美國再保險集團 (RGA) 2002 Q4 法說會逐字稿

Good day and welcome to the Reinsurance Group of America 4th 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 Executive Vice President and Chief Financial Officer, Mr. Jack Lay.

Please go ahead, Mr. Lay.

Thank you and good morning everyone.

Welcome to RGA's 4th quarter 2002 earnings conference call.

As indicated, Greig and David Atkinson who is our Chief Operating Officer are here this morning for the call, Greg will comment on the results and then we'll respond to any questions from our participants.

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're cautioned that actual results could differ materially from expected results.

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

With that I'll turn it over to Greig for his comments.

Good morning.

Thank you for joining us.

I'm pleased again to report positive results for the quarter.

In addition to commenting on the 4th quarter results, I'll also provide you with some insight for our expectations for 2003.

First the results, on a consolidated basis compared with 2001 operating earnings from continuing operations for the quarter totaled $38.7 million, up significantly over the prior year.

On a per share basis our reported operating earnings from continuing operations were 76 cents per share.

Consolidated net premiums increased a strong 23% for the quarter and 19% for the entire year and we are pleased with those results.

After realized capital losses and discontinued operations we reported net income of $33.4 million after tax for the quarter or 67 cents per share.

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

Pretax operating earnings were $49.2 million compared with $35.3 million in the prior year.

Mortality experience in the U.S. for the quarter was within the range of expectations, premiums increased 13% from the prior year quarter, they are up 14% on a year over year basis.

We are very pleased with the level of production.

U.S. reinsurance marketplace showed tremendous quoting activity lately.

This was caused by primary companies concerns over capital levels and rating agencies pressures leading them to turn to reinsurers for solutions.

For these reasons, 4th quarter of 2002 was very busy.

We would expect that to carry over into the early stages of 2003 if not farther.

We also closed a couple of meaningful annuity transactions during the quarter in the U.S. adding approximately $700 million in assets.

We're opportunistic in securing these types of annuity transactions and plan to do them from time to time.

Turning now to Canada, Canada finished the year with a good quarter.

Pretax operating earnings in Canada were $11.3 million compared with $9.9 million in the prior year's quarter.

Overall mortality was slightly better than expectations in Canada.

Premiums totaled about $49 million for the quarter, slightly ahead of the $47 million dollars for the prior year.

We have a very strong and experienced team in Canada that has brought us good results for quite some time.

Turning to our international operations.

Business development including new clients as well as with further penetration of our existing relationships was once again strong in the international operations.

And premiums for the segment including Latin America were approximately $140 million, compared with ~$79million a year ago, a 77% in increase.

Pretax operating income for the segment approximately totaled 700,000 for the quarter, below expectation due to adverse mortality internationally.

For the year, pretax operating income was $9.1 million significantly ahead of the prior year.

Results are highlighted by significant growth and strong operations in the UK, Japan, Australia and other selected markets.

We expect significantly increased operating earnings and some volatility because of the maturity of these operations but strengthening as they continue to grow and mature.

Looking ahead for 2003, we've set an operating earnings target of between $2.95 and $3.15 a share.

This target encompasses underlying earnings growth of 12 to 13%, as well as the impact of expensing stock options which will cost 2 or 3 cents.

We anticipate lower interest yields given the current interest rate environment putting pressure on earnings.

Premium growth about 12-15% over 2002 levels maybe even higher depending on market dynamics and as usual mortality variability can significantly influence where we end up within our range of that expectation.

It is still the biggest driver of our earnings results.

We expect to maintain an attractive share of North American markets and will continue to grow our presence in other international markets.

We don't have any significant plans to expand our presence in any meaningful way to other areas geographically at the current time but we'll continue to be on the lookout.

In conclusion, we're quite pleased with the results for 2002 with a year of solid execution, a nice accomplishment given the general industry and economic challenges.

We thank you for your support and interest in RGA.

With that, we will be happy now to take any questions you may have.

Thank you.

The question and answer session will be conducted electronically.

If you you would like to ask a question please press the star key followed by the digit one on your telephone.

Once again, to ask your question, please press star followed by the digit one.

And we'll take our first question from Nigel Stalley from Morgan Stanley.

~[Ken Zerbe]: Hi.

This is actually Ken Zerbe on behalf of Nigel Stalley.

My question is on your 12-15% premium growth outlook.

Premiums have been trending significantly higher than that, both in the 4th quarter as well as 2002.

I'm just trying to understand.

Given that the domestic life insurance are capital constrained, international showing extremely strong growth, why aren't you targeting a higher premium growth than just the 12 to 13%?

It wouldn't have surprised us, Ken, at all if it wasn't higher than that.

It's hard to predict at the levels that we saw in the 4th quarter which were unusually strong and it is a little bit difficult to project what is going to happen in the coming year but it wouldn't surprise us at all.

That's for the revenue side probably more like a baseline.

Okay.

All right.

Thank you.

Our next question, from Vanessa Wilson with Deutsche Banc.

Thank you.

Good morning.

Could you talk a little bit about the competitive environment with annuity and life troubles?

Does that really matter for the competitive environment for your business and I guess with some of the Europeans having capital pressures that might have big reinsurance operations.

How do you see the supply side of the equation?

There has been consolidation in the industry.

There is more to come and there have been problems with some of the reinsurers like Annuity and Life Reinsurers who have essentially been taken out of the competitive environment.

That does ease the competitive pressure a little bit.

Our pricing people would tell thought environment is probably a little bit easier to cope with although don't overdo that statement.

Because they still think it's a pretty competitive environment.

But it's clear that reduced number of competitors and some of the problems suffered by some of the other people in the market have had their affect.

And could you talk a little bit about the return on capital that you would get from doing one of these annuity contracts?

It seems like the demand for traditionalized reinsurance is picking up.

Are those returns comparable?

We price everything on a return of economic capital basis to be equivalent.

We have a target return on our economic capital and we we expect that from every transaction that we do more or less.

The economic capital we ascribe to these transactions is on our own model we've done a fair amount of research on it.

Based on that we feel we're getting a fair amount of returns otherwise we would not pursue these opportunities.

Can you say something about your capital needs for '03?

Yeah, Vanessa, this is Jack.

We think we're in a position where we won't have an additional capital need in '03.

Depending upon the growth rate -- there is always the possibility.

You could have a need later in the year.

But maybe a better way to respond is we certainly don't have an imminent capital need at this point.

Based on the numbers we gave you in terms of growth rates, we wouldn't expect to be in the capital market.

Okay.

And on the accident and health losses, can you give us some color on the size of the pools that are still in place or just any kind of parameters that give us comfort that this is getting smaller?

There is not much flow in terms -- well there is no flow in terms of premiums.

Very little flow in terms of other information.

Occasionally we do get some claims that come through.

It's dwindling down.

A lot of these are legal fees as we fight certain situations that we in fact are part of the industry that is fighting many of these situations.

So a lot of this is expenses.

Thank you very much.

Our next question is from Liz Werner from Goldman Sachs.

Good morning.

First, I was wondering if you could talk a little bit about the underwriting of the fix annuity business.

You described it as opportunistic.

But how many transactions you may have looked at versus passed on and actually what do you have if you do have hurdles in terms of where assets are invested and the returns are getting as well as what kind of lax trends do you see in the fixed annuity block?

Good question, Liz.

We did I think over the course of the year about four of these annuity transactions.

They are difficult to put in place because of the way that we do it.

We spend a lot of time, that's months negotiating because we have to be sure that we have a good working relationship and an agreement on credit investment philosophies and asset philosophy.

So we monitor the assets we have at least weekly conversation with each of the annuity carriers so we're in sync on them.

So for example say that they buy a bond X, which may be a perfectly good bond, but we already have a lot of that, we'll tell them to sell that and they will do that.

So we have to manage this as if we're managing outside money managers with some of our assets.

So to get all of that good working relationship alignment of philosophy and product structure and design, these transactions are few and far between.

We probably looked at least double of what we did.

But I'm not sure of the exact number.

None of these deals were done by a telephone call asking us if we have capacity in December.

They are done over a period of anywhere up to six to nine months of negotiation and discussion of how the deal would go forward in a management framework from the point of conclusion of the transaction.

Okay.

That sound great and on your comment with regard to the growth of 12-15% premiums this year, you said it could be higher.

I was wondering if you were referring to the behavior of competitors or if you might be refer to the opportunities for blocks of business that could come along?

We're referring mostly to the latter.

Okay.

We have found our competitive niches.

We do stay away from some parts of the market.

For example some of the triple X. term products but the other side of the coin we do find areas where we compete pretty well.

We're comfortable with our ability to compete in those places of the market so that's not our biggest concern.

Our biggest variable will be how many companies are looking to increase their reinsurance programs.

How fast we might see a growth in certain other international markets.

And consolidation in the industry always has an unknown affect on the level of reinsurance put into the marketplace afterwards so the level of any merger and acquisition activity would have some bearing as well.

But generally speaking, revenue has not been a problem as you know for the last many years and we don't really expect it to be this year.

But just to be safe we were saying the 12-15% is what we would at least expect.

Thank you.

Next, we'll hear from Michelle Giordano with JP Morgan.

A couple more questions on the fixed annuity business.

Could you tell us where you're actually taking on the risk?

Are you basically reinsuring in the event that the primary company doesn't meet their spreads or doesn't meet the minimum crediting rates?

Could you go into more detail about where your risk is on the fixed annuity business that you take on?

And then you had some problems with the other fixed annuity business that you had on your books last quarter with some DAK issues.

How has that resolved and what have you changed in terms of the terms of agreement of the new fixed annuity contract that you've put on versus what you had in the past?

First of all, Michelle, we're side by side.

It's a co-insurance transaction so we participate in all of the risks and all of the profits of the business.

We have to manage the spread just the same as the seating company does and our fortunes aligned.

They are mingled.

So that's why we have to be very careful about how we manage it.

We did have one contract where we unlocked the deck in the 3rd quarter.

That was after the worst of the experience in the marketplace for that product.

It's actually looking better right now.

It was sort of a minor unlocking, it is a unique contract.

We don't have that same feature with our other contracts.

They tend to be fairly vanilla as to what we pursue in the marketplace.

Okay.

And then on the traditional U.S. operations, I noticed in the last two quarters that the policy acquisition costs as a percentage of premiums has been fairly high which cuts into the margins.

Is there anything different about the business that you've put on in the last two quarters that it would cause that to happen and is this something that we should expect to continue to occur?

Michelle, this is Jack.

I'll take that.

When you look at that ratio compared to premium it tends to jump around a little bit and your observation is correct.

I would draw your attention to our annual rate because as you look forward and try to determine what to expect in the year sense, I would take a look at what we have on an annual basis sustained in terms of percent of premiums and it's fairly constant.

This year we were about 16% of premiums in total in the U.S. traditional part of our business.

And in year's past it's been 15% or 16% in the past 5 years, so you can draw your own conclusion.

But I would advise that you can expect something around 16% going forward.

Okay and then lastly, you gave us some earnings guidance of $2.95 to $3.15.

What type of scenario would we have to develop in order for us to get to $3.15 versus $2.95?

Good mortality experience is probably the most important thing.

The secondary factor would be interest rates holding up to the point where we could maintain a reasonable portfolio yield.

And what is the outlook for year olds in 2003?

We've assumed that we're going to decline a little bit.

Thanks very much.

Your next question is with Rob Ryan with Banc of America.

Good morning.

Could you give us a recap of various write downs of certain classes of assets during the year, where you were in the 4th quarter and what your feeling is in terms of credit quality going forward?

Rob, this is Jack.

I'll take this one.

Most of the write downs for the year involve primarily the vestage of the portfolio that was our floating rate portfolio.

We talked in the past about having CDOs and about a year ago, we estimated that we would have roughly $20 million of CDO write downs during 2002.

That is part of the market under performed for a lot of reasons.

We ended up with a little bit north net I'm sorry gross of write downs on CDOs a little bit north of $30 million.

That it's the bad news.

The good news is we really don't have much of that portfolio that's on our watch list at this point.

So on and going forward basis we don't expect nearly that much in the way of write downs.

Something between 5 and $10 million for all of 2003 associated with that portfolio.

And when you get outside of that portfolio we've been both good and lucky in terms of exposure to some of the credits that have fallen dramatically over the past 15-18 months.

So we haven't have had a lot of write downs in that respect.

Okay.

Is there some statistic that you can give us in terms of below investment grade percentage or anything like that that you would point towards giving you increased comfort as of the year-end balance sheet?

Below investment grade is less than 2% currently in connection with our entire portfolio so hopefully that will help.

Within the 10-K we'll try to break out rating classifications and that sort of thing to give you a better feel.

Rob, this is David Atkinson, I would add that some of those below investment grade are junk bonds that we happened originally and about half of that are fallen angels.

That it's probably lower than you're going to see from other insurance companies this year.

We've had an aggressive strategy of selling on the first bad news and it has really helped minimize our losses.

Okay.

Great.

Thank you.

As a reminder, if you would like the ask a question, please press star followed by the digit one.

And we'll move on to Lynn Savage with Fox Pitt and ~kelton.

Good morning.

Just first, on the increased activity in the U.S. from the capital pressures that the primary companies are experiencing.

Can you give us more color, what kind of reinsurance are they going to use?

Is it block companies or annuities or are they increasing the amount of mortality they insure at?

For the most part, it's the first two.

Block life transactions and annuity block transactions that we're floating around and especially block life transactions.

They tended to be a small a couple billion here and $3 billion there and so forth but we had a significant amount of transactions that were financially motivated appear for our valuation that is a level that we haven't seen in a long time.

We had a deal people who were working Christmas day this year for the first time in probably a decade.

So it is certainly a heightened level of activity.

And when you say pricing has gotten easier.

Would you say because of those transactions or has the treaty business changed?

It's always a little different generally than the regular flow of business.

The competitors might be more restricted.

Some companies -- when they realize they have a problem, they don't have time to put everything out for bids to a broad audience so they try to work with a couple of reinsurers.

Generally speaking the competitive characteristic on some of those types of transactions are usually reasonably good.

So no change in the competitive environment?

Not for those.

Other than the increased pressure, the level of competition is about the same as it has been.

And then just on spreads in the annuity business.

A lot of companies are concerned about the spread compressions.

What is your outlook for 2003?

We've been happy with the spreads we've achieved so far.

We work closely with the direct companies that are involved in the other side of the transaction in a partnership type way.

We manage very actively the asset liability mix to achieve those spreads and I think we're pretty happy so far.

It's a very active process.

It's not something that you can relax on.

Last question is on consolidation, you expect more consolidation to occur.

It seems along with consolidation, the Europeans may not be looking to invest as much as they were in the past.

Can you talk about what is driving all of this consolidation?

Also, would you be looking to be active in consolidation?

Well, what was driving it-- the thing you notice is the huge growth in the reinsurance business and the people who are focused are getting bigger, stronger and more professional and it gets more difficult to keep up with that pace of sophistication in the marketplace so you have to be committed to it or not.

And people are finding who dabbled in reinsurance or didn't have a scale to compete effectively are finding that the best strategy is to sell or get out of business or to focus on other things.

In terms of our own position, we've tended over the years to look at every property that came by but we don't really find very often that there is any holes in our operation that we pick up by doing these acquisitions, so it's a pure financial look on our part and we haven't found the property at a price that something else hasn't been willing to pay more for.

Thanks very much.

Tanya ~Lewandowski with AG Edwards will have our next question.

Good morning.

I just wanted to touch a little bit more on the earlier questions regarding the competitive environment.

One of your competitors mentioned that they see prices continuing to harden and expect that to continue through 2003.

I wondered if you could comment and if you've seen any noticeable price increases that you've been able to achieve in your business?

If it's the competitor that I think you're talking about then we hope this price is hardened too because they are probably the leader.

But when I talk to our pricing -- there haven't been any bell weather quotes in the last couple of months since the annuity re-lie has sort of pulled back from the competitive fray that you can gauge it by except one and we can't draw anything from one.

So they think that that might be right but it's a little too early to call yet.

And in terms of business you are seeing, are you seeing that you're bidding as much on large pools where you are one of many reinsurers participating in a pool or seeing smaller blocks of business that you're bidding on where RGA would be the sole reinsurer?

The ongoing treaties that's your selling a portfolio of term business or portfolio of universal life or permanent business that's typically split so companies will solicit and then divide the reinsurance business up to seven different ways depending on how big the program is and how much spready they want among reinsurers.

We would be side by side in that we don't necessarily have the same prices as other reinsurers.

On some of the individual blocks, it is true that we would look at that by ourselves.

I would say that's about 50/50 in terms of blocks that we've placed that we look at by ourselves or where we have competition.

Two more questions.

How have things will be looking on the facultative side?

Can you give us an update in terms of maybe the business mix for the 4th quarter or if it's easier to comment for the full year what you saw facultative related?

Facultative, of course, is a strong part of our operation.

We saw this year in the U.S. market where we do more facultative business than anybody about a 1% decrease in applications and so in other words about the same level as last year in terms of cases but in terms of the amount or the volume it was up 15% so even in that business we are generating a nice increase in terms of growth of policies that we look at.

And of course as we expand internationally we've built facultative operations because it's something that we know how to do and are good at and we have internationally total applications outside of the U.S. is about equal to what we have in the U.S. now.

So we've doubled our facultative case accounts.

The U.S. is still the largest average size but we get pretty decent size from other markets as well.

That's great.

Lastly, is there any update that you can give us on the progress with regard to your two latest international ventures.

They are still in the early stages, Seoul, India and Korea?

Well, two very different scenarios, first of all in Korea, we have had a contract with a major company, major international company for a long time there.

So we have a good flow of premiums out of Seoul.

We combine Seoul and Japan and together they were around $45 million of premium for us last year.

Essentially one large treaty out of Korea was contributing a significant piece of that.

But we have developed some additional relationships and we expect extremely good growth out of the Korean office next year so that's a situation where we had existing business in place and had to have a local office to support because it was getting so big.

In terms of India, many of the of big internationally minded carriers from both Europe and North America, can at U.S. as well as Old Mutual in South Africa and others have entered the India market in recent years and specifically at the request of a couple of those companies.

We supported them in India so that's really a growth scenario both for us and the companies starting there.

So it's off to a an okay start but expect slow development out of that market because it's all brand-new there.

Okay.

Great.

Thank you.

Next, we'll hear from Tom Gallagher with Legg Mason.

Just a question on fixed annuity reinsurance.

Do you have any contracts for the underlying assets or partly convertible bonds and if so, how big is the portfolio?

We do have one contract that is the one that we unlocked the DAK on in the 3rd quarter.

In terms of the underlying assets, less than $150 million currently.

Okay.

And has that been any issue in terms of asset performance from a spread standpoint in terms of profitability or is it too small to have a material impact?

It's too small to have a material impact but it hasn't performed very well and that's one thing that we've been monitoring this year and working with.

Okay.

Thanks.

Please press star one to ask your question.

Next, we'll hear from Jack Schumann with Pruitt and Pruitt.

Good morning.

In the other international operations you were profitable in all four quarters of this year.

It can have a different mix of harvesting verses investing.

Given that you do continue to move into some new markets, how do you expect that to play out?

Will the profitability continue to improve or will there be some additional investments that will offset that.

We should expect the overall profit to improve robustly because we're gaining maturity in those markets.

We'll continue to make some investments in building infrastructure but for the most part it's largely developed in Asia and in Europe.

And so as we move into new markets we will be adding a few resources but only if there is growth of the business .

It's not quite the same as it was when we were starting from scratch and didn't have anybody in the region on the ground.

As they get mature, they will generate significantly more profits so I think you should look for that to be rather strongly upward.

Terrific.

Thank you.

At this time, there are no further questions.

I'll turn the call back over to Mr. Jack Lay.

Once again we thank you everybody for joining us.

If you have any more questions, feel free the give us a call here in St. Louis and with that, we'll end the 4th quarter conference call.

Thank you.

That concludes today's conference call.

Thank you for your participation.