美國再保險集團 (RGA) 2002 Q3 法說會逐字稿

Good day, and welcome to the Reinsurance Group of America's third 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.

Please go ahead, Mr. Lay.

Greig will comment on our results and then we'll respond to questions from our participants.

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 could differ materially from expected results.

Additional detailed information concerning a number of factors that could cause actual results to differ materially from our expected results is readily available in our most recent annual report and 10-K for year ended December 31, 2001.

With that I'll turn it over to Greig.

Good morning, and thank you for joining us.

We are pleased to report good results for the third quarter.

On a consolidated basis compared with 2001, operating earnings from continuing operations for the quarter totaled $35.2 million or 71 cents a share compared with $25.7 million or 52 cents per share last year.

The prior year numbers reflect $10 million in losses associated with the September 11th terrorist attacks.

Net premiums increased 18% for the quarter and 18% on a year to date basis.

We estimate that we will finish the year with a premium growth rate at about this level.

Net income for the quarter of $33.6 million includes after-tax realized investment losses of about 700,000 and about $1.1 million loss in our discontinued A&H (ph) segment.

Turning to the overall condition of our market, in several respects the life insurance industry in the U.S. and abroad is under significant pressure.

That pressure relates in part to weakening investment portfolios and exposure to the fallout from poor equity market performance.

Rating agencies have downgraded many companies, and more downgrades may be likely.

Such pressures lead direct (ph) companies to seek additional support from the reinsurance industry, and our GA is well positioned to take advantage of opportunities for a number of reasons.

Our relationships with leading companies is very strong.

Our capital base is solid.

Our fixed income investment portfolio is conservatively invested, with little in investment -- non-investment grade holdings, very little direct or indirect exposure to equity markets, strong ratings, talented management and technical team.

It's worth noting in light of recent news that we have no exposure to guaranteed minimum death benefits.

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

Pretax earnings -- operating earnings were $53.5 million compared with $35.9 million a year ago.

That included $16 million of pretax World Trade Center claims.

Mortality experience for the quarter was favorable.

We reviewed our only annuity treaty that has not been performing to expectations and did unlock (ph) (inaudible) that treaty which had a negative effect of about $3 million pretax in the quarter.

Premiums in the U.S. segment increased 14% for the quarter, 15% year to date.

We continue to believe that long-term growth rates in this range are reasonable in the U.S. market.

New business activity remains good in the U.S. market.

Turning to Canada, pretax operating earnings decreased to $8.5 million in the current quarter from $8.8 million in the prior year's quarter.

Last year's results for Canada was very strong.

Premiums totaled about $42 million for the quarter, up 5% both for the quarter and year to date.

We've experienced a slowdown in growth in this market for a number of reasons, including the competitive condition of the market in Canada.

Earnings have slightly trailed our expectations year to date, primarily due to somewhat weak mortality results, relatively slow premium growth, and lower investment yields.

Turning now to our international operations, activity there was once again strong in Europe and south Africa and Asia Pacific.

In particular we saw strong top-line growth in the UK market, where we have large (inaudible) treaties in place and continue to see a number of new business opportunities.

Net premiums for the entire international segment, which also included operations in Latin America totaled $95.6 million compared to $67.9 million a year ago.

That's a 41% increase.

The Latin American operations contributed less than $1 million in premium in the current year compared with $9 million a year ago.

We continue to scale back our operations in Latin America where reinsurance opportunities have generally been slow to develop.

Pretax operating earnings for the international operations were $2.8 million compared with $1.2 million pretax operating loss in the prior year quarter.

We are pleased with international growth and the results and the contribution these operations are now making to the company.

To sum up, we've reported three solid quarters for 2002.

We appreciate your support and we look forward hopefully to a strong finish in the fourth quarter.

That concludes our prepared remarks this morning, and we'll now take your questions.

Thank you very much, gentlemen.

The question and answer session will be conducted electronically today.

For those of you who would like to ask a question, please press the star key, followed by the digit 1 on your touch-tone phone.

We will take as many questions as time permits and work in the order in which you signal us.

If you are on a speakerphone, please make sure your mute function is turned off.

And again, to ask a question, that is star 1 on your touch-tone phone.

Our first question comes from Michelle Giordano with JP Morgan.

Good morning.

I have a couple of questions.

First, I was wondering, Greig, if you could give us some more color on your comments about primary companies looking maybe for potentially more reinsurance coverage.

What specifically are they looking for?

Have -- you know, has that impacted premiums yet in the quarter?

When might we see an impact from that?

Secondly, I was hoping you can get into some more details on your annuity contract.

You did reference even in the press release some issues on the investment performance.

I was wondering what kind of DAQ (ph) you have left here.

We have heard about a poorly-performing annuity contract from annuity in Life Re (ph), which has turned into a downward spiral.

I was wondering if you could give us information as to why this would not be a downward spiral.

And could you fill us in on how September 11th claims are developing, and have you had any reserve releases?

Okay.

First of all, the pressures on the direct companies are most directly seen by pressures on their capital positions and their statutory surplus positions which, in many cases, forces these companies to think about alternatives to raise capital.

This being a difficult market, one of the easiest and quickest ways to achieve that in a limited fashion is through reinsurance.

So we've seen a number of opportunities occur because of companies that have less capital or a bad trend in capital compared to what they would like to have.

As to when these materialized and how they materialized, that's very unpredictable.

But typically these things take a while to develop, a while to be reported.

So the fallout typically would be -- would be -- the aftermath would come many months later, maybe, two, three, four quarters later in some cases.

On the annuity treaty, we have a backlift (ph) of about $18 million.

We -- our treaty is such that I think we've taken all the actions we plan to take given current market conditions.

We don't expect any death spiral or any future revisiting of this problem.

That's the nature of the contract we have and the size of it and so forth.

You know, things could deteriorate farther if the stock market went down a lot farther or other things went down a lot farther, but we don't expect that, in any event, we'll have a big impact left on this contract.

What's the total liabilities on this contract, or the total balances in the customers' accounts on this annuity contract?

This is Jack.

We have roughly $150 million remaining.

Great.

In terms of September 11th claims, we're still processing all of that information.

We haven't had any change really since the -- since the total we put up essentially in the corresponding quarter last year.

There has been some small claims coming in after that, most of which were then reinsured.

But there's really been no change in the numbers since then.

Thank you.

Next we'll take a question with Vanessa Wilson of Deutsche Bank.

Thank you.

Greig, could you finish off on this annuity treaty?

What exactly are you insuring?

Is it the GMBDs (ph) -- or what is the risk?

This is Jack.

It's really a fixed annuity, and we're simply reinsuring the spread.

Okay.

And there's $150 million of assets remaining in the contract?

That's correct.

I think it's $147 or so.

Is there any relationship between DAQ (ph) and those assets?

Why would $18 million or 12% of the balances be an appropriate number?

Well, we model it such that -- we model a number of different scenarios.

We have changed assumptions with respect to lapse rates on this particular treaty and think that the remaining DAQ (ph) of about $18 million is fully recoverable.

Okay.

And you talked a little bit about the capital pressures on the industry in general.

Could you talk a little bit about your capital position, how much excess capital does RGA have, how much capital will you need to write your new business over the next year, and also give us a little color on your investment portfolio as it relates to realized losses.

Maybe I'll take the latter -- this is Jack.

I'll take the latter part first.

Okay.

We feel pretty good about our investment portfolio.

We have sustained some level, as you know, of realized losses over the past several quarters, really over the past several years, and a lot related to the floating rate portion of the portfolio that several years back backed the investment -- the stable value investment contracts that we reinsured from General American.

For all intents and purposes, we have either written down or sold all of the problem securities in that portfolio, so there could be a smattering of losses going forward, but the lion's share is behind us, so we feel very good about that.

In terms of the realized gains and losses this quarter, we have roughly, on a gross basis, about $8 million or so of realized losses during the quarter, and slightly more than that in terms of realized gains.

And so the result was about $1 million net gain.

In terms of our capital position, we feel we have plenty of capital for this year and next year and so we're (ph) into 2004.

That's with, you know, normal circumstances.

Obviously, if we do big transactions or something, that uses up capital faster because of good opportunities that could affect our thinking.

So, Jack, with the earnings of -- operating earnings of 71 cents and realized capital gains this quarter, why didn't the book value grow a little more than it did?

You would have expected a higher book value growth rate there?

Yeah.

I think the progress versus second quarter is about 19 cents a share.

And I know you had a little bit of A&H (ph), but that looks like three pennies.

Very small.

If you can get back to me.

I'm drawing a blank.

There weren't any anomalies in the book value growth.

We can talk about it offline.

Sure.

Thank you.

Our next question is from Liz Werner from Goldman Sachs.

Good morning.

I was hoping you could comment on two things.

One is what the impact of a sustained low interest rate environment would be on your earnings outlook.

I think you're looking for 12% to 13% growth.

I was a little late on the call.

That is my first question, and if the sustained low interest rate environment would impact your expectations of profitability for that fixed annuity block.

And secondly, maybe you could talk about the competitive environment, if there is any changes in pricing or if there's been some changes in who the more active companies are in the competitive environment.

Yeah, Liz.

Mortality is far and away our biggest component of profit and loss.

Of course interest does matter.

If we invest our funds and make X one year and make less than X the next year, that's -- that hurts our comparison.

And over the last really couple of years we've seen our portfolio rate fall.

And so we've been fighting against that in terms of comparison year over year.

So when you talk about sustained low interest levels, it -- in terms of growth rates, if they're at the same level for a while, that will sort of normalize our growth rates, but at a low investment contribution.

We have positive cash flow on most of our business expected every year, so it's not a matter of asset liability matching, but simply a matter of what the absolute level of investment income is.

On -- the effect on the -- that annuity treaty, the effects -- the effects that we would be watching in particular are in terms of lapse rate and profitability, spread management on that business, we think we've managed it pretty well or as well as can be at this point.

I have a reserve for what we consider a high level of lapse rates, which is what we've been experiencing in the last couple of quarters, and we've modeled that for the future as well.

So we think we're pretty well protected there.

In terms of the competitive position in the marketplace, there has been a little bit of a reshuffling, we feel, in some of the players, but overall, the level of competition hasn't really changed much.

It's just different faces that appear in the -- in the primary target areas sometimes.

But the -- you know, the kaleidoscope goes on.

We continue to see very strong competition in all of our markets.

Okay.

That sounds great.

And can you disclose what the lapse rate assumption is?

Rather not.

We don't -- especially because people might be able to figure out which transaction it is and so we'd rather not.

Okay.

I think it's fair to say that assumption going forward is consistent with our recent poor experience.

Okay.

Great.

At this time we have two questions remaining in the queue.

I would like to remind everyone, if you would like to ask a question, or if you have a follow-up question, please press star 1 to signal.

We'll take our next question from Tonya Lewinowsky (ph) of AG Edwards.

Tonya Lewinowsky (ph): Two quick questions.

First, I wanted to get your feelings as to the future in Canada.

Is there any potential for an improvement in the Canadian operations next year, or do you see that as being a little further out?

And then, if you could just kind of talk to us about what you see as being the biggest risks or challenges to your business at this point.

Yes, Tonya.

In terms of Canada, you know, Canada is coming off of some tough comparisons because of a big surge of premiums they put on a couple of years ago.

And the last couple of years have made it hard to compete against those real strong growth rates.

And if you look on a longer-term basis, say over four or five years, Canadian experience both in profits and in premium growth has been very substantial.

You know, in the future, we do expect some of that to normalize, begin to move back to a little stronger position.

We are fighting some negative things as some particular blocks of business lapse off of the books in sort of the regular course of events and things like that.

So we have our work cut out for us.

But we would expect that we could pull the Canadian operation back into a much stronger position in the next couple of years.

Tonya Lewinowsky (ph): And then in terms of the risks ...

Yeah.

You know, our biggest challenge is our -- these days are managing all of the different growing operations, allocating resources, making sure that we have the right controls and oversight in place and actually continuing to develop our marketplace in the way that we have been.

I think that, you know, it's generally a fairly good time.

We've been very happy with the way things have progressed this year.

And, you know, those are the things we worry about most is the rapid growth, the deployment of resources, the acquisition of the right resources, and skilled people to handle these opportunities and carry forward.

Tonya Lewinowsky (ph): Okay.

And then I guess just lastly, if I could do one follow-up, has the relationship with MetLife -- I don't know if you can even comment on that -- but has there been any change with regard to the interaction with MetLife or the relationship there that you could comment on?

I would say there's been little or no change in the MetLife relationship.

There's been a little bit more interaction with our board members from the MetLife side than there had been just in terms of their interest in our company and their desire to help RGA.

But beyond that, really, there's no change.

Tonya Lewinowsky (ph): Okay.

Great.

Thank you.

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

Good morning.

A few things.

Can you remind us where you stand with regard to CAT (ph) cover?

Also Argentina, you pretty much run off the premiums.

Can you update us on what the remaining are there and how long it will take to run off that tail?

And thirdly, one more try on the annuity business, I guess kind of following up on Vanessa's comment.

It would - normally it would seem with DAQ equal to 12% of fund balances on an annuity contract with some investment issues and persistency issue, wouldn't seem normally well protected.

I'm wondering if there is some other factor that can give us some comfort there?

Are you dealing with it on the reserve side or how can we get more comfortable there?

Okay, Jeff.

CAT (ph) cover - we did renew.

The premiums did go up substantially but we did renew our CAT (ph) cover and have significant total line there.

That's just a fact of life, the limited availability and the high price of the CAT (ph) cover.

What is that attached and what is that limit?

The limit goes up to $80 million.

We basically have significant retention on the first layer.

First $25 million is 100% retained and then it's split on the next layer of 25 million.

In terms of Argentina, that's a place that still moves around a lot.

Reserves are -- of course, in peso terms, are pretty still pretty high in dollar terms.

They've fallen, but the unit rates continue to move in Argentina.

The peso/dollar relationship is unstable.

We're following that along.

It will probably be five to seven years as those things run off.

We are pushing to try to settle these earlier, but there's really very little impetus on the other side to want to settle right now, but there will come a time when we'll be pushing to clear those off.

But in the normal course of events it would be five to seven years, I would reckon from here.

In terms of sizing that, is it $50 million, $100 million?

How big is it?

It's about $100 million in terms of at the beginning of the year -- in pesos, of course; the dollar has strengthened 3.6 to one peso.

One peso is worth something like 30, 35 cents now.

So it's nominally fallen, and there is a corresponding currency adjustment in the capital counts (ph), but that's the level basically.

On the annuity side, it is a fixed annuity.

And there are relatively high surrender charges on these policies which have, you know, a lot of recent issues.

So I think we feel pretty good about, you know, the value left in here and how it can be recovered.

I mean, we are assuming very high lapse rates.

We've sort of taken the last two quarters, which we hope is peak and just taken that experience and pushed it all the way out.

And even under that scenario, we're okay here.

Okay.

Thank you.

Next, Eric Berg with Lehman Brothers.

Thanks.

My question, too, has to do with the fixed annuity block.

Why is it -- what's your best sense in why the lapsation (ph) is as high as it is, or why aren't the high surrender charges doing what they were intended to do?

Because the policy is the general kind of policy with some equity-like features and a floor (ph) value.

And so the agents, when they see that the equity-like features of it aren't performing so that there is no upside, are able to roll this over into a new contract, potentially collect a new commission.

And so maybe it's even at the consumer's detriment, but it gives them a fresh start.

So I think there's been lapses above what you would normally expect, even given the high surrender charges.

It's a -- customers are sort of smarting in this product from the poor equity market, so they're essentially willing to take their lumps, so to speak, in the favor of starting fresh in a fixed annuity?

That could be it.

This is agent-sold business.

We don't really know what's going on.

This is street level here.

Right.

Right.

Thank you.

We have our next question from Ronald McIntosh (ph) of Fox Pitt Kelton.

Ronald McIntosh (ph): Thank you.

Just one quick one.

I'm trying to reconcile, if you add back the World Trade Center a year ago, it looks like a flat quarter, looks like maybe 71 versus 72.

I'm trying to reconcile kind of flat earnings with 18% premium growth and very favorable mortality.

What's kind of the one or two bulletpoints you would put that have kept the earnings growth at least restrained this quarter?

I think one makes a lot of difference.

That is the Trade Center.

When the Trade Center happened, there was a lull in activity.

Everybody suspended a lot of stuff.

And as we reported the end of the third quarter, it looked very strong last year.

You remember that our claims in the fourth quarter were quite high.

A lot of those were the fact that a lot of that processing sort of was suspended for a week, week and a half at the end of the third quarter.

So a lot of those claims kind of carried over.

In other words, last year's third quarter was too good.

Last year's fourth quarter was probably better than the reported numbers in retrospect.

So we basically have -- as we reset all the trend lines, we're pretty much marching along where we expected to be -- a little bit ahead of plan in this quarter, pretty much on plan in the first two quarters, and very happy with the way things are progressing this year.

Ronald McIntosh (ph): Thank you.

As a final reminder, if you would like to ask a question or a follow-up question, please press star 1.

We do have a follow-up question from Vanessa Wilson from Deutsche Bank.

On your reinsurance CAT (ph) coverage, what date does that attach?

I think it's August 13th or something like that.

So in this quarter, do we already have the higher expense from the premium rate increase?

We do have some, that's right, although the higher expense for the year will be straight-lined over the entire year - the policy year.

Jack, how much should we think -- is it a penny a share, 10 cents a share?

Do we care?

Well, we care, so maybe you should.

I guess if you looked at it year over year, it's about $3.5 million, roughly higher than we paid on the previous policy.

Pretax.

Pretax, that's right.

Okay.

So -- and can we think about that from your perspective as a participant in the market?

You know, is that reflecting part of the demand fundamentals you're telling us about, so maybe your prices in 2003 will be higher and offset some of this $3.5 million?

No.

There's very little ability on our part to pass CAT (ph) coverage along.

In fact, the CAT (ph) coverage is covering our in-force book of business, in which there is no ability to change.

So it's very difficult.

It's just, I think, seven cents pretax on a yearly basis that we'll have to eat this year.

In 2003, you mean.

Between August and August.

Okay.

And then, Jack, you explained your layers.

You said you were taking the first 25 million.

How much do are you take right now, before August?

What was your retention before?

Retention before was considerably lower.

I think it was ...

$7.5 million.

Yeah.

It was 20% on that first $25 million layer, plus a deductible, so to speak, of about $1.5 million.

So 7, 6.5, 7.

You should think of this as, we do have coverage, it's more expensive, and substantially higher.

That's two things that are working against us, but that's the way the market is now.

Absolutely.

When we're doing our models, we have to think of more volatility on a quarterly basis in your earnings.

Only if there is a CAT (ph) event.

Multiple lives in a single event?

Right.

Is that what you're talking about?

Those happen very -- you know, outside of September 11th, the number of CAT (ph) events has been just one or two in our whole history.

Very, very small.

That's very helpful.

Thank you.

We also have a follow-up question from Liz Werner with Goldman Sachs.

Actually, my follow-up was answered.

Thank you.

It appears there are no further questions at this time.

Mr. Lay, I would like to send the conference back over to you for additional or closing remarks.

Thanks, everyone, who joined us this morning.

As usual, if any other questions come up, you can certainly contact us here in St. Louis and we'd be happy to oblige.

With that we'll end the call.

Thank you.

That does conclude today's conference call.

We thank you for your participation and have a good day.