美國再保險集團 (RGA) 2004 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Reinsurance Group of America first 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.

Okay.

Thank you.

Good morning, and welcome to everyone to RGA's first quarter 2004 conference call.

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

Dave Atkinson, our Chief Operating Officer is also here this morning for the call.

As a reminder, during the calling we plan to make certain statements and discuss certain subjects that will contain forward-looking information, including among others statements relating to projection of revenue and earnings, and future financial performance and growth potential of RGA and it's 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 from expected results is included in the earnings release that we issued yesterday.

In addition, during the course of this call, we'll make comments about our results based upon operating income.

On both 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 operation because it excludes several items, including first the net effect of realized capital gains and losses, and any related impact on DAC amortization, which tend to be highly variable.

Also excluded are discontinued operations, which are no longer a part of our ongoing business initiatives.

We also exclude the change in fair value of embedded derivatives, and related deferred acquisition cost amortization, for certain treaties structures on a modified co-insurance or funds withheld basis.

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

Also, during the current quarter we adopted SOP O3-1, which relates to accounting for separate accounts in nontraditional contracts.

The cumulative effect impact of this accounting standard was limited to about $361,000 after tax in terms of a charge, since we do not provide significant reinsurance support for the product risk under SOP 03-1.

This amount was excluded from operating earnings since it relates to prior periods.

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

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

Good morning, and thank you for joining us.

I'll make some brief comments on our results and then open the line for questions.

We're off to a good start for the year.

On a consolidated basis, the operating income for the quarter totaled $52.1 million, 34% above the first quarter of 2003.

Which was $38.9 million.

On a per share basis, our reporting operating income for the quarter was 83 cents per diluted share.

This represents 6% increase over the prior year results of 78 cents per share.

We are pleased with the results.

We knew the comparison would be difficult for a couple of reasons.

First of all, we had very strong first quarter in 2003, with highly favorable mortality in the U.S. and Canada as well.

Our sizable equity offering in late 2003 resulted in over 12 million new shares being issued, and over $425 million in capital was secured to grow the enterprise.

Much of that capital, most of it, remains to be deployed.

Reported net income for the quarter totaled $61.7 million, or 98 cents per diluted share.

A 48% increase on a per share basis over the prior year amount.

Current year net income includes $18.4 million of net realized capital gains, which over $6 million is due to foreign currency gains, as we have continued to restructure and versify our Canadian portfolios, and actually have taken some of the recent Canadian currency dollar gains off the table.

Premiums were up very strongly, up 49%, if we include everything all in, up 28% if we exclude the acquired Alliance block.

Continued strong growth in our international locations also contributed to this premium growth.

Our best estimate is that 20% year-over-year premium growth is achievable, which is a better outlook, I think, than we had had going into the year, where we expected something like 15% to 18%.

Turning to our operating segments.

First in the U.S., pretax operating income totaled $65.3 million, compared with $50.2 million last year, up 30%.

Generally premium levels were strong, providing a positive momentum for earnings.

On the other hand, unfavorable mortality hampered results.

This was basically in the form of a few large claims in our traditional business.

This is a statistical reality for us, that the number of large claims does fluctuate from quarter to quarter, and is not associated with anything other that a statistical operation we believe that things should even out during the course of the year.

In terms of comparison, the traditional segment last year reported favorable mortality in the first quarter.

As I mentioned, we reported good premium growth, up 44% with Alliance, and 12% without the Alliance acquisition included.

Demand is good in the marketplace, competitive dynamics and overall capacity within the industry continue to evolve.

Pricing power remains quite strong.

New business flow off the Alliance block was better than expected.

That improved the economics on the transaction for us over the long term, of course.

Our asset intensive business in the U.S. contributed $6.1 million pretax.

There were no new transactions during the quarter, a positive standard of about $1 billion above the first quarter's level last year, and we added about $100 million of assets during the quarter.

A U.S. management team is working hard to transition the Alliance block to our systems here at RGA in St. Louis, and that project is very much on track.

Turning to Canada next.

The Canadian operation had strong quarter, results further enhanced by the strength of the Canadian dollar.

Pretax operating income totalled $14.6 million, compared with $10.9 million in the prior period quarter, that's up 34% on a U.S. dollar basis, up 14% on a Canadian dollar basis.

So strong in spite of the currency, and especially strong after it.

Mortality was favorable in both in the current and prior year periods.

Premium flow was pretty much as expected, up 18% in Canadian dollars, and up 24% in U.S. dollar reporting.

New business opportunities in Canada are good, and the market in that regard, displays a lot of characteristics in common with the U.S. market.

Our international operations had a very strong quarter.

Again, profit continues to grow at a good clip.

Pretax operating income of $9.6 million versus $3.3 million last year.

Claims were somewhat higher in the prior period, but a lot of this is reflective of the increase in size of this operation.

Volatility can still be expected going forward for international operations as they grow from a small base and relatively new business.

As is usually the case, mortality results vary by location, but in total, we are pretty in line with expectations internationally over all.

Foreign currency translation about $1.2 million to the pretax earnings of international operations.

Premiums continue to surge internationally, up about 50%, when you factor out the currency strength, and up 75% as reported.

We don't expect that rate to be sustained for the year, of course, but those markets should nevertheless be strong reinsurance growth markets for us.

The overall yield on the investment portfolio in the quarter, excluding funds withheld, dipped slightly below 6%, from just above that at 6.06% in the fourth quarter.

We continue to fight for yields within the constraints of our generally low risk tolerance, and hope that we are pretty much at the bottom of what has been a declining trend for some time now.

In general, slight increases in investment yields or investment rates would be very good for us.

In conclusion we are pleased with the results for the first quarter.

We think there are positive factors within the life reinsurance marketplace for RGA, primarily relating to strong demand, and the market continues to consolidate and evolve in ways that will continue that strong demand for RGA's products and services and willingness to pay RGA's prices.

RGA's well positioned to take advantage of growth opportunities in in this market, as a market leader, with the capital that we raised in December poised to be deployed, with strong and stable ratings and strong and consistent management team, and with that we'll be happy to take any questions that you may have.

Thank you, gentlemen.

The question-and-answer session will be conducted electronically.

Any participant who would like to ask a question, please press star, 1 on your touch-tone key pad.

We'll take as many questions as time permits, and proceed in the order you signal us.

Additionally if you're using a spearker phone please make sure your mute function is turned off so your signal may reach our equipment.

Again it's star, 1 to be place in the queue.

We'll first hear from Eric Berg of Lehman Brothers.

Thanks very much.

I will apologize in advance as I lost the audio portion of your feeds for just a minute, did you say Greig what the earnings impact of the Alliance transaction was in the quarter, and what is was relative to your expectations?

Eric, the Alliance contributed a little bit better than expected, so it had a very strong performance.

We're hopeful that -- we're planning that, this is probably the last time we're going to comment on that, as we integrate that business, it becomes more and more difficult, and it's not worth the effort to try to separate the results of that block itself.

But I think it is a good message that for the first couple of reporting periods that we've had the Alliance block it has been performing at least at expectation.

Separately could you talk about--and again I apologize if you did reference this but if you could elaborate on the extent of the price increases that are taking place in the marketplace, and the extent to which customers are accepting them?

The pricing increases run the gamut.

It depends on the product and the situation, and how much, if you will, underprice we believe that the products were in the past.

We have seen some fairly large increases, as much as 20%, increases that have stuck.

On the other hand, I wouldn't, by any means characterize that as typical.

We are seeing a more modest -- more modest increases on a pricing basis than that typically, so it really depends on the product and the situation and the level of competition in the past.

Thank you very much.

Moving on we'll next hear from Jeff Hopson of A.G. Edwards.

Good morning.

Hello?

Hi.

Greig, could you comment on, I guess on the demand side, whether clients are changing their reinsurance strategy?

Certainly we've heard commentary from companies reacting to the pricing environment, you know within that they're considering changes, or looking at the reinsurance programs.

And then secondarily, in Asia Pacific, that growth rate seems to have bumped up.

Any particular country that's driving that?

Jeff, first of all, on the demand side, we haven't seen really any change in the demand at all yet, but you're right, that virtually every large company is reconsidering, in light of the change in pricing in the marketplace how much they will use reinsurance, so far there's been really no changes evident, people are pretty much reinsuring the way they used to reinsure, and expect a very strong flow of business this year.

In terms of Asia Pacific.

It was a strong quarter, probably stronger than we expected as well.

The biggest growth areas in Asia Pacific for us continue to be Australia, Japan and south Korea.

Any change in Japan, other than you getting a license?

Are you are getting more business from North American players?

It's a slow evolution.

I think our business is growing at a nice clip in Japan.

We continue, because of the size of the market, to push for something that breaks through to a little bit more North American style use of reinsurance, but we really haven't seen that yet.

We're still just growing fairly organically, and it just is such a big market that we're growing at a nice rate.

Great.

Thank you.

We'll next hear from Vanessa Wilson of Deutsche Banc.

Thank you.

You had nice new business gains in the U.S. this quarter.

And could you talk about just in terms of the growth life reinsurance written?

How much of that would have been from Alliance, and how much of that would have been maybe large blocks or something that's a little bit lumpy?

Yeah.

Vanessa, I don't think we had any large blocks that I'm aware of that came in the first quarter.

The new business growth was pretty much at a run rate, and was a combination of what was old Alliance and RGA, and it was not -- actually, the new business amount was not so much of a deviation from the glide path.

I think we are comparing to a little bit of a down first quarter, in terms of reporting last time, but it's pretty much in line with our expectations on the revenue side on the U.S. marketplace.

Okay.

And I guess just going back to Eric Berg's question about the accretion from Alliance, I mean you only acquired this in the fourth quarter.

You know, I would think for your own benefit, you would be tracking what you paid for it, and how much you're earning in terms of accretion on your capital invetsed, and I think that's a legitimate question that, you know, at least for 6 to12 months after an acquisition, you know, because I think if you -- if it's all mixed together, and Alliance is doing better than you expected, but your results are in line, it sort of the begs the question if the rest of the business, you know, is below expectations?

Vanessa, this is Jack.

Let me try and take that.

Your point is a good one, and certainly we do track internally the rate of return we get on any block, certainly one as big as Alliance.

Once we start transitioning, it becomes more and more difficult to go through the cost allocations, and all the various things we need to do, to come up with a firm P&L impact of a block like Alliance.

Greig mentioned that just from a pure underwriting standpoint, it did outperform our projection, but in terms of going forward and trying to break that out and go through the allocation process, we don't think that's particularly meaningful, and had not planned to do that.

We will be more interested in looking at experience by company, by issue year, by auto fact, by all of the other breakdowns that we normally go through, rather than walling off this as an Alliance block versus the other.

Once it becomes part of the overall U.S. operation, and especially some of the new business contributions from it, we're not going to try to separate it.

Okay.

And I understand that they're going to kind of, you know, integrate together, and it's hard to separate them, for practical purposes, you shouldn't do that, but just having some sense on the capital returned on the investment here.

I don't think you have to give us a dollar number, some pennies per share, but just a sense if the return is in line to better than expected?

Yeah, and hopefully we have -- this is Jack, hopefully we have communicated that so far it's a little better than expected.

Okay.

Thank you.

And again, it is star, 1 to be placed in the queue for a question.

We'll next hear from Jeff Schuman of KBW.

A few questions.

First of all, noticing that the corporate loss seems to be a higher in the last couple quarters since Alliance.

Is that related to Alliance, and is that going to continue, or is that something of an aberration?

That line always moves a little bit, just depending on investment income allocation that sort of thing, but I would say it's roughly a run rate.

It shouldn't depart materially from the ongoing quarters.

And was it impacted by Alliance?

Impacted by Alliance?

No, I wouldn't say that.

It just seemed to be larger than it has been historically, so I was just trying to figure out why that was.

Yeah, it relates primarily to how we allocate both expenses and more importantly investment income.

Okay.

I was wondering if you could help us understand some dynamics a little better in both parts of the other international operation.

What we've seen over the last few years has been an improving expense ratio, a benefit ratio that has tended to increase a bit, and they've netted to a nice improvement in margin, but I was wondering, is the business mix changing toward higher loss ratio business, or is it developing that way, or what's going on there?

Jeff, you know, that benefit ratio is a fairly crude tool.

A lot depends on the mix of business, and where it comes from, the relative mix say between the life business and critical illness business out of the UK market can probably change that ratio from time to time.

Generally speaking, as both of the things that you mentioned, the declining expense ratio and the increasing benefit ratio tend to be -- tend to be pretty predictable in terms of maturing growing business, starting from zero.

I don't know that I would read too much in that, except that things are going along as planned.

So that would be consistent with the natural evolution of the business in your view?

Yeah I think so.

And lastly, you continued to have some A&H losses in the quarter.

Can you give us an update on the schedule or outlook for arbitration going forward here?

We do have as many as four arbitrations or hearings that we expect to conduct during the course of the year.

Nothing of this flow, that you have seen, is any result from arbitration decisions during this quarter or for the last several quarters, but we are coming towards the end of that period.

The flow is just runoff from the business.

We expect the tail to end reasonably quickly here in the next couple of years, but it does continue on.

Okay.

Thank you very much.

And the last question in the queue at this is time comes from Eric Wizowski of FTN Midwest Research.

Good morning.

I was actually wondering if you could give us an update on the UK reinsurance marketplace?

Are mortgages and real estate values still driving that market higher?

Eric, that that has been the driver for a lot of the growth in the UK marketplace in the risk business, as they call it over there, over the last several years are.

The real estate market is cooling off a little bit.

We still continue to see strong insurance flow, though, coming off of mortgages and mortgage coverages in the UK marketplace.

So it's really not evident that there's a real slow down in the insurance business that seems to match the slowdown in the housing market right now.

Okay.

Thanks.

And just as a follow-up, are there other attractive market opportunities the company is pursuing in the UK?

Oh, in the UK, we are basically pretty well established as one of the major reinsurers in the risk part of the marketplace, and that's a pretty big risk market over in the UK, and so there's a lot of scope for us to grow and to establish ourselves there.

Our growth in the UK, still, we would like to broaden it out in the number of companies, number of relationships, and we're still working on that very actively.

Okay.

Thank you.

And with no one left in the queue, I would like to give our participants one final opportunity to signal for a question by pressing star, 1.

We'll pause for just a moment.

It appears we have no further questions at this point gentlemen.

I'll turn it back over to you for any closing remarks.

Thanks again to everyone to who has joined us this morning for the discussion of the first quarter results.

We look forward to any other questions or comments as the quarter moves along.

Thank you very much.

And that concludes today's conference.

We thank everyone for your participation.