.75%.
Based on the historic cash flows and the current financial results of the Company, management
believes RGAs cash flows will be sufficient to enable RGA to meet its obligations for at least the
next 12 months.
Collateral Finance Facility
In June 2006, RGAs 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 Company (RGA Reinsurance). Proceeds
from the notes, along with a $112.8 million direct investment by the Company, were deposited into a
series of trust accounts that collateralize the notes and are not available to satisfy the general
obligations of the Company. Interest on the notes will accrue at an annual rate of 1-month LIBOR
plus a base rate margin, payable monthly. The payment of interest and principal on the notes is
insured by a monoline insurance company through a financial guaranty insurance policy. The notes
represent senior, secured indebtedness of Timberlake Financial without legal recourse to RGA or its
other subsidiaries. Timberlake Financial will rely primarily upon the receipt of interest and
principal payments on a surplus note and dividend payments from its wholly-owned subsidiary,
Timberlake Reinsurance Company II (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 South Carolina regulatory approval, the return on Timberlake Res investment
assets and the performance of specified term life insurance policies with guaranteed level premiums
retroceded by RGAs subsidiary, RGA Reinsurance, to Timberlake Re.
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 Companys liquidity position (cash and cash equivalents and short-term investments) was $718.2
million and $633.1 million at September 30, 2010 and December 31, 2009, respectively. The increase
in the Companys liquidity position from December 31, 2009 is primarily due to the timing of
investment activity. 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 periodically sells investment securities under agreements to repurchase the same
securities. These arrangements are used for purposes of short-term financing. There were no
securities subject to these agreements outstanding at September 30, 2010 or December 31, 2009. The
Company also occasionally enters into arrangements to purchase securities under agreements to
resell the same securities. Amounts outstanding, if any, are reported in cash and cash
equivalents. These agreements are primarily used as yield enhancement alternatives to other cash
equivalent investments. There were no amounts outstanding at September 30, 2010 or December 31,
2009.
RGA Reinsurance is a member of the Federal Home Loan Bank of Des Moines (FHLB) and holds $18.9
million in common stock of the FHLB, which is included in other invested assets on the Companys
condensed consolidated balance sheets. RGA Reinsurance occasionally enters into traditional
funding agreements with the FHLB, but had no outstanding traditional funding agreements with the
FHLB at September 30, 2010 and December 31, 2009.
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 Reinsurances
commercial and residential mortgage-backed securities and commercial mortgage loans used to
collateralize RGA Reinsurances obligations under the funding agreements. RGA Reinsurance
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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 FHLBs recovery is limited to the amount of RGA Reinsurances
liability under the outstanding funding agreements. The amount of the Companys liability for the
funding agreements with the FHLB under guaranteed investment contracts was $199.3 million and
$399.3 million at September 30, 2010 and December 31, 2009, respectively, which is included in
interest sensitive contract liabilities. The advances on these agreements are collateralized
primarily by commercial and residential mortgage-backed securities and commercial mortgage loans.
Investments
The Company had total cash and invested assets of $22.9 billion and $19.7 billion at September 30,
2010 and December 31, 2009, respectively, as illustrated below (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Fixed maturity securities, available-for-sale |
$ | 14,169,930 | $ | 11,763,358 | ||||
Mortgage loans on real estate |
863,873 | 791,668 | ||||||
Policy loans |
1,173,148 | 1,136,564 | ||||||
Funds withheld at interest |
5,276,511 | 4,895,356 | ||||||
Short-term investments |
84,091 | 121,060 | ||||||
Other invested assets |
738,830 | 516,086 | ||||||
Cash and cash equivalents |
634,075 | 512,027 | ||||||
Total cash and invested assets |
$ | 22,940,458 | $ | 19,736,119 | ||||
The following table presents consolidated average invested assets at amortized cost, net
investment income and investment yield, excluding funds withheld. Funds withheld assets are
primarily associated with the reinsurance of annuity contracts on which the Company earns a spread.
Fluctuations in the yield on funds withheld assets are generally offset by a corresponding
adjustment to the interest credited on the liabilities (dollars in thousands).
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||
Increase/ | Increase/ | |||||||||||||||||||||||
2010 | 2009 | (Decrease) | 2010 | 2009 | (Decrease) | |||||||||||||||||||
Average invested assets at amortized cost |
$ | 15,763,396 | $ | 13,340,365 | 18.2 | % | $ | 15,205,358 | $ | 12,816,614 | 18.6 | % | ||||||||||||
Net investment income |
218,546 | 186,457 | 17.2 | % | 642,144 | 544,580 | 17.9 | % | ||||||||||||||||
Investment yield (ratio of net investment
income to average invested assets) |
5.66 | % | 5.71 | % | (5) bps | 5.67 | % | 5.71 | % | (4) bps |
Investment yield decreased for the three months ended September 30, 2010 due primarily to
slightly lower yields on several asset classes including fixed maturity securities, mortgage loans
and policy loans. The lower yields are due primarily to a lower interest rate environment which
decreases the yield on new investment purchases. All investments held by RGA and its subsidiaries
are monitored for conformance to the qualitative and quantitative limits prescribed by the
applicable jurisdictions insurance laws and regulations. In addition, the operating companies
boards of directors periodically review their respective investment portfolios. The Companys
investment strategy is to maintain a predominantly investment-grade, fixed maturity portfolio, to
provide adequate liquidity for expected reinsurance obligations, and to maximize total return
through prudent asset management. The Companys asset/liability duration matching differs between
operating segments. The average duration for all the Companys portfolios, when consolidated,
ranges between eight and ten years. However, based on Canadian reserve requirements, the Canadian
liabilities are matched with long-duration Canadian assets, and therefore, the duration of the
Canadian portfolio exceeds twenty years. See Note 4 Investments in the Notes to Consolidated
Financial Statements of the 2009 Annual Report for additional information regarding the Companys
investments.
Fixed Maturity and Equity Securities Available-for-Sale
The following tables provide information relating to investments in fixed maturity securities and
equity securities by sector as of September 30, 2010 and December 31, 2009 (dollars in thousands):
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Other-than- | ||||||||||||||||||||||||
Estimated | temporary | |||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | % of | impairments | |||||||||||||||||||
September 30, 2010: | Cost | Gains | Losses | Value | Total | in AOCI | ||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 4,499,821 | $ | 433,193 | $ | 81,964 | $ | 4,851,050 | 34.3 | % | $ | | ||||||||||||
Canadian and Canadian provincial
governments |
2,206,641 | 727,257 | 260 | 2,933,638 | 20.7 | | ||||||||||||||||||
Residential mortgage-backed securities |
1,520,269 | 63,274 | 22,255 | 1,561,288 | 11.0 | (1,902 | ) | |||||||||||||||||
Foreign corporate securities |
2,158,647 | 170,202 | 12,797 | 2,316,052 | 16.3 | | ||||||||||||||||||
Asset-backed securities |
457,047 | 13,697 | 56,229 | 414,515 | 2.9 | (5,203 | ) | |||||||||||||||||
Commercial mortgage-backed securities |
1,257,835 | 87,145 | 109,131 | 1,235,849 | 8.7 | (9,493 | ) | |||||||||||||||||
U.S. government and agencies |
233,512 | 21,787 | 10 | 255,289 | 1.8 | | ||||||||||||||||||
State and political subdivisions |
133,955 | 1,211 | 7,718 | 127,448 | 0.9 | | ||||||||||||||||||
Other foreign government securities |
465,389 | 12,309 | 2,897 | 474,801 | 3.4 | | ||||||||||||||||||
Total fixed maturity securities |
$ | 12,933,116 | $ | 1,530,075 | $ | 293,261 | $ | 14,169,930 | 100.0 | % | $ | (16,598 | ) | |||||||||||
Non-redeemable preferred stock |
$ | 109,416 | $ | 5,394 | $ | 4,507 | $ | 110,303 | 73.3 | % | ||||||||||||||
Other equity securities |
34,397 | 6,217 | 536 | 40,078 | 26.7 | |||||||||||||||||||
Total equity securities |
$ | 143,813 | $ | 11,611 | $ | 5,043 | $ | 150,381 | 100.0 | % | ||||||||||||||
Other-than- | ||||||||||||||||||||||||
Estimated | temporary | |||||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | % of | impairments | |||||||||||||||||||
December 31, 2009: | Cost | Gains | Losses | Value | Total | in AOCI | ||||||||||||||||||
Available-for-sale: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 3,689,797 | $ | 180,635 | $ | 147,384 | $ | 3,723,048 | 31.7 | % | $ | | ||||||||||||
Canadian and Canadian provincial
governments |
1,984,475 | 394,498 | 25,746 | 2,353,227 | 20.0 | | ||||||||||||||||||
Residential mortgage-backed securities |
1,494,021 | 32,538 | 70,015 | 1,456,544 | 12.4 | (7,018 | ) | |||||||||||||||||
Foreign corporate securities |
1,627,806 | 77,340 | 33,398 | 1,671,748 | 14.2 | | ||||||||||||||||||
Asset-backed securities |
522,760 | 9,307 | 80,131 | 451,936 | 3.8 | (2,194 | ) | |||||||||||||||||
Commercial mortgage-backed securities |
1,177,621 | 20,670 | 169,427 | 1,028,864 | 8.7 | (13,690 | ) | |||||||||||||||||
U.S. government and agencies |
540,001 | 1,085 | 15,027 | 526,059 | 4.5 | | ||||||||||||||||||
State and political subdivisions |
107,233 | 273 | 17,744 | 89,762 | 0.8 | | ||||||||||||||||||
Other foreign government securities |
473,243 | 2,198 | 13,271 | 462,170 | 3.9 | | ||||||||||||||||||
Total fixed maturity securities |
$ | 11,616,957 | $ | 718,544 | $ | 572,143 | $ | 11,763,358 | 100.0 | % | $ | (22,902 | ) | |||||||||||
Non-redeemable preferred stock |
$ | 123,648 | $ | 1,878 | $ | 12,328 | $ | 113,198 | 66.0 | % | ||||||||||||||
Other equity securities |
58,008 | 760 | 409 | 58,359 | 34.0 | |||||||||||||||||||
Total equity securities |
$ | 181,656 | $ | 2,638 | $ | 12,737 | $ | 171,557 | 100.0 | % | ||||||||||||||
The Companys fixed maturity securities are invested primarily in U.S. and foreign corporate
bonds, mortgage- and asset-backed securities, and U.S. and Canadian government securities. As of
September 30, 2010 and December 31, 2009, approximately 95.1% and 94.8%, respectively, of the
Companys consolidated investment portfolio of fixed maturity securities was investment grade.
Important factors in the selection of investments include diversification, quality, yield, total
rate of return potential and call protection. The relative importance of these factors is
determined by market conditions and the underlying product or portfolio characteristics. Cash
equivalents are invested in high-grade money market instruments. The largest asset class in which
fixed maturity securities were invested was in corporate securities, which represented
approximately 50.6% of fixed maturity securities as of September 30, 2010, compared to 45.9% at
December 31, 2009. The table below shows the major industry types and weighted average credit
ratings, which comprise the U.S. and foreign corporate fixed maturity holdings at (dollars in
thousands):
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Estimated | Average Credit | |||||||||||||||
September 30, 2010: | Amortized Cost | Fair Value | % of Total | Ratings | ||||||||||||
Finance |
$ | 1,554,491 | $ | 1,613,466 | 22.5 | % | A- | |||||||||
Industrial |
2,253,731 | 2,475,680 | 34.5 | BBB+ | ||||||||||||
Foreign (1) |
2,158,647 | 2,316,052 | 32.3 | A+ | ||||||||||||
Utility |
688,293 | 758,115 | 10.6 | BBB+ | ||||||||||||
Other |
3,306 | 3,789 | 0.1 | AA- | ||||||||||||
Total |
$ | 6,658,468 | $ | 7,167,102 | 100.0 | % | A- | |||||||||
Estimated | Average Credit | |||||||||||||||
December 31, 2009: | Amortized Cost | Fair Value | % of Total | Ratings | ||||||||||||
Finance |
$ | 1,411,464 | $ | 1,358,925 | 25.2 | % | A- | |||||||||
Industrial |
1,670,610 | 1,735,522 | 32.2 | BBB+ | ||||||||||||
Foreign (1) |
1,627,352 | 1,671,090 | 30.9 | A | ||||||||||||
Utility |
603,958 | 624,710 | 11.6 | BBB+ | ||||||||||||
Other |
4,219 | 4,549 | 0.1 | A | ||||||||||||
Total |
$ | 5,317,603 | $ | 5,394,796 | 100.0 | % | A- | |||||||||
(1) | Includes U.S. dollar-denominated debt obligations of foreign obligors and other foreign investments. |
The National Association of Insurance Commissioners (NAIC) assigns securities quality
ratings and uniform valuations called NAIC Designations which are used by insurers when preparing
their annual statements. 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 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 Companys 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
September 30, 2010 and December 31, 2009 was as follows (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||||
NAIC | Estimated | Estimated | ||||||||||||||||||||||||||
Designation | Rating Agency Designation | Amortized Cost | Fair Value | % of Total | Amortized Cost | Fair Value | % of Total | |||||||||||||||||||||
1 | AAA/AA/A |
$ | 9,362,432 | $ | 10,447,663 | 73.7 | % | $ | 8,457,812 | $ | 8,716,920 | 74.1 | % | |||||||||||||||
2 | BBB |
2,778,394 | 3,030,667 | 21.4 | 2,401,885 | 2,433,144 | 20.7 | |||||||||||||||||||||
3 | BB |
471,013 | 440,012 | 3.1 | 455,539 | 381,242 | 3.3 | |||||||||||||||||||||
4 | B |
237,136 | 185,668 | 1.3 | 210,252 | 145,206 | 1.2 | |||||||||||||||||||||
5 | CCC and lower |
63,033 | 44,683 | 0.3 | 75,486 | 70,165 | 0.6 | |||||||||||||||||||||
6 | In or near default |
21,108 | 21,237 | 0.2 | 15,983 | 16,681 | 0.1 | |||||||||||||||||||||
Total |
$ | 12,933,116 | $ | 14,169,930 | 100.0 | % | $ | 11,616,957 | $ | 11,763,358 | 100.0 | % | ||||||||||||||||
The Companys fixed maturity portfolio includes structured securities.
The following table shows the types of structured securities the Company held at September 30, 2010 and
December 31, 2009 (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||
Agency |
$ | 682,621 | $ | 728,354 | $ | 771,787 | $ | 797,354 | ||||||||
Non-agency |
837,648 | 832,934 | 722,234 | 659,190 | ||||||||||||
Total residential mortgage-backed securities |
1,520,269 | 1,561,288 | 1,494,021 | 1,456,544 | ||||||||||||
Commercial mortgage-backed securities |
1,257,835 | 1,235,849 | 1,177,621 | 1,028,864 | ||||||||||||
Asset-backed securities |
457,047 | 414,515 | 522,760 | 451,936 | ||||||||||||
Total |
$ | 3,235,151 | $ | 3,211,652 | $ | 3,194,402 | $ | 2,937,344 | ||||||||
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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. As of September 30, 2010
and December 31, 2009, the weighted average credit rating was AA+. 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, primarily as a result of owner
refinancing. Extension risk relates to the unexpected slowdown in principal payments. In
addition, mortgage-backed securities face default 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 September 30, 2010 and December 31, 2009, the Company had exposure to commercial
mortgage-backed securities with amortized costs totaling $1,782.6 million and $1,655.0 million, and
estimated fair values of $1,758.4 million and $1,439.1 million, respectively. Those amounts
include exposure to commercial mortgage-backed securities held directly in the Companys investment
portfolios within fixed maturity securities, as well as securities held by ceding companies that
support the Companys funds withheld at interest investment. The securities are highly rated with
weighted average S&P credit ratings of approximately AA- at September 30, 2010 and AA at
December 31, 2009. Approximately 54.6% and 65.1%, based on estimated fair value, were classified
in the AAA category at September 30, 2010 and December 31, 2009, respectively. The Company
recorded $2.6 million and $6.6 million in other-than-temporary impairments in its direct
investments in commercial mortgage-backed securities during the third quarter and first nine months
of 2010. The Company recorded $2.6 million and $2.9 million in other-than-temporary impairments in
its direct investments in commercial mortgage-backed securities during the third quarter and first
nine months ended September 30, 2009. The following tables summarize the securities by rating and
underwriting year at September 30, 2010 and December 31, 2009 (dollars in thousands):
AAA | AA | A | ||||||||||||||||||||||
September 30, 2010: | Estimated | Estimated | Estimated | |||||||||||||||||||||
Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 289,974 | $ | 317,843 | $ | 93,501 | $ | 94,950 | $ | 76,955 | $ | 70,908 | ||||||||||||
2006 |
306,784 | 325,261 | 54,545 | 59,045 | 47,969 | 48,061 | ||||||||||||||||||
2007 |
243,695 | 260,372 | 29,494 | 23,721 | 88,789 | 93,735 | ||||||||||||||||||
2008 |
29,089 | 35,673 | 45,420 | 49,867 | | | ||||||||||||||||||
2009 |
2,773 | 3,027 | 3,089 | 3,672 | 6,757 | 9,111 | ||||||||||||||||||
2010 |
17,744 | 18,527 | | | 5,970 | 6,499 | ||||||||||||||||||
Total |
$ | 890,059 | $ | 960,703 | $ | 226,049 | $ | 231,255 | $ | 226,440 | $ | 228,314 | ||||||||||||
BBB | Below Investment Grade | Total | ||||||||||||||||||||||
Estimated | Estimated | Estimated | ||||||||||||||||||||||
Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 70,791 | $ | 65,442 | $ | 36,149 | $ | 28,955 | $ | 567,370 | $ | 578,098 | ||||||||||||
2006 |
34,892 | 31,465 | 53,922 | 33,533 | 498,112 | 497,365 | ||||||||||||||||||
2007 |
86,680 | 87,545 | 133,742 | 76,628 | 582,400 | 542,001 | ||||||||||||||||||
2008 |
| | 23,850 | 14,593 | 98,359 | 100,133 | ||||||||||||||||||
2009 |
| | | | 12,619 | 15,810 | ||||||||||||||||||
2010 |
| | | | 23,714 | 25,026 | ||||||||||||||||||
Total |
$ | 192,363 | $ | 184,452 | $ | 247,663 | $ | 153,709 | $ | 1,782,574 | $ | 1,758,433 | ||||||||||||
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AAA | AA | A | ||||||||||||||||||||||
December 31, 2009: | Estimated | Estimated | Estimated | |||||||||||||||||||||
Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 398,619 | $ | 403,551 | $ | 57,602 | $ | 51,754 | $ | 75,449 | $ | 55,124 | ||||||||||||
2006 |
292,369 | 280,475 | 41,649 | 34,854 | 41,128 | 34,859 | ||||||||||||||||||
2007 |
223,827 | 216,853 | 6,922 | 2,267 | 64,860 | 56,996 | ||||||||||||||||||
2008 |
19,050 | 19,790 | 29,211 | 26,617 | | | ||||||||||||||||||
2009 |
16,638 | 16,422 | 1,485 | 1,532 | | | ||||||||||||||||||
Total |
$ | 950,503 | $ | 937,091 | $ | 136,869 | $ | 117,024 | $ | 181,437 | $ | 146,979 | ||||||||||||
BBB | Below Investment Grade | Total | ||||||||||||||||||||||
Estimated | Estimated | Estimated | ||||||||||||||||||||||
Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 47,616 | $ | 33,986 | $ | 28,298 | $ | 19,457 | $ | 607,584 | $ | 563,872 | ||||||||||||
2006 |
26,257 | 19,091 | 47,951 | 22,392 | 449,354 | 391,671 | ||||||||||||||||||
2007 |
82,460 | 68,428 | 128,193 | 62,440 | 506,262 | 406,984 | ||||||||||||||||||
2008 |
| | 25,384 | 12,204 | 73,645 | 58,611 | ||||||||||||||||||
2009 |
| | | | 18,123 | 17,954 | ||||||||||||||||||
Total |
$ | 156,333 | $ | 121,505 | $ | 229,826 | $ | 116,493 | $ | 1,654,968 | $ | 1,439,092 | ||||||||||||
Asset-backed securities include credit card and automobile receivables, subprime securities,
home equity loans, manufactured housing bonds and collateralized debt obligations. The Companys
asset-backed securities are diversified by issuer and contain both floating and fixed rate
securities and had a weighted average credit rating of AA- at September 30, 2010 and AA at
December 31, 2009. The Company owns floating rate securities that represent approximately 16.5%
and 19.0% of the total fixed maturity securities at September 30, 2010 and December 31, 2009,
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 condensed consolidated balance sheets as collateral finance facility. In addition to the risks
associated with floating rate securities, principal risks in holding asset-backed securities are
structural, credit and capital market risks. Structural risks include the securities priority in
the issuers capital structure, the adequacy of and ability to realize proceeds from collateral,
and the potential for prepayments. Credit risks include consumer or corporate credits such as
credit card holders, equipment lessees, and corporate obligors. Capital market risks include
general level of interest rates and the liquidity for these securities in the marketplace.
As of September 30, 2010 and December 31, 2009, the Company held investments in securities with
subprime mortgage exposure with amortized costs totaling $150.0 million and $164.6 million, and
estimated fair values of $114.7 million and $104.3 million, respectively. Those amounts include
exposure to subprime mortgages through securities held directly in the Companys investment
portfolios within asset-backed securities, as well as securities backing the Companys funds
withheld at interest investment. The weighted average S&P credit ratings on these securities was
approximately BBB- at September 30, 2010 and BBB+ at December 31, 2009. Historically, these
securities have been highly rated, however, in recent years have been downgraded by rating
agencies, although the weighted average rating remains investment-grade. Additionally, the Company
has largely avoided directly investing in securities originated since the second half of 2005,
which management believes was a period of lessened underwriting quality. While ratings and vintage
year are important factors to consider, the tranche seniority and evaluation of forecasted future
losses within a tranche is critical to the valuation of these types of securities. The Company
recorded $2.3 million and $2.7 million in other-than-temporary impairments in its subprime
portfolio during the third quarter and first nine months of 2010, respectively. The Company
recorded $4.5 million and $25.3 million, respectively, of other-than-temporary impairments in its
subprime portfolio, during the third quarter and first nine months of 2009. The following tables
summarize the securities by rating and underwriting year at September 30, 2010 and December 31,
2009 (dollars in thousands):
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Table of Contents
AAA | AA | A | ||||||||||||||||||||||
September 30, 2010: | Estimated | Estimated | Estimated | |||||||||||||||||||||
Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 18,905 | $ | 17,654 | $ | 21,115 | $ | 23,647 | $ | 9,855 | $ | 9,085 | ||||||||||||
2006 |
| | | | | | ||||||||||||||||||
2007 |
| | | | | | ||||||||||||||||||
2008 - 2010 |
| | | | | | ||||||||||||||||||
Total |
$ | 18,905 | $ | 17,654 | $ | 21,115 | $ | 23,647 | $ | 9,855 | $ | 9,085 | ||||||||||||
BBB | Below Investment Grade | Total | ||||||||||||||||||||||
Estimated | Estimated | Estimated | ||||||||||||||||||||||
Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 22,322 | $ | 18,621 | $ | 69,082 | $ | 39,752 | $ | 141,279 | $ | 108,759 | ||||||||||||
2006 |
| | 3,300 | 2,410 | 3,300 | 2,410 | ||||||||||||||||||
2007 |
| | 5,399 | 3,561 | 5,399 | 3,561 | ||||||||||||||||||
2008 - 2010 |
| | | | | | ||||||||||||||||||
Total |
$ | 22,322 | $ | 18,621 | $ | 77,781 | $ | 45,723 | $ | 149,978 | $ | 114,730 | ||||||||||||
AAA | AA | A | ||||||||||||||||||||||
December 31, 2009: | Estimated | Estimated | Estimated | |||||||||||||||||||||
Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 22,816 | $ | 18,780 | $ | 39,873 | $ | 33,014 | $ | 17,017 | $ | 9,779 | ||||||||||||
2006 |
| | | | | | ||||||||||||||||||
2007 |
| | | | | | ||||||||||||||||||
2008 - 2009 |
| | | | | | ||||||||||||||||||
Total |
$ | 22,816 | $ | 18,780 | $ | 39,873 | $ | 33,014 | $ | 17,017 | $ | 9,779 | ||||||||||||
BBB | Below Investment Grade | Total | ||||||||||||||||||||||
Estimated | Estimated | Estimated | ||||||||||||||||||||||
Underwriting Year | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||||||||
2005 & Prior |
$ | 24,394 | $ | 12,593 | $ | 39,203 | $ | 18,686 | $ | 143,303 | $ | 92,852 | ||||||||||||
2006 |
4,985 | 1,507 | 4,566 | 2,563 | 9,551 | 4,070 | ||||||||||||||||||
2007 |
| | 11,709 | 7,372 | 11,709 | 7,372 | ||||||||||||||||||
2008 - 2009 |
| | | | | | ||||||||||||||||||
Total |
$ | 29,379 | $ | 14,100 | $ | 55,478 | $ | 28,621 | $ | 164,563 | $ | 104,294 | ||||||||||||
Alternative residential mortgage loans (Alt-A) are a classification of mortgage loans where
the risk profile of the borrower falls between prime and sub-prime. At September 30, 2010 and
December 31, 2009, the Companys Alt-A mortgage-backed securities had an amortized cost of $145.4
million and $176.6 million, respectively, with an unrealized loss of $0.6 million and $21.9
million, respectively. As of September 30, 2010 and December 31, 2009, 53.8% and 56.4%,
respectively, of the Alt-A securities were rated AA- or better. This amount includes securities
directly held by the Company and securities backing the Companys funds withheld at interest
investment. The Company recorded $1.7 million in other-than-temporary impairments in the first
nine months of 2010 in its Alt-A portfolio due primarily to the increased likelihood that some or
all of the remaining scheduled principal and interest payments on select securities would not be
received. The Company recorded $2.8 million, and $13.0 million in other-than-temporary impairments
in the third quarter and first nine months of 2009, respectively, in its Alt-A portfolio due
primarily to the increased likelihood that some or all of the remaining scheduled principal and
interest payments on select securities would not be received.
At September 30, 2010 and December 31, 2009, the Companys fixed maturity and funds withheld
portfolios included approximately $653.8 million and $601.8 million, respectively, in estimated
fair value, of securities that are insured by various financial guarantors, or less than five
percent of consolidated investments. The securities are diversified between
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Table of Contents
municipal bonds and asset-backed securities with well diversified collateral pools. The
Company held investment-grade securities issued by financial guarantors totaling $8.3 million in
amortized cost at September 30, 2010 and December 31, 2009.
The Company does not invest in the common equity securities of Fannie Mae and Freddie Mac, both
government sponsored entities; however, as of September 30, 2010 and December 31, 2009, the Company
held in its general portfolio $60.1 million, amortized cost in direct exposure in the form of
senior unsecured agency and preferred securities. Additionally, as of September 30, 2010 and
December 31, 2009, the portfolios held by the Companys ceding companies that support its funds
withheld asset contain approximately $523.3 million and $543.6 million, respectively, in amortized
cost of unsecured agency bond holdings and no equity exposure. As of September 30, 2010 and
December 31, 2009, indirect exposure in the form of secured, structured mortgaged securities issued
by Fannie Mae and Freddie Mac totaled approximately $0.9 billion, in amortized cost across the
Companys general and funds withheld portfolios. Including the funds withheld portfolios, the
Companys direct holdings in the form of preferred securities had a total book value of $0.7
million at September 30, 2010 and December 31, 2009, respectively.
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 conditions and industry sector, current intent and ability to hold
securities and various other subjective factors. Based on managements judgment, securities
determined to have an other-than-temporary impairment in value are written down to fair value. The
Company recorded $4.9 million and $13.6 million in other-than-temporary impairments in its fixed
maturity and equity securities, including $4.9 million and $13.0 million of other-than-temporary
impairment losses on Subprime / Alt-A / Other structured securities, in the third quarter and first
nine months of 2010, respectively, primarily due to a decline in value of structured securities
with exposure to commercial mortgages. The Company recorded $20.9 million and $81.6 million in
other-than-temporary impairments in its fixed maturity and equity securities in the third quarter
and first nine months of 2009, respectively. The impairments in 2009 were due primarily to the
turmoil in the U.S. and global financial markets which has resulted in bankruptcies, credit
defaults, consolidations and government interventions. The table below summarizes
other-than-temporary impairments for the third quarter and first nine months of 2010 and 2009
(dollars in thousands).
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
Asset Class | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Subprime / Alt-A / Other structured securities |
$ | 4,867 | $ | 15,902 | $ | 12,999 | $ | 49,945 | ||||||||
Corporate / Other fixed maturity securities |
11 | 5,043 | 593 | 26,202 | ||||||||||||
Equity securities |
| | 32 | 5,430 | ||||||||||||
Other |
5,087 | 4,790 | 7,482 | 7,755 | ||||||||||||
Total |
$ | 9,965 | $ | 25,735 | $ | 21,106 | $ | 89,332 | ||||||||
During the three months ended September 30, 2010 and 2009, the Company sold fixed maturity
securities and equity securities with fair values of $97.6 million and $191.7 million at gross
losses of $7.8 million and $23.8 million, respectively, or at 92.6% and 89.0% of amortized cost,
respectively. During the nine months ended September 30, 2010 and 2009, the Company sold fixed
maturity securities and equity securities with fair values of $497.0 million and $514.3 million at
gross losses of $22.0 million and $62.3 million, respectively, or at 95.8% and 89.2% of amortized
cost, respectively. The Company generally does not engage in short-term buying and selling of
securities.
At September 30, 2010 and December 31, 2009, the Company had $298.3 million and $584.9 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.
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Table of Contents
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
Sector: |
||||||||
U.S. corporate securities |
29 | % | 26 | % | ||||
Canadian and Canada provincial governments |
| 4 | ||||||
Residential mortgage-backed securities |
7 | 12 | ||||||
Foreign corporate securities |
4 | 7 | ||||||
Asset-backed securities |
19 | 14 | ||||||
Commercial mortgage-backed securities |
37 | 29 | ||||||
State and political subdivisions |
3 | 3 | ||||||
U.S. government and agencies |
| 3 | ||||||
Other foreign government securities |
1 | 2 | ||||||
Total |
100 | % | 100 | % | ||||
Industry: |
||||||||
Finance |
24 | % | 25 | % | ||||
Asset-backed |
19 | 13 | ||||||
Industrial |
8 | 7 | ||||||
Mortgage-backed |
44 | 41 | ||||||
Government |
4 | 12 | ||||||
Utility |
1 | 2 | ||||||
Total |
100 | % | 100 | % | ||||
The following table presents total gross unrealized losses, including other-than-temporary
impairment losses reported in AOCI, for 601 and 1,316 fixed maturity securities and equity
securities as of September 30, 2010 and December 31, 2009, respectively, where the estimated fair
value had declined and remained below amortized cost by the indicated amount (dollars in
thousands):
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Number of | Unrealized | Number of | Unrealized | |||||||||||||||||||||
Securities | Losses | % of Total | Securities | Losses | % of Total | |||||||||||||||||||
Less than 20% |
482 | $ | 89,690 | 30.1 | % | 1,112 | $ | 254,075 | 43.4 | % | ||||||||||||||
20% or more for less than six months |
101 | 166,714 | 55.9 | 38 | 69,322 | 11.9 | ||||||||||||||||||
20% or more for six months or greater |
18 | 41,900 | 14.0 | 166 | 261,483 | 44.7 | ||||||||||||||||||
Total |
601 | $ | 298,304 | 100.0 | % | 1,316 | $ | 584,880 | 100.0 | % | ||||||||||||||
As of September 30, 2010 and December 31, 2009, respectively, 55.8% and 71.4% of these gross
unrealized losses were associated with securities that were investment grade. The Company has
experienced a significant recovery of market value since December 31, 2009. The amount of the
unrealized loss on these securities was primarily attributable to a widening of credit default
spreads since the time securities were purchased.
While all of these securities are monitored for potential impairment, the Company believes due to
fluctuating market conditions and liquidity concerns, and the relatively recent high levels of
price volatility, the extent and duration of a decline in value have become less indicative of when
there has been credit deterioration with respect to an issuer. The Companys 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 Companys 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. The Company continues to consider valuation declines as a
potential indicator of credit deterioration.
The following tables present the estimated fair values and gross unrealized losses, including
other-than-temporary impairment losses reported in AOCI, for the 601 and 1,316 fixed maturity
securities and equity securities that have estimated fair values below amortized cost as of
September 30, 2010 and December 31, 2009, respectively (dollars in thousands). These investments
are presented by class and grade of security, as well as the length of time the related market
value has remained below amortized cost.
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Table of Contents
Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
September 30, 2010: | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 78,777 | $ | 19,484 | $ | 276,688 | $ | 45,918 | $ | 355,465 | $ | 65,402 | ||||||||||||
Canadian and Canadian provincial
governments |
61,724 | 243 | 4,526 | 17 | 66,250 | 260 | ||||||||||||||||||
Residential mortgage-backed securities |
193,986 | 6,315 | 120,680 | 6,346 | 314,666 | 12,661 | ||||||||||||||||||
Foreign corporate securities |
165,983 | 170 | 147,561 | 9,219 | 313,544 | 9,389 | ||||||||||||||||||
Asset-backed securities |
18,695 | 1,408 | 147,091 | 29,488 | 165,786 | 30,896 | ||||||||||||||||||
Commercial mortgage-backed securities |
78,393 | 9,221 | 113,820 | 27,037 | 192,213 | 36,258 | ||||||||||||||||||
U.S. government and agencies |
1,817 | 10 | | | 1,817 | 10 | ||||||||||||||||||
State and political subdivisions |
13,319 | 635 | 30,221 | 4,873 | 43,540 | 5,508 | ||||||||||||||||||
Other foreign government securities |
69,996 | 183 | 43,042 | 2,714 | 113,038 | 2,897 | ||||||||||||||||||
Total investment grade securities |
682,690 | 37,669 | 883,629 | 125,612 | 1,566,319 | 163,281 | ||||||||||||||||||
Non-investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
29,322 | 6,987 | 107,501 | 9,575 | 136,823 | 16,562 | ||||||||||||||||||
Asset-backed securities |
2,388 | 6,192 | 26,243 | 19,141 | 28,631 | 25,333 | ||||||||||||||||||
Foreign corporate securities |
1,762 | 3,408 | | | 1,762 | 3,408 | ||||||||||||||||||
Residential mortgage-backed securities |
51 | 11 | 51,812 | 9,583 | 51,863 | 9,594 | ||||||||||||||||||
Commercial mortgage-backed securities |
| | 70,162 | 72,873 | 70,162 | 72,873 | ||||||||||||||||||
State and political subdivisions |
| | 5,914 | 2,210 | 5,914 | 2,210 | ||||||||||||||||||
Total non-investment grade securities |
33,523 | 16,598 | 261,632 | 113,382 | 295,155 | 129,980 | ||||||||||||||||||
Total fixed maturity securities |
$ | 716,213 | $ | 54,267 | $ | 1,145,261 | $ | 238,994 | $ | 1,861,474 | $ | 293,261 | ||||||||||||
Non-redeemable preferred stock |
$ | 11,396 | $ | 513 | $ | 29,019 | $ | 3,994 | $ | 40,415 | $ | 4,507 | ||||||||||||
Other equity securities |
6,606 | 271 | 1,044 | 265 | 7,650 | 536 | ||||||||||||||||||
Total equity securities |
$ | 18,002 | $ | 784 | $ | 30,063 | $ | 4,259 | $ | 48,065 | $ | 5,043 | ||||||||||||
Total number of securities in an
unrealized loss position |
203 | 398 | 601 | |||||||||||||||||||||
Less than 12 months | 12 months or greater | Total | ||||||||||||||||||||||
Gross | Gross | Gross | ||||||||||||||||||||||
Estimated | Unrealized | Estimated | Unrealized | Estimated | Unrealized | |||||||||||||||||||
December 31, 2009: | Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||||||
Investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
$ | 373,049 | $ | 27,625 | $ | 679,908 | $ | 89,711 | $ | 1,052,957 | $ | 117,336 | ||||||||||||
Canadian and
Canadian provincial governments |
494,718 | 15,374 | 135,315 | 10,372 | 630,033 | 25,746 | ||||||||||||||||||
Residential mortgage-backed securities |
402,642 | 23,671 | 197,320 | 20,185 | 599,962 | 43,856 | ||||||||||||||||||
Foreign corporate securities |
362,406 | 5,262 | 182,300 | 24,693 | 544,706 | 29,955 | ||||||||||||||||||
Asset-backed securities |
48,651 | 1,927 | 166,603 | 57,262 | 215,254 | 59,189 | ||||||||||||||||||
Commercial mortgage-backed securities |
177,360 | 10,312 | 425,793 | 79,297 | 603,153 | 89,609 | ||||||||||||||||||
U.S. government and agencies |
496,514 | 15,027 | | | 496,514 | 15,027 | ||||||||||||||||||
State and political subdivisions |
34,612 | 3,397 | 40,945 | 11,437 | 75,557 | 14,834 | ||||||||||||||||||
Other foreign government securities |
240,216 | 8,370 | 30,321 | 4,901 | 270,537 | 13,271 | ||||||||||||||||||
Total investment grade securities |
2,630,168 | 110,965 | 1,858,505 | 297,858 | 4,488,673 | 408,823 | ||||||||||||||||||
Non-investment grade securities: |
||||||||||||||||||||||||
U.S. corporate securities |
35,477 | 11,293 | 168,375 | 18,755 | 203,852 | 30,048 | ||||||||||||||||||
Asset-backed securities |
6,738 | 3,256 | 24,408 | 17,686 | 31,146 | 20,942 | ||||||||||||||||||
Foreign corporate securities |
1,755 | 17 | 3,771 | 3,426 | 5,526 | 3,443 | ||||||||||||||||||
Residential mortgage-backed securities |
10,657 | 1,909 | 66,756 | 24,250 | 77,413 | 26,159 | ||||||||||||||||||
Commercial mortgage-backed securities |
| | 57,179 | 79,818 | 57,179 | 79,818 | ||||||||||||||||||
State and political subdivisions |
| | 5,170 | 2,910 | 5,170 | 2,910 | ||||||||||||||||||
Total non-investment grade securities |
54,627 | 16,475 | 325,659 | 146,845 | 380,286 | 163,320 | ||||||||||||||||||
Total fixed maturity securities |
$ | 2,684,795 | $ | 127,440 | $ | 2,184,164 | $ | 444,703 | $ | 4,868,959 | $ | 572,143 | ||||||||||||
Non-redeemable preferred stock |
$ | 8,320 | $ | 1,263 | $ | 68,037 | $ | 11,065 | $ | 76,357 | $ | 12,328 | ||||||||||||
Other equity securities |
5 | 15 | 7,950 | 394 | 7,955 | 409 | ||||||||||||||||||
Total equity securities |
$ | 8,325 | $ | 1,278 | $ | 75,987 | $ | 11,459 | $ | 84,312 | $ | 12,737 | ||||||||||||
Total number of securities in an
unrealized loss position |
582 | 734 | 1,316 | |||||||||||||||||||||
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As of September 30, 2010, 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, as facts and circumstances change, the Company may
sell fixed maturity securities in the ordinary course of managing its portfolio to meet
diversification, credit quality, asset-liability management and liquidity guidelines.
As of September 30, 2010, 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, from time
to time if facts and circumstances change, the Company may sell equity securities in the ordinary
course of managing its portfolio to meet diversification, credit quality and liquidity guidelines.
As of September 30, 2010 and December 31, 2009, respectively, the Company classified approximately
10.7% and 15.3% of its fixed maturity securities in the Level 3 category (refer to Note 6 Fair
Value of Financial Instruments in the Notes to Condensed Consolidated Financial Statements for
additional information). These securities primarily consist of private placement corporate
securities with an inactive trading market and asset-backed securities with subprime exposure in
the Level 3 category due to the current market uncertainty associated with these securities and the
Companys utilization of information from third parties.
Mortgage Loans on Real Estate
Mortgage loans represented approximately 3.8% and 4.0% of the Companys cash and invested assets as
of September 30, 2010 and December 31, 2009, respectively. The Companys mortgage loan portfolio
consists principally of investments in U.S.-based commercial offices, light industrial properties
and retail locations. The mortgage loan portfolio is diversified by geographic region and property
type.
Valuation allowances on mortgage loans are established based upon losses expected by management to
be realized in connection with future dispositions or settlement of mortgage loans, including
foreclosures. The valuation allowances are 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. Information
regarding the Companys loan valuation allowances for mortgage loans as of September 30, 2010 and
2009 are as follows (dollars in thousands):
Nine Months Ended September 30, | ||||||||
2010 | 2009 | |||||||
Balance, beginning of period |
$ | 5,784 | $ | 526 | ||||
Additions |
7,484 | 6,836 | ||||||
Deductions |
| (2,294 | ) | |||||
Balance, end of period |
$ | 13,268 | $ | 5,068 | ||||
Information regarding the portion of the Companys mortgage loans that were impaired as
of September 30, 2010 and December 31, 2009 is as follows (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Impaired loans with valuation allowances |
$ | 33,827 | $ | 14,967 | ||||
Impaired loans without valuation allowances |
16,901 | 14,317 | ||||||
Subtotal |
50,728 | 29,284 | ||||||
Less: Valuation allowances on impaired loans |
13,268 | 5,784 | ||||||
Impaired loans |
$ | 37,460 | $ | 23,500 | ||||
The Companys average investment per impaired loan was $4.2 million and $3.2 million as
of September 30, 2010 and December 31, 2009, respectively. Interest income on impaired loans was
$0.5 million and $0.7 million for the three and nine months ended September 30, 2010 and $0.5
million and $0.6 million for the three and nine months ended 2009, respectively.
Policy Loans
Policy loans comprised approximately 5.1% and 5.8% of the Companys cash and invested assets as of
September 30, 2010 and December 31, 2009, 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 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.
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Funds Withheld at Interest
Funds withheld at interest comprised approximately 23.0% and 24.8% of the Companys cash and
invested assets as of September 30, 2010 and December 31, 2009, respectively. For agreements
written on a modified coinsurance basis and certain agreements written on a coinsurance basis,
assets equal to the net statutory reserves are withheld and legally owned and managed by the ceding
company, and are reflected as funds withheld at interest on the Companys condensed consolidated
balance sheet. In the event of a ceding companys 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. 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. The underlying portfolios also include options related to
equity-indexed annuity products. The market value changes associated with these investments have
caused some volatility in reported investment income. This is largely offset by a corresponding
change in interest credited, with minimal impact on income before taxes. To mitigate 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 September 30,
2010 and December 31, 2009. Certain ceding companies maintain segregated portfolios for the
benefit of the Company.
Other Invested Assets
Other invested assets represented approximately 3.2% and 2.6% of the Companys cash and invested
assets as of September 30, 2010 and December 31, 2009, respectively. Other invested assets include
equity securities, non-redeemable preferred stocks, limited partnership interests, structured loans
and derivative contracts. Carrying values of these assets as of September 30, 2010 and December
31, 2009 are as follows (dollars in thousands):
September 30, 2010 | December 31, 2009 | |||||||
Equity securities |
$ | 28,473 | $ | 58,359 | ||||
Non-redeemable preferred stock |
110,303 | 113,198 | ||||||
Limited partnerships |
201,838 | 156,573 | ||||||
Structured loans |
210,414 | 150,677 | ||||||
Derivatives |
142,564 | 24,156 | ||||||
Other |
45,238 | 13,123 | ||||||
Total other invested assets |
$ | 738,830 | $ | 516,086 | ||||
The Company recorded no other-than-temporary impairments on other invested assets for the
third quarter and first nine months ended September 30, 2010, respectively. The Company recorded
$0.5 million and $5.9 million in other-than-temporary impairments on other invested assets in the
third quarter and first nine months of 2009, respectively. The Company may be exposed to
credit-related losses in the event of non-performance by counterparties to derivative financial
instruments. Generally, the current credit exposure of the Companys derivative contracts is
limited to the net positive fair value at the reporting date less collateral held by the Company.
The Company held derivative assets related to its derivative contracts with counterparties of
$142.6 million and $24.2 million at September 30, 2010 and December 31, 2009, respectively.
However, due to counterparty netting arrangements, and collateral held, the Companys credit
exposure was $8.7 million at September 30, 2010. The Company had no credit exposure at December
31, 2009.
Contractual Obligations
From December 31, 2009 to September 30, 2010, the Companys obligation related to other policy
claims and benefits increased by $360.9 million primarily due to an increase in incurred claims not
reported. In addition, the value of the Companys obligation for payables for collateral received
under derivative contracts increased by $105.0 million due to a change in the value of the
underlying derivatives and the Companys obligation for commitments to fund limited partnerships
increased by $66.5 million. There were no other material changes in the Companys contractual
obligations from those reported in the 2009 Annual Report.
Enterprise Risk Management
RGA maintains an Enterprise Risk Management framework which provides a process for assessing,
measuring and monitoring risks facing the enterprise. This includes development and implementation
of mitigation strategies to maintain exposures within approved risk limits. Risk management is an
integral part of the Companys culture and every day activities. It includes guidelines and
controls in areas such as mortality, morbidity, longevity, pricing, underwriting,
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currency, administration, investments, asset-liability management, counterparty exposure,
financing, regulatory change, business continuity planning, human resources, liquidity, sovereign
risks and technology development.
The Enterprise Risk Management framework is directed by the Chief Risk Officer. The Chief Risk
Officer leads and is supported by the Risk Management Steering Committee which oversees all risk
taking of the organization. Risk management officers from all areas of the Company support the
Chief Risk Officer and the Risk Management Steering Committee in this effort. The Chief Risk
Officer provides quarterly risk management updates to the Finance, Investment and Risk Management
Committee of the Board of Directors, executive management and the internal risk management
officers.
Specific risk assessments and descriptions can be found below and in Item 1A Risk Factors the
2009 Annual Report.
Mortality Risk Management
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 RGAs mortality risk. 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 the individual life markets,
the Company retains a maximum of $8 million of coverage per individual life. In certain limited
situations, due to the acquisition of in force blocks of business, the Company has retained more
than $8 million per individual life. In total, the Company has identified 17 such cases of
over-retained lives, for a total amount of $38.5 million over the Companys normal retention limit.
These amounts include seven cases with $19.9 million of exposure related to second to die policies
with coverages split between multiple insureds. The largest amount over-retained on any one life
is $11.1 million. The Company enters into agreements with other reinsurers to help 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 million per individual life.
The Company maintains a catastrophe insurance program (Program) that renews on September 7th of
each year. The current Program began September 7, 2010, and covers events involving 10 or more
insured deaths from a single occurrence. The Company retains the first $25 million in claims, the
Program covers the next $75 million in claims, and the Company retains all claims in excess of $100
million. The Program covers reinsurance programs worldwide and includes losses due to acts of
terrorism, including terrorism losses due to nuclear, chemical and/or biological events. The
Program also includes losses from earthquakes occurring in California, but excludes, among other
things, losses from pandemics. The Program is insured by 16 insurance companies and Lloyds
Syndicates, with only one single entity providing more than $10 million of coverage.
Insurance Counterparty Risk
In the normal course of business, the Company seeks to limit its exposure to reinsurance contracts
by ceding a portion of the reinsurance to other insurance companies or reinsurers. Should a
counterparty not be able to fulfill its obligation to the Company under a reinsurance agreement,
the impact could be material to the Companys financial condition and results of operations. In
addition, certain reinsurance structures can lead to counterparty risk to the Companys clients.
Generally, RGAs insurance subsidiaries retrocede amounts in excess of their retention to RGA
Reinsurance, Parkway Reinsurance Company, RGA Reinsurance Company (Barbados) Ltd., RGA Americas
Reinsurance Company, Ltd., RGA Worldwide Reinsurance Company, Ltd. or RGA Atlantic Reinsurance
Company, Ltd. External retrocessions are arranged through the Companys retrocession pools for
amounts in excess of its retention. As of September 30, 2010, all retrocession pool members in
this excess retention pool reviewed by the A.M. Best Company were rated A-, the fourth highest
rating out of fifteen possible ratings, or better. For a majority of the retrocessionaires that
are not rated, letters of credit or trust assets have been given as additional security in favor of
RGA Reinsurance. 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.
The Company relies upon its clients to provide timely, accurate information. The Company may
experience volatility in its earnings as a result of erroneous or untimely reporting from its
clients. The Company works closely with its clients and monitors this risk in an effort to
minimize its exposure.
Market Risk
Market risk is the risk of loss that may occur when fluctuations in interest and currency exchange
rates and equity and commodity prices change the value of a financial instrument. Since both
derivative and nonderivative financial instruments
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have market risk, the Companys risk management extends beyond derivatives to encompass all
financial instruments held. The Company is primarily exposed to interest rate risk, including
credit spreads, and foreign currency risk.
Interest Rate Risk:
Interest rate risk arises from many of the Companys primary activities, as the Company invests
substantial funds in interest-sensitive assets and also has certain interest-sensitive contract
liabilities. The Company manages interest rate risk and credit risk to maximize the return on the
Companys capital effectively and to preserve the value created by its business operations. As
such, certain management monitoring processes are designed to minimize the impact of sudden and
sustained changes in interest rates on fair value, cash flows, and interest income.
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 reinsurance liabilities to the extent possible. As of September 30, 2010, the Company
had in place net investment hedges for a portion of its investments in its Canada and Australia
operations. Translation differences resulting from translating foreign subsidiary balances to U.S.
dollars are reflected in stockholders equity on the condensed 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). The majority
of the Companys foreign currency transactions are denominated in Canadian dollars, British pounds,
Australian dollars, Japanese yen, Korean won, euros and the South African rand.
Market Risk Associated with Annuities and Guaranteed Minimum Benefits:
The Company reinsures variable annuities including those with guaranteed minimum benefits and
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 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 mitigate the risks associated with income volatility around the change
in reserves on guaranteed benefits. 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 Companys 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 September
30, 2010 and December 31, 2009.
(dollars in millions) | September 30, 2010 | December 31, 2009 | ||||||
No guarantee minimum benefits |
$ | 1,242.6 | $ | 1,231.2 | ||||
GMDB only |
86.7 | 78.7 | ||||||
GMIB only |
6.0 | 5.7 | ||||||
GMAB only |
62.2 | 62.1 | ||||||
GMWB only |
1,652.6 | 1,563.0 | ||||||
GMDB / WB |
472.2 | 437.4 | ||||||
Other |
34.4 | 34.3 | ||||||
Total variable annuity account values |
$ | 3,556.7 | $ | 3,412.4 | ||||
Fair value of liabilities associated with living benefit riders |
$ | 174.0 | $ | 23.7 |
There has been no significant change in the Companys quantitative or qualitative aspects of market risk
during the quarter ended September 30, 2010 from that disclosed in the 2009 Annual Report.
New Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. Effective
July 1, 2009, FASB Accounting Standards Codification (Codification) has become the source of
authoritative U.S. accounting and reporting standards for nongovernmental entities, in addition to
guidance issued by the Securities and Exchange Commission for public companies.
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This statement is effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Company adopted Codification on September 30, 2009 and has updated
all disclosures to reference Codification herein.
Changes to the general accounting principles are established by the FASB in the form of accounting
standards updates to the FASBs Codification. Accounting standards updates not listed below were
assessed and determined to be either not applicable or are expected to have minimal impact on the
Companys condensed consolidated financial statements.
Consolidation and Business Combinations
In February 2010, the FASB amended the general accounting principles for Consolidation as it
relates to the assessment of a variable interest entity for potential consolidation. The amendment
defers the effective date of the Consolidation amendment made in June 2009 for certain variable
interest entities. This update also clarifies how a related partys interest should be considered
when evaluating variable interests. The amendment is effective for fiscal years and interim periods
beginning after January 31, 2010. The adoption of this amendment did not have an impact on the
Companys condensed consolidated financial statements.
In January 2010, the FASB amended the general accounting principles for Consolidation as it relates
to decreases in ownership of a subsidiary. This amendment clarifies the scope of the decrease in
ownership provisions. This amendment also requires additional disclosures about the deconsolidation
of a subsidiary or derecognition of a group of assets. The amendment is effective for fiscal years
and interim periods beginning after December 15, 2009. The adoption of this amendment did not have
an impact on the Companys condensed consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Consolidation as it relates to
the assessment of a variable interest entity for potential consolidation. This amendment also
requires additional disclosures to provide transparent information regarding the involvement in a
variable interest entity. The amendment is effective for fiscal years and interim periods beginning
after November 15, 2009. The adoption of this amendment did not have a material impact on the
Companys condensed consolidated financial statements.
In December 2007, the FASB amended the general accounting principles for Business Combinations.
This amendment establishes principles and requirements for how an acquirer recognizes and measures
certain items in a business combination, as well as disclosures about the nature and financial
effects of a business combination. The FASB also amended the general accounting principles for
Consolidation as it relates to noncontrolling interests in consolidated financial statements. This
amendment establishes accounting and reporting standards surrounding noncontrolling interest, or
minority interests, which are the portions of equity in a subsidiary not attributable, directly or
indirectly, to a parent. The amendments are effective for fiscal years beginning on or after
December 15, 2008 and apply prospectively to business combinations. Presentation and disclosure
requirements related to noncontrolling interests must be retrospectively applied. The adoption of
these amendments did not have a material impact on the Companys condensed consolidated financial
statements.
Investments
In July 2010, the FASB amended the general accounting principles for Receivables as it relates to
the disclosures about the credit quality of financing receivables and the allowance for credit
losses. This amendment requires additional disclosures that provide a greater level of
disaggregated information about the credit quality of financing receivables and the allowance for
credit losses. It also requires the disclosure of credit quality indicators, past due information,
and modifications of financing receivables. The amendment is effective for interim and annual
reporting periods ending on or after December 15, 2010, except for disclosures about activity that
occurs during the reporting period. Those disclosures are effective for interim and annual
reporting periods beginning after December 15, 2010. The Company is currently evaluating the impact
of this amendment on its condensed consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Investments as it relates to
the recognition and presentation of other-than-temporary impairments. This amendment updates the
other-than-temporary impairment guidance for fixed maturity securities to make it more operational
and to improve the presentation and disclosure of other-than-temporary impairments (OTTI) on
fixed maturity and equity securities in the financial statements. The recognition provisions apply
only to fixed maturity securities classified as available-for-sale and held-to-maturity, while the
presentation and disclosure requirements apply to both fixed maturity and equity securities. An
impaired fixed maturity security will be considered other-than-temporarily impaired if the Company
has the intent to sell or it more likely than not will be required to sell prior to recovery of the
amortized cost. If the holder of a fixed maturity security does not expect recovery of the entire
cost basis, even if there is no intention to sell the security, an OTTI has occurred. This
amendment also changes how an entity recognizes an OTTI for a fixed maturity security by separating
the loss between the amount representing the credit loss
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and the amount relating to other factors, if the Company does not have the intent to sell or it
more likely than not will not be required to sell prior to recovery of the amortized cost less any
current period credit loss. Credit losses will be recognized in net income and losses relating to
other factors will be recognized in accumulated other comprehensive income (AOCI). If the Company
has the intent to sell or it more likely than not will be required to sell before its recovery of
amortized cost less any current period credit loss, the entire OTTI will be recognized in net
income. This amendment is effective for interim and annual reporting periods ending after June 15,
2009. The adoption of this amendment resulted in a net after-tax increase to retained earnings and
a decrease to accumulated other comprehensive income of $4.4 million, as of April 1, 2009. The
required disclosures are provided in Note 4 Investments in the Notes to Condensed Consolidated
Financial Statements.
Transfers and Servicing
In June 2009, the FASB amended the general accounting principles for Transfers and Servicing as it
relates to the transfers of financial assets. This amendment also requires additional disclosures
to address concerns regarding the transparency of transfers of financial assets. The amendment is
effective for fiscal years and interim periods beginning after November 15, 2009. The adoption of
this amendment did not have a material impact on the Companys condensed consolidated financial
statements.
In February 2008, the FASB amended the general accounting principles for Transfers and Servicing as
it relates to the accounting for transfers of financial assets and repurchase financing
transactions. This amendment provides guidance for evaluating whether to account for a transfer of
a financial asset and repurchase financing as a single transaction or as two separate transactions.
The amendment is effective prospectively for financial statements issued for fiscal years beginning
after November 15, 2008. The adoption of this amendment did not have a material impact on the
Companys condensed consolidated financial statements.
Derivatives and Hedging
In March 2010, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to embedded derivatives. This amendment clarifies the scope exception for embedded credit
derivative features related to the transfer of credit risk in the form of subordination of a
financial instrument to another. The amendment is effective for financial statements issued for
fiscal years and interim periods beginning after June 15, 2010. The adoption of this amendment did
not have a material impact on the Companys condensed consolidated financial statements.
In March 2008, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to the disclosures about derivative instruments and hedging activities. This amendment
requires enhanced qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. The amendment is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company adopted this amendment in the first quarter
of 2009. The required disclosures are provided in Note 5 Derivative Instruments in the Notes
to Condensed Consolidated Financial Statements.
Fair Value Measurements and Disclosures
In January 2010, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to the disclosures about fair value measurements. This amendment requires
new disclosures about the transfers in and out of Level 1 and 2 measurements and also enhances
disclosures about the activity within the Level 3 measurements. It also clarifies the required
level of disaggregation and the disclosures regarding valuation techniques and inputs to fair value
measurements. The amendment is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the enhanced Level 3 disclosures. Those disclosures are effective for
interim and annual reporting periods beginning after December 15, 2010. The Company adopted the
effective portions of this amendment in the first quarter of 2010 and is evaluating the impact of
the enhanced Level 3 disclosures. The required disclosures are provided in Note 6 Fair Value of
Financial Instruments in the Notes to Condensed Consolidated Financial Statements.
In September 2009, the FASB amended the general accounting principles for Fair Value Measurements
and Disclosures as it relates to the fair value measurement of investments in certain entities that
calculate net asset value per share. This amendment allows the fair value of certain investments to
be measured on the basis of the net asset value. It also requires disclosure, by major category
type, of the attributes of those investments, such as the nature of any restrictions on redemption,
any unfunded commitments, and the investment strategies of the investees. The amendment is
effective for interim and annual reporting periods ending after December 15, 2009. The adoption of
this amendment did not have a material impact on the Companys condensed consolidated financial
statements.
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In August 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to measuring liabilities at fair value. This amendment provides guidance
for measuring liabilities at fair value when a quoted price in an active market for the identical
liability is not available. It also clarifies that the inclusion of a separate input, used in the
fair value measurement, relating to the existence of a restriction that prevents the transfer of a
liability is not necessary. The amendment is effective for interim and annual reporting beginning
after issuance. The adoption of this amendment did not have a material impact on the Companys
condensed consolidated financial statements.
In April 2009, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining fair value when the volume and level of activity for asset
or liability have significantly decreased and identifying transactions that are not orderly. This
amendment provides additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased in relation to normal market
activity for the asset or liability and clarifies that the use of multiple valuation techniques may
be appropriate. It also provides additional guidance on circumstances that may indicate a
transaction is not orderly. Further, it requires additional disclosures about fair value
measurements in annual and interim reporting periods. This amendment is effective prospectively for
interim and annual reporting periods ending after June 15, 2009. The adoption of this amendment did
not have a material impact on the Companys consolidated financial statements. The required
disclosures are provided in Note 6 Fair Value of Financial Instruments in the Notes to
Condensed Consolidated Financial Statements.
In October 2008, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to determining the fair value of a financial asset when the market for
that asset is not active. This amendment clarifies the application of fair value in a market that
is not active and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not active. The amendment
was effective upon issuance on October 10, 2008, including prior periods for which financial
statements had not been issued. The Company did not consider it necessary to change any valuation
techniques as a result of the amendment. The Company also adopted an amendment that delayed the
effective date of fair value measurement for certain nonfinancial assets and liabilities that are
recorded at fair value on a nonrecurring basis. The effective date was delayed until January 1,
2009 and impacts balance sheet items including nonfinancial assets and liabilities in a business
combination and the impairment testing of goodwill and long-lived assets. The adoption of this
amendment did not have a material impact on the Companys condensed consolidated financial
statements.
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 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
Company is currently evaluating the impact of this amendment on its condensed consolidated
financial statements.
Compensation
In April 2010, the FASB amended the general accounting principles for Compensation as it relates to
stock compensation. This amendment clarifies that an employee share-based payment award with an
exercise price denominated in the currency of a market in which a substantial portion of the
entitys equity securities trades should not be considered to contain a condition that is not a
market, performance, or service condition. Therefore, such an award should not be classified as a
liability if it otherwise qualifies as equity. The amendment is effective for fiscal years and
interim periods beginning after December 15, 2010. The adoption of this amendment is not expected
to have an impact on the Companys condensed consolidated financial statements.
In December 2008, the FASB amended the general accounting principles for Compensation as it relates
to employers disclosures about postretirement benefit plan assets. This amendment provides guidance
for disclosure of the types of assets and associated risks in retirement plans. The new disclosures
are designed to provide additional insight into the major categories of plan assets, the inputs and
valuation techniques used to measure the fair value of plan assets, the effect of fair value
measurements using significant unobservable inputs on changes in plan assets for the period,
significant concentrations of risk within plan assets and how investment decisions are made,
including factors necessary to understanding investment policies and strategies. The disclosures
about plan assets required by this amendment is effective for financial statements with fiscal
years ending after December 15, 2009. The adoption of this amendment did not have a material impact
on the Companys condensed consolidated financial statements.
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Debt
In October 2009, the FASB amended the general accounting principles for Debt as it relates to the
accounting for own-share lending arrangements entered into in contemplation of a convertible debt
issuance or other financing. This amendment provides accounting and disclosure guidance for
own-share lending arrangements issued in contemplation of convertible debt issuance. The amendment
is effective for fiscal years and interim periods beginning after December 15, 2009. The adoption
of this amendment did not have an impact on the Companys condensed consolidated financial
statements.
Equity
In January 2010, the FASB amended the general accounting principles for Equity as it relates to
distributions to shareholders with components of stock and cash. This amendment clarifies that the
stock portion of a distribution to shareholders, which allows them to elect to receive cash or
stock with a limitation on the total amount of cash that shareholders can receive, is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
The amendment is effective for fiscal years and interim periods beginning after December 15, 2009.
The adoption of this amendment did not have an impact on the Companys condensed consolidated
financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations Market Risk which is included herein.
ITEM 4. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the
design and operation of the Companys 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 Companys internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f) during the quarter ended September 30, 2010, that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting.
PART II OTHER INFORMATION
ITEM 1. 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. However, if such material litigation did
arise, it is possible that an adverse outcome on any particular arbitration or litigation situation
could have a material adverse effect on the Companys consolidated financial position and/or net
income in a particular reporting period.
ITEM 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Companys
2009 Annual Report.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Under a board of directors approved plan, the Company may purchase at its discretion up to $50
million of its common stock on the open market. The Company has approximately $43.4 million
remaining under the approved program with no shares purchased since 2002. The Company generally
uses treasury shares to support the future exercise of options granted under its stock option
plans.
ITEM 6. Exhibits
See index to exhibits.
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SIGNATURES
Pursuant to the requirements 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.
Reinsurance Group of America, Incorporated |
||||
November 3, 2010 | By: | /s/ A. Greig Woodring | ||
A. Greig Woodring | ||||
President & Chief Executive Officer (Principal Executive Officer) |
||||
November 3, 2010 | By: | /s/ Jack B. Lay | ||
Jack B. Lay | ||||
Senior Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) |
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INDEX TO EXHIBITS
Exhibit | ||
Number | Description | |
3.1
|
Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 of Current Report on Form 8-K filed November 25, 2008. | |
3.2
|
Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 of Current Report on Form 8-K filed November 25, 2008. | |
31.1
|
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. | |
31.2
|
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. | |
32.1
|
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. | |
32.2
|
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. |
73