美國再保險集團 (RGA) 2003 Q4 法說會逐字稿

Good day, everyone, welcome to the Reinsurance Group of America fourth quarter conference call.

Today's call is being recorded.

At this time I would like to turn the call over to the President and Chief Executive Officer, Mr. Greig Woodring and Executive Vice President and Chief Financial Officer Mr. Jack Lay.

Please go ahead, gentlemen.

Okay.

This is Jack.

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

I will turn the call over to Greig Woodring our CEO in just a minute, Dave Atkinson our Chief Operating Officer is also here this morning for the call.

Greig will come in on the results, then we will respond to any questions from any of the participants this morning.

As a reminder, during the call we plan to make certain statements and discuss certain subjects that will contain forward-looking information.

Including among other statements relating to projections of 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 those actual results to differ materially is included in the earnings release statement issued yesterday.

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

Under S.E.C. regulations, operating income is considered a non-GAAP financial measure.

We believe this measure better reflects the ongoing profitability and underlying trends of our continuing operations because it excludes several items.

Including, first,the net effect of capital gains and losses and any related impact of DAC amortization tend to be highly variable and not directly relate to the performance of our reinsurance treaties therefore we exclude those items.

Also our discontinued operations, which are no longer part of our on going business, are excluded from operating earnings, and, finally, also excluded is the change in fair value of embedded derivatives and related deferred acquisition costs and amortization for certain treaties structured on a modified co-insurance or funds withheld basis.

The the fair value of embedded derivatives in these treaties fluctuates primarily due to movements in credit spreads and do not affect the interest income we earn or interest credited under the various reinsurance treaties.

This adjustment applies only to modified coinsurance or funds withheld insurance treaties in our asset intensive segment and as a result of the newly adopted B-36 accounting standard.

During the quarter, this new accounting standard resulted in an after tax gain of approximately $9 million.

If we own a fixed maturity security supporting the funds withheld balances, this $9 million adjustment would have been captured as part of a FAS adjustment, shareholders equity and recorded as an unrealized gain in stockholders equity.

Going forward we expect this adjustment to fluctuate each quarter since it is tied to movements and credit spreads and a significant amount of our asset intensive business is structured on a micro or funds withheld basis.

Note that any such reported gains or losses are unrealized and this reporting does not affect the return expectations or cash flows over the life of those treaties.

Please refer to the tables in our press release for the reconciliations of operating income to net income.

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

Good morning, thank you for joining us.

We completed the year on a solid note.

We closed the Allianz transaction in the fourth quarter and successfully added over $400 million to our capital basis for a common equity offering.

Additionally we finished the year with mortality results that were within our range of expectation.

On a consolidated basis, operating income for the quarter totaled $48.2 million, 28% above the fourth quarter of 2002.

On a per share basis, our reported operating income for the quarter was 85 cents per diluted share.

This represents the 12% increase over the prior year results of 76 cents per diluted share.

The quarter's results were affected by the fact that we closed Allianz transaction which contributed approximately $6.8 million in after-tax earnings and the offering which added a modest amount of earnings per share dilution.

Having not closed the Allianz transaction or executed the common equity offering, operating income would have been roughly 81 cents per share.

For the year, operating income per share has increased 15% over last year, at $3.22, versus $2.80 per share.

Net income for the quarter totaled $56.1 million or 99 cents per diluted share, up 48% increase on a per share basis over the prior year's amount.

As Jack previously mentioned, net income for the quarter includes an after tax gain of approximately $9 million related to the newly adopted accounting standard on embedded derivative.

On a year-to-date basis net income per share is 36% ahead of prior year at $3.36 versus $2.47 per share.

Consolidated net premiums increased 60% for the quarter and 33% for the year, including Alliance.

Excluding the Allianz transaction premiums increased 18 percent for the year, and 21 for the quarter -- I mean and 21% for the year.

Our stated objective is to increase premiums year over ear by at least 15%, and so we have met that goal.

Premium flows continue to be strong, essentially across all segments of our business.

In terms of our individual operating sectors, let's begin with U.S. operations, our largest segment.

For the quarter, pretax operating income was $58 million, compared with $48.5 million in the prior year.

The current quarter end result includes the $10.5 million and pretax income from Allianz transaction.

Mortality within the quarter was within the range of our expectation as each quarter has been year-to-date.

Good results in our traditional mortality business were somewhat offset by approximately $3 million in credit losses associated with one of our funds withheld, portfolios in our asset intensive segment.

These credit losses are not unusual and in fact meet the expectations for the business.

However, our expectations factor in these losses evenly over the life of the business, whereas in realty the losses are lumpy and not evenly distributed by quarter.

Premiums in the U.S. increased 68% for the quarter, 28% for the year, including Allianz, excluding Allianz premiums increased 8% for the quarter a% for the year and we achieved a 10% premium growth rate that we mentioned on our last quarter call excluding Alliance.

For U.S., our U.S. management team continues their efforts to transfer the Allianz business to our systems.

That effort is pretty much on track although early, we expect the bulk of this business transferred by the end of this year.

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

Pretax operating income totaled $14.7 million compared with [audio interruption]in the prior period quarter, 30% increase.

11% increase excluding foreign currency [inaudible].

Premiums increased about 25% to approximately $51 million for the quarter, on a year-to-date basis, premiums have increased about 18%, strengthening Canadian dollar contributed roughly 20% for the quarter and 13% for the year.

Year-to-date pretax operating income totaled $46.1 million, up 19% from $38.8 million in 2002.

Regarding our international operations, profit expansion on this relatively young segment continues.

For the quarter premiums for the international segment increased 46% to $197.5 million.

Much of this growth emanates from our U.K operation as well as several of the operations in Asia Pacific.

Pretax operating income totaled $15.7 million for the quarter compared with break even results a year ago.

The current quarter represents about 21% of our consolidated pretax operating earnings with significant contribution.

As indicated in the press release, foreign currency had a favorable impact on results.

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

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

Net realized capital gains for the quarter totaled $4.6 million on a pretax basis, due primarily to sales in our Canadian portfolio to reduce concentrations in certain issuers and sales that previously impaired securities have gained.

On a gross basis writedowns due to the credit impairment for the quarter totaled $5 million.

Losses on sales totaled $4 million and gains on sales totaled $13.6 million.

The overall yield on the portfolio for the quarter was 6.06% down from the previous quarter, this decrease was the result of adjustments on a large block policy loan and the large inflow of funds at year end from our equity offering.

That offering generated approximately $427 million in net proceeds, adding over 9 million new shares to our public float.

Net life purchased 3 million shares in its ownership of RGA , now stands at approximately 52%.

Looking ahead, for 2004, we have set an operating earnings target of between $3.40 to $3.65 per share.

This target represents an underlying earnings per share growth rate of approximately 13% at the top of the range, this is consistent with our previous guidance of 12 to 13% growth.

Our growth rate for 2004 will be dampened by the impact of the equity offering, which is creating some dilution in the near term as we deployed the proceeds into our business over time.

In terms of the top line growth rate, the rate of 15 to 18%, we suggested in our press release, is likely quite conservative, or at least somewhat conservative, it's always difficult to estimate in advance premium flows on recent treaties, and on new business opportunities that will arise in 2004.

We tend to try to be conservative on those things.

That range is some fairly conservative estimates for the impact of foreign currency translation and productions on some more recently written treaties.

We expect international premium growth to be -- to moderate considerably since that base of underlying business is more substantial, but we still expect growth in the 25 to 30% range.

We would expect North American premiums, outside of Allianz, to continue to grow approximately 10% or so.

We are fairly confident in the top line growth and that it will meet the range noted with the chance to exceed that level.

We will be in a better position to readdress the top line growth estimate after the first quarter overall results.

In conclusion, we are pleased with the results for 2003 and we have added significantly to our market position and are firmly entrenched [inaudible] to likely insure in the North American market.

We are poised to maintain this position while [inaudible] acquisitions outside of North America.

We look forward to the year ahead and we look forward to your support.

Thank you.

We are happy to take any questions at this time.

Thank you, if you have a question please press the star key followed by the digit 1 on your telephone.

Once again, press star 1 if you have any questions at this time.

We will go first to Nigel Dali with Morgan Stanley.

Great, good morning.

Couple of questions.

First we have got the international earnings, with earnings very strong.

Was there anything one time in those results, which should lead us to believe that earnings are not sustainable at that sort of level?

And, second, with regard to pricing environment, number of primary insurers talking about rising reinsurance prices, hoping you can address what you are seeing in terms of prices.

Thanks.

In terms of one time event, there was no one-time events in the international operations, but, you have to realize that those are lumpy.

There was a lot of business that was recorded on the books by the year's end by the seating company's' desire to get reserve credit and to get the books cleaned up towards year end.

So we did have a lot of flow in the fourth quarter.

So don't read the quarter as a guideline, but the general trend is very strong.

There is no special one-time positive events there.

In terms of the pricing level, we could ask the question a lot about the effects of the change in the marketplace, and it's fair to say that prices are hardening somewhat, that you will see some, some prices go up selectively for different clients, different products.

But it's also something we continue to reiterate that our results for 2004 will depend on pricing we have done over the last 20 years, essentially.

So it will be very slowly blended into the experience that we generate going forward.

So it's a good thing, but it's not something to expect a huge right turn in the rate.

If I can just follow up, is it fair to say that the business that you are currently writing is being done at a higher margin than your older block of business?

We would, we would like to say we are -- you know, boy, that's a hard one to answer.

We are probably not stretching as much to get to the final pricing target, so, in that sense, yes.

But realistically, we have believed we have been pretty consistent and disciplined in our pricing throughout the worst of the pricing period.

That's great, thanks guys.

For the next question you have Michelle Giordano with JP Morgan.

Hi, good morning, I have a couple of questions.

First, could you give us a little bit more detail on the credit losses in the asset intensive business how much did that impact pretax income and could you explain specifically what kink of contracts this occurred under, so that we can understand the risk in this going forward.

Secondly, with Alliance, I think you said you would expect $30 to $40 million of after tax earnings on our last conference call.

Do you still feel like that's a good estimate.

And then third, part of your guidance for 2004 suggests stable investment yields.

There was a drop in investment yield from the third to the fourth quarter.

Could you highlight, you know, what was driving that drop in yields and then why you think yields are going to remain stable from here on out?

Okay.

First of all, let me take Allianz, which is the easy one.

We have no change in our outlook on Allianz.

We would stand by what we had said previously regarding the $30 to $40 million of run rate for earnings there.

In terms of the credit losses in the portfolio, that occurs, annuity co-insurance, where the funds are held by the seating company, and we have oversight but not direct management of them.

In that case, just the way insurance accounting works, credit losses that normally would be written by a direct company as a capital gains and losses hit us as operating income, that's just the way the accounting works.

The extent of it was about $1.5 million in the fourth quarter.

In terms of --

I could take that question.

Michelle, relative to yields, this is Jack, a couple of things happened.

We did have a general downward trend in our overall yield, in part, because we had a lot of investable funds come in particularly with regard to the equity offering.

But we also had a policy loan yield, that is a fairly big asset on the balance sheet, drop considerably.

Now I will remind you and everyone that's really a spread business, so to the extent that the policy loan yield drops so does the interest credited rate.

So it didn't really have an impact on bottom line but it did tend to drive down our overall portfolio yield by about 30 basis points because it was a fairly substantial drop in that policy loan yield.

So, between those those two items, it did tend to drive the yield down considerably.

We expect, as we put our plan together, to earn roughly the same rates that the portfolio was earning at the end of the year, in other words, part of the fourth quarter.

Okay.

What was the level at the end of the year versus the fourth quarter?

Well, a little over 6%.

Okay.

Portfolio yield, at year end.

Okay, and then just for clarification, on the credit losses, that $1.5 million, was that pretax or after tax?

That's a pretax number.

Okay, great.

Thank you.

Moving on to Jeff Hopson with AG Edwards.

Hi, good morning.

A few questions.

One, many primary companies have reacted to the higher prices with suggestioning that they are looking at the reinsurance strategy.

Any risk that their retention would change.

And, number two, the GE obviously is no longer writing new business.

Can you tell us if that's having any impact on your business?

Are you picking up some share that they previously had?

Yes, Jeff.

We are picking up share both in the U.S. and Canada on selected treaties that were previously held by GE.

Others are as well.

That's just more business out in the market for the rest of us.

You know, we like some of the things we have picked up, obviously.

Yes, I think that one of the options of direct writers is to retain more business and reinsure less.

We haven't really seen any trend, any big trend to do that, any noticeable trend at all to do that yet.

But there is there is more talk of it than there used to be obviously, because the pricing that reinsurers are putting into the market is less advantageous to the direct writers than it used to be.

So the talk naturally tends to go that way.

It's so far just been talk.

Okay.

And, in Asia Pacific, you mentioned that that was particularly strong on the top line, and I assume some of that is currency.

You also mentioned some quarter end activity.

Which markets, in particular, saw that quarter end activity?

First of all, on the currency side, if you looked at the year over all, I don't think Asia Pacific benefited that much from currency as contrasted to Canada and Australia did a little bit in England.

But most of Asia I think was pretty neutral.

The business originated from, a lot of it from Japan and Korea, I think, towards the end of the year, it was simply catch up of business that had not been reported to us, being reported by year end.

Okay.

Any change in the Japanese market?

Positive, negative?

Always hard to say because everything moves at less of a pace than we would like it to move in Japan, but we keep waiting for the Japanese market, which is on the direct life side, a huge market to move at a little faster rate towards more reinsurance usage.

It seems to be going that way slowly.

You know, we are pleased with growth in Japan for us.

What we keep waiting for are big breaks to to occur.

Okay, thank you.

Eric Berg with Lehman Brothers has our next question.

Thanks very much.

Can you hear me?

Yes.

Great.

I just want -- obviously an international issue.

I mean, you basically are saying that in the quarter, the impact of currency and of special items was very, was small or?

I mean, there is a lot going on here, you know, the rush by companies to get the reserve credit.

You have the impact of currency.

As we focus on the quarter alone, can you give me a sense for what you think the sort of underlying or normalized rate of growth was, please?

Well, you know, that -- that is somewhat hard to answer, Eric.

When I mentioned currency, I was talking about Asia Pacific over all.

Currency certainly did have an effect internationally for us because of some places like Canada and the U.K. and other selective markets.

But, you almost have to take the business flow on a longer period of time such as the year, and try to trend it as best you can.

It really is difficult to get a run rate in a quarter, because we still don't have a mature enough in force block in many of these, many of these market yet.

To get a predictable baseline without doing that.

It almost has to be to be taken apart and reconstructed by just moving.

But if one looks at Asia Pacific alone, you are saying that, again, the impact of currency in the quarter was relatively small, that the impact of currency internationally was more on your Canadian operation?

Yes.

Eric, this is Jack.

Greig is absolutely right.

There was virtually no impact in the Asia Pacific division.

However, Europe and South Africa, we had a little more impact, just about $1 million after tax impact on the fourth quarter.

So what you say, I am going to move on very quickly on this, because I think we have exhausted the issue, but would you say that the 28% growth outside of Canada internationally, on your top line on your premiums, was, again, nothing really special in there other than the usual year-end push by certain seatings to qualify for reserve credit?

That's right.

Okay.

If I could just move on and ask a quick question about Allianz?

Sure.

Should we continue to think about Allianz as a closed block at this point, or, because you mentioned growth of premiums respectively in your core businesses or I think you said outside of Allianz.

Was that another way of saying that the Allianz business should be thought of, still, as a closed block with no growth opportunities?

Well, yes, you probably should think of it that way, because the on going will just be merged in with our regular business.

It will enhance our regular business, but we will essentially be showing increasing, with increasingly difficulty, to separate all of the pieces of Allianz going forward.

So, I think we will probably just talk more in terms of our U.S. operations, the farther we get away from here, because it gets difficult, as we begin to integrate these things, move them onto our system, to try to separate them back into what was Allianz and what wasn't.

Eric in terms of --

Go ahead.

Yes, this is Jack.

I was just going to say, you really should in terms of growth think of Allianz as a closed block.

There may be a little bit of growth in the sequential next two quarters or so.

But after that you really should think of it as a closed block.

Great.

Thank you very much.

We will move now to Vanessa Wilson with Deutsche Banc.

Thank you, good morning.

I am just confused on the fourth quarter.

This is further follow-up on Eric's question, you said there was a catch up in treaties in the fourth quarter but that was in the Asian business.

What happened in the U.K. and South Africa?

Was it similar?

Yes, you are correct.

Most of the catchup that we are referring to was in Asia.

So then you really had a very strong result in what you call other internationally European.

I would assume that the, that the U.K. is very, is very strong at this point?

Yes, yes.

And it's a fairly seasoned market.

You know, can you give us some guidance of what you expect going forward in that segment?

Well, you know, that's been building for, really, the whole year.

You can see the growth in that business.

And the increased contributions that is making --

That is $8.8 million this quarter, right?

Yes.

We do see that in the U.K..

Companies do not split their treaties as much.

We tend to get large treaties, so the number of actual treaties we have in the U.K. is not very broadly based.

And so it's always treacherous to project too much going forward.

We do expect good growth in the U.K. and in the low basin, 25%, 30% range that we mentioned for overall international business.

Okay.

But the $8.8 million this quarter, in whatever is in that segment, is that a sustainable number or is that a very high fourth quarter number we should not annualize?

That's a pretty good fourth quarter number.

So we should not annualize it?

You should not annualize that.

Okay, on the U.S, the new business written, the gross life insurance written.

It is listed this quarter as $434 million.

How much of that is from Allianz.

Is the whole seating commission in there?

In terms of business volume, Allianz contributed about $287 million of the total.

Your goal of 15 to 18% premium growth, that's excluding Allianz, right?

No, that's including Allianz.

But as Greig mentioned, we think it's a fairly conservative estimate.

Okay.

I mean, there being very easy comparison given that you added Allianz?

That's right.

And then, on your A and H losses, it's about 7 cents a share this quarter.

Could you give us some outlook on where that is going?

This is Jack.

Yes, we sustained roughly about same operating loss on that business, and run off the last couple of years.

No reason to believe it will be dramatically different in '04.

Okay.

And this accounting thing with the derivative, it sounds like it affects your book value, GAAP book value slightly on a reported basis.

Any impact on rating agency capital levels or do they just ignore it?

Well, it's, it's new to all of us.

My strong suspicion is that they will look at it separately as they do at FAS 115 sort of adjustment.

Okay.

Thanks very much.

As a reminder, if you have a question, please press star 1 now.

We will go next to Jeff Schuman with KBW.

Good morning, a couple of questions.

Greig, you talked about North American, organic growth of 10%.

Is that consistent with your expectation for market growth or is there some share, gain or loss anticipated there?

That's our, that's our estimate of what the market growth will be in terms of volume reinsured and given, you know, where our book is and what we have to do to increase it from here.

And with regard to currency, if we froze the exchange rate just to the current level, do you have any sense of what the year over year pick up would be in EPS?

Jeff, this is Jack.

Are you talking about into '04 or are you talking about an '03 comparison to '02?

'04 versus '03 if we froze currency here?

If we froze currency, you shouldn't see a dramatic impact compared to what we have articulated as our guidance range.

Okay, I am wondering if the guidance anticipates some year over year pick up given the way currencies moved in late '03?

No.

Yes, that is what I am saying, it presumes rates roughly where we ended the year.

Okay.

And, lastly, can you talk a little bit about your strategy for continuing to secure reserve credits from a not admitted paper as the volume of XXX business builds?

I think suffice it to say we have been working very hard at that, have actually secured some nice facilities very recently.

Some of that, we would view as somewhat proprietary in terms of exactly what we are doing there, but I think we have been very conscious of what our current and future obligations are and will be have and have been trying to do the prudent thing to line up all the facilities we need to handle the business we had on the books and will have on the books.

Okay.

Thank you very much.

And, Mr. Lay, there are no further questions at this time.

Okay.

Well, thanks to everyone to joined us this morning.

If any other questions come up, give us a call here in St. Louis.

With that, we will end the call.

Thank you, that concludes today's conference.

Thank you everyone for joining.