美國再保險集團 (RGA) 2003 Q3 法說會逐字稿

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

Please go ahead, sir.

Okay, thank you very much.

Good morning to everyone and welcome to RGA's third quarter 2003 conference call.

I'll turn the call over to Greig in a second.

Greig Woodring, our CEO is with us this morning as is David Atkinson, our Chief Operating Officer.

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

As a reminder, during the call intend to discuss certain subjects that will contain forward-looking information, including among other things, statements relating to projections of the revenue or earnings and future financial performance and growth potential of RGA and its subsidiaries.

You are cautioned that actual results could differ materially from expected results.

A list of important factors that could cause actual results to differ materially from expected results is included in the earnings release issued yesterday.

In addition, during the course of the call, we'll make comments about our results based on operating income, both on a pretax and after tax basis.

Under SEC regulations, operating income is considered a nonGAAP financial measure.

We believe this measure better reflects the ongoing profitability of our continuing operations because it excludes the net effect of capital gains and losses, which can be volatile from period to period, and any discontinued operations which are no longer part of our ongoing business initiatives.

Please refer to the text of our press release for the reconciliation of operating income to net income.

With that, I'll turn it over to Greig.

Good morning and thank you for joining us.

We had a mixed quarter with strong top line growth with somewhat soft operating earnings.

On the earnings front, we gave back some of the positive mortality results we experienced in both the fist and second quarters, which came in with better mortality than expected, and we're still ahead of our mortality expectations on a year-to-date basis.

I'll comment a little bit more on mortality in a minute.

On a consolidated basis then, operating income for the quarter was $38 million, 8% above the third quarter 2002 total of $35.2 million.

On a per share basis our reported operating income for the quarter was 76 cents per diluted share.

This represents a 7% increase over prior result of 71 cents.

On a year-to-date basis, operating income per share has increased16% over last year.

That's $2.36 versus $2.04 per share.

On a dollar basis, operating earnings have also increased 16% year-over-year.

Net income for the quarter totaled $41.8 million or 83 cents per diluted share, a 22% increase on a per share basis over the prior year amount.

On a year-to-date basis, net income per share is 30% ahead of prior year at $2.34 versus 1.80 per share.

And consolidated net premiums increased 26% for the quarter and 22% for the first nine months.

Our stated on the objective is to increase premium year-over-year by at least 15% and we've been running ahead of that, although the prior year quarter was an easy comparison.

Premium flows continue to be strong across all lines of business.

In terms of our individual operating segments, let's start with the U.S. operations, our largest segment.

For the quarter, pretax operating income was $46.8 million compared with $53.5 million in the prior year.

As you know, mortality drives our results during the third quarter, mortality experience was below expectation by approximately $6 million pretax.

This comes on the heels of the first two quarters in which mortality results were ahead of expectations.

The less favorable mortality in the current quarter was primarily results in having more large claims than average, in other words, severity versus frequency, whereas in previous quarters, we had fewer large claims than average or expected.

These things normally even out over time.

On a year-to-date basis, mortality experience is favorable and we remain on track for a strong year in the U.S.

Premiums in the U.S. increased a healthy 15% over prior year quarter.

On a year-to-date basis, premiums have increased about 11%.

As we indicated in last quarter's call, we expect premium growth rate for the year to be about at least 10% for the year and so we're on track in that regard.

The U.S. asset intensive business reported good results for the quarter and did not execute any new treaties during the quarter but we did add approximately $145 million of deposits on existing treaties.

U.S. management team is working diligently to close the previous announced transaction with Allianz Life.

Those efforts are proceeding smoothly at this point.

We remain on track on fourth quarter close.

As we indicated in the press release this transaction, that is Allianz Life, should add 30 to $40 million of earnings on an annual basis, beginning next year.

We expect positive impact on operating earnings on the fourth quarter at less than the annual run rate due to transition costs and other first-year issues.

Our best estimate at this point is that this business will add between $5 and $8 million of operating earnings in the fourth quarter.

Turning to Canada, the Canadian operation had a solid quarter with results further enhanced by a strong Canadian dollar.

Pretax operating income totaled $10.9 million compared with $8.5 million in the prior period quarter a 28% increase.

Premiums increased about 27% to approximately $53 million.

On a year-to-date basis, premiums have increased about 16%.

Of that increase, roughly 10% is the result of the strengthening Canadian dollar.

Year-to-date in Canada, pretax operating income totaled $31.4 million, up about 15% from $27.4 in 2002.

Regarding our international operations, they continue to grow from a small base strongly.

For the quarter premiums in the international segment increased 58% to $149.8 million.

Much of this growth emanates from our UK operation and from several operations in Asia Pacific.

Pretax operating income more than doubled from $4 million in the prior year period to $8.7 million in the current quarter.

The current quarter result represents about 15% of our consolidated pretax operating earnings.

That's a significant contribution.

Although we continue to build scale in these operations, results remain more volatile than our mature operations of North America.

However, we continue to be pleased with the progress we are making in these markets.

Our consolidated effective tax rate for the quarter, at 33%, was slightly lower than our usual tax rate due to refinement made as we file various tax returns around the world.

Our expected tax rate on an ongoing basis is between 34 and 35%.

Net realized capital gains for the quarter totaled $6.6 million on a pretax basis, due primarily to sales in our Canadian portfolio to reduce concentration to certain issuers.

On a gross basis, write downs due to credit impairments for the quarter, losses on sales total $4.4 million and gains on sales totaled $15.6 million.

During the quarter, we came to an end in the claims activity associated with the terrorist attacks of 9/11 and so we released approximately $3 million pretax in redundant reserves.

Overall yield on the portfolio for the quarter was 6.66%, fairly consistent with the previous quarter.

So, wrapping up, in conclusion, we are very happy with the results for the first nine months of the year.

These results combined with the Allianz transaction, which we were quite pleased to reach an agreement on, makes this a very exciting time for us.

With that we'll now take any questions you may have.

Thank you, gentlemen.

The question and answer session will be conducted electronically.

Any participant wishing to ask a question please press star one on your touch-tone telephone.

Additionally, if you are using a speaker phone, be sure your mute function has been turned off so your signal can reach our equipment.

Again that's star one to be placed in the queue for a question.

We'll first here from Nigel Dally of Morgan Stanley.

Great, thank you and good morning.

A couple of questions.

First with regards to capital.

Obviously, there is a requirement to raising capital at some point in the future.

Hopefully, can you give us some guidance as to the form of state capital, the likely amount of the capital raising and potential timing.

And second just with regards to the APS outlook, with the acquisition there is a lot of noise.

Hopefully you can provide us guidance for 2004.

Nigel, this is Jack.

I'll take the question on the capital.

You know, we've indicated in the past that based upon our growth rates we expected to raise capital, at the latest, in 2004 and certainly with our rate of growth including the Allianz transaction, that if anything accelerates it.

And certainly our stock price has moved up a little.

So, I would suggest that in terms of timing, at the outside, it would be at some point during next year, I think, certainly the rating agencies when they look at our level of growth as well as the Allianz transaction, expect us at some point to be adding some capital.

I can't comment on exactly when, but I can only suggest it's somewhere between now and mid to latter part of next year.

In terms of amount, we indicated in the 8 k that we filed in September that on a long-term basis, we would expect to allocate $250 million of capital to support the Allianz business.

Certainly we have other capital and needs beyond that, so I think our investors should presume that if we went to market, we would raise something in excess of $250 million.

Because of our leverage situation, which we're very comfortable with, but in order to support ratings, we wouldn't want to lever up too much more, one could expect any capital offering would be primarily something that was either common equity or certainly close to common equity.

So hopefully, that answers that part of the question.

Great.

Thanks.

In terms of EPS guidance, Nigel, I think we have tended to do that once a year and we will refresh the guidance in the next quarter's call in January, for the 2004 period.

We did try to help you out a little bit by estimating the run rate, if you will, for the Allianz business between 30 and $40 million.

Yes, if you were to exclude out Allianz and exclude out any impact of capital, your typical growth rate was around 12%.

Is that still a reasonable number as a base case for those events?

Yeah, it is between 12 and 13.

Right.

Excellent, thanks.

And we do expect Allianz to be accretive even after adding capital.

Next we'll hear from Michelle Giordano of J.P. Morgan.

Good morning.

I was wondering if you could just give us a bit more color on the Allianz book.

How much overlap is there with your book of business, currently.

And is there anywhere you are taking on more concentration of risk than you actually originally wanted to?

So, will there be any other reinsurance that you might do, purchasing of reinsurance because of that?

And then secondly, on the mortality in the U.S., could you give us a little bit more color?

What was the average claim size that you saw?

Was it related to any specific primary companies?

And how did your reinsurance help you related to this severity and do you need to chane any of your reinsurance coverage as a result of this?

Okay, let me take the second piece first.

When we talk about large claims, we're talking about claims say $1 million and more.

Much of that falls within our retention typically, so that we're not really looking to change our retrocession.

There weren't any particularly large claims that were, you know, say $4 million or $6 million, which is our maximum for life now.

But the number of claims over $1 million for the quarter was substantially higher, say, than it was the first two quarters.

And, you know, that is a typical pattern.

When you talk about just the claims of $1 million or more it gets pretty lumpy.

The numbers are really fairly small.

So that you do have these kinds of fluctuations.

We are not at this point concerned about that fact at all.

In fact, we look at the year as a whole and say mortality's been quite good.

In terms of Allianz, there is a significant overlap in clients and some overlap in even the treaties that were on.

We're not picking up any concentrations that we don't want.

But remember, when we acquired this block of business, we essentially did it on a basis where we assumed the value of the new business would be nil.

And we were expecting the returns that we get on this business to be from the in force block of business, not from any prospective synergies or anything like that.

And so we will be working through that block trying to preserve as much as we think is appropriate in terms of ongoing new business, but we would be happy just with the block of business.

Okay.

Just as a follow up related to the reserves associated with the September 11th attacks, how much reserves are you carrying right now and is there any potential to release any more reserves?

We're really -- that did release.

The $3 million did release during the fourth quarter release the remaining reserves.

So there's no additional reserves to be released at this point.

Okay, thank you.

And there are four left in the queue, we'll next hear from Jeff Hopson of A.G. Edwards.

Edwards.

Hi, good morning.

A few questions here.

One: Can you remind us of what your own retention is on claims and how that's changed over the last 12 months or so?

You may have seen that Scottish is buying a piece of ERC.

Just curious if you view that as a major event in terms of overall supply and how you see ERC these days as a competitor?

On the international side, you talked about critical mass, and the business being a little more volatile, but assuming normal mortality, do you think you are at a point where this business will be able to produce the type of earnings levels that we're starting to see in the last couple of quarters?

Yeah.

Jeff, in terms of retention, we increased our retention per life from 4 million to $6 million in July.

That had no affect on when I talked about the severity of the claims of the additional largements.

We had no claims over $4 million in the quarter.

That's typically what you'd expect.

When you make a change in retention, it only affects new business plus old recaption business, so you don't pick up any additional sized claims for a while, typically.

But we're very comfortable with that level and we keep pushing it upwards, actually, as our block gets bigger.

We will be at the completion of the Allianz transaction, over a trillion dollars of individual life mortality in force.

On the question of let's take them in order here.

The ERC transaction, I think it may send a signal to clients in the market who haven't, I guess, donned on them yet that ERC really is serious about selling their life reinsurance business, which we believe to be the case and that they are proceeding along that way.

It does mean more consolidation in the industry.

There are lots of pieces of ERC left.

They haven't sold the biggest blocks of it yet, but we do expect that the strong possibility if not a likelihood in the future here.

In terms of international, yes, you are right.

We do keep reminding everybody that the smaller, newer operations can be more volatile and that is certainly the case.

And the finer you break it down into different operating sub-companies or markets, the more you get that.

But we are at a point where the expected trend line is more like what we had for the last two quarters.

The results this quarter is pretty close to our expectation.

So that's, I mean, there are a lot of variations within that international based on markets and so forth.

But it all together it was right on where we expected.

Okay.

If I could follow up, we hear from primary companies that pricing clearly has hardened in reinsurance, and obviously, that only affects new business, but, you know, can you make a general comment on that trend and, you know, how much impact that could be to, you know, new business and profitability on new business?

Yeah.

I think the reinsurance market has hardened prices that moved upwards a little bit.

The most aggressive terms on some of the brokerage term portfolios, the ones that have moved the most and some of the more permanent business that's not generating substantial volumes of reinsurance, have not moved as much.

Every reinsurer's mix of business is, therefore affected somewhat differently but I think in general, your conclusion is correct that the market is hardening, rates are going slightly upward.

You are also correct when you say that results of 2003 depend upon pricing done in 2002, 2001, 2000 and so forth much more than they do on market pricing in 2003.

And that only has a slowly creeping effect as time goes on.

So it's not the situation where you can say that because the market is pricing has gone up currently in the markets, say 5% or 6% that you will immediately see 5% or 6% better results on the bottom line for everybody.

It slowly works its way into the premium flow.

Okay, thanks.

Next we'll hear from Vanessa Wilson of Deutsche Banc.

Thank you, good morning.

Jack and Greig, on the 30 to $40 million number, that is an after-tax number?

That's right.

Does that include assumptions about the costs of funds?

Yes.

Okay.

So that's a net number?

Yes it is.

And how should we think about the return on investments?

We shouldn't use the $310 million ceding commission, we should use the $250 million capital allocation?

Exactly.

Yeah, that's the amount of capital we have backing that business so that's how certainly we look at returns.

I would suggest that's how you take a look at the return on that business.

So if we take the 30 divided by the 250, that's a 12% unlevered return?

That's right.

And then with respect to, just an old subject, Argentina.

Could you give us a sense, you know, in this discontinued operation, what the size of your liabilities are at this point and how that's trending and, you know, how we can think about that running off?

Sure.

We have about $50 million U.S. dollar liabilities still set up there.

It's running off over time as we've indicated in the past.

It's expected to take several years to run off, and so far it's running off essentially the way we expected.

Okay.

And what changes does the size of that liability?

There was some issue with inflation and government bond prices at one point?

Well, there's a lot of assumptions like that that go into the assumptions that underlie the reserves that we set up.

Once we set those up, though, I wouldn't think of it in terms of that changing the liability quarter to quarter.

But just simplistically, no new news there?

That's right.

And just Michelle had a question on the mortality, the number of companies ceding.

That's bad mortality to you?

Yeah, we don't really look at it that way, Vanessa.

I mean, we're talking about claims in any given quarter.

We get lots of claims from just, I don't even know the number.

We probably get more than 1,000 claims a month.

And they come from all over the place.

So I think we just have to look at patterns.

We do try to analyze any specific company that gives us a lot of claims, but there were no companies that stood out this quarter.

Okay, thank you.

Next we'll hear from Gail Golightly of Wachovia securities.

Thank you.

I noticed that the ratio of the funds withheld at interest in you investment portfolio mixed up, and I was wondering if you could talk a little about what trends were driving that?

The funds withheld is essentially occurring because of the annuity co-insurance that we're doing.

Actually, the run rate or the increase in that is probably is somewhat less than it has been this quarter over let's say the first two quarters of the latter part of last year.

But in terms of assets, that is building assets and that is an increasing proportion of our asset base.

And is that going to be effective at all with the advent of 133-B-36 the Modco reinsurance accounting?

Yeah, there will be an impact.

We are trying to get antra on that right now.

We don't expect it to be dramatic but we will comment upon that when we file our third quarter Q.

Thank you.

And again it is star one to be placed in the queue for a question.

We'll next hear from Eric Berg of Lehman brothers.

Thanks very much.

Two questions.

Good morning to everyone.

First, since reinsurance can be thought of as kind of the raw material of insurance, like, you know, raw material would be to a manufacturer, is it right to say that since the price of reinsurance is going up that margins are going to be squeezed at the primary level?

That's my first question.

My second question is, in its news release, this morning, Scottish Re said in its headline it was acquiring the life reinsurance business of ERC.

I've not had a chance to read the full text of the release.

So, I guess I'm hoping jack can elaborate on what was meant when Jack said there is a lot more of ERC to be sold?

That was me, actually, Eric.

Okay.

Yeah, that was a piece of ERC, a property that they were trying to hide off from the big company or the big operation and so it was a distinct operation.

So we were aware of that being out in the marketplace.

Is ERC, Greg, retaining still after this transaction with Scottish, additional life reinsurance business?

Oh, yes.

I think what they sold probably amounts to no more than 5% to 10%, something like that.

Okay, that clarifies that.

And the question of margins being squeezed at the primary company level, it could be some of that, but also some of that will just be passed along to retail customers.

Typically, what happens, and what we've seen this year as well is that the primary reinsurers are not coming back to the reinsurance market for pricing as frequently.

So a lot of their products are just remaining.

We don't see too many reinsurers or too many reinsurance terms being canceled right now.

We just need more of, if you will, favorable from the reinsurer's point of view pricing new quotes coming in.

Somewhere along the way as new products get freshened up, there is an effect, but that's usually passed along to the retail customer.

Just to clarify one minute further, when you have an existing treaty with a primary company, the price is set for a given amount of mortality risk transfer?

The price is set for the contract and when can it be raised, if at all?

Well, it can be raised for new business but typically that requires 90 days' notice, and we don't see that happening on a broad basis in the industry.

What is happening instead is companies who have a term product that was aggressively priced, say a year and a half ago, are just leaving that product and reinsurance in place as opposed to coming out with a new product.

I understand.

Thank you.

And with two left in the queue, we'll next hear from David Hinton of Boston Partners.

I'm sorry, I tend to withdraw myself from the queue.

No question.

Our last question will be a follow-up from Jeff Hopson of at A.G. Edwards.

Thanks again.

Greig the fourth quarter is a fairly active period.

Just wondering about your comments in regard to this quarter, whether you think there's a lot of activity out there and whether the Allianz deal would preclude you from being as active as you typically would be?

No, Jeff, we expect, you know, business as normal.

We would expect that our pipeline is pretty good now.

We would expect that the fourth quarter would be our typical very active period of time.

The Allianz transaction will take a significant amount of time and effort.

We want to make sure we integrate this properly and integration in this case is moving the data and admin of that business over to RGA as quickly as possible, But we feel we can do that and still maintain the current level of activity with our regular operations.

Great.

Thanks.

And with no further questions, gentlemen, I turn it back over to you for any closing comments.

Okay.

Thanks again for everyone who joined us here.

With that, we will finish the third quarter earnings release conference call and should any other questions come up, why don't you just give us a call here in St. Louis.

Thanks again.

That will conclude today's conference.

We thank everyone for your participation.