美國再保險集團 (RGA) 2002 Q1 法說會逐字稿

Good day, everyone. Welcome to the Reinsurance Group of America first quarter conference call. Today's call is being recorded. At this time I would like to introduce the president and chief executive officer, Mr. Greig Woodring, and the executive vice president and chief financial officer, Mr. Jack Lay. Mr. Lay, please go ahead.

Thank you and good morning to everyone joining us for RGA's first quarter 2002 conference call. Greig Woodring, our CEO, and David Atkinson, our chief operating officer, are here this morning. We'll respond to any questions from participants after Greig comments on our results. As a reminder, during the call we plan to discuss certain subjects that will contain forward-looking information, including expected financial performance, future transactions, and industry trends.

You are cautioned that actual results could differ materially from expected results. Additional detailed information concerning a number of factors that could cause actual results to differ materially from expected results is readily available in our most recent annual report and 10-K for the year ended December 31, 2001. With that, I'll turn it over to Greig for his comments.

Good morning. Thanks for joining us. We're pleased to report good results for the quarter. On a consolidated basis compared to 2001, operating earnings from continuing operations increased 38 percent. For the quarter, over a weak quarter last year, to $32.4 million from $22.4 million.

On a per share basis, our reported operating earnings from continuing operations were also up 38 percent, $0.65, versus 47 percent in 2001.

Net premiums increased 16 percent for the quarter, which is within our long-term range of expectations. Net income for the quarter of $27.8 million includes $2.6 million after-tax and net capital losses, $700,000 in goodwill write-off related to new accounting standards, and $1.3 million in after-tax losses associated with the discontinued A and H segment related to legal expenses and some miscellaneous claims settlements.

The goodwill write-off is related to our operations in Argentina and represents the write-off of the entire goodwill balance associated with those operations. We continue to reflect approximately $7 million of goodwill associated with our acquisition of RGA Financial Group during 2000. Under the new accounting standards, this goodwill will not be amortized, but rather be subject to annual impairment review. The effect on annual EPS of not amortizing this goodwill is not really significant. It adds approximately a penny and a half annually to EPS.

Other expenses for the quarter are down $2.7 million relative to the prior year. We controlled our variable expenses strongly in the first quarter, with fewer new developments underway in new market expansion. Over the course of the entire year, we expect expense levels roughly approximate to those reported in 2001.

In terms of individual operating segments, let me first comment on the U.S. Our largest segment, pre-tax operating earnings, were $40.7 million. Mortality on our recurrent core traditional block, our largest piece of business and the piece of business that caused us some problems last year, was back in line with expectations.

Our in force block business slightly underperformed. That business tends to be lumpy and tends to reflect the reporting vagaries from quarter to quarter. You will remember, that business performed probably better than expected last year, and we don't see any cause for concern with minor changes in the in force block results on a quarterly basis.

Premiums in the U.S. segment increased 13 percent for the quarter. It's a very solid result, given the prior quarter was exceptionally strong as well. We continue to believe that the long-term growth rates in the 12 to 15 percent range are reasonable for us in this market. We reflected one new annuity transaction this quarter, involving approximately $200 million of deposits. As is usually the case when we first record a transaction, the bottom-line impact for the quarter was immaterial.

The pipeline for business in the U.S. remains good.

Ok, I'll turn to Canada now. Our premiums in Canada totalled about $46.5 million for the quarter, up 9 percent from the prior year -- pretty much in line with our expectations. Pre-tax operating earnings in Canada totalled $8.9 million, slightly below our expectation. Comparison to the prior year is difficult, due to better than expected mortality a year ago, and, in fact, the first quarter of each of the last two years.

So prior year is difficult, due to better expected

a year ago, and in fact the first quarter of each of the last two years. Mortality in Canada this quarter was approximately right on. We did a larger than typical amount of administrative and data cleanup during the quarter and then it had a somewhat negative effect on the operating results. This type of administrative and data cleanup is not unusual in our business. We'd like to connect Canada's segment prospects for the year, as a whole in terms of operating results.

Turning to international operations. Activity continues to be very good, and our Europe and South Africa and our Asian Pacific operations. Premiums for these operations totalled $73.4 million compared to $42.1 million a year ago, a 74 percent increase. Pre-tax operating earnings for these operations totaled $2.3 million. We're happy with our progress in these markets as we slowly build what we believe to be a valuable franchise in the global

insurance business.

We expect for an approximate $300 million of premiums over the course of the year in these operations. The operations I'll remind you however are still relatively small and immature and reporting in timing issues could have a significant impact on the ultimate level of premiums one way or the other.

We continue to scale-back our operations in Latin America. The total of premiums for the quarter were only $4.2 million. We're currently negotiating claim settlements for Argentinian pension business where possible. The ongoing weakness of the Argentinian peso provides us with some advantage on settlement of these claims. During the quarter, we settled regular claims payments that turned to be a small amount of claims, and due to the weakness of the Argentinian peso, we reported a pre-tax profit for the quarter of $1.3 million on such settlements.

The situation in Argentina continues to be unstable, and difficult to predict. Therefore, we're managing the situation very closely. We remain comfortable, however, with the level of reserves we're currently holding for the

business.

We've purchased 225,000 shares of our stock during the quarter under the $50 million board-authorized buy-back program that we announced in January. The total cost of these shares was approximately $6.6 million. We will continue to evaluate future purchases. To sum up, the quarter results were pretty much in line with our expectations. We remain well-positioned in the life reinsurance market. That's the market that we believe in, that we think continues to present attractive growth opportunities. We appreciate your interest in our

and look forward to a good year.

That concludes the prepared remarks this morning, and we'll be now happy to take any questions you may have.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question today, you can do so by pressing star one on your telephone keypad. Once again that is star one. We will proceed in the order that you do signal us. We'll take as many questions as time allows. We'll pause just one moment to assemble our roster.

And our first question today will come from

with Goldman Sachs.

Good morning. I have a couple questions. First I was wondering if you could comment on your outlook for mortality experience in the U.S. for both your -- the large

, which I understand had higher than expected claims in the quarter, as well as your recurring business. And to the extent you can -- do you think actually the first quarter was indicative of what might be a normal quarter if you will for mortality experience? And then secondly if you could just comment on your outlook for investment returns, that would be great as well. Thanks a lot.

I'll take the question on mortality. Well first of all, if you look at those separately, they both regress to the mean if you will, somewhat during the quarter. It was the big block of in

traditional mortality risk business that had caused us concern last year, and we were happy to see that reverted back to an expected level. And we look forward to basically good mortality results for the year.

We see no reason not to, and we would sort of reaffirm our guidance that we gave last quarter on where we expect results to come in. It may or may not mean anything, but our high mortality occurred basically in January. So it's kind of a continuation of the mortality we had seen late in the year last year, and it tailed off considerably as the quarter progressed. That may or may not mean anything, but we're really expecting that the year's going to be a good mortality year.

Did you know how much the high mortality in January added to this quarter?

Well, I said the in

block mortality may have added about $6 million more than expected during the quarter. Like I said, we have a discrete number of those transactions. You know, you can count them. And the reporting on those tends to be up and down quite a bit. So we don't see that as anything to be concerned about at this point.

OK, great. Thanks.

Yes, this is Jack. In terms of our expectations regarding investment income, probably the best way to answer that is in terms of yield on the portfolio. I think we're at about 664 for the first quarter. And our expectation for the year is roughly 6 1/2 percent. With what rates are doing, we would expect that overall portfolio yield to trim down a little bit. So that's probably the best guidance I can give in terms of what we expect.

OK. Great. Thank you.

And next we hear from

with J.P. Morgan.

Hi, good morning. I was wondering with the adverse mortality in the U.S., what portion of either your in

business does this represent? Could you, you know, highlight how big of a block this is?

Secondly I think at the end of the fourth quarter, we had talked about potentially a lost ratio in the traditional U.S. business of around 79 to 80 percent. Are you still comfortable with that, or are we going with something higher given the higher loss ratio thus far in the first quarter? And then I'll have a follow-up question.

First of all on the lost ratio, that takes into consideration mix of business, age of business, type of business, and all sorts of other factors. And can't bounce around from quarter to quarter. It's not a pure read on where mortality versus expected mortality is. I think we've seen it relatively high in the first quarters historically. We'll have to see how that goes, but we couldn't

expected mortality a lot more closely then that big aggregate ratio which has a lot of noise in it.

Secondly, on the mortality on in

blocks, that's a smallish piece of our business still at this point. It is growing, but I would say it represents something less than 25 percent -- quite bit less than 25 percent of our expected mortality in the quarter.

This is Jack. Getting back to that first question. If you look at our historical loss ratios, I would still suggest that something around 79 would be our best estimate. It's always difficult to predict, but we certainly -- if you ask me what's the best estimate now, I'd suggest it's still 79 percent.

OK. And then just as a follow-up, can you just talk about the losses again in the accident and health business -- give us a little bit more color here on whether we're likely to see future losses. And then I wanted a follow-up on the comment on the Canada business about the administration and data cleanup. Was that one of the reasons why the expense ratio was higher in the quarter, and would we expect that to revert back to the mean?

Well, first of all on the

business, we increased some legal fees, and the rest of it predominantly was very old business where it was retroceded and one of the

went under for a relatively small amount in one of the pools that we had been in quite a while ago. So we don't expect that to reoccur except for one time -- one time event. But we don't really make any predictions about that business from quarter to quarter. We're just winding it down, and there's events that happen. We're getting to the point where there's very few things going on, but every one of them is a one time event at this point.

, anything further?

Jack, on the

in Cananda?

Yes. I would suggest that the loss ratio was influenced by the cleanup of the administration of business because we did book adjustments to the overall reserves, and that would come through in the loss ratio. And I would also suggest that it should revert to the expectation or the mean over the course of the year.

OK.

We don't expect a continual recurrence of that.

OK. I think the policy acquisition to premiums were a little higher. And I was wondering if there was anything unusual there.

No there isn't. If you take a look at that particular ratio, I presume you're looking at it as a percent of premiums, bounces around considerably from quarter to quarter. But you might take a look -- and the same thing in the U.S. operation, you'll see a similar occurrence where it comes to move a point or two quarter to quarter. But for the year, you can expect it to revert back to pretty much the historical trend.

OK. Thank you.

with Deutsche Bank has a question.

Thank you. Could you give us a quick read on sort of the competitive environment and demand and how that's looking and then also could you help us reconcile the book value from year end to the first period on a

basis? Because it looks like it went up a little bit more than your net income, and, you know,

would be the one.

Yes, Vanessa. I'll take the competitive marketplace first. You know, it still is competitive, while we still see a lot of opportunities however, we tend to focus on areas where we like the market and we think there's plenty of opportunities for growth and we can see the premium increase numbers in the U.S. market as well as internationally for us are relatively strong in the quarter.

We think that's going to continue, and we think that RGA's well positioned to take advantage of the situations in the marketplace today.

Greig, do you see more competitors emerging or...

No, it's hard to say. I think there's probably going to be some consolidation in the industry, but you know the competitors are tending to be bigger and more focused as well. And you may see some net reduction in the number of competitors, with maybe a couple of new entrants over time, but more like

consolidation.

Thank you.

Vanessa, this is Jack. Relative to the book value movement, I think probably what you're seeing in terms of -- or I should say probably what you're not considering or don't have access to currently is the fact that our currency translation account moved upward about $17 million. And the reason for that is primarily our long liability position in Argentina and the fact that during the quarter, the dollar-Argentine peso relationship widened considerably.

So that as the impact of adding about $17 million to equity through that CTA account.

OK. And then Jack, could you just comment on the investment portfolio? You had a little bit more realized losses this quarter. What do you -- what is the trend there in terms of credit quality and I guess you had some CDOs that you were marking down overtime. Where are we on all that?

Yes, I think reverting back to comments about 90 days ago when we closed the year, we suggested that indent CBO portfolio which was a little over $120 million at that point, we segregated according to asset quality and

and so on and so forth. And it's always difficult to predict.

But our best prediction at that time was that we would have somewhere around $20 million if you had to peg it, and future losses if any of the securities continues to deteriorate. And we did see some of that. In fact, we wrote down about $8 million to $9 million during the quarter. We had some upset in gain, but that's not apparent in the net capital gain presentation, I should say.

But that $9 million would indicate that if our last estimate was close to accurate, we got about another $10 million or so. And that's probably a best estimate at this point.

And are there any other spots in the investment portfolio that you're keeping an eye on?

Well, you know we always keep an eye on the entire portfolio, but I would characterize virtually all of our concerns right now relate to that CBO portfolio. And just winding it down -- we're fairly comfortable with the rest of the portfolio.

And you're saying CBO, not CDO?

Yes.

.

Yes, and in fact we kind of use them interchangeably here. But CBO is a better term.

OK, and the Argentine investments, where are we on those? Are those all gone?

Well, yes. We liquidated the entire Argentine investment portfolio that previously backed the pension business. That was done in the second and third quarter of last year. From the asset side, our only exposure is we still have an investment in that direct writing company in Argentina. And that net investment's about $13 million or so currently.

OK. Thank you.

And next we'll hear from Jeff Schuman with Keefe, Bruyette, and Woods.

Good morning, guys. Wonder if we talk first a little bit more about expenses. You talked about managing down variable expenses in the quarter. I'm wondering to what extent those expenses have really been kind of eliminated, or to what extent they were simply deferred to later in the year. And sort of what the impact on the quarter was.

Well, I think, Jeff, that's probably been pretty much eliminated for the quarter, but we don't expect necessarily to have a repeat of the first quarter all year. So sort of a one-time reduction in some of those variable expenses we might have. We just noticed that the expenses were quite a bit lower, but we don't expect that's been conscious.

In terms of travel and so forth, a little light in the first quarter and other things. And we don't expect that to recur, and we actually expect the

to be somewhere around last year's numbers, I think.

OK. So, you mean I

the conference, but it wasn't as if you were deferring or pushing the expenses out within the year.

Correct.

And also in Canada, can you quantify the amount of the kind of

adjustments in the quarter?

Jeff, this is Jack. It's always difficult to get your arms around completely, but I would suggest it was about $2 million to $2.5 million.

About three million, Canadian.

OK. And lastly you took on additional financing late in the fourth quarter with the cost from the financing or the reinvestment of the

segments or not?

No, that's at the corporate level.

Corporate segments.

Strictly at the corporate level, OK. Thank you.

Eric Berg with Lehman Brothers has the next question.

Thank you very much. I'm trying -- I want to get a clearer understanding of a couple of things, one in the mortality area, and then in Canada. At the outset, I gather -- you were going pretty quickly, but I gather that Greig was distinguishing between the recurring business on the one hand and the reinsurance of

blocks. Is that correct? That was the distinction you were making?

Yes.

OK. So the point -- and what I'd like to do is try to reconcile sort of what was said at the end of the December quarter when you had your mortality problem with what's now being said today. As I recall back then, you were saying that, if I understood your point back then correctly, mortality was -- had advanced last year, or improvements in life spans had continued last year, but not as quickly as you might have -- as you had originally forecasted at the start of 2001.

And now, was this -- and that this effected therefore results for the fourth quarter and led you to revise downward your expectations for 2002. Just -- if I can ask my question correctly, was that the -- my interpretation, was that correct?

The way I would phrase it, Eric, is that mortality has been running at a certain level. It was quite a bit better than originally priced because some of that business was priced long ago. Mortality improvements over time had far outstripped the original pricing assumption, so we had come to use a certain expected mortality in developing our plans and expectations.

Mortality last year was worse than that expectation, but it was still quite a bit better than expected in price mortality.

So it was better than pricing, but not as good as what was embedded in your budget, say...

Correct, correct.

...and therefore -- OK. And this shortfall that occurred, did it affect -- and I realize we're back in the December quarter. I'll quickly move to the March quarter, but this affected both the imports business, this shortfall, and the -- pardon me, the recurring business and the reinsurance of whole blocks of business?

No, no. It's the big recurring in

block which tends to be older business.

Right, and what's the problem?

Older price business. The

actually were better than expected. They of course are imports, so they may have older policy issue dates. But for us, the pricing was done more recently on this.

OK, and so just to clarify that. In the March quarter, what we're talking about today, you said at the outset that your -- this issue with respect to the older business that surfaced

or that you first told us about in the December quarter, it has gone away, or...

Well, correct. It is reverted back to pretty much the expected level of

.

OK. And then the January phenomenon?

On the

, the reporting on that tends to be once a quarter. So you get everything in a lump, and so that does wobble around quite a bit. And this particular quarter happened to be high. If you looked at the last five quarters, that business is performing very well.

OK. I got the picture, so the recurring business -- that reverted back to mortality aligned with expectations. The in force business, or the reinsurance of in force blocks, had a bit of a tough quarter.

Right.

OK. Thank you very much. And finally with respect to Canada, we did cover a lot of ground here, and I'm trying to just clarify in my own mind how the different matters affected different line items: legal fees, the failure of a

data and data cleanup. How did each of those, legal fees, failure of a

, and the data cleanup, flow through the financials?

OK. Two sets of things, Eric. The legal fees and the failure of a

we're on an

line affected, the discontinued line.

OK. That's

. Had nothing to do with Canada.

Nothing to do with Canada.

OK.

And the one item that did impact Canadian results was that cleanup of kind of a backlog of business that we administered during the quarter.

Very good. I'm clear now. Thank you.

And next we'll hear from Rob Ryan with Bank of America.

Good morning. Could you give us your impressions, sort of a read from the overall industry data contained in the decided actuary survey, and then more specifically to RGA's performance as indicated by the data?

Well, you know, we look at those surveys, and some of, of course, our marketing people pay a lot of attention to them. We always pay some attention to them. They're indicative. They tend to deal with

amounts as opposed to premiums. They merge a lot of things into one big bucket and then turn the heat up and stir it.

It's very difficult to tell from that snapshot except in long periods of time and in generalized trends what's happening. The industry data is also confused by how people report what people say to that study. We tend to view it with a little bit of a grain of salt, but it does reflect if you look to it as a

over the last several years the continuing trend to reinsure more and more business that the percentage of business we insured to, that within the overall life insurance industry continues to climb, and that just sort of validates what we see in the marketplace, as almost every company is now reinsuring substantial quota shares of their -- on a first dollar basis of what they write, of immortality risks.

We see the market still continuing to provide a lot of opportunities, and we don't really pay much attention to our market share, as expressed as a percentage of premium, of volume, but we do pay a lot of attention to our market share in our target accounts and the people we like to do business with. And we like to maintain our presences, and we think we're doing that. We think RGA's position is still very good.

This is Dave Atkinson. That being said, I'd say, my view of the survey is it's really a year of not much change, other than the acquisition of

by

. That was probably the biggest change in the survey. Otherwise, a lot of players stayed about where they were, some small ups and downs in market shares, but nothing significant.

OK, thank you.

On a completely different topic, can you comment on these current expectation as well as -- well, current expectation of availability as well as pricing on

coverage that will become an issue, I guess, more in the second half of this year?

You mean on that

cover up?

Yes.

Yes, well, we're -- we'll be looking to renew our coverage in August, and so we're beginning the process of settling data and looking at soliciting offers in the marketplace. We think we'll get that job done. We think we'll get it covered, but it will be a tougher situation this year, clearly, than it was last year.

OK, thank you.

And next, we'll take a follow-up question from

with Deutsche Bank.

Hi, I just wanted to ask about the tax rate, Jack. It was a little bit lower this quarter.

Yes, but the fact that that's driven down related to where some of the income originates. For instance, if we do originate income in some of our foreign locations where in the past we've had deferred tax valuation reserve set up, some of that income can come in virtually tax free. And so that would tend to drive down the tax rate as long as we have those valuation reserves set up.

So what should we use in our models for the rest of the year?

Well, I would use 35 to 36 percent.

OK, thank you.

And next, we'll hear from

with

.

Yes, good morning, RGA, just a quick question of the

. I guess the

now is around 13, and given the start-up in the international, probably our U.S. and Canadian

are probably closer to 13.5, 14.

I'm just wondering if the

in Canada are far different in the

in the U.S.; are they in that 13-14 percent range? The reason I'm asking the question is the

rate of earning the last few quarters have been high-single digit pre-tax earnings in Canada versus an old

rate of low double-digit.

Ron, this is Jack, I'll take that. The North American -- that is U.S. and Canada -- don't depart significantly. Lots of times, when you have an

calculation, a lot depends on whether you're using economic capital or gap capital and that sort of thing.

But I would characterize the Canadian returns to be slightly behind the U.S. returns.

As a reminder, if you would like to ask a question, you can do so by pressing star-1 on your telephone key pad, and

with Goldman Sachs has a follow-up question.

Hi, I just wondered if you might be able to elaborate a little more on pricing and the environment. I know you mentioned that the larger competitors are more focused now. But I'm wondering if, as you look over the landscape, if the more price competitive companies tend to be larger or is it hard to correlate the size?

And then secondly, I just wanted to know if there are fewer potential people you could go to to look for

cover in August? Have you seen a retraction in capacity there?

Yes, there's definitely a retraction in capacity. The number of people that are in the market is quite reduced. In terms of pricing on an individual quote, it's hard to generalize, in terms of who is most competitive. Some of the big companies are very competitive in certain situations, and some of the smaller companies as well.

And it depends on the situation. It depends on the client. It is ironic, it seems that reinsurers tend to have their favorite clients, tend to be more aggressive for their clients, and that's small reinsurers, larger reinsurers, everybody. It's hard to tell who is going to be the most competitive at any given time period.

OK, great, thank you.

At this time, we have no questions in the cue. I will now turn the conference back over to Jack Lay for any closing or additional remarks.

OK, well, thanks to everyone who joined us this morning. To the extent, you have any other questions, come up, feel free to give any of us a call here in St. Louis. And with that, we'll end the first quarter conference call.

And that concludes today's conference call. Thank you for joining us today.