REINSURANCE GROUP OF AMERICA INC – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Edgar Online, Inc.

Forward-Looking and Cautionary Statements

  This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, among others, statements relating to projections of the strategies, earnings, revenues, income or loss, ratios, future financial performance, and growth potential of the Company. The words "intend," "expect," "project," "estimate," "predict," "anticipate," "should," "believe," and other similar expressions also are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results, performance, and achievements could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements.  Numerous important factors could cause actual results and events to differ materially from those expressed or implied by forward-looking statements including, without limitation, (1) adverse capital and credit market conditions and their impact on the Company's liquidity, access to capital and cost of capital, (2) the impairment of other financial institutions and its effect on the Company's business, (3) requirements to post collateral or make payments due to declines in market value of assets subject to the Company's collateral arrangements, (4) the fact that the determination of allowances and impairments taken on the Company's investments is highly subjective, (5) adverse changes in mortality, morbidity, lapsation or claims experience, (6) changes in the Company's financial strength and credit ratings and the effect of such changes on the Company's future results of operations and financial condition, (7) inadequate risk analysis and underwriting, (8) general economic conditions or a prolonged economic downturn affecting the demand for insurance and reinsurance in the Company's current and planned markets, (9) the availability and cost of collateral necessary for regulatory reserves and capital, (10) market or economic conditions that adversely affect the value of the Company's investment securities or result in the impairment of all or a portion of the value of certain of the Company's investment securities, that in turn could affect regulatory capital, (11) market or economic conditions that adversely affect the Company's ability to make timely sales of investment securities, (12) risks inherent in the Company's risk management and investment strategy, including changes in investment portfolio yields due to interest rate or credit quality changes, (13) fluctuations in U.S. or foreign currency exchange rates, interest rates, or securities and real estate markets, (14) adverse litigation or arbitration results, (15) the adequacy of reserves, resources and accurate information relating to settlements, awards and terminated and discontinued lines of business, (16) the stability of and actions by governments and economies in the markets in which the Company operates, including ongoing uncertainties regarding the amount of United States sovereign debt and the credit ratings thereof, (17) competitive factors and competitors' responses to the Company's initiatives, (18) the success of the Company's clients, (19) successful execution of the Company's entry into new markets, (20) successful development and introduction of new products and distribution opportunities, (21) the Company's ability to successfully integrate and operate reinsurance business that the Company acquires, (22) action by regulators who have authority over the Company's reinsurance operations in the jurisdictions in which it operates, (23) the Company's dependence on third parties, including those insurance companies and reinsurers to which the Company cedes some reinsurance, third-party investment managers and others, (24) the threat of natural disasters, catastrophes, terrorist attacks, epidemics or pandemics anywhere in the world where the Company or its clients do business, (25) changes in laws, regulations, and accounting standards applicable to the Company, its subsidiaries, or its business, (26) the effect of the Company's status as an insurance holding company and regulatory restrictions on its ability to pay principal of and interest on its debt obligations, and (27) other risks and uncertainties described in this document and in the Company's other filings with the Securities and Exchange Commission ("SEC").  Forward-looking statements should be evaluated together with the many risks and uncertainties that affect the Company's business, including those mentioned in this document and the cautionary statements described in the periodic reports the Company files with the SEC. These forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligations to update these forward-looking statements, even though the Company's situation may change in the future. The Company qualifies all of its forward-looking statements by these cautionary statements. For a discussion of these risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements, you are advised to see Item 1A - "Risk Factors".  

Overview

  RGA is an insurance holding company that was formed on December 31, 1992. The consolidated financial statements include the assets, liabilities, and results of operations of RGA, RGA Reinsurance, RCM, RGA Barbados, RGA Americas, RGA Atlantic, RGA Canada, RGA Australia and RGA International as well as other subsidiaries, which are primarily wholly owned (collectively, the Company).  

The Company is primarily engaged in the reinsurance of individual and group coverages for traditional life and health, longevity, disability income, annuity and critical illness products, and financial reinsurance. RGA and its predecessor,

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  the Reinsurance Division of General American Life Insurance Company, a Missouri life insurance company, have been engaged in the business of life reinsurance since 1973. Approximately 66.3% of the Company's 2012 net premiums were from its operations in North America, represented by its U.S. and Canada segments.  

The Company derives revenues primarily from renewal premiums from existing reinsurance treaties, new business premiums from existing or new reinsurance treaties and income earned on invested assets.

  The Company's primary business is life and health reinsurance, which involves reinsuring life insurance policies that are often in force for the remaining lifetime of the underlying individuals insured, with premiums earned typically over a period of 10 to 30 years. Each year, however, a portion of the business under existing treaties terminates due to, among other things, lapses or voluntary surrenders of underlying policies, deaths of insureds, and the exercise of recapture options by ceding companies.  As is customary in the reinsurance business, clients continually update, refine, and revise reinsurance information provided to the Company. Such revised information is used by the Company in preparation of its financial statements and the financial effects resulting from the incorporation of revised data are reflected in the current period.  The Company's long-term profitability primarily depends on the volume and amount of death claims incurred and the ability to adequately price the risks it assumes. While death claims are reasonably predictable over a period of many years, claims become less predictable over shorter periods and are subject to significant fluctuation from quarter to quarter and year to year. The maximum amount of individual life coverage the Company retains per life varies by market and can be as high as $8.0 million. In certain limited situations the Company has retained more than $8.0 million per individual life. Exposures in excess of these retention amounts are typically retroceded to retrocessionaires; however, the Company remains fully liable to the ceding company for the entire amount of risk it assumes. The Company believes its sources of liquidity are sufficient to cover potential claims payments on both a short-term and long-term basis.  The Company has five geographic-based or function-based operational segments, each of which is a distinct reportable segment: U.S., Canada, Europe & South Africa, Asia Pacific and Corporate and Other. The U.S. operations provide traditional life, long-term care, group life and health reinsurance, annuity and financial reinsurance products. During 2012, the Company issued its first fee-based synthetic guaranteed investment contracts, which include investment-only, stable value contracts, to retirement plans. The Canada operations reinsure traditional individual life products as well as creditor reinsurance, group life and health reinsurance, non-guaranteed critical illness products and longevity reinsurance. Europe & South Africa operations include a variety of life and health products, critical illness and longevity business throughout Europe and in South Africa, in addition to other markets the Company is developing. The principle types of reinsurance in Asia Pacific include life, critical illness, health, disability income, superannuation and financial reinsurance. Corporate and Other includes results from, among others, RTP, a wholly-owned subsidiary that develops and markets technology solutions for the insurance industry, interest expense related to debt and the investment income and expense associated with the Company's collateral finance facility. The Company measures segment performance based on profit or loss from operations before income taxes.  The Company allocates capital to its segments based on an internally developed economic capital model, the purpose of which is to measure the risk in the business and to provide a consistent basis upon which capital is deployed. The economic capital model considers the unique and specific nature of the risks inherent in RGA's businesses. As a result of the economic capital allocation process, a portion of investment income and investment related gains and losses is credited to the segments based on the level of allocated capital. In addition, the segments are charged for excess capital utilized above the allocated economic capital basis. This charge is included in policy acquisition costs and other insurance expenses.  The Company is one of the leading life reinsurers in North America based on premiums and the amount of life reinsurance in force. Based on an industry survey of 2011 information prepared by Munich American at the request of the Society of Actuaries Reinsurance Section ("SOA survey"), the Company has the second largest market share in North America as measured by individual life insurance in force. The Company's approach to the North American market has been to:      •   focus on large, high quality life insurers as clients;    

• provide quality facultative underwriting and automatic reinsurance

          capacity; and       •   deliver responsive and flexible service to its clients.   In 1994, the Company began using its North American underwriting expertise and industry knowledge to expand into international markets and now has operations in Australia, Barbados, Bermuda, China, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Mexico, the Netherlands, New Zealand, Poland, Singapore, South Africa, South Korea, Spain, Taiwan, the UAE and the UK. The Company generally starts new operations from the ground up in these markets as                                           32

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  opposed to acquiring existing operations, and it often enters these markets to support its North American clients as they expand internationally. Based on information from competitors' annual reports, the Company believes it is the third largest global life and health reinsurer in the world based on 2011 life and health reinsurance premiums. The Company conducts business with the majority of the largest U.S. and international life insurance companies. The Company has also developed its capacity and expertise in the reinsurance of asset-intensive products (primarily annuities and corporate-owned life insurance) and financial reinsurance.  Industry Trends 

The Company believes that the following trends in the life insurance industry will continue to create demand for life reinsurance.

  Outsourcing of Mortality. The SOA survey indicates that U.S. life reinsurance in force has more than doubled from $4.6 trillion in 2001 to $9.6 trillion at year-end 2011. The Company believes this trend reflects the continued utilization by life insurance companies of reinsurance to manage capital and mortality risk and to develop competitive products. However, the survey results indicate a decline in the percentage of new business being reinsured in recent years, which has caused premium growth rates in the U.S. life reinsurance market to moderate. The Company believes the decline in new business being reinsured is likely a reaction by ceding companies to a broad-based increase in reinsurance rates in the market, stronger capital positions maintained by ceding companies in recent years and a desire by ceding companies to adjust their risk profiles. However, the Company believes reinsurers will continue to be an integral part of the life insurance market due to their ability to efficiently aggregate a significant volume of life insurance in force, creating economies of scale and greater diversification of risk. As a result of having larger amounts of data at their disposal compared to primary life insurance companies, reinsurers tend to have better insights into mortality trends, creating more efficient pricing for mortality risk.  Capital Management. Changing regulatory environments, most notably in Europe, rating agencies and competitive business pressures are causing life insurers to evaluate reinsurance as a means to:         •    manage risk-based capital by shifting mortality and other risks to

reinsurers, thereby reducing amounts of reserves and capital they need to

           maintain;       •   release capital to pursue new business initiatives; and          •    unlock the capital supporting, and value embedded in, non-core product           lines.   Consolidation and Reorganization Within the Life Reinsurance and Life Insurance Industry. As a result of consolidations over the last decade within the life reinsurance industry, there are fewer competitors. According to the SOA survey, as of December 31, 2011, the top five companies held approximately 73.3% of the market share in North America based on life reinsurance in force. As a consequence, the Company believes the life reinsurance pricing environment will remain attractive for the remaining life reinsurers, particularly those with a significant market presence and strong ratings.  

The SOA surveys indicate that the authors obtained information from participating or responding companies and do not guarantee the accuracy and completeness of their information. Additionally, the surveys do not survey all reinsurance companies, but the Company believes most of its principal competitors are included. While the Company believes these surveys to be generally reliable, the Company has not independently verified their data.

  Additionally, merger and acquisition transactions within the life insurance industry continue. The Company believes that reorganizations and consolidations of life insurers will continue. As reinsurance services are increasingly used to facilitate these transactions and manage risk, the Company expects demand for its products to continue.  Changing Demographics of Insured Populations. The aging of the population in North America is increasing demand for financial products among "baby boomers" who are concerned about protecting their peak income stream and are considering retirement and estate planning. The Company believes that this trend is likely to result in continuing demand for annuity products and life insurance policies, larger face amounts of life insurance policies and higher mortality and longevity risk taken by life insurers, all of which should fuel the need for insurers to seek reinsurance coverage. The Company continues to follow a two-part business strategy to capitalize on industry trends.  

Continue Growth of North American Mortality Business. The Company's strategy includes continuing to grow each of the following components of its North American mortality operations:

• Facultative Reinsurance. Based on discussions with the Company's clients,

an industry survey and informal knowledge about the industry, the Company

believes it is a leader in facultative underwriting in North America. The

Company intends to maintain that status by emphasizing its underwriting

standards, prompt response on quotes, competitive pricing, capacity,

          value added services and flexibility in meeting customer needs. The           Company believes its facultative business has allowed it to develop           close, long-standing client                                            33 

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relationships and generate additional business opportunities with its

facultative clients. The Company has processed over 300,000 facultative

         submissions annually in 2011 and 2012.    

• Automatic Reinsurance. The Company intends to expand its presence in the

North American automatic reinsurance market by using its mortality

          expertise and breadth of products and services to gain additional market           share.    

• In Force Block Reinsurance. There are occasions to grow the business by

          reinsuring in force blocks, as insurers and reinsurers seek to exit           various non-core businesses and increase financial flexibility in order           to, among other things, redeploy capital and pursue merger and           acquisition activity. The Company continually seeks these types of           opportunities.   Continue Expansion Into Selected Markets and Products. The Company's strategy includes building upon the expertise and relationships developed in its North American business platform to continue its expansion into selected markets and products, including:   

• International Markets. Management believes that international markets

offer opportunities for long-term growth, and the Company intends to

capitalize on these opportunities by establishing a presence in selected

markets. Since 1994, the Company has entered new markets internationally,

          including, in the mid-to-late 1990's, Australia, Hong Kong, Japan,           Malaysia, New Zealand, South Africa, Spain, Taiwan and the UK, and           beginning in 2002, China, India and South Korea. The Company received           regulatory approval to open a representative office in China in 2005,

opened representative offices in Poland and Germany in 2006, opened new

offices in France and Italy in 2007, opened a representative office in

the Netherlands in 2009 and commenced operations in the UAE in 2011.

Before entering new markets, the Company evaluates several factors

          including:       ¡    the size of the insured population,       ¡    competition,       ¡    the level of reinsurance penetration,       ¡    regulation,       ¡    existing clients with a presence in the market, and       ¡    the economic, social and political environment.   As previously indicated, the Company generally starts new operations in these markets from the ground up as opposed to acquiring existing operations, and it often enters these markets to support its large international clients as they expand into additional markets. Many of the markets that the Company has entered since 1994, or may enter in the future, are not utilizing life reinsurance, including facultative life reinsurance, at the same levels as the North American market, and therefore, the Company believes these markets represent opportunities for increasing reinsurance penetration. In particular, management believes markets such as Japan and South Korea are beginning to realize the benefits that reinsurers bring to the life insurance market. Markets such as China and India represent longer-term opportunities for growth as the underlying direct life insurance markets grow to meet the needs of growing middle class populations. Additionally, the Company believes that regulatory changes (e.g., Solvency II) in European markets, may cause ceding companies to reduce counterparty exposure to their existing life reinsurers and reinsure more business, creating opportunities for the Company.    

• Asset-intensive Reinsurance and Other Products. The Company intends to

continue leveraging its existing client relationships and reinsurance

expertise to create customized reinsurance products and solutions.

Industry trends, particularly the increased pace of consolidation and

reorganization among life insurance companies and changes in products and

product distribution, are expected to enhance existing opportunities for

asset-intensive reinsurance and other products. The Company began

reinsuring annuities with guaranteed minimum benefits on a limited basis

in 2007. To date, most of the Company's asset-intensive reinsurance

          business has been written in the U.S.; however, the Company believes           opportunities outside of the U.S. may further develop in the near future,           particularly expanding its operations in Japan. The Company also provides           longevity reinsurance in the UK and Canada, and in 2008 entered the U.S.           healthcare reinsurance market with a primary focus on long-term care and           Medicare supplement insurance. In 2010, the Company expanded into the           group reinsurance market in North America with the acquisition of           Reliastar Life Insurance Company's U.S. and Canada operations.                                            34 

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  Table of Contents  Results of Operations  Consolidated  Consolidated net income increased $85.8 million, or 15.7%, and $10.3 million, or 1.9%, in 2012 and 2011, respectively. Diluted earnings per share on net income were $8.52 in 2012 compared to $7.37 in 2011 and $7.17 in 2010. The increase in net income in 2012 is primarily due to an increase in investment related gains and an increase in net premiums in all segments. The increase in investment related gains reflects a favorable change in the value of embedded derivatives within the U.S. segment due to the effect of tightening credit spreads and a reduction in the benchmark interest rate in the U.S. debt markets. During 2012, the Company executed a large fixed deferred annuity reinsurance transaction in its U.S. Asset-Intensive sub-segment. The Company deployed approximately $350.0 million of capital to support this transaction, which increased the Company's invested asset base by approximately $5.4 billion.  The increase in net income in 2011 is primarily due to increased net premiums and investment income and the recognition in other revenues of gains on the repurchase of collateral finance facility securities of $65.6 million. Largely offsetting the increase in net income in 2011 was an unfavorable change in the value of embedded derivatives within the U.S. segment due to the impact of widening credit spreads and lower interest rate environment in the U.S. debt markets and poor equity market performance, as compared to 2010. Foreign currency exchange fluctuations resulted in a decrease in net income of approximately $4.5 million and an increase of approximately $10.3 million in 2012 and 2011, respectively.  The Company recognizes in consolidated net income, changes in the fair value of embedded derivatives on modified coinsurance ("modco") or coinsurance with 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 modco or funds withheld basis are subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. The unrealized gains and losses associated with these embedded derivatives, after adjustment for deferred acquisition costs, increased net income by $33.1 million in 2012 and reduced it by $36.4 million in 2011, respectively, as compared to the prior years. Changes in benchmark rates used in the fair value estimates of embedded derivatives associated with EIAs affect the amount of unrealized gains and losses the Company recognizes. The unrealized gains and losses associated with EIAs, after adjustment for deferred acquisition costs and retrocession, increased net income by $7.3 million in 2012 and reduced it by $6.9 million in 2012 and 2011, respectively, as compared to the prior years. The change in the Company's liability for variable annuities associated with guaranteed minimum living benefits affects the amount of unrealized gains and losses the Company recognizes. The unrealized gains and losses associated with guaranteed minimum living benefits, after adjustment for deferred acquisition costs, increased net income by $36.6 million in 2012 and reduced it by $25.2 million in 2011, respectively, as compared to the prior years.  The combined changes in these three types of embedded derivatives, after adjustment for deferred acquisition costs and retrocession, resulted in an increase of approximately $77.0 million and a decrease of approximately $68.5 million in consolidated net income in 2012 and 2011, respectively, as compared to the prior years. These fluctuations do not affect current cash flows, crediting rates or spread performance on the underlying treaties. Therefore, management believes it is helpful to distinguish between the effects of changes in these embedded derivatives and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income, and interest credited.  Consolidated net premiums increased $570.9 million, or 7.8%, and $676.0 million, or 10.2%, in 2012 and 2011, respectively, due to growth in life reinsurance in force. Foreign currency fluctuations relative to the prior year affected net premiums unfavorably by approximately $62.6 million in 2012 and favorably by approximately $167.7 million in 2011. Consolidated assumed life insurance in force was $2,927.6 billion, $2,664.4 billion and $2,540.3 billion as of December 31, 2012, 2011 and 2010, respectively. Foreign currency fluctuations affected the increases in assumed life insurance in force positively by $34.2 billion in 2012 and negatively by $32.5 billion in 2011. The Company added new business production, measured by face amount of insurance in force, of $426.6 billion, $428.9 billion and $327.6 billion during 2012, 2011 and 2010, respectively. Premiums on U.S. health and group related coverages contributed $164.6 million and $88.6 million to the increase in net premiums in 2012 and 2011, respectively. In addition, new group treaties in Australia contributed approximately $81.0 billion to the increase in 2011. Management believes industry consolidation and the established practice of reinsuring mortality risks should continue to provide opportunities for growth, albeit at rates less than historically experienced in some markets.  Consolidated investment income, net of related expenses, increased $155.0 million, or 12.1%, and $42.5 million, or 3.4%, in 2012 and 2011, respectively. The increases in investment income in 2012 and 2011 reflect a larger average invested asset base somewhat offset by lower effective investment portfolio yields. Contributing to the increase in investment income in 2012 was $129.8 million of investment income associated with a large fixed annuity transaction executed in the second quarter of 2012. Average invested assets at amortized cost, excluding funds withheld and other spread business, totaled $16.6 billion, $15.3 billion and $13.7 billion in 2012, 2011 and 2010, respectively. The average yield earned on investments,                                           35

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  excluding funds withheld and other spread business, was 4.98%, 5.28% and 5.46% in 2012, 2011 and 2010, respectively. The average yield will vary from year to year depending on a number of variables, including the prevailing interest rate and credit spread environment, changes in the mix of the underlying investments and cash balances, and the timing of dividends and distributions on certain investments. A continued low interest rate environment in the U.S. and Canada is expected to put downward pressure on this yield in future reporting periods.  Total investment related gains (losses), net, improved by $290.2 million in 2012 and declined by $248.1 million in 2011. The improvement in 2012 is primarily due to a favorable change in the value of embedded derivatives related to guaranteed minimum living benefits of $328.8 million and a favorable change in the value of embedded derivatives associated with reinsurance treaties written on a modco or funds withheld basis of $202.2 million offset by a decrease in the fair value of derivatives used to hedge the embedded derivative liabilities associated with guaranteed minimum living benefits of $261.6 million. The decline in 2011 was primarily due to unfavorable changes in the value of embedded derivatives associated with reinsurance treaties written on a modco or funds withheld basis of $247.5 million, unfavorable changes in the embedded derivatives related to guaranteed minimum living benefits of $195.4 million, partially offset by an increase in net hedging gains related to the liabilities associated with guaranteed minimum living benefits of $173.6 million. See Note 4 - "Investments" and Note 5 - "Derivative Instruments" in the Notes to Consolidated Financial Statements for additional information on investment related gains (losses), net, and derivatives. Investment income and investment related gains and losses are allocated to the operating segments based upon average assets and related capital levels deemed appropriate to support segment operations.  The consolidated provision for income taxes represented approximately 31.3%, 28.5% and 33.5%, of pre-tax income for 2012, 2011, and 2010, respectively. In 2011 the Company recognized an income tax benefit associated with previously enacted reductions in federal statutory tax rates and adjustments to various provincial statutory tax rates in Canada. This 2007 enactment included phased in effective dates through 2012. These adjustments in tax rates should have been recognized beginning in 2007, when the Canadian tax legislation was enacted. The Company recorded a cumulative tax benefit adjustment of $30.7 million in 2011 in "Provision for income taxes" to correct the deferred tax liabilities that were not properly adjusted. If the impact of the tax rates had been recorded in the prior years, the Company estimates that it would have recognized approximately $3.0 million, $6.0 million, $9.0 million, and $12.0 million of tax benefit in the years ended 2007, 2008, 2009, and 2010, respectively. The effective tax rates for 2012, 2011 and 2010 are affected by earnings of non-U.S. subsidiaries in which the Company is permanently reinvested whose statutory tax rates are less than the U.S. statutory tax rate of 35.0%, Subpart F income and differences in tax bases in foreign jurisdictions.  

Critical Accounting Policies

  The Company's accounting policies are described in Note 2 - "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements. The Company believes its most critical accounting policies include the capitalization and amortization of deferred acquisition costs ("DAC"); the establishment of liabilities for future policy benefits and incurred but not reported claims; the valuation of investments and investment impairments; the valuation of embedded derivatives; and accounting for income taxes. The balances of these accounts require extensive use of assumptions and estimates, particularly related to the future performance of the underlying business.  Differences in experience compared with the assumptions and estimates utilized in the justification of the recoverability of DAC, in establishing reserves for future policy benefits and claim liabilities, or in the determination of other-than-temporary impairments to investment securities can have a material effect on the Company's results of operations and financial condition.  

Deferred Acquisition Costs

  Costs of acquiring new business, which vary with and are primarily related to the production of new business, have been deferred to the extent that such costs are deemed recoverable from future premiums or gross profits. Such costs include commissions and allowances as well as certain costs of policy issuance and underwriting. Non-commission costs related to the acquisition of new and renewal insurance contracts may be deferred only if they meet the following criteria:      •   Incremental direct costs of a successful contract acquisition.          •    Portions of employees' salaries and benefits directly related to time           spent performing specified acquisition activities for a contract that has           been acquired or renewed.          •    Other costs directly related to the specified acquisition or renewal           activities that would not have been incurred had that acquisition           contract transaction not occurred.    

• Advertising costs that meet the capitalization criteria in other GAAP

          guidance (i.e., certain direct-response marketing).                                            36 

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  The Company tests the recoverability for each year of business at issue before establishing additional DAC. The Company also performs annual tests to establish that DAC remain recoverable at all times, and if financial performance significantly deteriorates to the point where a deficiency exists, a cumulative charge to current operations will be recorded. No such adjustments related to DAC recoverability were made in 2012, 2011 or 2010.  DAC related to traditional life insurance contracts are amortized with interest over the premium-paying period of the related policies in proportion to the ratio of individual period premium revenues to total anticipated premium revenues over the life of the policy. Such anticipated premium revenues are estimated using the same assumptions used for computing liabilities for future policy benefits.  

DAC related to interest-sensitive life and investment-type policies are amortized over the lives of the policies, in proportion to the actual and estimated gross profits expected to be realized from mortality, investment income less interest credited, and expense margins.

Liabilities for Future Policy Benefits and Incurred but not Reported Claims

  Liabilities for future policy benefits under long-term life insurance policies (policy reserves) are computed based upon expected investment yields, mortality and withdrawal (lapse) rates, and other assumptions, including a provision for adverse deviation from expected claim levels. The Company primarily relies on its own valuation and administration systems to establish policy reserves. The policy reserves the Company establishes may differ from those established by the ceding companies due to the use of different mortality and other assumptions. However, the Company relies upon its ceding company clients to provide accurate data, including policy-level information, premiums and claims, which is the primary information used to establish reserves. The Company's administration departments work directly with its clients to help ensure information is submitted by them in accordance with the reinsurance contracts. Additionally, the Company performs periodic audits of the information provided by ceding companies. The Company establishes reserves for processing backlogs with a goal of clearing all backlogs within a ninety-day period. The backlogs are usually due to data errors the Company discovers or computer file compatibility issues, since much of the data reported to the Company is in electronic format and is uploaded to its computer systems.  The Company periodically reviews actual historical experience and relative anticipated experience compared to the assumptions used to establish aggregate policy reserves. Further, the Company establishes premium deficiency reserves if actual and anticipated experience indicates that existing aggregate policy reserves, together with the present value of future gross premiums, are not sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. The premium deficiency reserve is established through a charge to income, as well as a reduction to unamortized acquisition costs and, to the extent there are no unamortized acquisition costs, an increase to future policy benefits. Because of the many assumptions and estimates used in establishing reserves and the long-term nature of the Company's reinsurance contracts, the reserving process, while based on actuarial science, is inherently uncertain. If the Company's assumptions, particularly on mortality, are inaccurate, its reserves may be inadequate to pay claims and there could be a material adverse effect on its results of operations and financial condition.  Claims payable for incurred but not reported losses are determined using case-basis estimates and lag studies of past experience. The time lag from the date of the claim or death to the date when the ceding company reports the claim to the Company can be several months and can vary significantly by ceding company, business segment and product type. Incurred but not reported claims are estimates on an undiscounted basis, using actuarial estimates of historical claims expense, adjusted for current trends and conditions. These estimates are continually reviewed and the ultimate liability may vary significantly from the amount recognized, which are reflected in net income in the period in which they are determined.  

Valuation of Investments and Other-than-Temporary Impairments

  The Company primarily invests in fixed maturity securities, mortgage loans, short-term investments, and other invested assets. For investments reported at fair value, the Company utilizes, when available, fair values based on quoted prices in active markets that are regularly and readily obtainable. Generally, these are very liquid investments and the valuation does not require management judgment. When quoted prices in active markets are not available, fair value is based on market valuation techniques, market comparable pricing and the income approach. The Company may utilize information from third parties, such as pricing services and brokers, to assist in determining the fair value for certain investments; however, management is ultimately responsible for all fair values presented in the Company's financial statements. This includes responsibility for monitoring the fair value process, ensuring objective and reliable valuation practices and pricing of financial instruments, and approving changes to valuation methodologies and pricing sources. The selection of the valuation technique(s) to apply considers the definition of an exit price and the nature of the investment being valued and significant expertise and judgment is required.                                           37 

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  Fixed maturity securities are classified as available-for-sale and are carried at fair value. Unrealized gains and losses on fixed maturity securities classified as available-for-sale, less applicable deferred income taxes as well as related adjustments to deferred acquisition costs, if applicable, are reflected as a direct charge or credit to accumulated other comprehensive income ("AOCI") in stockholders' equity on the consolidated balance sheets.  See "Investments" in Note 2 - "Summary of Significant Accounting Policies" and Note 6 - "Fair Value of Assets and Liabilities" in the Notes to the Consolidated Financial Statements for additional information regarding the valuation of the Company's investments.  Mortgage loans on real estate are carried at unpaid principal balances, net of any unamortized premium or discount and valuation allowances. For a discussion regarding the valuation allowance for mortgage loans see "Mortgage Loans on Real Estate" in Note 2 - "Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements.  In addition, investments are subject to impairment reviews to identify when a decline in value is other-than-temporary. Other-than-temporary impairment losses related to non-credit factors are recognized in AOCI whereas the credit loss portion is recognized in investment related gains (losses), net. See "Other-than-Temporary Impairment" in Note 2 - "Summary of Significant Accounting Policies" in the Notes to the Consolidated Financial Statements for a discussion of the policies regarding other-than-temporary impairments.  

Valuation of Embedded Derivatives

  The Company reinsures certain annuity products that contain terms that are deemed to be embedded derivatives, primarily equity-indexed annuities and variable annuities with guaranteed minimum benefits. The Company assesses each identified embedded derivative to determine whether it is required to be bifurcated under the general accounting principles for Derivatives and Hedging. If the instrument would not be reported in its entirety at fair value and it is determined that the terms of the embedded derivative are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is bifurcated from the host contract and accounted for as a freestanding derivative. Such embedded derivatives are carried on the consolidated balance sheets at fair value with the host contract.  Additionally, reinsurance treaties written on a modified coinsurance or funds withheld basis are subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. The majority of the Company's funds withheld at interest balances are associated with its reinsurance of annuity contracts, the majority of which are subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives. Management believes the embedded derivative feature in each of these reinsurance treaties is similar to a total return swap on the assets held by the ceding companies.  The valuation of the various embedded derivatives requires complex calculations based on actuarial and capital markets inputs and assumptions related to estimates of future cash flows and interpretations of the primary accounting guidance continue to evolve in practice. See "Derivative Instruments" in Note 2 - "Summary of Significant Accounting Policies" and Note 6 - "Fair Value of Assets and Liabilities" in the Notes to the Consolidated Financial Statements for additional information regarding the valuation of the Company's embedded derivatives.  Income Taxes  The Company provides for federal, state and foreign income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities and are recognized in net income or in certain cases in other comprehensive income. The Company's accounting for income taxes represents management's best estimate of various events and transactions considering the laws enacted as of the reporting date.  Deferred tax assets and liabilities resulting from temporary differences between the financial reporting and tax bases of assets and liabilities are measured at the balance sheet date using enacted tax rates in the relevant jurisdictions expected to apply to taxable income in the years the temporary differences are expected to reverse.  The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryback or carryforward periods under the tax law in the applicable tax jurisdiction. The Company has significant deferred tax assets related to net operating and capital losses. The Company has projected its ability to utilize its U.S. and foreign net operating losses and has determined that all of the U.S. losses are expected to be utilized prior to their expiration and established a valuation allowance on the portion of the foreign deferred tax assets the Company believes more likely than not that deferred income tax assets will not be realized. The Company completed an extensive 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. In addition, it is the Company's intention to hold all unrealized loss securities until maturity or until their market value recovers.                                           38 

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However, future unforeseen circumstances could create a situation in which the Company would prematurely sell securities in an unrealized loss position.

  The Company will establish a valuation allowance if management determines, based on available information, that it is more likely than not that deferred income tax assets will not be realized. Significant judgment is required in determining whether valuation allowances should be established as well as the amount of such allowances. When making such determination, consideration is given to, among other things, the following:   

(i) 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.

   Any such changes could significantly affect the amounts reported in the consolidated financial statements in the year these changes occur. The Company accounts for its total liability for uncertain tax positions considering the recognition and measurement thresholds established in general accounting principles for income taxes. The tax effects of a position are recognized in the consolidated statement of income only if it is more likely than not to be sustained upon examination by the appropriate taxing authority. Unrecognized tax benefits due to tax uncertainties that do not meet the more likely than not criteria are included within other liabilities and are charged to earnings in the period that such determination is made. The Company classifies interest related to tax uncertainties as interest expense whereas penalties related to tax uncertainties are classified as a component of income tax.  

U.S. Operations

  U.S. operations consist of two major 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.    For the year ended December 31, 2012

Non-Traditional

                                                                                                     Financial                                                       Traditional           Asset-Intensive        Reinsurance           Total U.S. (dollars in thousands)  Revenues: Net premiums                                        $     4,308,780       

$ 14,095 $ -- $ 4,322,875 Investment income, net of related expenses

                  535,589                 497,431              1,068              1,034,088 Investment related gains (losses), net: Other-than-temporary impairments on fixed maturity securities                                         (10,608)                 (1,566)                 --               (12,174) Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income                       (6,303)                      --                 --                (6,303) Other investment related gains (losses), net                 14,441                 207,211                (141 )             221,511  Total investment related gains (losses), net                  (2,470 )              205,645                (141 )             203,034 Other revenues                                                4,616                 112,016             46,005                162,637  Total revenues                                            4,846,515                 829,187             46,932              5,722,634   Benefits and expenses: Claims and other policy benefits                          3,732,717                  12,724                  --             3,745,441 Interest credited                                            55,667                 322,857                  --               378,524 Policy acquisition costs and other insurance expenses                                                    598,875                 245,579              4,567                849,021 Other operating expenses                                     91,161                  12,442              9,635                113,238  Total benefits and expenses                               4,478,420                 593,602             14,202              5,086,224   Income before income taxes                          $       368,095        $        235,585       $     32,730        $       636,410                                             39 

--------------------------------------------------------------------------------   Table of Contents For the year ended December 31, 2011

Non-Traditional

                                                                                                    Financial                                                       Traditional          Asset-Intensive        Reinsurance          Total U.S. (dollars in thousands)  Revenues: Net premiums                                        $     3,979,489       $

13,189 $ -- $ 3,992,678 Investment income, net of related expenses

                  495,650                362,722                164               858,536 Investment related gains (losses), net: Other-than-temporary impairments on fixed maturity securities                                         (14,493)                (6,519)               (57)              (21,069) Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income                        2,980                    756                 12                 3,748 Other investment related gains (losses), net                 55,724               (101,771)               (83)              (46,130)  Total investment related gains (losses), net                 44,211               (107,534)              (128)              (63,451) Other revenues                                                3,401                 87,518             36,373               127,292  Total revenues                                            4,522,751                355,895             36,409             4,915,055   Benefits and expenses: Claims and other policy benefits                          3,458,279                 14,277                  --            3,472,556 Interest credited                                            59,891                255,354                  --              315,245 Policy acquisition costs and other insurance expenses                                                    555,511                 42,717              3,191               601,419 Other operating expenses                                     85,106                  8,217              6,875               100,198  Total benefits and expenses                               4,158,787                320,565             10,066             4,489,418   Income before income taxes                          $       363,964       $ 

35,330 $ 26,343 $ 425,637

   For the year ended December 31, 2010

Non-Traditional

                                                                                                    Financial                                                       Traditional          Asset-Intensive        Reinsurance          Total U.S. (dollars in thousands)  Revenues: Net premiums                                        $     3,775,951       $

21,130 $ -- $ 3,797,081 Investment income, net of related expenses

                  480,115                385,410                273               865,798 Investment related gains (losses), net: Other-than-temporary impairments on fixed maturity securities                                          (6,200)                (4,387)                 --              (10,587) Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income                          620                    (34)                 --                  586 Other investment related gains (losses), net                 30,404                171,332                (86)              201,650  Total investment related gains (losses), net                 24,824                166,911                (86)              191,649 Other revenues                                                1,720                 86,598             23,507               111,825  Total revenues                                            4,282,610                660,049             23,694             4,966,353   Benefits and expenses: Claims and other policy benefits                          3,214,336                 15,273                  --            3,229,609 Interest credited                                            64,472                245,496                  --              309,968 Policy acquisition costs and other insurance expenses                                                    547,149                257,549              2,014               806,712 Other operating expenses                                     78,917                 10,797              4,223                93,937  Total benefits and expenses                               3,904,874                529,115              6,237             4,440,226   Income before income taxes                          $       377,736       $ 

130,934 $ 17,457 $ 526,127

    Income before income taxes for the U.S. operations segment increased by $210.8 million, or 49.5%, and decreased by $100.5 million, or 19.1%, in 2012 and 2011, respectively. The increase in income before income taxes in 2012 can primarily be attributed to the Asset-Intensive sub-segment. The increase in Asset-Intensive income before income taxes in 2012 is due to the effect of changes in credit spreads on the fair value of embedded derivatives associated with treaties written on a modified coinsurance or funds withheld basis and a new fixed annuity coinsurance transaction entered into during the year. Also contributing to the increase in income in 2012 was the net effect of the embedded derivative supporting the guaranteed minimum living benefits associated with the Company's variable annuities, after adjustments for related deferred acquisition expenses. The decrease in income before income taxes in 2011 can be partially attributed to an increase in investment related losses related to the unfavorable impact of changes in credit spreads and interest rates on the fair value of embedded                                           40 

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  derivatives associated with treaties written on a modco or funds withheld basis. In addition, unfavorable claims experience in the U.S. Traditional sub-segment also contributed to the decrease in income before income taxes in 2011.  

Traditional Reinsurance

The U.S. Traditional sub-segment provides life and health reinsurance to domestic clients for a variety of products through yearly renewable term, coinsurance and modified coinsurance agreements. These reinsurance arrangements may involve either facultative or automatic agreements.

  Income before income taxes for the U.S. Traditional sub-segment increased by $4.1 million, or 1.1%, and decreased by $13.8 million, or 3.6% in 2012 and 2011, respectively. The increase in income before income taxes in 2012 is primarily due to slightly more favorable mortality experience in 2012 compared to 2011. Investment income increased $39.9 million due to a higher invested asset base, however this was more than offset by a decrease in net investment related gains of $46.7 million. The decrease in income before income taxes in 2011 can be primarily attributed to unfavorable mortality experience, largely offset by an increase in investment related gains and additional investment income. In 2011, the loss ratio in this sub-segment increased 1.8% over 2010. Investment related gains and investment income increased by $19.4 million and $15.4 million, respectively, in 2011 compared to 2010.  Net premiums increased $329.3 million, or 8.3%, and $203.5 million, or 5.4% in 2012 and 2011, respectively. These increases in net premiums were driven primarily by the growth in individual life business in force and health and group related coverages. The sub-segment added new life business production, measured by face amount of insurance in force, of $151.4 billion, $110.5 billion and $141.2 billion during 2012, 2011 and 2010, respectively. Total face amount of life business in force was $1,393.3 billion, $1,343.0 billion and $1,334.8 billion as of December 31, 2012, 2011, and 2010, respectively. Contributing to the increase was a large in force block transaction of $42.4 billion which contributed $64.8 million to the increase in net premiums in 2012. In addition, premiums on health and group related coverages contributed $164.6 million and $88.6 million to the increase in net premiums in 2012 and 2011, respectively.  Net investment income increased $39.9 million, or 8.1%, and $15.5 million, or 3.2%, in 2012 and 2011, respectively, primarily due to growth in the average invested asset base partially offset by lower yields in both years. Investment related gains decreased by $46.7 million and increased by $19.4 million in 2012 and 2011, respectively. Investment income and investment related gains and losses are allocated to the various operating segments based on average assets and related capital levels deemed appropriate to support segment operations. Investment performance varies with the composition of investments and the relative allocation of capital to the operating segments.  Claims and other policy benefits as a percentage of net premiums ("loss ratios") were 86.6%, 86.9% and 85.1% in 2012, 2011 and 2010, respectively. The increase in the percentage in 2011 was primarily due to normal volatility in mortality claims and an increase in group reinsurance claims associated with disability, medical and life coverages. Although reasonably predictable over a period of years, claims experience is typically volatile over shorter periods.  Interest credited expense decreased $4.2 million, or 7.1%, and $4.6 million, or 7.1%, in 2012 and 2011, respectively. The variances in interest credited expense are largely offset by variances in investment income. The decrease in 2012 is the result of one treaty in which the most prevalent credited loan rate decreased from 4.8% to 3.5% partially offset by a slight increase in its asset base. The decrease in 2011 was driven primarily by the same treaty with a decrease in the credited loan rate to 4.8% in 2011 compared to 5.6% in 2010. Interest credited in this sub-segment relates to amounts credited on cash value products which also have a significant mortality component. Income before income taxes is affected by the spread between the investment income and the interest credited on the underlying products.  Policy acquisition costs and other insurance expenses as a percentage of net premiums were 13.9%, 14.0% and 14.5% in 2012, 2011 and 2010, 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 $6.1 million, or 7.1%, and $6.2 million, or 7.8% in 2012 and 2011, respectively. Other operating expenses, as a percentage of net premiums, were 2.1% in each of 2012, 2011 and 2010. The expense ratio tends to fluctuate only slightly from period to period due to maturity and scale of this sub-segment.  Asset-Intensive Reinsurance  The U.S. Asset-Intensive sub-segment primarily assumes investment risk within underlying annuities and corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance with funds withheld or modco                                           41

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  whereby the Company recognizes profits or losses primarily from the spread between the investment income earned and the interest credited on the underlying deposit liabilities, as well as fees associated with variable annuity account values.  

Impact of certain derivatives:

  Income for the asset-intensive business tends to be volatile due to changes in the fair value of certain derivatives, including embedded derivatives associated with reinsurance treaties structured on a modco or funds withheld basis, as well as embedded derivatives associated with the Company's reinsurance of EIAs and variable annuities with guaranteed minimum benefit riders. Fluctuations occur period to period primarily due to changing investment conditions including, but not limited to, interest rate movements (including risk-free rates and credit spreads), implied volatility and equity market performance, all of which are factors in the calculations of fair value. Therefore, management believes it is helpful to distinguish between the effects of changes in these derivatives, net of related hedging activity, and the primary factors that drive profitability of the underlying treaties, namely investment income, fee income (included in other revenues), and interest credited. These fluctuations are considered unrealized by management and do not affect current cash flows, crediting rates or spread performance on the underlying treaties.  The following table summarizes the asset-intensive results and quantifies the impact of these embedded derivatives for the periods presented. Revenues before certain derivatives, benefits and expenses before certain derivatives, and income before income taxes and certain derivatives, should not be viewed as substitutes for GAAP revenues, GAAP benefits and expenses, and GAAP income before income taxes.    For the year ended December 31,                     2012               2011               2010 (dollars in thousands)  Revenues: Total revenues                                 $     829,187      $     355,895      $     660,049 Less: Embedded derivatives - modco/funds withheld treaties                                             117,055            (89,648)           160,274 Guaranteed minimum benefit riders and related free standing derivatives                     49,392            (17,851)             3,912  Revenues before certain derivatives                  662,740            463,394            495,863   Benefits and expenses: Total benefits and expenses                          593,602            320,565            529,115 Less: Embedded derivatives - modco/funds withheld treaties                                              75,849            (75,546)           115,920 Guaranteed minimum benefit riders and related free standing derivatives                     27,862             (7,339)             5,935 Equity-indexed annuities                               5,264             16,507              5,882  Benefits and expenses before certain derivatives                                          484,627            386,943            401,378   Income (loss) before income taxes: Income (loss) before income taxes                    235,585             35,330            130,934 

Less:

 Embedded derivatives - modco/funds withheld treaties                                              41,206            (14,102)            44,354 Guaranteed minimum benefit riders and related free standing derivatives                     21,530            (10,512)            (2,023) Equity-indexed annuities                              (5,264)           (16,507)            (5,882)  Income before income taxes and certain derivatives                                          178,113             76,451             94,485    Embedded Derivatives - Modco/Funds Withheld Treaties - Represents the change in the fair value of embedded derivatives on funds withheld at interest associated with treaties written on a modco or funds withheld basis. The fair value changes of embedded derivatives on funds withheld at interest associated with treaties written on a modco or funds withheld basis are reflected in revenues, while the related impact on deferred acquisition expenses is reflected in benefits and expenses. Changes in the fair value of the embedded derivative are driven by changes in investment credit spreads, including the Company's own credit risk. Generally, an increase in investment credit spreads, ignoring changes in the Company's own credit risk, will have a negative impact on the fair value of the embedded derivative (decrease in income). Changes in fair values of these embedded derivatives are net of an increase (decrease) in revenues of $(62.7) million, $23.1 million and $(32.2) million for the years ended December 31, 2012, 2011 and 2010, respectively, associated with the Company's own credit risk. A 10% increase in the Company's own credit risk rate would have increased revenues in 2012 by approximately $0.3 million. Conversely, a 10% decrease in the Company's own credit risk rate would have decreased revenues in 2012 by approximately $0.3 million.                                           42 

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  In 2012, the change in fair value of the embedded derivative increased revenues by $117.1 million and related deferred acquisition expenses increased benefits and expenses by $75.8 million, for a positive pre-tax income impact of $41.2 million, primarily due to a decrease in investment credit spreads. In 2011, the change in fair value of the embedded derivative decreased revenues by $89.6 million and related deferred acquisition expenses decreased benefits and expenses by $75.5 million, for a negative pre-tax income impact of $14.1 million. The decrease in 2011 can primarily be attributed to a recapture of a retrocession agreement related to a funds withheld treaty. Also contributing to the decrease in 2011 was an increase in investment credit spreads.  Guaranteed Minimum Benefit Riders - Represents the impact related to guaranteed minimum benefits associated with the Company's reinsurance of variable annuities. The fair value changes of the guaranteed minimum benefits along with the changes in fair value of the free standing derivatives (interest rate swaps, financial futures and equity options), purchased by the Company to substantially hedge the liability are reflected in revenues, while the related impact on deferred acquisition expenses is reflected in benefits and expenses. Changes in fair values of these embedded derivatives are net of an increase in revenues of $16.5 million in 2012 associated with the Company's own credit risk. Changes in fair values of embedded derivatives on variable annuity contracts associated with the Company's own credit risk for the years ended December 31, 2011 and 2010 were not material. A 10% increase in the Company's own credit risk rate would have increased revenues by approximately $1.6 million in 2012. Conversely, a 10% decrease in the Company's own credit risk rate would have decreased revenues by approximately $1.6 million in 2012.  In 2012, the change in the fair value of the guaranteed minimum benefits, after allowing for changes in the associated free standing derivatives to substantially economically hedge risk, increased revenues by $49.4 million and related deferred acquisition expenses increased benefits and expenses by $27.9 million for a positive pre-tax income impact of $21.5 million. In 2011, the change in the fair value of the guaranteed minimum benefits, after allowing for changes in the associated free standing derivatives to economically hedge risk, decreased revenues by $17.9 million and related deferred acquisition expenses decreased benefits and expenses by $7.3 million for a negative pre-tax income impact of $10.5 million.  

Equity-Indexed Annuities - Primarily represents the impact of changes in the benchmark rate on the calculation of the fair value of embedded derivative liabilities associated with EIAs, after adjustments for related deferred acquisition expenses. In 2012 and 2011, expenses increased $5.3 million and $16.5 million respectively.

Discussion and analysis before certain derivatives:

  Income before income taxes and certain derivatives increased by $101.7 million and decreased by $18.0 million in 2012 and 2011, respectively. The increase in income in 2012 was in part due to net changes in investment related gains and losses associated with the funds withheld and coinsurance portfolios and their related DAC impact. Funds withheld capital gains and losses are reported through investment income while coinsurance activity is reflected in investment related gains (losses), net. In addition, income earned on a new fixed annuity coinsurance transaction also contributed to the increase in earnings in 2012 compared to 2011. The decrease in income in 2011 can be attributed to a decrease in net investment related gains of $24.5 million combined with a decline in the broader U.S. financial markets and the related unfavorable impact on the underlying annuity account values. Lower annuity account values lead to a reduction in expected fund based fees collected in future periods. This lower expectation of future revenue lead to an increase in the amortization of deferred acquisition costs in 2011. The decrease in income before income taxes in 2011 was partially offset by income related to the aforementioned recapture of a retrocession agreement on an existing funds withheld treaty.  Revenue before certain derivatives increased by $199.3 million and decreased by $32.5 million in 2012 and 2011, respectively. The increase in 2012 was driven primarily by an increase in investment income and other investment related gains related to the aforementioned new fixed annuity coinsurance transaction. In addition, other revenues in 2012 increased $27.1 million due primarily to the amortization of the deferred profit liability associated with the new fixed annuity coinsurance transaction. The decrease in 2011 was driven by changes in investment income related to equity options held in a funds withheld portfolio associated with EIAs. Increases and decreases in investment income related to equity options were mostly offset by corresponding increases and decreases in interest credited expense.  Benefits and expenses before certain derivatives increased by $97.7 million and decreased by $14.4 million in 2012 and 2011, respectively. The increase in 2012 was primarily due to an increase in interest credited related to the new fixed annuity coinsurance transaction. The decrease in 2011 was primarily due to changes in the interest credited expense related to equity option income on funds withheld EIAs. These changes were mostly offset by corresponding increases or decreases in investment income.  The invested asset base supporting this sub-segment increased by $5.4 billion and $0.3 billion in 2012 and 2011, respectively. The growth in the asset base in 2012 was driven by the new fixed annuity coinsurance transaction executed during the year. As of December 31, 2012 and 2011, $4.2 billion of the invested assets were funds withheld at interest, of which 92.3% and 90.2%, respectively, was associated with one client.                                           43 

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Financial Reinsurance

  U.S. Financial Reinsurance sub-segment income before income taxes consists primarily of net fees earned on financial reinsurance transactions. Additionally, a portion of the business is brokered business in which the Company does not participate in the assumption of risk. The fees earned from financial reinsurance contracts and brokered business are reflected in other revenues, and the fees paid to retrocessionaires are reflected in policy acquisition costs and other insurance expenses.  

Income before income taxes increased by $6.4 million, or 24.2%, and $8.9 million, or 50.9%, in 2012 and 2011, respectively. The increases in 2012 and 2011 were primarily related to additional fees from financial reinsurance.

  At December 31, 2012, 2011 and 2010, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures, was $2.7 billion, $2.0 billion and $1.7 billion, respectively. The increase in 2012 can primarily be attributed to an increase in the number of new transactions entered into in 2012 and is consistent with the increase in related income. Fees earned from this business can vary significantly depending on the size of the transactions and the timing of their completion, and therefore, can fluctuate from period to period.  

Canada Operations

  The Company conducts reinsurance business in Canada primarily through RGA Life Reinsurance Company of Canada ("RGA Canada"), a wholly-owned subsidiary. RGA Canada assists clients with capital management activity and mortality and morbidity risk management, and is primarily engaged in traditional individual life reinsurance, as well as creditor, group life and health, critical illness, and longevity reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or commercial loans in the event of death, disability or critical illness and is generally shorter in duration than traditional life insurance.    For the year ended December 31,                   2012                   2011                  2010 (dollars in thousands)  Revenues: Net premiums                                $       915,764        $       835,298        $     797,206 Investment income, net of related expenses                                            190,337                188,304              169,136 Investment related gains (losses), net: Other-than-temporary impairments on fixed maturity securities                                 --                     --                   -- Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income                                      --                     --                   -- Other investment related gains (losses), net                                        27,659                 26,996               12,682  Total investment related gains (losses), net                                        27,659                 26,996               12,682 Other revenues                                        6,504                  5,433                1,146  Total revenues                                    1,140,264              1,056,031              980,170   Benefits and expenses: Claims and other policy benefits                    706,716                673,105              656,358 Interest credited                                        28                      --                   -- Policy acquisition costs and other insurance expenses                                  206,337                180,712              172,210 Other operating expenses                             40,212                 37,261               29,864  Total benefits and expenses                         953,293                891,078              858,432   Income before income taxes                  $       186,971        $       164,953        $     121,738    Income before income taxes increased by $22.0 million, or 13.3%, and $43.2 million, or 35.5%, in 2012 and 2011, respectively. The increase in income in 2012 is primarily due to a decrease in reserves of $16.2 million for a block of group creditor business as a result of a refinement of estimates and $6.3 million of income from the recapture of a previously assumed block of individual life business. The increase in income in 2011 is primarily due to an increase in net investment related gains of $14.3 million and improved traditional individual life mortality experience compared to prior year. In addition, contributing to the increase in income in 2011 is $3.3 million of income from the recapture of a previously assumed block of individual life business. Foreign currency exchange fluctuation in the Canadian dollar resulted in a decrease in income before income taxes of approximately $0.9 million in 2012 and an increase of approximately $5.7 million in 2011.  

Net premiums increased $80.5 million, or 9.6%, and $38.1 million, or 4.8%, in 2012 and 2011, respectively. Foreign currency exchange fluctuation in the Canadian dollar resulted in a decrease in net premiums of approximately $9.0

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  million in 2012 and an increase in net premiums of $31.3 million in 2011. Premiums increased in 2012 and 2011 primarily due to new business from both new and existing treaties. Excluding the impact of foreign exchange, reinsurance in force increased 11.5% and 8.9% in 2012 and 2011, respectively. The increase in premiums in 2011 was largely offset by a decrease in longevity reinsurance of $40.8 million. In 2010, the Company completed its first longevity in force reinsurance transaction and reported a one-time advance premium of $43.3 million, which represents the majority of the decrease in longevity premiums in 2011. In addition, creditor premiums increased by $23.9 million and $1.3 million in 2012 and 2011, respectively. The segment added new business production, measured by face amount of insurance in force, of $49.0 billion, $51.1 billion and $51.1 billion during 2012, 2011 and 2010, respectively. The face amount of reinsurance in force totaled approximately $389.7 billion, $344.9 billion, and $324.1 billion at December 31, 2012, 2011, and 2010, respectively. 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 $2.0 million, or 1.1%, and $19.2 million, or 11.3%, in 2012 and 2011, respectively. The effect of changes in the Canadian dollar exchange rates resulted in an decrease in net investment income of approximately $2.9 million and an increase of $6.3 million in 2012 and 2011, respectively. Investment income and investment related gains and losses are allocated to the segments based upon average assets and related capital levels deemed appropriate to support segment operations. Investment performance varies with the composition of investments and the relative allocation of capital to the operating segments. The increases in investment income, excluding the impact of foreign exchange, were mainly the result of increases in the allocated asset base of 0.6% and 7.3% in 2012 and 2011, respectively, due to growth in the underlying business volume offset by decreases in investment yields.  Other revenues increased by $1.1 million and $4.3 million in 2012 and 2011, respectively. The increase in 2012 was primarily due to fees earned from the modification of existing treaties and a fee earned from the recapture of a previously assumed block of individual life business. The increase in 2011 was primarily due to a $4.9 million fee earned from the recapture of a previously assumed block of individual life business.  Loss ratios for this segment were 77.2%, 80.6% and 82.3% in 2012, 2011 and 2010, respectively. The decrease in the 2012 loss ratio was primarily due to the aforementioned $16.2 million decrease in reserves for a block of group creditor business. Excluding creditor business, loss ratios for this segment were 90.9%, 92.1% and 94.4% in 2012, 2011 and 2010, respectively. Historically, the loss ratio increased primarily as the result of several large permanent level premium in force blocks assumed in 1997 and 1998. These blocks are mature blocks of long-term permanent level premium business in which mortality as a percentage of net premiums is expected to be higher than historical ratios. The nature of permanent level premium policies requires the Company to set up actuarial liabilities and invest the amounts received in excess of early-year claims costs to fund claims in later years when premiums, by design, continue to be level as compared to expected increasing mortality or claim costs. Excluding creditor business, claims and other policy benefits, as a percentage of net premiums and investment income were 71.8%, 72.0% and 74.6% in 2012, 2011 and 2010, respectively. The decrease in the loss ratio for 2011 compared to 2010 is due to improved traditional individual life mortality experience.  Policy acquisition costs and other insurance expenses as a percentage of net premiums totaled 22.5%, 21.6% and 21.6% in 2012, 2011 and 2010, respectively. Policy acquisition costs and other insurance expenses as a percentage of net premiums for traditional individual life business were 12.7%, 12.6% and 13.8% in 2012, 2011 and 2010, 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 $3.0 million, or 7.9%, and $7.4 million, or 24.8%, in 2012 and 2011, respectively. The effect of changes in the Canadian dollar exchange rates resulted in a decrease in operating expenses of approximately $0.3 million in 2012 and an increase of $1.1 million in 2011. Other operating expenses as a percentage of net premiums were 4.4%, 4.5% and 3.7% in 2012, 2011 and 2010, respectively. The 2011 increase in other operating expenses as a percentage of net premiums in 2011 is primarily due to office relocation expenses.                                           45 

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Europe & South Africa Operations

  The Europe & South Africa segment includes operations in the UK, South Africa, France, Germany, India, Italy, Mexico, the Netherlands, Poland, Spain and the UAE. The segment provides reinsurance for a variety of life and health products through yearly renewable term and coinsurance agreements, critical illness coverage and longevity risk related to payout annuities. Reinsurance agreements may be facultative or automatic agreements covering primarily individual risks and, in some markets, group risks.    For the year ended December 31,                    2012                 2011                2010 (dollars in thousands)  Revenues: Net premiums                                 $     1,308,462      $     1,194,477      $     918,513 Investment income, net of related expenses            45,576               44,351             37,039 Investment related gains (losses), net: Other-than-temporary impairments on fixed maturity securities                                        --                (332)            (2,429) Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income                     --                   --                 -- Other investment related gains (losses), net                                                   11,574                6,332              5,013  Total investment related gains (losses), net                                                   11,574                6,000              2,584 Other revenues                                         6,679                5,031              2,099  Total revenues                                     1,372,291            1,249,859            960,235   Benefits and expenses: Claims and other policy benefits                   1,134,219            1,001,921            734,392 Policy acquisition costs and other insurance expenses                                    51,236               59,217             60,192 Other operating expenses                             112,889              105,619             93,526  Total benefits and expenses                        1,298,344            1,166,757            888,110   Income before income taxes                   $        73,947      $        83,102      $      72,125    Income before income taxes decreased by $9.2 million, or 11.0%, and increased by $11.0 million, or 15.2%, in 2012 and 2011, respectively. The decrease in income before income taxes in 2012 was primarily due to unfavorable claims experience in the UK. The increase in income before income taxes in 2011 was primarily due to an increase in net premiums in the UK, South Africa, Italy, Spain, India and the UAE offset by unfavorable claims experience in South Africa, Mexico and the UAE. Foreign currency exchange fluctuations contributed to a decrease in income before income taxes of approximately $5.9 million in 2012 and an increase of approximately $0.9 million in 2011.  Net premiums grew by $114.0 million, or 9.5%, and $276.0 million, or 30.0%, in 2012 and 2011, respectively. These increases were the result of new business from both new and existing treaties including an increase associated with reinsurance of longevity risk in the UK of $39.0 million and $54.7 million in 2012 and 2011, respectively. In addition, net premiums in 2012 and 2011 include approximately $110.1 million and $64.7 million, respectively, associated with single premium in force transactions in Italy. The segment added new business production, measured by face amount of insurance in force, of $136.0 billion, $148.3 billion and $103.6 billion during 2012, 2011 and 2010, respectively. The face amount of reinsurance in force totaled approximately $602.5 billion, $513.4 billion, and $467.6 billion at December 31, 2012, 2011, and 2010, respectively. During 2012, there were unfavorable foreign currency exchange fluctuations, particularly with the British pound, the Euro and the South African rand weakening against the U.S. dollar which decreased net premiums by approximately $51.6 million in 2012 as compared to 2011. During 2011, there were favorable foreign currency exchange fluctuations, particularly with the British pound, the Euro and the South African rand strengthening against the U.S. dollar, which increased net premiums by approximately $31.3 million in 2011 as compared to 2010. Premium levels can be significantly influenced by currency fluctuations, large transactions and reporting practices of ceding companies and therefore can fluctuate from period to period.  A portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage, primarily in the UK. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Net premiums earned from this coverage totaled $248.6 million, $244.8 million and $224.1 million in 2012, 2011 and 2010, respectively.  Net investment income increased $1.2 million, or 2.8%, and $7.3 million, or 19.7%, in 2012 and 2011, respectively. The increases can be primarily attributed to growth in the average invested asset base of 21.3% and 36.2% in 2012 and 2011, respectively, largely offset by decreases in investment yields. Investment income and investment related gains and losses are allocated to the various operating segments based on average assets and related capital levels deemed appropriate to support segment operations. Investment performance varies with the composition of investments and the relative allocation of capital to the operating segments.                                           46 

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  Loss ratios for this segment were 86.7%, 83.9% and 80.0% in 2012, 2011 and 2010, respectively. The increase in the loss ratio in 2012 was due to unfavorable claims experience, primarily from UK critical illness and mortality coverages. The increase in the loss ratio in 2011 was due to unfavorable claims experience, primarily in South Africa, Mexico and the UAE. Although reasonably predictable over a period of years, claims experience is typically volatile over shorter periods. Management views recent experience as normal volatility that is inherent in the business.  Policy acquisition costs and other insurance expenses as a percentage of net premiums were 3.9%, 5.0% and 6.6% for 2012, 2011 and 2010, respectively. The decreases in policy acquisition costs and other insurance expenses in 2012 and 2011 are related to a decrease in the amortization of deferred acquisition costs affected by the mix of business, primarily in the UK. These percentages fluctuate due to timing of client company reporting, variations in the mixture of business and the relative maturity of the business. In addition, as the segment grows, renewal premiums, which have lower allowances than first-year premiums, represent a greater percentage of the total net premiums.  Other operating expenses increased $7.3 million, or 6.9%, and $12.1 million, or 12.9%, in 2012 and 2011, respectively. Foreign currency exchange fluctuations contributed to a decrease of approximately $3.9 million and an increase of approximately $1.4 million in operating expenses in 2012 and 2011, respectively. Other operating expenses as a percentage of net premiums totaled 8.6%, 8.8% and 10.2% in 2012, 2011 and 2010, respectively. These decreases in expenses as a percentage of net premiums reflect sustained growth in net premiums for this segment.  While concerns continue in 2012 relating to the European sovereign debt and European economies, approximately 78.8% of revenues for the segment were earned outside of the eurozone in 2012. Approximately 15.2% of the segment's revenues were earned in Spain, Italy and Portugal in 2012.  

Asia Pacific Operations

  The Asia Pacific segment includes operations in Australia, Hong Kong, Japan, Malaysia, Singapore, New Zealand, South Korea, Taiwan and mainland China. The principal types of reinsurance include life, critical illness, disability 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 year ended December 31,                    2012                 2011                 2010 (dollars in thousands)  Revenues: Net premiums                                 $     1,350,330      $     1,304,490      $     1,139,065 Investment income, net of related expenses            83,387               84,837               71,827 Investment related gains (losses), net: Other-than-temporary impairments on fixed maturity securities                                        --                (336)                   -- Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income                     --                   --                   -- Other investment related gains (losses), net                                                    8,990                7,350                6,153  Total investment related gains (losses), net                                                    8,990                7,014                6,153 Other revenues                                        52,838               34,073               26,419  Total revenues                                     1,495,545            1,430,414            1,243,464   Benefits and expenses: Claims and other policy benefits                   1,079,699            1,076,833              926,383 Interest credited                                      1,311                1,149                    -- Policy acquisition costs and other insurance expenses                                   252,041              201,130              149,453 Other operating expenses                             117,116              109,068               93,746  Total benefits and expenses                        1,450,167            1,388,180            1,169,582   Income before income taxes                   $        45,378      $        42,234      $        73,882    Income before income taxes increased by $3.1 million, or 7.4%, and decreased by $31.6 million, or 42.8%, in 2012 and 2011, respectively. The increase in income in 2012 was primarily due to strong revenue growth in Hong Kong, Southeast Asia and Japan partially offset by both adverse claims experience and a net increase of $46.5 million in benefit reserves in Australia. The decrease in income in 2011 was affected by $24.0 million in reserve increases related to updated termination assumptions for Australia disability income business and an increase in incurred but not reported claims for                                           47

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  Australian individual and group life business in addition to adverse claims experience. Foreign currency exchange fluctuations contributed to a decrease in income before income taxes of approximately $0.8 million in 2012 and an increase of approximately $5.8 million in 2011.  Net premiums increased by $45.8 million, or 3.5%, and $165.4 million, or 14.5%, in 2012 and 2011, respectively. Premiums in 2012 increased in most markets primarily due to new treaties and increased production under existing treaties, notably Hong Kong and Southeast Asia by $52.0 million and Australia and New Zealand, which increased by $25.0 million. These increases are partially offset by decreases in Japan and Korea. Premiums in 2011 increased in most markets due to new treaties and increased production under existing treaties, particularly in Australia and New Zealand which increased by $153.8 million and Hong Kong and Southeast Asia which increased by $18.9 million, compared to 2010. The segment added new business production, measured by face amount of insurance in force, of $90.2 billion, $119.0 billion and $30.7 billion during 2012, 2011 and 2010, respectively. The face amount of reinsurance in force totaled approximately $539.8 billion, $457.6 billion, and $408.1 billion at December 31, 2012, 2011, and 2010, respectively. Foreign currency exchange fluctuations contributed to a decrease in net premiums of approximately $2.0 million in 2012 and an increase of approximately $105.3 million in 2011. Premium levels can be significantly influenced by currency fluctuations, large transactions and reporting practices of ceding companies and can fluctuate from period to period.  A portion of the net premiums for the segment, in each period presented, relates to reinsurance of critical illness coverage. This coverage provides a benefit in the event of the diagnosis of a pre-defined critical illness. Reinsurance of critical illness in the Asia Pacific operations is offered primarily in South Korea, Australia and Hong Kong. Net premiums from this coverage totaled $224.4 million, $157.3 million, and $186.2 million in 2012, 2011 and 2010, respectively.  Net investment income decreased $1.5 million, or 1.7%, and increased by $13.0 million, or 18.1%, in 2012 and 2011, respectively. The decrease in 2012 was primarily due to lower investment yields. The increase in 2011 was primarily due to growth in assets related to asset-intensive treaties offset in part by decreases in investment yields. Investment income and investment related gains and losses are allocated to the various operating segments based on average assets and related capital levels deemed appropriate to support segment operations. Investment performance varies with the composition of investments and the relative allocation of capital to the operating segments.  Other revenues increased by $18.8 million, or 55.1%, and $7.7 million, or 29.0%, in 2012 and 2011, respectively. The primary source of other revenues is fees from financial reinsurance treaties in Japan. The increase in other revenues in 2012 is largely due to a transaction with a client in Australia which resulted in a one-time fee income amount of $12.2 million. The transaction did not have a significant impact on income before taxes because the amount is offset by additional amortization of deferred acquisition costs, net of the release of reserves. Other revenues in 2012 also reflected fees from two new financial reinsurance treaties in Japan. The increase in other revenues in 2011 is primarily due to a new financial reinsurance treaty executed during that year. At December 31, 2012 and 2011, the amount of reinsurance assumed from client companies, as measured by pre-tax statutory surplus, risk based capital and other financial reinsurance structures was $2.1 billion and $1.9 billion, 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 80.0%, 82.5% and 81.3% for 2012, 2011 and 2010, respectively. While Australia experienced adverse individual and group claims experience as well as a net $46.5 million increase in claim liabilities for group life, and total and permanent disability ("TPD") reinsurance business in 2012, loss ratios decreased for most other offices. Australia's additional claim liabilities were primarily associated with group treaties that exhibited emerging negative claims development. The increase in the loss ratio in 2011 compared with 2010 was due to $24.0 million in reserve increases related to updated termination assumptions for Australia disability income business and an increase in incurred but not reported claims for Australian individual and group life business, a higher level of individual life claims in Australia and the estimated losses from the Japan and New Zealand earthquakes. Although reasonably predictable over a period of years, death claims are typically volatile over shorter periods. Management views recent experience as normal 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.  Interest credited expense increased by $0.2 million and $1.1 million in 2012 and 2011, respectively. The increases were due to contractual interest related to a new asset-intensive treaty in Japan entered into in 2011.  Policy acquisition costs and other insurance expenses as a percentage of net premiums were 18.7%, 15.4% and 13.1% for 2012, 2011 and 2010, respectively. The increase in the ratio in 2012 was due to additional amortization of deferred acquisition costs which largely offsets the one-time fee related to the aforementioned transaction with a client in Australia. The ratio of policy acquisition costs and other insurance expenses as a percentage of net premiums should generally decline as the business matures; however, the percentage does fluctuate periodically due to variations in the mixture of business.                                           48

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  Other operating expenses increased $8.0 million, or 7.4%, and $15.3 million, or 16.3%, in 2012 and 2011, respectively. Foreign currency exchange fluctuations contributed approximately $0.3 million and $4.5 million to the increase in operating expenses in 2012 and 2011, respectively. Other operating expenses as a percentage of net premiums totaled 8.7%, 8.4% and 8.2% in 2012, 2011 and 2010, respectively. The timing of premium flows and the level of costs associated with the entrance into and development of new markets in the Asia Pacific segment may cause other operating expenses as a percentage of net premiums to fluctuate over periods of time.  Corporate and Other  Corporate and Other revenues include investment income and investment related gains and losses from unallocated invested assets. Corporate and Other expenses consist of the offset to capital charges allocated to the operating segments within the policy acquisition costs and other insurance expenses line item, unallocated overhead and executive costs, interest expense related to debt, and the investment income and expense associated with the Company's collateral finance facility. Additionally, Corporate and Other includes results from, among others, RTP, a wholly-owned subsidiary that develops and markets technology solutions for the insurance industry.    For the year ended December 31,                    2012                 2011                2010 (dollars in thousands)  Revenues: Net premiums                                  $       9,165        $       8,744        $      7,815 Investment income, net of related expenses                                             82,818              105,169              94,860 Investment related gains (losses), net: Other-than-temporary impairments on fixed maturity securities                                  (3,734)              (9,136)            (18,904) Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income               (1,315)                 176               1,459 Other investment related gains (losses), net                                                   7,928               (3,655)             16,407  Total investment related gains (losses), net                                                   2,879              (12,615)             (1,038) Other revenues                                       15,315               76,881               9,871  Total revenues                                      110,177              178,179             111,508   Benefits and expenses: Claims and other policy benefits                        (76)                 768                 413 Interest credited                                        52                     -                 14 Policy acquisition costs and other insurance expenses (income)                         (52,165)             (52,457)            (50,978) Other operating expenses                             68,304               67,194              50,898 Interest expenses                                   105,348              102,638              90,996 Collateral finance facility expense                  12,197               12,391               7,856  Total benefits and expenses                         133,660              130,534              99,199   Income (loss) before income taxes             $     (23,483)       $      

47,645 $ 12,309

    Income before income taxes decreased by $71.1 million, or 149.3%, and increased by $35.3 million, or 287.1%, in 2012 and 2011, respectively. The decrease in income in 2012 is primarily due to a $61.6 million decrease in other revenue and a $22.4 million decrease in investment income. The increase in income in 2011 is primarily due to a $67.0 million increase in other revenues and a $10.3 million increase in investment income partially offset by a $11.6 million increase in interest expense and a $16.3 million increase in other operating expenses.  Total revenues decreased $68.0 million, or 38.2%, and increased $66.7 million, or 59.8%, in 2012 and 2011, respectively. The decrease in revenues in 2012 is largely due to a $61.6 million decrease in other revenue due to gains on the repurchase of collateral finance facility securities of $65.6 million in 2011 and a $22.4 million decrease in investment income due to lower investment yields. The increase in revenues in 2011 was primarily due to a $65.6 million gain on the aforementioned repurchase of collateral finance facility securities and a $10.3 million increase in investment income, primarily due to growth in the invested asset base.  Total benefits and expenses increased $3.1 million or 2.4%, and $31.3 million or 31.6%, in 2012 and 2011, respectively. The increase in benefits and expenses in 2012 is primarily due to an increase in interest expense of $2.7 million largely due to interest expense related to uncertain tax positions of $2.7 million. The increase in total benefits and expenses in 2011 was primarily due to an increase in other operating expenses related to employee compensation as well as a loss associated with the redemption and remarketing associated with Preferred Income Equity Redeemable Securities of $4.4 million. This loss reflects the recognition of the unamortized issuance costs of the original preferred securities. Also contributing to the increase in 2011 was interest expense related to uncertain tax positions which increased by $8.5 million                                           49

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  and interest on a higher level of outstanding debt. Collateral finance facility expense increased $4.5 million related to a collateral financing arrangement transacted with an international bank.  

Deferred Acquisition Costs

  DAC related to interest-sensitive life and investment-type contracts is amortized over the lives of the contracts, in relation to the present value of estimated gross profits ("EGP") from mortality, investment income, and expense margins. The EGP for asset-intensive products include the following components: (1) estimates of fees charged to policyholders to cover mortality, surrenders and maintenance costs; (2) expected interest rate spreads between income earned and amounts credited to policyholder accounts; and (3) estimated costs of administration. EGP is also reduced by the Company's estimate of future losses due to defaults in fixed maturity securities as well as the change in reserves for embedded derivatives. DAC is sensitive to changes in assumptions regarding these EGP components, and any change in such assumptions could have an effect on the Company's profitability.  The Company periodically reviews the EGP valuation model and assumptions so that the assumptions reflect best estimates of future experience. Two assumptions are considered to be most significant: (1) estimated interest spread, and (2) estimated future policy lapses. The following table reflects the possible change that would occur in a given year if assumptions, as a percentage of current deferred policy acquisition costs related to asset-intensive products ($1,039.2 million as of December 31, 2012), are changed as illustrated:     Quantitative Change in Significant            One-Time Increase in         

One-Time Decrease in

              Assumptions                               DAC                  

DAC

  Estimated interest spread increasing (decreasing) 25 basis points from the current spread                                        1.46 %                

-1.59 %

  Estimated future policy lapse rates decreasing (increasing) 20% on a permanent basis (including surrender charges)                                              0.64 %                

-0.50 %

   In general, a change in assumption that improves the Company's expectations regarding EGP is going to have the effect of deferring the amortization of DAC into the future, thus increasing earnings and the current DAC balance. DAC can be no greater than the initial DAC balance plus interest and would be subject to recoverability testing which is ignored for purposes of this analysis. Conversely, a change in assumption that decreases EGP will have the effect of speeding up the amortization of DAC, thus reducing earnings and lowering the DAC balance. The Company also adjusts DAC to reflect changes in the unrealized gains and losses on available-for-sale fixed maturity securities since these changes affect EGP. This adjustment to DAC is reflected in accumulated other comprehensive income.  The DAC associated with the Company's non-asset-intensive business is less sensitive to changes in estimates for investment yields, mortality and lapses. In accordance with generally accepted accounting principles, the estimates include provisions for the risk of adverse deviation and are not adjusted unless experience significantly deteriorates to the point where a premium deficiency exists.  

The following table displays DAC balances for asset-intensive business and non-asset-intensive business by segment as of December 31, 2012:

(dollars in thousands) Asset-Intensive DAC Non-Asset-Intensive DAC

        Total DAC  U.S.                     $          1,039,180      $              1,527,029      $     2,566,209 Canada                                      --                      271,146              271,146 Europe & South Africa                       --                      322,181              322,181 Asia Pacific                                --                      459,738              459,738 Corporate and Other                         --                            --                   --  Total                    $          1,039,180      $              2,580,094      $     3,619,274    As of December 31, 2012, the Company estimates that all of its DAC balance is collateralized by surrender fees due to the Company and the reduction of policy liabilities, in excess of termination values, upon surrender or lapse of a policy.                                           50 

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Liquidity and Capital Resources

Current Market Environment

  The current U.S. interest rate environment is negatively affecting the Company's earnings. The average investment yield, excluding funds withheld and other spread business, has decreased 30 basis points in 2012 as compared to 2011. In addition, the Company's insurance liabilities, in particular its annuity products, are sensitive to changing market factors. Results of operations in 2012 reflect favorable changes in the value of embedded derivatives as credit spreads tightened compared to 2011. Conversely, results of operations in 2011 reflect unfavorable changes in the value of embedded derivatives as credit spreads widened compared to 2010. There has been continued improvement in gross unrealized gains on fixed maturity and equity securities available-for-sale, which were $2,871.4 million and $2,306.6 million at December 31, 2012 and 2011, respectively. Gross unrealized losses have totaled $133.6 million and $292.5 million at December 31, 2012 and 2011, respectively. The increase in the gross unrealized gains is primarily due to lower interest rates.  The Company continues to be in a position to hold any investment security showing an unrealized loss until recovery, provided it remains comfortable with the credit of the issuer. As indicated above, gross unrealized gains on investment securities of $2,871.4 million are well in excess of gross unrealized losses of $133.6 million as of December 31, 2012. Historically low interest rates continued to put pressure on the Company's investment yield. In January 2012, U.S. Federal Reserve officials indicated that economic conditions in the U.S. would likely warrant exceptionally low federal funds rate through 2014. The Company does not rely on short-term funding or commercial paper and to date it has experienced no liquidity pressure, nor does it anticipate such pressure in the foreseeable future.  The Company projects its reserves to be sufficient and it would not expect to write down deferred acquisition costs or be required to take any actions to augment capital, even if interest rates remain at current levels for the next five years, assuming all other factors remain constant. While the Company has felt the pressures of sustained low interest rates and volatile equity markets and may continue to do so, its business operations are not overly sensitive to these risks. Although management believes the Company's current capital base is adequate to support its business at current operating levels, it continues to monitor new business opportunities and any associated new capital needs that could arise from the changing financial landscape.  

The Holding Company

  RGA is an insurance holding company whose primary uses of liquidity include, but are not limited to, the immediate capital needs of its operating companies, dividends paid to its shareholders, repurchase of common stock and interest payments on its indebtedness (See Note 13-"Debt" in the Notes to Consolidated Financial Statements). RGA recognized interest expense of $143.3 million, $111.6 million and $96.6 million in 2012, 2011, and 2010, respectively. RGA made capital contributions to subsidiaries of $70.4 million, $105.6 million and $74.0 million in 2012, 2011, and 2010, respectively. Dividends to shareholders were $61.9 million, $44.2 million and $35.2 million in 2012, 2011, and 2010, respectively. RGA made principal payments on debt of $200.0 million in 2011. The primary sources of RGA's liquidity include proceeds from its capital raising efforts, interest income on undeployed corporate investments, interest income received on surplus notes with RGA Reinsurance, RCM and Rockwood Re and dividends from operating subsidiaries. RGA recognized interest and dividend income of $86.4 million, $245.6 million and $128.5 million in 2012, 2011 and 2010, respectively. Net proceeds from unaffiliated long-term debt issuance were $393.7 million and $394.4 million in 2012 and 2011, respectively. Proceeds from affiliated long-term debt issuance were $500.0 million in 2011. As the Company continues its expansion efforts, RGA will continue to be dependent upon these sources of liquidity. As of December 31, 2012 and 2011, RGA held $722.3 million and $583.6 million, respectively, of cash and cash equivalents, short-term and other investments and fixed maturity investments. See "Part IV - Item 15(a)(2) Financial Statement Schedules - Schedule II - Condensed Financial Information of Registrant" for more information regarding RGA's financial information.  The Company, through a wholly-owned subsidiary, has committed to provide statutory reserve support to a third-party through 2035, in exchange for a fee, by funding a loan if certain defined events occur. Such statutory reserves are required under the U.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX for term life insurance policies and Regulation A-XXX for universal life secondary guarantees). The maximum potential obligation under this commitment is $560.0 million. The third-party has recourse to RGA should the subsidiary fail to provide the required funding, however, as of December 31, 2012, the Company does not believe that it will be required to provide any funding under this commitment as the occurrence of the defined events is considered remote.  RGA established an intercompany revolving credit facility where certain subsidiaries can lend to or borrow from each other and from RGA in order to manage capital and liquidity more efficiently. The intercompany revolving credit facility, which is a series of demand loans among RGA and its affiliates, is permitted under applicable insurance laws. This facility reduces overall borrowing costs by allowing RGA and its operating companies to access internal cash resources instead of incurring third-party transaction costs. The statutory borrowing and lending limit for RGA's Missouri-domiciled                                           51

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  insurance subsidiaries is currently the lesser of 3% of the insurance company's admitted assets and 25% of its surplus, in both cases, as of its most recent year-end. There were no amounts outstanding under the intercompany revolving credit facility as of December 31, 2012 and 2011.  The Company believes that it has sufficient liquidity for the next 12 months to fund its cash needs under various scenarios that include the potential risk of early recapture of reinsurance treaties and higher than expected death claims. Historically, the Company has generated positive net cash flows from operations. However, in the event of significant unanticipated cash requirements beyond normal liquidity, the Company has multiple liquidity alternatives available based on market conditions and the amount and timing of the liquidity need. These options include borrowings under committed credit facilities, secured borrowings, the ability to issue long-term debt, preferred securities or common equity and, if necessary, the sale of invested assets subject to market conditions.  The Company did not have any significant changes in its capital structure during 2012; however, in anticipation of the redemption and remarketing of RGA's trust preferred securities as discussed below in "Debt," RGA purchased 3.0 million shares of its outstanding common stock from MetLife, Inc. in February 2011, at a price of $61.14 per share, reflecting the most recent closing price of the Company's common stock. The purchased common shares were placed into treasury for general corporate purposes.  In March 2011, RGA entered into an accelerated share repurchase ("ASR") agreement with a financial counterparty. Under the ASR agreement, RGA purchased 2.5 million shares of its outstanding common stock at an initial price of $59.76 per share and an aggregate price of approximately $149.4 million. The purchase price was funded from cash on hand. The counterparty completed its purchases during the second quarter of 2011 and as a result, RGA was required to pay $4.3 million to the counterparty for the final settlement which resulted in a final price of $61.47 per share on the repurchased common stock. The common shares repurchased were placed into treasury to be used for general corporate purposes.  The Company's share repurchase transactions described above were intended to offset share dilution associated with the issuance of approximately 5.5 million common shares from the exercise of warrants as discussed below in "Debt".  

During the third quarter of 2011, RGA repurchased 838,362 shares of common stock under a previously approved stock repurchase program for $43.1 million. The common shares repurchased were placed into treasury to be used for general corporate purposes.

  In July 2012, the Company's quarterly dividend was increased to $0.24 per share from $0.18 per share. All future payments of dividends are at the discretion of RGA's board of directors and will depend on the Company's earnings, capital requirements, insurance regulatory conditions, operating conditions, and other such factors as the board of directors may deem relevant. The amount of dividends that RGA can pay will depend in part on the operations of its reinsurance subsidiaries.  

See Note 3-"Stock Transactions", Note 13 - "Debt" and Note 20 - "Subsequent Events" in the Notes to Consolidated Financial Statements for additional information regarding the Company's securities transactions.

Statutory Dividend Limitations

  RCM and RGA Reinsurance are subject to Missouri statutory provisions that restrict the payment of dividends. They may not pay dividends in any 12-month period in excess of the greater of the prior year's statutory net gain from operations or 10% of statutory capital and surplus at the preceding year-end, without regulatory approval. The applicable statutory provisions only permit an insurer to pay a shareholder dividend from unassigned surplus. Any dividends paid by RGA Reinsurance would be paid to RCM, its parent company, which in turn has restrictions related to its ability to pay dividends to RGA. RCM's primary asset is its investment in RGA Reinsurance. As of January 1, 2013, RCM and RGA Reinsurance could pay maximum dividends, without prior approval, of approximately $169.2 million and $164.5 million, respectively. The MDI allows RCM to pay a dividend to RGA to the extent RCM received the dividend from RGA Reinsurance, without limitation related to the level of unassigned surplus. Dividend payments from other subsidiaries are subject to regulations in the jurisdiction of domicile, which are generally based on their earnings and/or capital level.  The dividend limitations for RCM and RGA Reinsurance are based on statutory financial results. Statutory accounting practices differ in certain respects from accounting principles used in financial statements prepared in conformity with GAAP. Significant differences include the treatment of deferred acquisition costs, deferred income taxes, required investment reserves, reserve calculation assumptions and surplus notes.  

Debt

  Certain of the Company's debt agreements contain financial covenant restrictions related to, among others, liens, the issuance and disposition of stock of restricted subsidiaries, minimum requirements of consolidated net worth, maximum ratios of debt to capitalization and change of control provisions. The Company is required to maintain a minimum                                           52

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  consolidated net worth, as defined in the debt agreements, of $2.8 billion, calculated as of the last day of each fiscal quarter. Also, consolidated indebtedness, calculated as of the last day of each fiscal quarter, cannot exceed 35% of the sum of the Company's consolidated indebtedness plus adjusted consolidated net worth. A material ongoing covenant default could require immediate payment of the amount due, including principal, under the various agreements. Additionally, the Company's debt agreements contain cross-default covenants, which would make outstanding borrowings immediately payable in the event of a material uncured covenant default under any of the agreements, including, but not limited to, non-payment of indebtedness when due for an amount in excess of $100.0 million, bankruptcy proceedings, or any other event which results in the acceleration of the maturity of indebtedness. As of December 31, 2012 and 2011, the Company had $1,815.3 million and $1,414.7 million, respectively, in outstanding borrowings under its debt agreements and was in compliance with all covenants under those agreements. The ability of the Company to make debt principal and interest payments depends on the earnings and surplus of subsidiaries, investment earnings on undeployed capital proceeds, and the Company's ability to raise additional funds. There currently are no repayments of debt due over the next five years.  The Company enters into derivative agreements with counterparties that reference either the Company's debt rating or its financial strength rating. If either rating is downgraded in the future it could trigger certain terms in the Company's derivative agreements, which could negatively affect overall liquidity. For the majority of the Company's derivative agreements, there is a termination event should the long-term senior debt ratings drop below either BBB+ (S&P) or Baa1 (Moody's) or the financial strength ratings drop below either A-(S&P) or A3 (Moody's).  The Company may borrow up to $850.0 million in cash and obtain letters of credit in multiple currencies on its revolving credit facility that expires in December 2015. As of December 31, 2012, the Company had no cash borrowings outstanding and $402.9 million in issued, but undrawn, letters of credit under this facility. As of December 31, 2012, the average interest rate on long-term debt outstanding was 5.99% compared to 5.94% at the end of 2011.  On August 21, 2012, RGA issued 6.20% Fixed-To-Floating Rate Subordinated Debentures due September 15, 2042 with a face amount of $400.0 million. These subordinated debentures have been registered with the Securities and Exchange Commission. The net proceeds from the offering were approximately $393.7 million and will be used for general corporate purposes. Capitalized issue costs were approximately $6.3 million.  

On May 27, 2011, RGA issued 5.00% Senior Notes due June 1, 2021 with a face amount of $400.0 million. These senior notes have been registered with the Securities and Exchange Commission. The net proceeds from the offering were approximately $394.4 million and were used to fund the payment of the RGA's $200.0 million senior notes that matured in December 2011 and for general corporate purposes. Capitalized issue costs were approximately $3.4 million.

  On March 4, 2011, RGA completed the remarketing of approximately 4.5 million trust preferred securities with an aggregate accreted value of approximately $158.2 million that were initially issued as a component of its Trust Preferred Income Equity Redeemable Securities ("PIERS Units"). When issued, each PIERS Unit initially consisted of a preferred security and a warrant to purchase at any time prior to December 15, 2050, 1.2508 shares of RGA common stock. Approximately 4.4 million of the warrants were exercised on March 4, 2011, at a price of $35.44 per warrant, resulting in the issuance of approximately 5.5 million shares. The warrant exercise price was paid to RGA. Remaining warrants were redeemed in cash at their redemption amount of $14.56 per warrant. As a result of the remarketing, the remarketed preferred securities had a fixed accreted value of $35.44 per security with a fixed annual distribution rate of 2.375% and were repaid on June 5, 2011, the revised maturity date. In the first quarter of 2011, RGA recorded a $4.4 million pre-tax loss, included in other operating expenses, related to the recognition of the unamortized issuance costs of the original preferred securities.  

Based on the historic cash flows and the current financial results of the Company, management believes RGA's cash flows will be sufficient to enable RGA to meet its obligations for at least the next 12 months.

Collateral Finance Facilities and Statutory Reserve Funding

  The Company uses various internal and third-party reinsurance arrangements and funding sources to manage statutory reserve strain, including reserves associated with Regulation XXX, and collateral requirements. Assets in trust and letters of credit are often used as collateral in these arrangements. See "Assets in Trust" and "Letters of Credit" below for more information.  Regulation XXX, implemented in the U.S. for various types of life insurance business beginning January 1, 2000, significantly increased the level of reserves that U.S. life insurance and life reinsurance companies must hold on their statutory financial statements for various types of life insurance business, primarily certain level premium term life products. The reserve levels required under Regulation XXX increase over time and are normally in excess of reserves required under GAAP. In situations where primary insurers have reinsured business to reinsurers that are unlicensed and unaccredited in the U.S., the reinsurer must provide collateral equal to its reinsurance reserves in order for the ceding company to receive statutory financial statement credit. In order to manage the effect of Regulation XXX on its statutory financial statements, RGA Reinsurance has retroceded a majority of Regulation XXX reserves to unaffiliated and affiliated unlicensed reinsurers.                                           53

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RGA Reinsurance's statutory capital may be significantly reduced if the unaffiliated or affiliated reinsurer is unable to provide the required collateral to support RGA Reinsurance's statutory reserve credits and RGA Reinsurance cannot find an alternative source for collateral.

  In June 2006, RGA's subsidiary, Timberlake Financial, issued $850.0 million of Series A Floating Rate Insured Notes due June 2036 in a private placement. The notes were issued to fund the collateral requirements for statutory reserves required by the U.S. Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX) on specified term life insurance policies reinsured by RGA Reinsurance and retroceded to Timberlake Re. Proceeds from the notes, along with a $112.8 million direct investment by the Company, were deposited into a series of accounts that collateralize the notes and are not available to satisfy the general obligations of the Company. As of December 31, 2012, the Company held assets in trust and in custody of $909.2 million, of which $33.2 million were held in a Debt Service Coverage account to cover interest payments on the notes. Interest on the notes accrues at an annual rate of 1-month LIBOR plus a base rate margin, payable monthly and totaled $6.9 million and $7.1 million in 2012 and 2011, respectively. The payment of interest and principal on the notes is insured through a financial guaranty insurance policy by a monoline insurance company whose parent company is operating under Chapter 11 bankruptcy. The notes represent senior, secured indebtedness of Timberlake Financial without legal recourse to RGA or its other subsidiaries.  Timberlake Financial relies primarily upon the receipt of interest and principal payments on a surplus note and dividend payments from its wholly-owned subsidiary, Timberlake Re, a South Carolina captive insurance company, to make payments of interest and principal on the notes. The ability of Timberlake Re to make interest and principal payments on the surplus note and dividend payments to Timberlake Financial is contingent upon the South Carolina Department of Insurance's regulatory approval. As of December 31, 2012, Timberlake Re's surplus totaled $33.0 million. Reserve decreases and statutory profits are expected to increase capital and surplus above $35.0 million by year-end 2014. Since Timberlake Re's capital and surplus fell below the minimum requirement in its licensing order of $35.0 million, it has been required, since the second quarter of 2011, to request approval on a quarterly rather than annual basis and provide additional scenario testing results. Approval to pay interest on the surplus note was granted through March 28, 2013. In the event Timberlake Re did not receive approval to pay Timberlake Financial interest on the surplus notes, Timberlake Financial would still be obligated to pay the interest on its notes. Timberlake Financial has the ability to make such payments until its invested assets in the Debt Service Coverage account are exhausted, at which time, the financial guarantor would be responsible for payment.  During 2011, the Company repurchased $198.5 million face amount of the Timberlake Financial notes for $130.8 million, which was the market value at the date of the purchases. The notes were purchased by RGA Reinsurance. As a result, the Company recorded pre-tax gains of $65.6 million, after fees, in other revenues in 2011.  The Company's consolidated balance sheets include the assets of Timberlake Financial, a wholly-owned subsidiary, recorded as fixed maturity investments and other invested assets, which consists of restricted cash and cash equivalents, with the liability for the notes recorded as collateral finance facility. The Company's consolidated statements of income include the investment return of Timberlake Financial as investment income and the cost of the facility is reflected in collateral finance facility expense.  In 2010, Manor Re obtained $300.0 million of collateral financing through 2020 from an international bank which enabled Manor Re to deposit assets in trust to support statutory reserve credit for an affiliated reinsurance transaction. The bank has recourse to RGA should Manor Re fail to make payments or otherwise not perform its obligations under this financing. Interest on the collateral financing accrues at an annual rate of 3-month LIBOR plus a base rate margin, payable quarterly and totaled $5.3 million in both 2012 and 2011.  

During 2011, to enhance liquidity and capital efficiency within the group, various operating subsidiaries purchased $500.0 million of newly issued RGA subordinated debt. Similarly, RGA also purchased $475.0 million

  Based on the growth of the Company's business and the pattern of reserve levels under Regulation XXX associated with term life business and other statutory reserve requirements, the amount of ceded reserve credits is expected to grow. This growth will require the Company to obtain additional letters of credit, put additional assets in trust, or utilize other funding mechanisms to support the reserve credits. If the Company is unable to support the reserve credits, the regulatory capital levels of several of its subsidiaries may be significantly reduced. The reduction in regulatory capital would not directly affect the Company's consolidated shareholders' equity under GAAP; however, it could affect the Company's ability to write new business and retain existing business.                                           54

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Assets in Trust

  Some treaties give ceding companies the right to request that the Company place assets in trust for the benefit of the cedant to support statutory reserve credits in the event of a downgrade of the Company's ratings to specified levels, generally non-investment grade levels, or if minimum levels of financial condition are not maintained. As of December 31, 2012, these treaties had approximately $1,522.1 million in statutory reserves. Assets placed in trust continue to be owned by the Company, but their use is restricted based on the terms of the trust agreement. Securities with an amortized cost of $2,140.7 million were held in trust for the benefit of certain RGA subsidiaries to satisfy collateral requirements for reinsurance business at December 31, 2012. Additionally, securities with an amortized cost of $7,549.0 million as of December 31, 2012 were held in trust to satisfy collateral requirements under certain third-party reinsurance treaties. Under certain conditions, the Company may be obligated to move reinsurance from one subsidiary of RGA to another subsidiary of RGA or make payments under a given treaty. These conditions include change in control or ratings of the subsidiary, insolvency, nonperformance under a treaty, or loss of reinsurance license of such subsidiary. If the Company was ever required to perform under these obligations, the risk to the Company on a consolidated basis under the reinsurance treaties would not change; however, additional capital may be required due to the change in jurisdiction of the subsidiary reinsuring the business, which could lead to a strain on liquidity.  Proceeds from the notes issued by Timberlake Financial and the Company's direct investment in Timberlake Financial were deposited into a series of trust accounts as collateral and are not available to satisfy the general obligations of the Company. As of December 31, 2012 the Company held deposits in trust and in custody of $909.2 million for this purpose, which is not included above. See "Collateral Finance Facility" above for additional information on the Timberlake notes.  Letters of Credit  The Company has obtained bank letters of credit in favor of various affiliated and unaffiliated insurance companies from which the Company assumes business. These letters of credit represent guarantees of performance under the reinsurance agreements and allow ceding companies to take statutory reserve credits. Certain of these letters of credit contain financial covenant restrictions similar to those described in the "Debt" discussion above. At December 31, 2012, there were approximately $45.4 million of outstanding bank letters of credit in favor of third parties. Additionally, the Company utilizes letters of credit to secure statutory reserve credits when it retrocedes business to its subsidiaries, including Parkway Re, Timberlake Re, Rockwood Re, RGA Americas, RGA Barbados and RGA Atlantic. The Company cedes business to its affiliates to help reduce the amount of regulatory capital required in certain jurisdictions, such as the U.S. and the UK. The capital required to support the business in the affiliates reflects more realistic expectations than the original jurisdiction of the business, where capital requirements are often considered to be quite conservative. As of December 31, 2012, $763.5 million in letters of credit from various banks were outstanding, but undrawn, backing reinsurance between the various subsidiaries of the Company. See Note 12-"Commitments and Contingent Liabilities" in the Notes to Consolidated Financial Statements for information regarding the Company's letter of credit facilities.  In 2006, the Company entered into a reinsurance agreement that requires it to post collateral for a portion of the business being reinsured. As part of the collateral requirements, a third party financial institution has issued a letter of credit for the benefit of the ceding company (the "beneficiary"), which may draw on the letter of credit to be reimbursed for valid claim payments not made by RGA pursuant to the reinsurance treaty. RGA is not a direct obligor under the letter of credit. To the extent the letter of credit is drawn by the beneficiary, reimbursement to the third party financial institution will be through reduction in amounts owed to RGA by the third party financial institution under a secured structured loan. RGA's liability under the reinsurance agreement will be reduced by any amount drawn by the ceding company under the letter of credit. As of December 31, 2012, the structured loan totaled $208.6 million and the amount of the letter of credit totaled $235.9 million. The structured loan is recorded in "other invested assets" on RGA's consolidated balance sheets.  Reinsurance Operations  Reinsurance agreements, whether facultative or automatic, generally provide recapture provisions. Most U.S.-based reinsurance treaties include a recapture right for ceding companies, generally after 10 years. Outside of the U.S., treaties primarily include a mutually agreed upon recapture provision. Recapture rights permit the ceding company to reassume all or a portion of the risk formerly ceded to the reinsurer. In some situations, the Company has the right to place assets in trust for the benefit of the ceding party in lieu of recapture. Additionally, certain treaties may grant recapture rights to ceding companies in the event of a significant decrease in RGA Reinsurance's NAIC risk based capital ratio or financial strength rating. The RBC ratio trigger varies by treaty, with the majority between 125% and 225% of the NAIC's company action level. Financial strength rating triggers vary by treaty with the majority of the triggers reached if RGA Reinsurance's financial strength rating falls five notches from its current rating of "AA-" to the "BBB" level on the S&P scale. Recapture of business previously ceded does not affect premiums ceded prior to the recapture of such business, but would reduce premiums in subsequent periods. Upon recapture, the Company would reflect a net gain or loss on the settlement of the                                           55 

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  assets and liabilities associated with the treaty. In some cases, the ceding company is required to pay the Company a recapture fee. The Company estimates approximately $341.7 billion of its gross assumed in force business, as of December 31, 2012, was subject to treaties where the ceding company could recapture in the event minimum levels of financial condition or ratings were not maintained.  Guarantees  RGA has issued guarantees to third parties on behalf of its subsidiaries for the payment of amounts due under certain reinsurance treaties, securities borrowing arrangements and office lease obligations, whereby if a subsidiary fails to meet an obligation, RGA or one of its other subsidiaries will make a payment to fulfill the obligation. In limited circumstances, treaty guarantees are granted to ceding companies in order to provide additional security, particularly in cases where RGA's subsidiary is relatively new, unrated, or not of significant size, relative to the ceding company. Liabilities supported by the treaty guarantees, before consideration for any legally offsetting amounts due from the guaranteed party, totaled $686.0 million and $697.5 million as of December 31, 2012 and 2011, respectively, and are reflected on the Company's consolidated balance sheets in future policy benefits. As of December 31, 2012 and 2011, the Company's exposure related to treaty guarantees, net of assets held in trust, was $463.5 million and $467.5 million, respectively. Potential guaranteed amounts of future payments will vary depending on production levels and underwriting results. Guarantees related to borrowed securities provide additional security to third parties should a subsidiary fail to make principal and/or interest payments when due. As of December 31, 2012, RGA's obligation related to borrowed securities guarantees was $87.5 million. RGA has issued payment guarantees on behalf of two of its subsidiaries in the event the subsidiaries fail to make payment under their office lease obligations, the exposure of which was $10.1 million as of December 31, 2012.  In addition, the Company indemnifies its directors and officers pursuant to its charters and by-laws. Since this indemnity generally is not subject to limitation with respect to duration or amount, the Company does not believe that it is possible to determine the maximum potential amount due under this indemnity in the future.  

Off-Balance Sheet Arrangements

  At December 31, 2012, the Company's commitments to fund investments were $176.7 million in limited partnerships, $22.2 million in commercial mortgage loans and $68.5 million in private placement investments. At December 31, 2011, the Company's commitments to fund investments were $156.6 million in limited partnerships, $33.6 million in commercial mortgage loans and $100.0 million in private placement investments. The Company anticipates that the majority of its current commitments will be invested over the next five years; however, these commitments could become due any time at the request of the counterparties. Investments in limited partnerships and private placements are carried at cost or reported using the equity method and included in other invested assets in the consolidated balance sheets. Bank loans are carried at fair value and included in fixed maturities available-for-sale.  

The Company has not engaged in trading activities involving non-exchange-traded contracts reported at fair value, nor has it engaged in relationships or transactions with persons or entities that derive benefits from their non-independent relationship with the Company.

Cash Flows

  The Company's principal cash inflows from its reinsurance operations include premiums and deposit funds received from ceding companies. The primary liquidity concerns with respect to these cash flows are early recapture of the reinsurance contract by the ceding company and lapses of annuity products reinsured by the Company. The Company's principal cash inflows from its invested assets result from investment income and the maturity and sales of invested assets. The primary liquidity concern with respect to these cash inflows relates to the risk of default by debtors and interest rate volatility. The Company manages these risks very closely. See "Investments" and "Interest Rate Risk" below.  Additional sources of liquidity to meet unexpected cash outflows in excess of operating cash inflows and current cash and equivalents on hand include selling short-term investments or fixed maturity securities and drawing funds under existing credit facilities, under which the Company had availability of $447.1 million as of December 31, 2012. The Company also has $546.8 million of funds available through collateralized borrowings from the Federal Home Loan Bank of Des Moines ("FHLB").  The Company's principal cash outflows relate to the payment of claims liabilities, interest credited, operating expenses, income taxes, and principal and interest under debt and other financing obligations. The Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under excess coverage and coinsurance contracts (See Note 2, "Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements). The Company performs annual financial reviews of its retrocessionaires to evaluate financial stability and performance. The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires nor to the                                           56

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  recoverability of future claims. The Company's management believes its current sources of liquidity are adequate to meet its cash requirements for the next 12 months.  The Company's net cash flows provided by operating activities for the years ended December 31, 2012, 2011 and 2010 were $1,974.5 million, $1,309.5 million and $1,842.7 million, respectively. Cash flows from operating activities are affected by the timing of premiums received, claims paid, and working capital changes. 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 Company's short-and long-term obligations.  Net cash used in investing activities for the years ended December 31, 2012, 2011 and 2010 were $1,968.0 million, $905.8 million and $1,720.5 million, respectively. Contributing to the net cash used in investing activities in 2012 is the investment of proceeds from the issuance of $400.0 million in subordinated debentures during the year. Cash flows from investing activities primarily reflect the sales, maturities and purchases of fixed maturity securities related to the management of the Company's investment portfolios and the investment of excess cash generated by operating and financing activities. Cash flows from investing activities also include the investment activity related to mortgage loans, policy loans, funds withheld at interest, short-term investments and other invested assets.  Net cash provided by (used in) financing activities for the years ended December 31, 2012, 2011 and 2010 were $281.9 million, $102.0 million and $(193.4) million, respectively. Contributing to the net cash provided by financing activities in 2012 is the proceeds from the issuance of $400.0 million in subordinated debentures during the year. Cash flows from financing activities primarily reflects the Company's capital management efforts, treasury stock activity, dividends to stockholders, changes in collateral for derivative positions and the activity related to universal life and other investment type policies and contracts.  Contractual Obligations 

The following table displays the Company's contractual obligations, including obligations arising from its reinsurance business (in millions):

                                                                             Payment Due by Period                                            Total           Less than 1 Year 

1-3 Years 4-5 Years After 5 Years Future policy benefits(1)

             $    7,184.9       $          (425.1) 

$ (723.7)$ (597.7)$ 8,931.4 Interest-sensitive contract liabilities(2)

                            18,256.9                 1,575.1           3,178.6           2,774.1            10,729.1 Long-term debt, including interest         4,138.2                   109.1             327.2             492.8             3,209.1 Collateral financing, including interest(3)                                1,034.2                    10.3              42.4             131.5               850.0 Other policy claims and benefits           3,160.3                 3,160.3                 --                --                  -- Operating leases                              64.5                    14.6              19.5              11.5                18.9 Limited partnerships                         176.7                   176.7                 --                --                  -- Investment purchase and loan commitments                                   90.7                    90.7                 --                --                  -- Payables for collateral received under derivative transactions                136.4                   136.4                 --                --                  --  Total                                 $   34,242.8       $         4,848.1       $   2,844.0       $   2,812.2       $    23,738.5     

(1) Future policyholder benefits include liabilities related primarily to the

Company's reinsurance of life and health insurance products. Amounts

presented in the table above represent the estimated obligations as they

become due to ceding companies for benefits under such contracts, and also

include future premiums, allowances and other amounts due to or from the

ceding companies as the result of the Company's assumptions of mortality,

morbidity, policy lapse and surrender risk as appropriate to the respective

product. Total payments may vary materially from prior years due to the

assumption of new treaties or as a result of changes in projections of future

experience. All estimated cash payments presented in the table above are

undiscounted as to interest, net of estimated future premiums on policies

currently in force and gross of any reinsurance recoverable. The sum of the

undiscounted estimated cash flows shown for all years in the table is an

obligation of $7,184.9 million compared to the discounted liability amount of

$11,372.9 million included on the consolidated balance sheet, substantially

all due to the effects of discounting the estimated cash flows in the balance

sheet liability. The time value of money is not factored into the

calculations in the table above. In addition, differences will arise due to

changes in the projection of future benefit payments compared with those

developed when the reserve was established. Expected premiums exceed expected

policy benefit payments and allowances due to the nature of the reinsurance

    treaties, which generally have increasing premium rates that exceed the     increasing benefit payments.    

(2) Interest-sensitive contract liabilities include amounts related to the

Company's reinsurance of asset-intensive products, primarily deferred

annuities and corporate-owned life insurance. Amounts presented in the table

above represent the estimated obligations as they become due both to and from

ceding companies relating to activity of the underlying policyholders.

Amounts presented in the table above represent the estimated obligations

under such contracts undiscounted as to interest, including assumptions

related to surrenders, withdrawals, premium persistency, partial withdrawals,

surrender charges, annuitizations, mortality, future interest credited rates

and policy loan utilization. The sum of the obligations shown for all years

in the table of $18,256.9 million exceeds the liability amount of $13,353.5

million included on the consolidated balance sheet principally due to the

    lack of discounting and accounting for separate account contracts.    

(3) Includes the Manor Re collateral financing arrangement that does not appear

on the consolidated balance sheets due to a master netting agreement where

the Company holds a term deposit note of equal value from the counterparty.

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  Excluded from the table above are net deferred income tax liabilities, unrecognized tax benefits, and accrued interest related to unrecognized tax benefits of $2,095.8 million, $245.6 million, and $49.6 million, respectively, for which the Company cannot reliably determine the timing of payment. Current income tax payable is also excluded from the table.  The net funded status of the Company's qualified and nonqualified pension and other postretirement liabilities included within other liabilities has been excluded from the amounts presented in the table above. As of December 31, 2012, the Company had a net unfunded balance of $97.2 million related to qualified and nonqualified pension and other postretirement liabilities. See Note 10 - "Employee Benefit Plans" in the Notes to Consolidated Financial Statements for information related to the Company's obligations and funding requirements for pension and other post-employment benefits.  

Asset / Liability Management

  The Company actively manages its cash and invested assets using an approach that is intended to balance quality, diversification, asset/liability matching, liquidity and investment return. The goals of the investment process are to optimize after-tax, risk-adjusted investment income and after-tax, risk-adjusted total return while managing the assets and liabilities on a cash flow and duration basis.  The Company has established target asset portfolios for each major insurance product, which represent the investment strategies intended to profitably fund its liabilities within acceptable risk parameters. These strategies include objectives and limits for effective duration, yield curve sensitivity and convexity, liquidity, asset sector concentration and credit quality.  The Company's asset-intensive products are primarily supported by investments in fixed maturity securities reflected on the Company's balance sheet and under funds withheld arrangements with the ceding company. Investment guidelines are established to structure the investment portfolio based upon the type, duration and behavior of products in the liability portfolio so as to achieve targeted levels of profitability. The Company manages the asset-intensive business to provide a targeted spread between the interest rate earned on investments and the interest rate credited to the underlying interest-sensitive contract liabilities. The Company periodically reviews models projecting different interest rate scenarios and their effect on profitability. Certain of these asset-intensive agreements, primarily in the U.S. operating segment, are generally funded by fixed maturity securities that are withheld by the ceding company.  The Company's liquidity position (cash and cash equivalents and short-term investments) was $1,548.0 million and $1,051.4 million at December 31, 2012 and 2011, respectively. Cash and cash equivalents includes cash collateral received from derivative counterparties of $136.4 million and $241.5 million as of December 31, 2012 and 2011, respectively. This unrestricted cash collateral is included in cash and cash equivalents and the obligation to return it is included in other liabilities in the Company's consolidated balance sheets. Liquidity needs are determined from valuation analyses conducted by operational units and are driven by product portfolios. Periodic evaluations of demand liabilities and short-term liquid assets are designed to adjust specific portfolios, as well as their durations and maturities, in response to anticipated liquidity needs.  The Company participates in a securities borrowing program whereby securities, which are not reflected on the Company's consolidated balance sheets, are borrowed from a third party. The Company is required to maintain a minimum of 100% of the market value of the borrowed securities as collateral. The Company had borrowed securities with an amortized cost of $87.5 million and $150.0 million as of December 31, 2012 and 2011, respectively, which was equal to the market value in both periods. The borrowed securities are used to provide collateral under an affiliated reinsurance transaction.  The Company also participates in a repurchase/reverse repurchase program in which securities, reflected as investments on the Company's consolidated balance sheets, are pledged to a third party. In return, the Company receives securities from the third party with an estimated fair value equal to a minimum of 100% of the securities pledged. The securities received are not reflected on the Company's consolidated balance sheets. As of December 31, 2012 the Company had pledged securities with an amortized cost of $290.2 million and an estimated fair value of $305.9 million, in return the Company received securities with an estimated fair value of $342.0 million. There were no securities pledged or received under this program as of December 31, 2011. In addition to its security agreements with third parties, certain RGA's subsidiaries have entered into intercompany securities lending agreements to more efficiently source securities for lending to third parties and to provide for more efficient regulatory capital management.  RGA Reinsurance is a member of the FHLB and holds $32.3 million of common stock in the FHLB, which is included in other invested assets on the Company's 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 December 31, 2012 or 2011. The Company's average outstanding balance of traditional funding agreements was $6.1 million during 2012. The Company's average outstanding balance of traditional funding agreements was $23.2 million                                           58 

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during 2011. Interest on traditional funding agreements with the FHLB is reflected in interest expense on the Company's consolidated statements of income.

  In addition, RGA Reinsurance has also entered into funding agreements with the FHLB under guaranteed investment contracts whereby RGA Reinsurance has issued the funding agreements in exchange for cash and for which the FHLB has been granted a blanket lien on RGA Reinsurance's commercial and residential mortgage-backed securities and commercial mortgage loans used to collateralize RGA Reinsurance's obligations under the funding agreements. RGA Reinsurance maintains control over these pledged assets, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. The funding agreements and the related security agreements represented by this blanket lien provide that upon any event of default by RGA Reinsurance, the FHLB's recovery is limited to the amount of RGA Reinsurance's liability under the outstanding funding agreements. The amount of the Company's liability for the funding agreements with the FHLB under guaranteed investment contracts was $500.0 million and $197.7 million at December 31, 2012 and 2011, 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. The amount of collateral exceeds the liability and is dependent on the type of assets collateralizing the guaranteed investment contracts.  

Investments

Management of Investments

  The Company's investment and derivative strategies involve matching the characteristics of its reinsurance products and other obligations and to seek to closely approximate the interest rate sensitivity of the assets with estimated interest rate sensitivity of the reinsurance liabilities. The Company achieves its income objectives through strategic and tactical asset allocations, security and derivative strategies within an asset/liability management and disciplined risk management framework. Derivative strategies are employed within the Company's risk management framework to help manage duration, currency, and other risks in assets and/or liabilities and to replicate the credit characteristics of certain assets. For a discussion of the Company's risk management process see "Market Risk" in the "Enterprise Risk Management" section below.  The Company's portfolio management groups work with the Enterprise Risk Management function to develop the investment policies for the assets of the Company's domestic and international investment portfolios. All investments held by the Company, directly or in a funds withheld at interest reinsurance arrangement, are monitored for conformance with the Company's stated investment policy limits as well as any limits prescribed by the applicable jurisdiction's insurance laws and regulations. See Note 4 - "Investments" in the Notes to Consolidated Financial Statements for additional information regarding the Company's investments.  

Portfolio Composition

The Company had total cash and invested assets of $34.2 billion and $25.9 billion at December 31, 2012 and 2011, respectively, as illustrated below (dollars in thousands):

                                                              2012              

2011

Fixed maturity securities, available-for-sale $ 22,291,614$ 16,200,950 Mortgage loans on real estate

                              2,300,587                991,731 Policy loans                                               1,278,175              1,260,400 Funds withheld at interest                                 5,594,182              5,410,424 Short-term investments                                       288,082                 88,566 Other invested assets                                      1,159,543              1,012,541 Cash and cash equivalents                                  1,259,892                962,870  Total cash and invested assets                      $     34,172,075       $     25,927,482                                             59 

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Investment Yield

  The following table presents consolidated average invested assets at amortized cost, net investment income and investment yield, excluding funds withheld at interest and spread related business. Funds withheld at interest assets and other spread related business are primarily associated with the reinsurance of annuity contracts on which the Company earns an interest rate spread between assets and liabilities. Fluctuations in the yield on funds withheld assets and other spread related business are substantially offset by a corresponding adjustment to the interest credited on the liabilities (dollars in thousands).                                                                                                         Increase /(Decrease)                                           2012               2011               2010               2012               2011  Average invested assets at amortized cost                       $   16,555,144     $   15,288,576     $   13,716,003               8.3%              11.5% Net investment income                       823,987            806,655            749,408               2.1%               7.6%  Investment yield (ratio of net investment income to average invested assets)            4.98%              5.28%              5.46%            (0.30)%            (0.18)%   The current low U.S. interest rate environment is negatively affecting the Company's earnings through reinvestment of maturing assets and investment of new liability cash flows. Investment yield decreased in 2012 and 2011 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, although this is offset by the increase in average invested assets, resulting in a slight increase in investment income.  

Fixed Maturity and Equity Securities Available-for-Sale

  See "Fixed Maturity and Equity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for tables that provide the amortized cost, unrealized gains and losses, estimated fair value of fixed maturity and equity securities, and the other-than-temporary impairments in AOCI by sector as of December 31, 2012 and 2011.  The Company's fixed maturity securities are invested primarily in corporate bonds, mortgage-and asset-backed securities, and U.S. and Canadian government securities. As of December 31, 2012 and 2011, approximately 94.2% and 95.5%, respectively, of the Company's consolidated investment portfolio of fixed maturity securities were investment grade.  Important factors in the selection of investments include diversification, quality, yield, call protection and total rate of return potential. The relative importance of these factors is determined by market conditions and the underlying reinsurance liability and existing portfolio characteristics. The largest asset class in which fixed maturity securities were invested was in corporate securities, which represented approximately 55.5% of total fixed maturity securities at December 31, 2012, compared to 46.0% at December 31, 2011. The Company's investment in corporate securities was diversified between financial institutions, industrials and utilities sectors; however, during 2012, RGA shifted its corporate portfolio toward the industrial sector away from the financial sector for added diversification and better risk return characteristics as financial credit spreads tightened throughout the year. See "Corporate Fixed Maturity Securities" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for tables showing the major industry types which comprise the corporate fixed maturity holdings at December 31, 2012 and 2011.  As of December 31, 2012, the Company's investments in Canadian and Canadian provincial government securities represented 18.2% of the fair value of total fixed maturity securities compared to 23.9% of the fair value of total fixed maturity securities at December 31, 2011. These assets are primarily high quality, long duration provincial strips whose valuation is closely linked to the interest rate curve. The Company's holdings in Canadian securities were the largest contributor to the net unrealized gain reported in the accumulated other comprehensive income reflected in the Company's consolidated balance sheets. These assets are longer in duration and held primarily for asset/liability management to meet Canadian regulatory requirements. See "Fixed Maturity and Equity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for tables showing the various sectors as of December 31, 2012 and 2011.  The creditworthiness of Greece, Ireland, Italy, Portugal and Spain, commonly referred to as "Europe's peripheral region" is under ongoing stress and uncertainty due to high debt levels and economic weakness. The Company did not have material exposure to sovereign fixed maturity securities, which includes global government agencies, from Europe's peripheral region as of December 31, 2012 and 2011. In addition, the Company did not purchase or sell credit protection, through credit default swaps, referenced to sovereign entities of Europe's peripheral region. The tables below show the Company's exposure to sovereign fixed maturity securities originated in countries other than Europe's peripheral region, included in "Other foreign government, supranational and foreign government-sponsored enterprises," in Note 4 - "Investments," as of December 31, 2012 and 2011 (dollars in thousands):                                           60  --------------------------------------------------------------------------------

  Table of Contents December 31, 2012:                                Estimated                         Amortized Cost            Fair Value           % of Total Australia            $           472,188      $        483,629                30.9 % Japan                            291,955               297,025                19.0 United Kingdom                   130,792               139,826                 8.9 Cayman Islands                    69,172                77,912                 5.0 South Africa                      63,721                66,372                 4.2 South Korea                       52,613                55,563                 3.5 Germany                           51,413                54,602                 3.5 New Zealand                       53,593                54,092                 3.5 France                            45,342                48,761                 3.1 Other                            258,578               287,421                18.4  Total                $         1,489,367      $      1,565,203               100.0 %   December 31, 2011:                                Estimated                         Amortized Cost            Fair Value           % of Total Australia            $           437,713      $        446,694                39.1 % Japan                            214,994               219,276                19.2 United Kingdom                   118,618               130,106                11.4 Germany                           72,926                75,741                 6.6 New Zealand                       51,547                51,544                 4.5 South Africa                      37,624                38,528                 3.4 South Korea                       30,592                32,025                 2.8 Other                            139,927               148,792                13.0  Total                $         1,103,941      $      1,142,706               100.0 %    As of December 31, 2012, the Company's investment in sovereign fixed maturity securities represented 7.0% of the fair value of total fixed maturity securities compared to 7.1% of the fair value of total fixed maturity securities at December 31, 2011. The Company's largest exposures to sovereign fixed maturity securities remain Australia, Japan, and the UK, although the concentration of securities within these countries has decreased as the overall sovereign portfolio has become more diversified.  The tables below show the Company's exposure to non-sovereign fixed maturity and equity securities, based on the security's country of issuance, from Europe's peripheral region as of December 31, 2012 and 2011 (dollars in thousands):     December 31, 2012:                                                      Estimated                                             Amortized Cost              Fair Value             % of Total Financial institutions: Ireland                                 $              4,093        $          4,520                   3.8 % Spain                                                 38,422                  39,920                  33.7  Total financial institutions                          42,515                  44,440                  37.5   Other: Ireland                                               38,852                  41,019                  34.6 Italy                                                  6,434                   6,653                   5.6 Spain                                                 24,725                  26,547                  22.3  Total other                                           70,011                  74,219                  62.5  Total                                   $            112,526        $        118,659                 100.0 %                                             61 

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  Table of Contents  December 31, 2011:                                                      Estimated                                             Amortized Cost              Fair Value             % of Total Financial institutions: Ireland                                  $             4,084        $          4,397                   5.9 % Spain                                                 25,565                  20,378                  27.6  Total financial institutions                          29,649                  24,775                  33.5   Other: Ireland                                               12,474                  13,149                  17.8 Italy                                                  2,898                   2,808                   3.8 Spain                                                 34,459                  33,137                  44.9  Total other                                           49,831                  49,094                  66.5  Total                                    $            79,480        $         73,869                 100.0 %    Strong improvement in European financial markets, as the governments of the European Union have demonstrated willingness to negotiate a solution to the region's debt problems during 2012, has resulted in unrealized gains in both financial institutions and all other fixed maturity and equity securities held by the Company that were issued within the region.  The Company references rating agency designations in some of its investments disclosures. These designations are based on the ratings from nationally recognized statistical rating organizations, primarily those assigned by S&P. In instances where a S&P rating is not available the Company references the rating provided by Moody's and in the absence of both the Company will generally assign equivalent ratings based on information from the National Association of Insurance Commissioners ("NAIC") or other rating agency. The NAIC assigns securities quality ratings and uniform valuations called "NAIC Designations" which are used by insurers when preparing their statutory filings. The NAIC assigns designations to publicly traded as well as privately placed securities. The designations assigned by the NAIC range from class 1 to class 6, with designations in classes 1 and 2 generally considered investment grade (BBB or higher rating agency designation). NAIC designations in classes 3 through 6 are generally considered below investment grade (BB or lower rating agency designation).  The quality of the Company's available-for-sale fixed maturity securities portfolio, as measured at fair value and by the percentage of fixed maturity securities invested in various ratings categories, relative to the entire available-for-sale fixed maturity security portfolio, at December 31, 2012 and 2011 was as follows (dollars in thousands):                                                            December 31, 2012                                                December 31, 2011     NAIC         Rating Agency                               Estimated                                                         Estimated Designation      Designation        Amortized Cost         Fair  Value     

     % of Total          Amortized Cost          Fair  Value           % of

Total      1        AAA/AA/A             $    12,059,154      $     14,300,571                64.2 %     $      10,087,612      $     11,943,633                73.7 %      2        BBB                        6,186,536             6,692,929                30.0               3,283,937             3,522,411                21.8      3        BB                           694,349               712,712                 3.2                 446,610               436,001                 2.7      4        B                            444,996               444,035                 2.0                 244,645               210,222                 1.3      5        CCC and lower                118,738                95,906                 0.4                  95,128                71,410                 0.4

     6        In or near default            55,659                45,461   

             0.2                  24,948                17,273                 0.1                  Total              $    19,559,432      $     22,291,614               100.0 %     $      14,182,880      $     16,200,950               100.0 %   

The Company's fixed maturity portfolio includes structured securities. The following table shows the types of structured securities the Company held at December 31, 2012 and 2011 (dollars in thousands):

                                                    December 31, 2012                            December 31, 2011                                                                 Estimated                                    Estimated                                        Amortized Cost           Fair Value          Amortized Cost           Fair Value Residential mortgage-backed securities: Agency                                $       497,918       $        555,535       $       561,156       $        619,010 Non-agency                                    471,349                486,529               606,109                608,224  Total residential mortgage-backed securities                                    969,267              1,042,064             1,167,265              1,227,234 Commercial mortgage-backed securities                                  1,608,376              1,698,903             1,233,958              1,242,219 Asset-backed securities                       700,455                691,555               443,974                401,991  Total                                 $     3,278,098       $      3,432,522       $     2,845,197       $      2,871,444                                             62 

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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</org>. As of December 31, 2012 and 2011, the weighted average credit rating of the residential mortgage-backed securities was "A+" and "AA," respectively. The principal risks inherent in holding mortgage-backed securities are prepayment and extension risks, which will affect the timing of when cash will be received and are dependent on the level of mortgage interest rates. Prepayment risk is the unexpected increase in principal payments from the expected, primarily as a result of owner refinancing. Extension risk relates to the unexpected slowdown in principal payments from the expected. In addition, non-agency mortgage-backed securities face credit risk should the borrower be unable to pay the contractual interest or principal on their obligation. The Company monitors its mortgage-backed securities to mitigate exposure to the cash flow uncertainties associated with these risks.  As of December 31, 2012 and 2011, the Company had exposure to commercial mortgage-backed securities with amortized costs totaling $1,969.4 million and $1,595.1 million, and estimated fair values of $2,090.0 million and $1,615.9 million. Those amounts include exposure to commercial mortgage-backed securities held directly in the Company's investment portfolios of fixed maturity securities, as well as securities held by ceding companies that support the Company's funds withheld at interest investment. The securities are highly rated with weighted average credit ratings of approximately "A+" at December 31, 2012 and 2011. During 2011, commercial mortgage-backed securities were sold in the portfolios held by ceding companies supporting the funds withheld at interest investments in an effort to reduce exposure to subordinated commercial mortgage-backed securities. Approximately 30.3% and 40.2% of commercial mortgage-backed securities, based on estimated fair value, were classified in the "AAA" category at December 31, 2012 and 2011, respectively. The decrease in the ratings was primarily attributable to the repositioning of assets to achieve target yields in underlying portfolios. The Company recorded $14.2 million, $12.4 million and $8.0 million of other-than-temporary impairments in its direct investments in commercial mortgage-backed securities for the years ended December 31, 2012, 2011 and 2010, respectively. The following tables summarize the Company's commercial mortgage-backed securities by rating and underwriting year at December 31, 2012 and 2011 (dollars in thousands):    December 31, 2012:                                         AAA                                               AA                                                A                                                                     Estimated                                         Estimated                                         Estimated Underwriting Year                        Amortized Cost             Fair Value             Amortized Cost             Fair Value             Amortized Cost            Fair Value 2005 & Prior                           $          69,810        $          75,706        $         129,430        $         141,189        $          99,840        $        103,112 2006                                             243,222                  270,756                   59,773                   66,862                   85,198                  93,688 2007                                             182,456                  201,131                   32,810                   37,542                   69,266                  77,657 2008                                               7,674                    7,672                   53,510                   67,624                   14,387                  17,098 2009                                               1,655                    1,820                   17,399                   19,483                    3,463                   5,599 2010                                              27,984                   29,956                   47,085                   53,027                   13,273                  14,405 2011                                              15,748                   16,411                   16,069                   18,184                   40,546                  42,726 2012                                              28,324                   29,080                   36,340                   36,925                   58,376                  59,595  Total                                  $         576,873        $         632,532        $         392,416        $         440,836        $         384,349        $        413,880                                                              BBB                                     Below Investment Grade                                    Total                                                                     Estimated                                         Estimated                                         Estimated Underwriting Year                        Amortized Cost            Fair  Value             Amortized Cost            Fair  Value             Amortized Cost            Fair  Value 2005 & Prior                           $         110,887        $         113,801        $          42,838        $          37,720        $         452,805        $        471,528 2006                                              83,565                   84,689                   67,131                   65,645                  538,889                 581,640 2007                                              93,414                  108,902                  115,028                   91,505                  492,974                 516,737 2008                                                   --                       --                  22,416                   17,386                   97,987                 109,780 2009                                               3,880                    5,547                        --                       --                  26,397                  32,449 2010                                                   --                       --                       --                       --                  88,342                  97,388 2011                                              33,242                   33,757                        --                       --                 105,605                 111,078 2012                                              43,346                   43,811                        --                       --                 166,386                 169,411  Total                                  $         368,334        $         390,507        $         247,413        $         212,256        $       1,969,385        $      2,090,011                                             63 

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  Table of Contents December 31, 2011:                                        AAA                                                  AA                                                A                                                                     Estimated                                           Estimated                                         Estimated Underwriting Year                       Amortized Cost              Fair Value              Amortized Cost              Fair Value              Amortized Cost            Fair Value 2005 & Prior                          $          92,275         $          98,213         $         130,890         $         143,609         $          32,504         $      31,187 2006                                            260,765                   277,959                    52,883                    59,727                    52,805                55,074 2007                                            201,228                   214,510                    23,565                    18,700                   116,898               122,945 2008                                              8,975                     9,053                    48,818                    59,536                    17,012                19,237 2009                                              1,664                     1,709                    12,367                    13,684                     7,060                 9,515 2010                                             27,946                    28,872                    49,323                    53,480                    19,434                20,727 2011                                             20,047                    20,002                    11,146                    12,079                     7,563                 7,594  Total                                 $         612,900         $         650,318         $         328,992         $         360,815         $         253,276         $     266,279                                                             BBB                                        Below Investment Grade                                    Total                                                                     Estimated                                           Estimated                                         Estimated Underwriting Year                       Amortized Cost             Fair  Value              Amortized Cost             Fair  Value              Amortized Cost            Fair Value 2005 & Prior                          $          24,750         $          24,295         $          52,475         $          40,753         $         332,894         $     338,057 2006                                             27,995                    26,563                    53,205                    43,559                   447,653               462,882 2007                                            102,604                   108,047                   113,946                    77,718                   558,241               541,920 2008                                                  --                        --                   24,916                    17,554                    99,721               105,380 2009                                                  --                        --                        --                        --                   21,091                24,908 2010                                                  --                        --                        --                        --                   96,703               103,079 2011                                                  --                        --                        --                        --                   38,756                39,675  Total                                 $         155,349         $         158,905         $         244,542         $         179,584         $       1,595,059         $   1,615,901    Asset-backed securities include credit card and automobile receivables, subprime mortgage-backed securities, home equity loans, manufactured housing bonds and collateralized debt obligations. The Company's asset-backed securities are diversified by issuer and contain both floating and fixed rate securities and had weighted average credit ratings of "AA-" at December 31, 2012 and 2011. The Company owns floating rate securities that represent approximately 15.0% and 15.2% of the total fixed maturity securities at December 31, 2012 and 2011, respectively. These investments have a higher degree of income variability than the other fixed income holdings in the portfolio due to the floating rate nature of the interest payments. The Company holds these investments to match specific floating rate liabilities primarily reflected in the consolidated balance sheets as collateral finance facility. In addition to the risks associated with floating rate securities, principal risks in holding asset-backed securities are structural, credit and capital market risks. Structural risks include the securities' cash flow priority in the capital structure and the inherent prepayment sensitivity of the underlying collateral. Credit risks include the adequacy and ability to realize proceeds from the collateral. Credit risks are mitigated by credit enhancements which include excess spread, over-collateralization and subordination. Capital market risks include general level of interest rates and the liquidity for these securities in the marketplace.  Since the financial crisis of 2008, the Company has continued to monitor its exposure in other structured security investments that includes subprime mortgage securities as well as Alt-A securities, a classification of mortgage loans where the risk profile of the borrower falls between prime and subprime. At December 31, 2012 and 2011, the Company directly held investments in asset-backed securities with subprime mortgage exposure and also within the portfolios supporting the Company's funds withheld at interest with amortized costs totaling $122.6 million and $136.7 million, and estimated fair values of $103.0 million and $102.7 million, respectively. 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. At December 31, 2012 and 2011, the Company's Alt-A securities had an amortized cost of $169.0 million and $140.5 million, and estimated fair values of $174.4 million and $136.5 million, respectively. The Alt-A securities are held directly as well as within the portfolios supporting the Company's funds withheld at interest. The Company recorded $0.2 million, $2.2 million and $4.0 million, in other-than-temporary impairments in its direct subprime portfolio for the years ended December 31, 2012, 2011 and 2010, respectively. The Company also recorded other-than-temporary impairments of $0.3 million, $0.1 million and $1.9 million, in its Alt-A securities portfolio for the years ended December 31, 2012, 2011 and 2010, respectively.  The Company does not invest in the common equity securities of Fannie Mae and Freddie Mac, both government sponsored entities. However, as of December 31, 2012 and 2011, the Company held senior unsecured and preferred agency securities at amortized cost of $64.7 million and $51.0 million, respectively. Additionally, as of December 31, 2012 and 2011, the portfolios held by ceding companies that support the Company's funds withheld assets contain approximately $307.2 million and $454.6 million, respectively, in amortized cost of unsecured agency bond holdings, and no equity exposure. As of December 31, 2012 and 2011, indirect exposure in the form of secured, structured mortgaged securities                                           64

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  issued by Fannie Mae and Freddie Mac totaled approximately $700.9 million and $723.7 million, respectively, in amortized cost across the Company's general and funds withheld portfolios.  The Company monitors its fixed maturity and equity securities to determine impairments in value and evaluates factors such as financial condition of the issuer, payment performance, the length of time and the extent to which the market value has been below amortized cost, compliance with covenants, general market and industry sector conditions, current intent and ability to hold securities, and various other subjective factors. Based on management's judgment, securities determined to have an other-than-temporary impairment in value are written down to fair value. See "Investments - Other-than-Temporary Impairment" in Note 2 - "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements for additional information. The Company recorded $43.2 million, $41.3 million and $35.9 million in other-than-temporary investment impairments in 2012, 2011 and 2010, respectively. The impairments in 2012 and 2011 were largely related to other-than-temporary impairments in Subprime/Alt-A/Other structured securities, primarily due to a decline in the value of commercial mortgage-backed securities. In addition, increases in other impairments in 2012 and 2011 are due to mortgage loan provision and impairments on limited partnerships. The impairment losses on equity securities of $3.0 million in 2012 and $4.1 million in 2011 are primarily due to the decline in fair value of securities issued by European financial institutions. The impaired equity securities are hybrid securities that contain both debt and equity-like features. The table below summarizes other-than-temporary impairments for 2012, 2011 and 2010 (dollars in thousands):                                                              2012            2011            2010

Subprime / Alt-A / Other structured securities $ 15,342$ 18,012$ 16,700 Corporate / Other fixed maturity securities

                8,184           8,937          13,175 Equity securities                                          3,025           4,116              32 Other impairments (primarily mortgage loans and limited partnerships)                                     16,602          10,238           5,976  Total                                                 $   43,153      $   41,303      $   35,883    At December 31, 2012 and 2011, the Company had $133.6 million and $292.5 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:                                                           December 31,              December 31,                                                           2012                      2011 Sector: Corporate securities                                          30.4 %                    46.5 % Canadian and Canada provincial governments                     0.1                         -- Residential mortgage-backed securities                         2.8                       5.6 Asset-backed securities                                       21.6                      18.4 Commercial mortgage-backed securities                         38.8                      27.2 State and political subdivisions                               4.3                       1.1 Other foreign government, supranational and foreign government-sponsored enterprises                       2.0                       1.2  Total                                                        100.0 %                   100.0 %   Industry: Finance                                                       18.0 %                    36.0 % Asset-backed                                                  21.6                      18.4 Industrial                                                     9.0                       8.2 Mortgage-backed                                               41.6                      32.8 Government                                                     6.4                       2.4 Utility                                                        3.4                       2.2  Total                                                        100.0 %                   100.0 %    See "Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for a table that presents the total gross unrealized losses for fixed maturity securities and equity securities at December 31, 2012 and 2011, respectively, where the estimated fair value had declined and remained below amortized cost by less than 20% or more than 20%.                                           65

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  The Company's determination of whether a decline in value is other-than-temporary includes analysis of the underlying credit and the extent and duration of a decline in value. The Company's credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the amortized cost of the investment. The Company continues to consider valuation declines as a potential indicator of credit deterioration. The Company believes that due to fluctuating market conditions and an extended period of economic uncertainty, the extent and duration of a decline in value have become less indicative of when there has been credit deterioration with respect to a fixed maturity security since it may not have an impact on the ability of the issuer to service all scheduled payments and the Company's evaluation of the recoverability of all contractual cash flows or the ability to recover an amount at least equal to amortized cost. In the Company's impairment review process, the duration and severity of an unrealized loss position for equity securities are given greater weight and consideration given the lack of contractual cash flows and the deferability features of these securities. As of December 31, 2012 and 2011, there were immaterial gross unrealized losses on equity securities greater than 20 percent of the amortized cost for more than 12 months.  See "Purchased Credit Impaired Fixed Maturity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for tables that present information related to the Company's purchases of credit impaired securities in 2012.  See "Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for tables that present the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for fixed maturity and equity securities that have estimated fair values below amortized cost, by class and grade security, as well as the length of time the related market value has remained below amortized cost as of December 31, 2012 and 2011.  As of December 31, 2012 and 2011, respectively, the Company classified approximately 10.0% and 8.5% of its fixed maturity securities in the Level 3 category (refer to Note 6 - "Fair Value of Assets and Liabilities" in the Notes to Consolidated Financial Statements for additional information). These securities primarily consist of private placement corporate securities, bank loans, below investment grade commercial and residential mortgage-backed securities and subprime asset-backed securities with inactive trading markets.  

See "Securities Borrowing and Other" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for information related to the Company's securities borrowing program and its repurchase/reverse repurchase program.

Mortgage Loans on Real Estate

  Mortgage loans represented approximately 6.7% and 3.8% of the Company's cash and invested assets as of December 31, 2012 and 2011, respectively. As of December 31, 2012, all mortgages were U.S. based with approximately 84.4% invested in mortgages on commercial offices, industrial properties and retail locations. The Company's largest mortgage loan is approximately $100.0 million but most mortgage loans range in size up to $20.0 million, with the average mortgage loan investment as of December 31, 2012 totaling approximately $6.8 million. The mortgage loan portfolio was diversified by geographic region and property type as discussed further in Note 4 - "Investments" in the Notes to Consolidated Financial Statements.  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.  

See "Mortgage Loans" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for information regarding for information regarding valuation allowances and impairments.

Policy Loans

  Policy loans comprised approximately 3.7% and 4.9% of the Company's cash and invested assets as of December 31, 2012 and 2011, 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.                                           66 

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Funds Withheld at Interest

  The majority of the Company's funds withheld at interest balances are associated with its reinsurance of annuity contracts. The funds withheld receivable balance totaled $5.6 billion and $5.4 billion at December 31, 2012 and 2011, respectively, of which $3.9 billion and $3.8 billion at December 31, 2012 and 2011, respectively, were subject to the general accounting principles for Derivatives and Hedging related to embedded derivatives for both periods. Under these principles, the Company's funds withheld receivable under certain reinsurance arrangements incorporate credit risk exposures that are unrelated or only partially related to the creditworthiness of the obligor and include an embedded derivative feature that is not clearly and closely related to the host contract. Therefore, the embedded derivative feature must be measured at fair value on the consolidated balance sheets and changes in fair value reported in income. See "Embedded Derivatives" in Note 2 - "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements for further discussion.  Funds withheld at interest comprised approximately 16.4% and 20.9% of the Company's cash and invested assets as of December 31, 2012 and 2011, respectively. Of the $5.6 billion funds withheld at interest balance as of December 31, 2012, $3.9 billion of the balance is associated with one client. For reinsurance agreements written on a modified coinsurance basis and certain agreements written on a coinsurance basis, assets equal to the net statutory reserves are withheld and legally owned and managed by the ceding company, and are reflected as funds withheld at interest on the Company's consolidated balance sheets. In the event of a ceding company's insolvency, the Company would need to assert a claim on the assets supporting its reserve liabilities. However, the risk of loss to the Company is mitigated by its ability to offset amounts it owes the ceding company for claims or allowances with amounts owed by the ceding company. Interest accrues to these assets at rates defined by the treaty terms and the Company estimated the yields were approximately 6.97%, 6.87% and 7.20% for the years ended December 31, 2012, 2011 and 2010, respectively. Changes in these estimated yields are affected by changes in the fair value of equity options held in the funds withheld portfolio associated with EIAs. Additionally, under certain treaties the Company is subject to the investment performance on the withheld assets, although it does not directly control them. These assets are primarily fixed maturity investment securities and pose risks similar to the fixed maturity securities the Company owns. To mitigate this risk, the Company helps set the investment guidelines followed by the ceding company and monitors compliance. Ceding companies with funds withheld at interest had an average rating of "A" at December 31, 2012 and 2011. Certain ceding companies maintain segregated portfolios for the benefit of the Company.  

Based on data provided by ceding companies at December 31, 2012 and 2011, funds withheld at interest were approximately (dollars in thousands):

                                                                              December 31, 2012                                                                                                  % of Total Estimated Underlying Security Type:                        Book Value          Estimated Fair Value             Fair Value Segregated portfolios: Investment grade corporate securities           $ 1,898,188         $           2,106,040                      45.1 % Below investment grade corporate securities         133,385                       133,817                       2.9 Structured securities                               844,818                       880,962                      18.9 U.S. government and agency debentures               375,612                       505,617                      10.8 Derivatives(1)                                       43,125                        43,125                       0.9 Other                                               851,475                     1,002,007                      21.4  Total segregated portfolios                       4,146,603                     4,671,568                     100.0 %  Non-segregated portfolios                         1,690,756                     1,690,756 Embedded derivatives(2)                             (243,177 )                          --  Total funds withheld at interest                $ 5,594,182         $           6,362,324                                             67 

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  Table of Contents                                                                        December 31, 2011                                                                                                % of Total Estimated Underlying Security Type:                   Book Value            Estimated Fair Value              Fair Value Segregated portfolios: Investment grade corporate securities                               $     1,859,727         $           1,953,769                       43.6 % Below investment grade corporate securities                                       142,678                       129,225                        2.9 Structured securities                            823,207                       820,400                       18.3 U.S. government and agency debentures                                       559,377                       675,701                       15.1 Derivatives(1)                                    46,519                        46,519                        1.1 Other                                            776,210                       852,208                       19.0  Total segregated portfolios                    4,207,718                     4,477,822                      100.0 %  Non-segregated portfolios                      1,564,162                     1,564,162 Embedded derivatives(2)                         (361,456)                            -- 

Total funds withheld at interest $ 5,410,424 $

 6,041,984     

(1) Derivatives primarily consist of S&P 500 options which are used to hedge

    liabilities and interest credited for EIAs reinsured by the Company.    

(2) Represents the fair value of embedded derivatives related to reinsurance

written on a modco or funds withheld basis and subject to the general

accounting principles for Derivatives and Hedging related to embedded

derivatives for the segregated portfolios. When the segregated portfolios are

presented on a fair value basis in the "Estimated Fair Value" column, the

calculation of a separate embedded derivative is not applicable.

Based on data provided by the ceding companies at December 31, 2012, the maturity distribution of the segregated portfolio portion of funds withheld at interest was approximately (dollars in thousands):

                                                                         December 31, 2012                                                                                              % of Total Estimated Maturity                                   Book Value           Estimated Fair Value              Fair Value Within one year                         $        88,878        $              88,888                        1.8 % More than one, less than five years             463,876                      500,409                       10.0 More than five, less than ten years           1,016,044                    1,127,962                       22.5 Ten years or more                             2,917,649                    3,294,153                       65.7  Subtotal                                      4,486,447                    5,011,412                      100.0 %  Less reverse repurchase agreements             (339,844)                    (339,844)  Total all years                         $     4,146,603        $           4,671,568    Other Invested Assets  Other invested assets include equity securities, limited partnership interests, joint ventures, structured loans and derivative contracts. Other invested assets represented approximately 3.4% and 3.9% of the Company's cash and invested assets as of December 31, 2012 and 2011, respectively. See "Other Invested Assets" in Note 4 - "Investments" in the Notes to Consolidated Financial Statements for a table that presents the carrying value of the Company's other invested assets by type as of December 31, 2012 and 2011.  

The Company recorded $10.3 million, $4.1 million and $0.1 million in other-than-temporary impairments on other invested assets in 2012, 2011 and 2010, respectively.

  The Company has utilized derivative financial instruments, to protect the Company against possible changes in the fair value of its investment portfolio as a result of interest rate changes, to hedge liabilities associated with the reinsurance of variable annuities with guaranteed living benefits and to manage the portfolio's effective yield, maturity and duration. In addition, the Company has used derivative financial instruments to reduce the risk associated with fluctuations in foreign currency exchange rates. The Company uses both exchange-traded and customized over-the-counter derivative financial instruments. The Company's use of derivative financial instruments historically has not been significant to its financial position.  

See Note 5 - "Derivative Instruments" in the Notes to Consolidated Financial Statements for a table that presents the notional amounts and fair value of investment related derivative instruments held at December 31, 2012 and 2011.

  The Company may be exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments. Generally, the credit exposure of the Company's derivative contracts is limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company. The Company had credit exposure related to its derivative contracts, excluding futures, of $7.1 million and $12.0 million at December 31, 2012 and 2011, respectively.                                           68

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  The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. As exchange-traded futures are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties. See Note 5 - "Derivative Instruments" in the Notes to Consolidated Financial Statements for more information regarding the Company's derivative instruments.  

Enterprise Risk Management

  RGA maintains an Enterprise Risk Management ("ERM") program to consistently identify, assess, mitigate, monitor and communicate all material risks facing the organization in order to effectively manage all risks, increasing protection of RGA's clients, shareholders, employees, and other stakeholders. RGA's ERM framework provides a platform to assess the risk / return profiles of risks throughout the organization, thereby enabling enhanced decision making. This includes development and implementation of mitigation strategies to reduce exposures to these risks to acceptable levels. Risk management is an integral part of the Company's culture and is interwoven in day to day activities. It includes guidelines, risk appetites, risk targets, risk limits, and other controls in areas such as mortality, morbidity, longevity, pricing, underwriting, currency, administration, investments, asset liability management, counterparty exposure, geographic exposure, financing, asset leverage, regulatory change, business continuity planning, human resources, liquidity, collateral, sovereign risks and information technology development.  The Chief Risk Officer ("CRO"), aided by the Risk Management Steering Committee ("RMSC"), Business Unit Chief Risk Officers, Risk Management Officers and a dedicated ERM function, is responsible for ensuring, on an ongoing basis, that objectives of the ERM framework are met; this includes ensuring proper risk controls are in place, risks are effectively identified, assessed and managed, and key risks to which the Company is exposed are disclosed to appropriate stakeholders. For each Business Unit and key risk, a Risk Management Officer is assigned. A Risk Officer is also assigned to take overall responsibility of a specific risk across all markets to monitor and assess this risk consistently. In addition to this network of Risk Management Officers, the Company also has risk focused committees such as the Business Continuity and Information Governance Steering Committee, Consolidated Investment Committee, Derivatives Risk Oversight Committee, Asset and Liability Management Committee, Hedging Oversight Committee, Collateral and Liquidity Committee, and the Currency Risk Management Committee. These committees are comprised of various risk experts and have overlapping membership, enabling consistent and holistic management of risks. These committees report directly or indirectly to the RMSC. The RMSC, which includes senior management executives, including the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer ("COO") and the CRO, is the primary risk management oversight for the Company.  The RMSC approves both targets and limits for each material risk and reviews these limits annually. Exposure to these risks is calculated and presented to the RMSC at least quarterly. Any exception to established risk limits or waiver needs to be approved by the RMSC.  The CRO, reports regularly to the Finance, Investment and Risk Management ("FIRM") Committee, a sub-committee of the Board of Directors responsible, among other duties, for overseeing the management of RGA's ERM programs and policies. An extensive ERM report is presented to the FIRM quarterly. The report contains information on all risks as well as qualitative and quantitative assessments. A list of all breaches, exceptions and waivers is also included in the report. The Board of Directors has other committees, such as the Audit Committee, whose responsibilities include aspects of risk management. The CRO reports to the COO and has direct access to the RGA Board of Directors, through the FIRM Committee.  The Company has devoted significant resources to develop its ERM program, and expects continuing to do so in the future. Nonetheless, the Company's policies and procedures to identify, manage and monitor risks may not be fully effective. Many of the Company's methods for managing risk are based on historical information, which may not be a good predictor of future risk exposures, such as the risk of a pandemic causing a large number of deaths. Management of operational, legal and regulatory risk rely on policies and procedures which may not be fully effective under all scenarios.                                           69

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The Company categorizes its main risks as follows:

     •   Insurance Risk     •   Liquidity Risk     •   Market Risk     •   Credit Risk     •   Operational Risk  

Specific risk assessments and descriptions can be found below and in Item 1A - "Risk Factors".

  Insurance Risk  The risk of loss due to experience deviating adversely from expectations for mortality, morbidity, and policyholder behavior or lost future profits due to treaty recapture by clients. This category is further divided into mortality, morbidity, longevity, policyholder behavior, and client recapture. The Company uses multiple approaches to managing insurance risk: active insurance risk assessment and pricing appropriately for the risks assumed, transferring undesired risks, and managing the retained exposure prudently. These strategies are explained below.  

Insurance Risk Assessment and Pricing

  The Company has developed extensive expertise in assessing insurance risks which ultimately forms an integral part of ensuring that it is compensated commensurately for the risks it assumes and that it does not overpay for the risks it transfers to third parties. This expertise includes a vast array of market and product knowledge supported by a large information database of historical experience which is closely monitored. Analysis and experience studies derived from this database help form the basis for the Company's pricing assumptions which are used in developing rates for new risks. If actual mortality or morbidity experience is materially adverse, some reinsurance treaties allow for increases to future premium rates.  Misestimation of any key risk can threaten the long term viability of the enterprise Further, the pricing process is a key operational risk and significant effort is applied to ensuring the appropriateness of pricing assumptions. Some of the safeguards the Company uses to ensure proper pricing are: experience studies, strict underwriting, sensitivity and scenario testing, pricing guidelines and controls, authority limits and internal and external pricing reviews. In addition, the Global ERM function provides additional pricing oversight which includes periodic pricing audits.  

Risk Transfer

To minimize volatility in financial results and reduce the impact of large losses, the Company transfers some of its insurance risk to third parties using vehicles such as retrocession and catastrophe coverage.

Retrocession

  In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of claims paid by ceding reinsurance to other insurance enterprises (or retrocessionaires) under excess coverage and coinsurance contracts. In individual life markets, the Company retains a maximum of $8.0 million of coverage per individual life. In certain limited situations the Company has retained more than $8.0 million per individual life. The Company enters into agreements with other reinsurers to mitigate the residual risk related to the over-retained policies. Additionally, due to some lower face amount reinsurance coverages provided by the Company in addition to individual life, such as group life, disability and health, under certain circumstances, the Company could potentially incur claims totaling more than $8.0 million per individual life.  

Catastrophe Coverage

  The Company accesses the markets each year for annual catastrophic coverages and reviews current coverage and pricing of current and alternate designs. Purchases vary from year to year based on the Company's perceived value of such coverages. The current policy covers events involving 10 or more insured deaths from a single occurrence and covers $100 million of claims in excess of the Company's $50 million deductible.  

Mitigation of Retained Exposure

  The Company retains most of the inbound insurance risk. The Company manages the retained exposure proactively using various mitigating factors such as diversification and limits. Diversification is the primary mitigating factor of short term volatility risk, but it also mitigates adverse impacts of changes in long term trends and catastrophic events. The Company's insured populations are dispersed globally, diversifying the insurance exposure because factors that cause actual experience to deviate materially from expectations do not affect all areas uniformly and synchronously or in close sequence. A variety of limits mitigate retained insurance risk. Examples of these limits include geographic exposure limits, which set                                           70 

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the maximum amount of business that can be written in a given locale, and jumbo limits, which prevent excessive coverage on a given individual.

  In the event that mortality or morbidity experience develops in excess of expectations, some reinsurance treaties allow for increases to future premium rates. Other treaties include experience refund provisions, which may also help reduce RGA's mortality risk.  

Liquidity Risk

  Liquidity risk is the risk that cash resources are insufficient to meet the Company's cash demands without incurring unacceptable costs. Liquidity demands come primarily from payment of claims, expenses and investment purchases, all of which are known or can be reasonably forecasted. Contingent liquidity demands exist and require the Company to inventory and estimate likely and potential liquidity demands stemming from stress scenarios.  The Company maintains cash, cash equivalents, credit facilities, and short-term liquid investments to support its current and future anticipated liquidity requirements. The Company may also borrow via the reverse repo market, and holds a large pool of unrestricted, FHLB-eligible collateral that may be pledged to support any FHLB advances needed to provide additional liquidity.  

The amount of liquidity available both within 24 hours and within 72 hours is reviewed and reported at least weekly.

Market Risk

  Market risk is the risk that net asset and liability values or revenue will be affected adversely by changes in market conditions such as market prices, exchange rates, and nominal interest rates. The Company is primarily exposed to interest rate, equity and currency risks.  

Interest Rate Risk

  Interest rate risk is the potential for loss, on a net asset and liability basis, due to changes in interest rates, including both normal rate changes and credit spread changes. This risk arises from many of the Company's primary activities, as the Company invests substantial funds in interest-sensitive assets and also has certain interest-sensitive contract liabilities. The Company manages interest rate risk to maximize the return on the Company's capital effectively and to preserve the value created by its business operations. As such, certain management monitoring processes are designed to minimize the effect of sudden and/or sustained changes in interest rates on fair value, cash flows, and net interest income. The Company manages its exposure to interest rates principally by matching floating rate liabilities with corresponding floating rate assets and by matching fixed rate liabilities with corresponding fixed rate assets. On a limited basis, the Company uses equity options to minimize its exposure to movements in equity markets that have a direct correlation with certain of its reinsurance products.  The following table presents the account values, the weighted average interest-crediting rates and minimum guaranteed rate ranges for the contracts containing guaranteed rates by major class of interest-sensitive product as of December 31, 2012 and 2011 (dollars in thousands):                                                                                                        Current weighted-average                                                                    Account value                    interest crediting rate         Minimum guaranteed rate ranges Interest sensitive contract liability                        2012                 2011                2012            2011             2012            

2011

 Traditional individual fixed annuities                  $     5,955,867      $     1,132,648         2.94%           2.47%         0.50 - 4.50%       0.50 - 4.50% Equity-indexed annuities                                      4,827,592            4,878,432         3.17%           4.07%         1.00 - 3.00%       1.00 - 3.00% Individual variable annuity contracts                             5,714                5,722         2.93%           4.02%         0.33 - 4.35%       1.50 - 5.42% Guaranteed investment contracts                                 500,056              197,721         1.53%           3.79%         0.00 - 4.50%       0.00 - 4.50% Universal life - type policies                                1,877,674            1,891,268         4.36%           4.69%         3.00 - 6.00%       3.00 - 6.00%                                            71 

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  The following table presents the account values by each minimum guaranteed rate, rounded to the nearest percentage, by class of interest-sensitive product as of December 31, 2012 and 2011 (dollars in thousands):                                                                                                Account Value as of December 31, 2012 Interest sensitive contract liability                  1%                 2%                  3%                 4%               5%              6%              Total Traditional individual fixed annuities            $   266,300       $   1,054,383       $   3,962,683       $   658,343       $   14,158       $      --      $   5,955,867 Equity-indexed annuities                              667,716           3,011,539           1,148,337                 --               --             --          4,827,592 Individual variable annuity contracts                       5                   --              3,122             2,587                --             --              5,714 Guaranteed investment contracts                       347,654              39,383                   --           87,709           25,310              --            500,056 Universal life - type policies                              --                  --             45,153         1,745,870           61,160         25,491           1,877,674                                                                                              Account Value as of December 31, 2011 Interest sensitive contract liability                  1%                 2%                  3%                 4%               5%              6%              Total Traditional individual fixed annuities            $   218,247       $       3,159       $     373,401       $   522,102       $   15,739       $      --      $   1,132,648 Equity-indexed annuities                              383,014           3,223,573           1,271,845                 --               --             --          4,878,432 Individual variable annuity contracts                       --                  --              3,074                 --           2,648              --              5,722 Guaranteed investment contracts                        30,100              28,560                   --          113,751           25,310              --            197,721 Universal life - type policies                              --                  --             43,578         1,752,454           62,219         33,017

1,891,268

   The spread profits on the Company's fixed annuity and interest-sensitive whole life, universal life ("UL") and fixed portion of variable universal life ("VUL") insurance policies are at risk if interest rates decline and remain relatively low for a period of time, which has generally been the case in recent years. Should interest rates remain at current levels that are significantly lower than those existing prior to the declines of recent years, the average earned rate of return on the Company's annuity and UL investment portfolios will continue to decline. Declining portfolio yields may cause the spreads between investment portfolio yields and the interest rate credited to contract holders to deteriorate as the Company's ability to manage spreads can become limited by minimum guaranteed rates on annuity and UL policies. In 2012 and 2011, minimum guaranteed rates on non-variable annuity and UL policies generally ranged from 0.5% to 6.0%, with an average guaranteed rate of approximately 2.7%.  Interest rate spreads are managed for near term income through a combination of crediting rate actions and portfolio management. Certain annuity products contain crediting rates that reset annually, of which $2,658.2 million and $804.3 million of account balances are not subject to surrender charges, with 96.7% and 95.0% of these already at their minimum guaranteed rates as of December 31, 2012 and 2011, respectively. As such, certain management monitoring processes are designed to minimize the effect of sudden and/or sustained changes in interest rates on fair value, cash flows, and net interest income.  The Company's exposure to interest rate price risk and interest rate cash flow risk is reviewed on a quarterly basis. Interest rate price risk exposure is measured using interest rate sensitivity analysis to determine the change in fair value of the Company's financial instruments in the event of a hypothetical change in interest rates. Interest rate cash flow risk exposure is measured using interest rate sensitivity analysis to determine the Company's variability in cash flows in the event of a hypothetical change in interest rates.  Interest rate sensitivity analysis is used to measure the Company's interest rate price risk by computing estimated changes in fair value of fixed rate assets and liabilities in the event of a hypothetical 10% change (increase or decrease) in market interest rates. The Company does not have fixed rate instruments classified as trading securities. The Company's projected loss in fair value of financial instruments in the event of a 10% unfavorable change in market interest rates at its fiscal years ended December 31, 2012 and 2011 was $283.7 million and $288.5 million, respectively.  The calculation of fair value is based on the net present value of estimated discounted cash flows expected over the life of the market risk sensitive instruments, using market prepayment assumptions and market rates of interest provided by independent broker quotations and other public sources, with adjustments made to reflect the shift in the treasury yield curve as appropriate.  Interest rate sensitivity analysis is also used to measure the Company's interest rate cash flow risk by computing estimated changes in the cash flows expected in the near term attributable to floating rate assets and liabilities in the event of a range of assumed changes in market interest rates. This analysis assesses the risk of loss in cash flows in the near term in market risk sensitive floating rate instruments in the event of a hypothetical 10% change (increase or decrease) in market interest rates. The Company does not have variable rate instruments classified as trading securities. The Company's projected decrease in cash flows in the near term associated with floating rate instruments in the event of a 10% unfavorable change in market interest rates at its fiscal years ended December 31, 2012 and 2011 was $5.2 and $4.0 million, respectively.                                           72 

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  Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, and mortgage prepayments, and should not be relied on as indicative of future results. Further, the computations do not contemplate any actions management could undertake in response to changes in interest rates.  Certain shortcomings are inherent in the method of analysis presented in the computation of the estimated fair value of fixed rate instruments and the estimated cash flows of floating rate instruments, which constitute forward-looking statements. Actual values may differ materially from those projections presented due to a number of factors, including, without limitation, market conditions varying from assumptions used in the calculation of the fair value. In the event of a change in interest rates, prepayments could deviate significantly from those assumed in the calculation of fair value. Finally, the desire of many borrowers to repay their fixed rate mortgage loans may decrease in the event of interest rate increases.  In order to reduce the exposure of changes in fair values from interest rate fluctuations, the Company has developed strategies to manage the interest rate sensitivity of its asset base. From time to time, the Company has utilized the swap market to manage the volatility of cash flows to interest rate fluctuations.  

Foreign Currency Risk

  The Company is subject to foreign currency translation, transaction, and net income exposure. The Company manages its exposure to currency principally by matching invested assets with the underlying liabilities to the extent possible. The Company has in place net investment hedges for a portion of its investments in its Canadian and Australian operations to reduce excess exposure to these currencies. Translation differences resulting from translating foreign subsidiary balances to U.S. dollars are reflected in stockholders' equity on the consolidated balance sheets.  The Company generally does not hedge the foreign currency exposure of its subsidiaries transacting business in currencies other than their functional currency (transaction exposure). However, the Company has entered into certain interest rate swaps in which the cash flows are denominated in different currencies, commonly referred to as cross currency swaps. Those interest rate swaps have been designated as cash flow hedges. The majority of the Company's foreign currency transactions are denominated in Australian dollars, British pounds, Canadian dollars, Euros, Japanese yen, Korean won, and the South African rand.  

The maximum amount of assets held in a specific currency (with the exception of the U.S. Dollar) is measured relative to risk targets and is monitored regularly.

Inflation Risk

  The primary direct effect on the Company of inflation is the increase in operating expenses. A large portion of the Company's operating expenses consists of salaries, which are subject to wage increases at least partly affected by the rate of inflation. The rate of inflation also has an indirect effect on the Company. To the extent that a government's policies to control the level of inflation result in changes in interest rates, the Company's investment income is affected.  Equity Risk  Equity risk is the risk that net asset and liability (e.g. variable annuities or other equity linked exposures) values or revenues will be affected adversely by changes in equity markets. The Company assumes equity risk from embedded derivatives in alternative investments, fixed indexed annuities and variable annuities.  Alternative Investments  Alternative Investments are investments in non-traditional asset classes that are most commonly backing capital and surplus and not liabilities. The Company generally restricts the alternative investments portfolio to non-liability supporting assets: that is, free surplus. For (re)insurance companies, alternative investments generally encompass: hedge funds, owned commercial real estate, emerging markets debt, distressed debt, commodities, infrastructure, tax credits, and equities, both public and private. The Company mitigates its exposure to alternative investments by limiting the size of the alternative investments holding.  

Fixed Indexed Annuities

  Credits for fixed indexed annuities are affected by changes in equity markets. Thus the fair value of the benefit is a function of primarily index returns and volatility. The Company hedges some of the underlying equity exposure.  

Variable Annuities

  The Company reinsures variable annuities including those with guaranteed minimum death benefits ("GMDB"), guaranteed minimum income benefits ("GMIB"), guaranteed minimum accumulation benefits ("GMAB") and guaranteed minimum withdrawal benefits ("GMWB"). Strong equity markets, increases in interest rates and decreases in volatility will generally decrease the fair value of the liabilities underlying the benefits. Conversely, a decrease in the equity markets along                                           73 

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  with a decrease in interest rates and an increase in volatility will generally result in an increase in the fair value of the liabilities underlying the benefits, which has the effect of increasing reserves and lowering earnings. The Company maintains a customized dynamic hedging program that is designed to substantially mitigate the risks associated with income volatility around the change in reserves on guaranteed benefits, ignoring the Company's own credit risk assessment. However, the hedge positions may not fully offset the changes in the carrying value of the guarantees due to, among other things, time lags, high levels of volatility in the equity and derivative markets, extreme swings in interest rates, unexpected contract holder behavior, and divergence between the performance of the underlying funds and hedging indices. These factors, individually or collectively, may have a material adverse effect on the Company's net income, financial condition or liquidity. The table below provides a summary of variable annuity account values and the fair value of the guaranteed benefits as of December 31, 2012 and 2011.                                                                                December 31, (dollars in millions)                                                 2012             2011 No guarantee minimum benefits                                      $      948       $      986 GMDB only                                                                  79               85 GMIB only                                                                   6                6 GMAB only                                                                  54               55 GMWB only                                                               1,662            1,538 GMDB / WB                                                                 455              498 Other                                                                      31               31  Total variable annuity account values                              $    

3,235 $ 3,199

Fair value of liabilities associated with living benefit riders $ 172 $ 277

   Credit Risk  Credit risk is the risk of loss due to counterparty (obligor, client, retrocessionaire, or partner) credit deterioration or unwillingness to meet its obligations. Credit risk has two forms: investment credit risk (asset default and credit migration) and insurance counterparty risk.  

Investment Credit Risk

  Investment credit risk, which includes default risk, is risk of loss due to credit quality deterioration of an individual financial investment, derivative or non-derivative contract or instrument. Credit quality deterioration may or may not be accompanied by a ratings downgrade. Generally, the investment credit exposure is limited to the fair value, net of any collateral received, at the reporting date.  The creditworthiness of Europe's peripheral region is under ongoing stress and uncertainty due to high debt levels and economic weakness. The Company does not have exposure to sovereign fixed maturity securities, which includes global government agencies, from Europe's peripheral region. The Company does have exposure to sovereign fixed maturity securities originated in countries other than Europe's peripheral region and to non-sovereign fixed maturity and equity securities issued from Europe's peripheral region. See "Investments" above for additional information on the Company's exposure related to investment securities.  The Company manages investment credit risk using per-issuer investments limits. In addition to per-issuer limits, the Company also limits the total amounts of investments per rating category. An automated compliance system checks for compliance for all investment positions and sends warning messages when there is a breach. The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. Because exchange-traded futures are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties to such derivative instruments.  The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection with its derivative instruments. Collateral agreements contain attachment thresholds that vary depending on the posting party's financial strength ratings. Additionally, a decrease in the Company's financial strength rating to a specified level results in potential settlement of the derivative positions under the Company's agreements with its counterparties. The Collateral and Liquidity Committee sets rules, approves and oversees all deals requiring collateral. See "Credit Risk" in Note 5 - "Derivative Instruments" in the Notes to Consolidated Financial Statements for additional information on credit risk related to derivatives.                                           74 

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Insurance Counterparty Risk

  Insurance counterparty risk is the potential for the Company to incur losses due to a client, retrocessionaire, or partner becoming distressed or insolvent. This includes run-on-the-bank risk and collection risk.  

Run-on-the-Bank

  The risk that a client's in force block incurs substantial surrenders and/or lapses due to credit impairment, reputation damage or other market changes affecting the counterparty. Severely higher than expected surrenders and/or lapses could result in inadequate in force business to recover cash paid out for acquisition costs.  Collection Risk 

For clients and retrocessionaires, this includes their inability to satisfy a reinsurance agreement because the right of offset is disallowed by the receivership court; the reinsurance contract is rejected by the receiver, resulting in a premature termination of the contract; and/or the security supporting the transaction becomes unavailable to RGA.

  The Company manages insurance counterparty risk by limiting the total exposure to a single counterparty and by only initiating contracts with creditworthy counterparties. In addition, some of the counterparties have set up trusts and letters of credit, reducing the Company's exposure to these counterparties.  Generally, RGA's insurance subsidiaries retrocede amounts in excess of their retention to RGA Reinsurance, Parkway Re, RGA Barbados, RGA Americas, Rockwood Re, Manor Re, RGA Worldwide or RGA Atlantic. External retrocessions are arranged through the Company's retrocession pools for amounts in excess of its retention. As of December 31, 2012, all retrocession pool members in this excess retention pool rated by the A.M. Best Company were rated "A-" or better except for one pool member that was rated "B++." A rating of "A-" is the fourth highest rating out of fifteen possible ratings. For a majority of the retrocessionaires that were not rated, letters of credit or trust assets have been given as additional security. In addition, the Company performs annual financial and in force reviews of its retrocessionaires to evaluate financial stability and performance.  The Company has never experienced a material default in connection with retrocession arrangements, nor has it experienced any material difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires or as to the recoverability of any such claims.  

Aggregate Counterparty Limits

  In addition to investment credit limits and insurance counterparty limits, there are aggregate counterparty risk limits which include counterparty exposures from reinsurance, financing and investment activities at an aggregated level to control total exposure to a single counterparty. Counterparty risk aggregation is important because it enables the Company to capture risk exposures at a comprehensive level and under more extreme circumstances compared to analyzing the components individually.  

All counterparty exposures are calculated on a quarterly basis, reviewed by management and monitored by the ERM function.

Operational Risk

  Operational risk is the risk of loss due to inadequate or failed internal processes, people or systems, or external events. These risks are sometimes residual risks after insurance, market and credit risks have been identified. Operational risk is further divided into: Process, Legal/Regulatory, Financial, and Intangibles. In order to effectively manage operational risks, management primarily relies on:  Risk Culture  Risk management is embedded in RGA's business processes in accordance with RGA's risk philosophy. As the cornerstone of the ERM framework, risk culture plays a preeminent role in the effective management of risks assumed by RGA. At the heart of RGA's risk culture is prudent risk management. Senior management sets the tone for RGA risk culture, inculcating positive risk attitudes so as to entrench sound risk management practices into day-to-day activities.  

Structural Controls

Structural controls provide additional safeguards against undesired risk exposures. Examples of structural controls include: pricing and underwriting reviews, standard treaty language, etc.

Risk Monitoring and Reporting

Proactive risk monitoring and reporting enable early detection and mitigation of emerging risks. For example, there

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  is elevated regulatory activity in the wake of the global financial crisis and RGA is actively monitoring regulatory proposals in order to respond optimally. Risk escalation channels coupled with open communication lines enhance the mitigants explained above.  

New Accounting Standards

See "New Accounting Pronouncements" in Note 2 - "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by Item 7A is contained in Item 7 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations-Market Risk"

  In addition to the information provided in Note 2 - "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements, the Company estimates that the adoption of the amended general accounting principles for Financial Services - Insurance as it relates to accounting for costs associated with acquiring or renewing insurance contracts is expected to result in a decrease in management's projection of income before income taxes between 6 and 10 percent in 2013, ignoring investment related gains and losses, which are difficult to predict. 

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