美國再保險集團 (RGA) 0 Q0 法說會逐字稿

Good day and welcome to the ReInsurance Group of America second 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 Chief Financial Officer, Mr. Jack Lay.

Please go ahead Mr. Lay.

Ok, thank you and good morning.

Welcome everyone to RGA's second quarter 2002 conference call.

Greig Woodring, our CEO, and Dave Atkinson, our Chief Operating Officer are also here this morning.

We'll respond to any questions from our participants this morning after Greig comments on our results.

As a reminder, during this 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 can differ matterially from expected results.

Additionally detailed information concerning a number of factors that could cause those actual results to differ materially from expected results is readily availble in our recent annual report and 10K for the year ended Dec. 31, 2001.

With that, I will turn it over to Greig for his comments on the second quarter results.

Good morning, thank you for joining us.

I'm pleased to report good results for the second quarter.

I would characterize the quarter as fairly routine.

On a consolidated basis, operate is earnings totaled $33.9 million for if quarter compared with $35.8 million in the prior year.

On a per share basis I reported operating earnings totaled 68 cents in the current quarter and that met our expectations for the quarter.

The prior year second quarter was a particularly strong one in terms of operating earnings.

On a year to date basis, operating earnings were $66.3 million or $1.33 compared with $59.2 million or $1.19.

Consolidated net premiums increased 20% on the quarter and 18% on a year to date basis.

As we've indicated in the past quarterly premium growth rates are affected by the timing of information flow from our clients.

At this time, we would project full year premium increases for 2002 to be somewhere in the 16 to 19% range.

Net income for the quarter of $28.1 million includes $8.4 million in pretax and realized investment losses and $900,000 in losses associated with the discountinuing in each segment.

T he net loss realized on investment transactions during the quarter relates primarily to the liquidation of our position in worldcom McI.

That resulted in 8.7 million in pretax realized losses.

We have no remaining exposure to Worldcom MCI.

In terms of our individual operating segments, I'll first comment on the U.S. operations, our largest seingment.

The U.S. market continues to be quite active.

ReInsurance volume is expected to sustain at a healthy level.

Pretax earnings, approximately 43.2 million.

Volatity, as expected across all parts of the segment.

In recent months, several companies have announced increases in reserves to cover the events of September 11th.

We have not adjusted our reserves of the original estimate of approximately $10 million after tax and remain comfortable with our reserve level and believe essentially all claims have been reported to us at this time.

Turning to the the top line net premiums for the U.S. segment increased 19% for the quarter and 16% on a year to date basis.

The pipeline is pretty much unchanged from the previous couple quarters.

Canada, pretax operating earnings in Canada totaled $10 million compared with 12.1 million in the prior year second quarter.

The decrease is a reflection of favorable more talent in the prior year's quarter, while in this current quarter was slightly unfavorable.

Premiums told 44.1 million for the quarter which is flat compared to the prior year.

Year to date premiums are up about 5%, which is in line with the current expectations.

Turning to our international operations, activity was once again strong in Europe and South Africa an Asia-pacific operations.

In particular, we saw strong top line growth in the UK market, where we have had several large producing treaties in place, and we continue to see new business opportunities.

During the quarter, we expanded our Asia-pacific by opening a rep office inSeul, Korea.

Net premiums including international segment including Latin America totalled $86.1 million compared to $62.7 million a year ago, 37% increase.

Latin America operations contributed only $2.3 million in premium in the current year compared with $18.4 million a year ago .

Pretax earnings for the international operations perfect 3.3 million compared to 1.1 million in the prior year quarter.

We continue to scale back our operations in Latin America.

For the quarter Latin America, sub segment reported modest pretax income of $4 00,000.

We don't project any significant growth there based in Latin America. on the current level of activity we're seeing.

As a whole, our international operations continue to expand and remain an integral part of RGA's growth strategy.

The 50 million stock buy back program announced in January remains in place.

We didn't make any additional purchases in the quarter, but we will consider them in the future.

The quarter's results were dangerous weapon, we feel we're on track for a solid year, we remain in a good position in the life reinsurance market, a market that we think continues to offer attractive growthopportunity and we look forward optimistly to a good second half of 2002.

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

Thank you.

The question and answer session will be conducted electronically.

Any participant wanting to ask questions press star 1 on your touch-tone phone.

Tom Van Buskirk of McManSecurities.

One, do you have specific guidance for the second half of the year next quarter, whatever you're up to providing, and any thoughts about 2003?

I know it's early.

Secondly, on the share buybacks, given the stock where it is now and the decline that we've seen since May or late last year, are you more inclined to do share repurchases going forward with the stock at these levels?

This is Jack.

I'll take that.

Relative to the guidance, we issue guidance early in the year for the entire year and that was in the 265 to 285 range and we really have no reason to back off from that or to change in the any meaningful way at this point, so that guidance still holds.

A little too early for us to issue guidance relative to next year.

We're just starting the plan and budgeting process for that time period, so it's probably a little too early.

Relative to the share repurchase program, certainly the stock price is off a little right now compared to the average price per the last quarter, so we'll take a much harder look and may very well avail ourselves of the opportunity buying back stock in the 3rd quarter.

Next, we'll hear from Vanessa Wilson of Deutsch Banc.

Good morning.

Protective life talked about overpaying premiums to reinsurers in the last 10 years of 62 million and they expect to recoop that amount.

Would that affect your business going forward, is there any charge or anything that we could expect to see?

Reinsurers expect to make a profit when they do a transaction.

Protective is a very good company and also good negotiators, but it shouldn't affect our business with them.

There's nothing that they're going to do that's going to change the terms or conditions of the business that's already in place with us, and we expect to make money on transactions we do between us and we think there are other substantial benefits for the companies that on the other side of the transactions, and that's why they do them.

But can we expect to see you return premium to Protective?

No, no, no.

Okay.

And could you talk a little about the complexion of your business in your pipeline?

Is it recurring business, is it a lumpy one-time event?

What kind of flow are you expecting to see, Greig?

I would say the pipeline looks more recurring with one-time events, especially in the U.S.

There are more perhaps one-time events on some international opportunities, but right now the mixture is pretty much recurring business.

And finally, in the 1st quarter, many of the primary companies had adverse more talent reported.

Have you looked at that and any comments on what that might have related to?

We got that question quite a bit when the companies were reporting in the 1st quarter.

With the benefit of time?

And now that we're talking about our our 2nd quarter results, first of all, the lag factors are not that severe.

We overlap a little bit, but nothing signigicantly, so if they were reporting it in the first quarter, we most likely would have seen anything in the second quarter if we were to see it and we didn't.

It's really not always the case that you can predict what's going to happen in the reinsurance industry by what happens in the direct industry.

There's all sorts of mixed issues and age issues and so forth.

And then to further then take it into specific companies, it gets very difficult to predict.

We did hear those comments when you put them all together with companies that might not have commented on good mortality, it's hard to say where the overall industry was.

We didn't have any more talent wiggles at all in the second quarter.

This is David Atkinson.

Just to clarify, the lag on claims tends to be no more than a month or two between ceding companies.

Next, we'll hear from Liz Werner of Goldman Sachs.

Good morning.

I was hoping you'd talk to the competitive price environment.

I believe in your release you mentioned that consolidation is continuing within the market.

Could you elaborate on that?

And a couple of followups.

In terms of competitive pricing, the money is aggressive and competitive and has been for some time.

We don't see that as being changed or getting worse or better at the moment.

The players sometimes shovel themselves.

We at RGA tend to pick our spots where we think pricing makes sense and we also are in places very strong such as our facultative operation and so forth, so we're getting plenty of business without trying to stretch our aggressive -- stretch our competitive pricing levels at all.

In terms of consolidation.

That's always hard to predict.

We've heard rumors about more consolidation.

Nothing that we know of is exactly imminent at the moment, but you never know.

My two followups were if you could give us an update on the CBO portfolio and if you still expect some losses to be coming out of that, and also on your asset intensive business, is there anything new in that portfolio particularly given the exposure to fixed annuities?

This is Jack.

We have built up some additional asset balances during the quarter, but in terms of anything particularly new, I would say no, there's really not, nothing meaningful.

The CBO portfolio, no dramatic changes there.

We did take some modest write downs during the second quarter and some other gains and I would characterize that as just positioning the portfolio.

On a going forward basis, there's still some depreciation in the CBO portion of that portfolio, and if I had to size it, I would suggest that we could have -- and it's always difficult to tell depending on the economic environment, but we could have another 5 to 10 million of writedowns or losses on sales over the next couple quarters or so.

Thank you.

I think last quarter it was 10 million, so if it's coming down towards the 5 to 10, it looks like it's shrinking.

We feel we're managing it as best as we can.

Thanks.

Star 1 for a question.

If your question has been answered, you can remove yourself by queue by pressing the pound key.

This is Tonya Dawksi of AG Edwards.

Good morning.

I was wondering if you could help us with the expense side of the income statement.

Obviously, premiums continue to grow at a nice pace and mortality seems to be in line.

What are you seeing in terms of margins, operating margins going forward?

Do you have a target for that, can you kind of help us out in terms of how the margins are going?

The margins that we report are risk business during all the generations we've written business and some of that old business has extremely high margins now.

The newer business has the smaller margins.

We don't actually price most often on a margin basis.

More often we price on a return basis, and our pricing has been consistent in terms of the expectations, although assumptions move with time as more information comes in, but the pricing is -- parameters are pretty consistent over time.

It looks like other operating expenses which I would categorize as more of a variable, it looks like that has held fairly steady.

Would you expect that to continue to stay?

That's our general operating expenses here to run the business.

We have been pretty tight on management of that this year.

We certainly expect it to be something we actively manage and can control a little bit so that we're watching it and we like to see essentially productivity improvements flow through to increased earnings over time.

Just lastly, I guess can you reiterate your comfort level with the reserves that have been set aside for Argentina, we continue to read news about the situation over there, and I know your operations have definitely been cut back there, but do you feel like the reserves are -- look for sufficient at this point?

Yeah, the reserves -- reserves at this point are sufficient.

We continue to watch the situation.

It's obviously, one in a lot of flux.

The exchange rates vary all the time.

Our assets are in US dollars and we feel that we're monitoring the situation and watching the runoff of that business as it works its way through the system very actively.

Thank you.

Our next question, Nigel Dally of Morgan Stanley.

Wondering if you were seeing any shift in the primary insurer to hold mortality risk as a result of anything we've been having in the market.

And second on the competitive front, you said there still continue to be several aggressive competitors out there.

Could I get an update as to who that is, the European companies, exactly where that competition is coming from.

We don't usually comment on who specifically our competitors are, who's causing us trouble.

Suffice it to say that there always seem to be some rabbits in the mix when you do a price comparative quote, and those have been pretty constant over the last little bit of time.

In terms of primary companies and their appetite for mortality risk, there's been a long general trend for reinsurancing more and it's gotten to the point where something more than 60% of all mortality risk written in the exactly was reinsured last year.

It's unlikely that you're going to see too much expansion of that, but we don't see any contraction of it either.

Thanks.

Our next question comes from Jeff Schuman of KBW.

Good morning.

The Canadien results bounce around quite a bit.

Sometimes it's hard to tell which way the wind is blowing.

Can you point to any particular recent period that we could view as being fairly normal in terms of kind of gauging margin and lost ratio expectations?

Jeff, the -- the Canadian operation is smaller, and when you get smaller, you get a little more ups and downs.

Canada has had two quarters that were slightly less than maybe a good comparison we would have wanted, but they'd have probably six or eight good quarters before that.

In fact, some last year, like last year's second quarter, were extremely good quarters.

That operation is earning significantly more than they were just maybe three, four years ago, and so we looked over that a long period of time.

They've performed very well for us.

We are a little disappointed in the results so far this year, but we hope to kick that back up to where we would see the long-term trend as soon as possible.

It really is hard to find a place in a smaller operation that's exactly stable and you can fill the long-term trend line because it does bounce a little bit.

I would say that they're a little bit below where we would like them to be right now and they were probably above where we would have expected them to be last year.

Okay, and internationally, I guess you opened an office recently in South Korea, and in the first half of this year, overall we've gun to see earnings really -- begun to emerge from international.

Are you still in a period where you're moving into harvest mode and can actually realize earnings or will you undertake more new office initiatives going forward?

We'll balance that obviously, but we are in a mode where we would expect the profits to be positive from this point on.

Again, give us some allowance for having small operations that could have a big claim or two in any given quarter and fluctuate, but expectations would be positive, so some of this business is now to the point where it's maturing and profitable and of course we're investing in new business development in these countries at the same time, so expect continued growth and continued probably rapid increase in percentage terms from here on the profit side.

Outside of the Latin America are there any market that haven't been performing to expectations?

No.

Next, Scott Woodcock of J.P. Morgan.

I had a question of about Argentina.

Were they still making a loss?

I'll respond to that.

Argentina, if you combine operations, we're at a slight loss without the foreign currency translation impact.

Mexico was at a gain, so as you can see from the premium level there's really not a whole lot of business down there, but it's -- ex-currency was slightly lower.

Stewart Johnson of Lehman Brothers.

Good morning.

I'm looking at the results from the U.S. and international operations and obviously, you're showing some good top line growth there.

The claims and acquisitions costs are rising faster than the top line.

Can you give us a little color on what's behind that?

This is Jack.

I'll respond.

If you look at a loss ratio or the -- you're addressing primarily the claims and not the data costs; is that right?

That's right.

If you look at U.S.

In particular, if you compute a loss ratio on the throw additional side roughly 79%, that's right in a narrow range that we would expect for the year.

And consistent with past.

Very consistent.

In particular, after we went through the process of reevaluating the mortality line at the end of last year, I would suggest that that sort of loss ratio is right at our expectation.

It can wobble up and down, but we would characterize what you're seeing this quarter as fairly routine and what we expect.

And then how about on the international side?

International, I would suggest it's pretty much the same situation, although you're in a very different stage of development, so Europe and south after is an example.

We'll bring on quite a bit of premium growth there.

That can have some impacts on your loss ratio, but over the long-term, the mortality was pretty much as expected for all the international areas.

Okay, thanks.

As a final reminder, it's star 1 to be placed in the queue for a question.

John Gentry of Federated Investors.

Thank you.

Could you help us with some basic balance sheet numbers like cash, debt, bank borrowings and what your capital structure plans are for the rest of year.

Thank you.

We really -- we typically don't get into the balance sheet breakdown until we issue the Q, which will be coming next week, so I would suggest you may want to wait until we do have that issue to everyone at the same time.

In terms of the capital position, we feel based upon the growth rates that we expect that we have a cape base that will suffice through next year and probably into the following year.

In other words, we don't expect any capital activities until at least 2004 at this point.

That can always change if there's some rapid development or some significant opportunities, but that's our best estimate at this point.

Thank you.

And the last question in the queue is a follow-up from Liz Werner of Goldman Sachs.

I just wanted to follow up on your comment on the potential consolidation within the next.

I was wondering if you viewed yourselves as somebody who would be interested in making acquisitions, or if you think what might be available isn't that attractive or if you have a presence for organic growth over acquisition?

Liz, we've looked at all of them that have come down the pike, and we -- you know, we have a hard time coming to anything close to price that's been paid because for many of these operations, we would view them as strictly financial transactions, that is, we're not looking to pick up any extra capabilities that we don't have because we don't really see them in the properties that have been on the market, so we basically are also happy with our organic growth and have to concern ourselves with the problems of integration and what that might do to the organic growth rates that we've established, but we do continue to look at these and if the right situation comes along, we would potentially be involved.

Thank you.

That appears to be all the questions we have, gentlemen.

Any closing comments or remarks?

Thanks to everyone who joined us this morning.

Should any other issues or questions come up, feel free to give us a call.

With that we'll end the second quarter conference call.

That concludes the RGA conference call.