美國再保險集團 (RGA) 2004 Q3 法說會逐字稿

Good day 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.

And now at this time I would like to turn things over to Mr. Lay for opening remarks and introductions.

Please go ahead sir.

Okay.

Thank you.

Good morning and welcome to RGA's third quarter 2004 conference call.

I'll turn the call over to our CEO, Greig Woodring, in just a moment.

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

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

As a reminder, during the course of the call we plan to make certain statements and discuss certain subjects that will contain forward-looking information including, among others, statements relating to projections of revenue or earnings and future financial performance and growth potential of RGA and it's subsidiaries.

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

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

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

Under SEC regulations, operating income is considered a non-GAAP financial measure.

We believe this measure better reflects the ongoing profitability and underlying trend of our continuing operations.

Please refer to the tables in our press release for more information on this measure and reconciliations of operating income to net income with from our various business segments.

With that I'll turn it over to Grieg for his comments the third quarter.

Good morning, thank you for joining us.

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

The third quarter continued our string of good quarters both from a top line and a bottom line operating income standpoint.

On a consolidated basis, operating income for the quarter increased 57% and totaled almost $60 million, a record earnings level for the Company.

On a per share basis, our reported operating earnings increased 25% for the quarter, 95 cents per diluted share, compared to 76 cents a year ago.

These are strong results even when considering the comparison to the prior year quarter included some modest adverse mortality.

Reported net income for the quarter totaled $39.4 million, or 63 cents per diluted share, compared to 41.8 million, or 83 cents per diluted share.

That decrease comes primarily due to a negotiated settlement in our discontinued accident and health business that I will discuss in more detail in just a minute.

Additionally the fair value of embedded derivatives declined during the quarter.

Let me remind you that such reported gains or losses are unrealized and this reporting does not affect the return expectation or cash flows that is interest earned or interest credited over the life of these treaties.

This item is volatile on a quarterly basis since it's value is sensitive primarily to credit spreads.

This adjustment applies only to modified co-insurance or funds with held reinsurance treaties in our asset-intensive segment and is the result of the B-36 accounting standard adopted in 2003.

Year-to-date the value of embedded derivatives after related DAC amortization has decreased about $4 million.

Consolidated net premiums were strong, up 43% overall, up 22% excluding the Allianz block.

All segments reported good premium growth.

Turning now individually to our operating segments.

First in the U.S., pretax operating income totaled 78.4 million compared to 46.8 last year, up 68%.

Mortality experience was favorable in the U.S. for the quarter, whereas we experienced unfavorable mortality in the third quarter of 2003.

Year-to-date mortality experienced in 2004 is now at our expectation.

U.S. market continues to exhibit highly favorable conditions.

Consolidation continues with Scottish Re's acquisition of ING's life reinsurance block.

We do compete with ING and Scottish Re.

This acquisition reduces the competition by one.

Scottish has indicated that they will discontinue ING's facultative operation, that may create additional opportunities for RGA.

Additional consolidation may occur in the future and, as always, we'll pursue opportunities as they arise.

However, with our strong organic growth we'll only do transactions on our terms.

Our asset-intensive business contributed $5.2 million in pretax operating earnings.

That's a good quarter.

No new transactions during the quarter.

Macro conditions really don't favor growth for this business currently.

The invested asset base is about $3.5 billion as of September 30th.

Our U.S. management team continues to transition the Allianz block to our systems and it's on schedule and without surprises.

We reached some significant milestones during the third quarter in terms of moving business to our systems and we remain on schedule with the transition which will be substantially complete by year end.

Turning next to Canada.

The Canadian operation had another strong quarter.

Pretax operating income totaled $15.9 million, up 46% from the prior year total of $10.9 million.

Excluding the impact of foreign currency strength, pretax operating income was still up 39%.

Mortality was favorable in Canada, as has been the case for the entire year, a particularly good streak.

Premium flow was good, up 6% in Canadian dollars, 11% in reported U.S. dollars.

Year-to-date premiums are approximately 10% on a Canadian dollar basis; up.

New business has increased about 26% over last year.

The Canadian market continues to benefit from favorable dynamics.

Regarding our international operations, results were mixed in the quarter.

Our Europe and South Africa operations reported a strong with 9.2 million in pretax operating earnings.

Well ahead of the prior year end total of $2.1 million.

The U.K. continues to be the key contributor to growth for that operation.

Results in Asia Pacific were hampered by poor mortality.

In that segment we reported a pretax operating loss for the quarter of $1.7 million.

This sort of quarterly volatility is not unusual due to the size and lack of maturity of the business.

On a year-to-date basis the combined pretax operating earnings for our international business totaled almost $33 compared to about $21 million in the prior year.

Premiums for the international operations continue to grow at a good clip.

In total they're up about 34% for the quarter when you factor out currency strength, and up 47% in U.S. dollars.

We continue to be very optimistic about our international growth opportunities as we further penetrate or current markets.

Our A&H operation, which is a discontinued business at this point, showed some important activity during the quarter.

We reported an $18.6 million loss for the quarter due primarily to a negotiated settlement of our largest treaty dispute.

By putting this dispute behind us we have reduced, by almost 75%, the amounts claimed against us that are in excess of our reserves.

Those amounts totaled $108 million at June 30th and with the settlement will be reduced to about $28 million.

While we still have additional disputes and arbitrations ahead of us, the disputed amounts, as you can see, have grown significantly smaller.

Putting this particular disagreement behind us is a significant step forward.

Now, let me briefly comment on the recent headlines on broker compensation and bid rigging.

While this is an unfortunate situation with which the broader insurance industry must deal, we should not be directly affected at RGA.

Recent articles that reported primarily on issues that arose primarily in the property and casualty market.

I don't expect any broader implications for us and, in my opinion, for anybody in the life reinsurance industry.

Please with the strong operating results for the third quarter.

We have good momentum going into the fourth quarter.

We were pleased to be recognized as life reinsurer of the year by The Review, a trade publication published in the U.K.; and that recognition is a reflection of the hard work and dedication of our talented associates.

We look forward to continued growth and appreciate your support.

And with that, we will take any questions you may have.

Thank you. [Caller Instructions] And we'll take our first question today from Jeff Hopson with A.G. Edwards.

Hi, good morning.

Few questions.

Greig, you mentioned the Scottish deal.

Do you expect any appreciable impact on, I guess, industry conditions, capacity, et cetera?

And how many players are left in the facultative business?

Jeff, we do expect some fallout from this acquisition.

As I said, it does eliminate a competitor.

Secondly it's our understanding they have cancelled-- ING has cancelled all of their existing treaties, putting pretty much all that have business up for grabs.

Which means, potentially, a lot of new business activity or quoting activity over the coming few months.

The upshot is that RGA will probably pick up some of that.

It's always hard to say how many facultative reinsurers there are.

Usually--most reinsurers do some facultative reinsurance, but the number of real competitors has gotten to just a very small, small group now.

Okay.

And then on the Asia Pacific side, any -- was there a country specific issue in the claims?

And can you give us an update in terms of the premium growth country by country, which countries are driving the high growth in Asia Pacific?

The claims were predominantly from Australia in this particular quarter.

You have to understand in these smaller operations it's not only that claims can be more volatile because you don't have a large base of renewal premiums, but also the fact that we're keeping a fairly large retention for the size of those operations.

And the fact that because it's a lot of new business, the reporting structures are not quite as smooth and so you do tend to get lumpy reporting from time to time as well.

We had pretty good results in most of the other Asia Pacific markets.

Generally our growth in Asia is coming from Korea, Japan, and Australia currently.

Okay.

Very good.

Thank you.

We'll now take a question from Jeff Schuman with KBW Investment Bank.

Mr. Schuman your line is open.

Please go ahead if have you any questions at this time.

Sorry about that.

Good morning.

Congratulations on a very good quarter.

Wanted to follow up first on the facultative business.

Can you just give us a little bit of an update in terms of just how big that business is in terms of premium or earnings contribution and then just kind of generally how results have been trending within that business recently?

Yeah, Jeff, you know we're about as big as we can get to some extent.

So that business is not a real fast growing business like the automatic reinsurance has been in recent years.

We are up this year.

It tends to move with the increased volumes of insurance written in the life insurance industry.

So it tends to grow fairly modestly, but it is up reasonably this year.

That business for us represents a fairly small amount of our U.S. premiums.

We do leverage it into a lot of extra opportunities and we do make a fairly good return on the premiums on facultative.

I would say it's probably in the 20% range, low 20%.

Yeah, it's typically between 20 and 25% of the U.S. premium level.

20 to 25% of the U.S. premiums and maybe a higher percentage of earnings.

Yeah.

Yeah.

Exactly.

Okay.

Next I was wondering if you could comment on the dividend increase.

You did increase the dividend by 50%.

Maybe you could just talk about kind of updating us on the capitol position-- the capitol outlook generally and help us, I guess, to understand understand the dividend increase, sort of, in that context.

Sure.

This is Jack.

I'll take that.

We really raised the dividend--if you look back historically, we had not raised the dividend in four years or so and really raised because we had a feeling that we were -- well, it's more than a feeling.

We were towards the bottom of range of our insurance competitors in terms of payout ratios and that sort of thing.

So it wasn't that we're trying to make a statement that we're slowing growth or anything like that.

But we had this uncomfortable that we may be shut out of some portfolios if we continue to let the yield run down a little bit.

So that's why we made that move.

It really doesn't cost us all that much per year, and, frankly, we still think we have a capital base that will a low us to grow for at least 18 months or 2 years; and this is all absent any big M&A activity.

But between the internal earnings generation and debt capacity and so on, we think we are in a fairly stable position capital-wise at this point.

Okay.

And lastly there's an article this morning in the Wall Street Journal talking about higher coverage limits in the life insurance industry.

I'm wondering to what extent you've observed that trend?

Secondly, what kind of an opportunity does that create for the reinsurance market?

I mean is there likely to be good reinsurance penetration of those increased volumes?

And thirdly does it create any underwriting concerns due to maybe a little more anti-selection?

Jeff, I haven't seen the article so I'm not really sure I can comment on the question there.

Well, just in a nutshell what it says is that a number of major insurers including Met Life, New York Life, Prudential have substantially increased sort of their standard coverage limits.

Basically saying that they're often willing to write maybe 30 times earnings when they previously maybe would have written, say, 20 times.

Well, certainly if that's the case, that -- that trend does generate more reinsurance volume.

Those cases very often end up in the reinsurer's laps to deal with.

Those often are very difficult cases to manage and overall capacity in the reinsurance business is somewhat down from recent years, especially after 9/11 some of the casual players taking some retro have sort of moved away from the space.

So that's been an area we've been really working hard at is trying to get capacity extended and keep it up.

It's important to our facultative operation, obviously, and also to our overall operation.

So at this point you haven't been really focused on this--or seen a lot of evidence of this particular trend.

No no.

We really haven't seen that it's generated so much.

I think it's a recognition of maybe an evolutionary move but we haven't seen any sharp breaking points here?

And just more generally, I think it's pretty clear that top line growth has been fairly dear for many of the primary companies.

Have you seen any, I guess, relaxation of underwriting, do you think, as a result?

Well, it's something we guard against and we do significant number of external audits of our client companies and we have a lot of discussions with them.

Typically -- typically there might be one or two companies we worry about at any given time but, generally speaking, most of the companies are adhering to underwriting principles and behaving responsibly.

Very good.

Thanks a lot.

We'll now take a question from Ken Zerby with Morgan Stanley.

Good morning.

Two questions for you.

Is it possible to quantify the mortality impacts in each of the business lines that we saw?

And, second, I was hoping to get a little update in terms of the rate increases you've been able to push through so far.

Mostly just in terms of how how big have they been and what percentage of your book have you been able it reprice each year.

Ken, this is Jack.

I'll respond to the comment on mortality fluctuations.

This quarter was typical in some respects in that you know we have aberrations every quarter, some positive some negative, and it's always difficult to put a fine point on it.

But I will give it a try here.

In terms of U.S. mortality, on a pretax basis that probably added about $10 million to earnings.

Canada, was pretty close to break even, maybe added a half a million or so in terms of positive mortality variance.

Europe and South Africa had positive mortality.

Sizing it would probably result in about 2 million or so.

And then Asia Pacific, as Greig had commented, had negative mortality probably about 7 million or so.

So if you add all that up we still had a positive mortality variance in the 5 million range.

Okay.

And Ken, on the rate increase those are always tough to tell.

A lot of what happens is simply the auction dynamics of the fact that there are fewer-- fewer competitors bidding.

So when you take the top three offers you end up with a range that's more -- more centralized so you don't get the extreme bidders winning the quotes all the time.

I would generally say prices have gone up something like 10% in the market over the last little bit.

Remember, you know, our industry mortality improves generally every year.

So with prices actually going up the -- the impact is even stronger because the raw ingredients, if you will, of mortality is trending downward continuously.

Okay.

So the prices themselves up 10% and then you're getting an additional boost from the mortality improvements.

Right and there are period of times where pricing goes down faster than mortality and other times where it goes down slower than mortality.

This is a fairly unique time where, due to a number of factors, maybe overblown competition is one of the contributing factors in the past few years; prices are actually going up.

Okay.

All right.

Ken, this is David Atkinson.

Just to clarify too, our contracts are long-term rate guarantees.

We don't preprice the existing book from year-to-year like the property is casualty does.

So what you're seeing then is the new business we're putting on the books is coming in at more favorable prices and that gradually helps our profit ratios.

Got ya.

Okay.

Yeah, I would imagine some of the longer term guaranteed rates would eventually reprice as they come up for renewal.

There is no renewal.

They're contracts for life just like our clients have contracts for life.

If you buy life insurance for the most part it's guaranteed for life.

I see.

Okay.

Great.

Thank you.

[Caller Instructions] We'll now move onto Eric Wisotsky from FTN Midwest Research.

Hello and good morning.

I have a question regarding the remaining 28 million of accident and health claims still under dispute.

Do you have a sense for the timing of when those claims might be settled?

And also does the recent settlement set the stage for possibly expediting those remaining disputed claims?

Eric, this is Jack.

I'll take that.

It's a fairly slow process, moving through the dispute mitigation process.

My suspicion is that it will still be couple years or so before we have gone through and settled all of these claims.

I don't think the most recent settlement will have any material impact on the rate at which we settle the remaining disputes.

I think the main thing is we have whittled down considerably the total level of disputed claims and it will simply take whatever time it takes to mitigate any of these disputes at this point.

Okay.

Thank you.

We'll now take a question from Scott Woodcock from Neuberger Berman.

Hi.

Good morning.

I had a couple of questions.

First off I was wondering if you could just give a little bit more background on the claims that you did settle in the accident and health area?

And then also, I was just wondering if you could talk a little about the acquisition environment?

I know there are, you know, there are rumored to be a couple other properties available in the market.

So I was just wondering if you could give your outlook for acquisitions going forward?

Thanks.

Yeah.

I'll take that.

On the A&H side, this was a particular hole that was hard to predict what the ultimate claims position would be.

We felt we had a case for rescission.

At some point along the way we decided the better course of action would be to settle it at some compromised point just to get it behind us.

The whole industry is like that a lot.

There's very much uncertainty as to what the ultimate claim level might be on some of these things and it's kind of hard to predict how cases would end up in an arbitration setting.

So I think, while we're somewhat disappointed that we didn't get a full rescission on the case, that's the way these things go sometimes and we did the best we could with managing it from this point.

On the acquisition front, we also hear rumors of others.

We're not aware of anything that's currently for sale actively, but we wouldn't be surprised at all to see some more acquisition activity and we also expect to see a couple new entrants into our business.

At this point, frankly, that may not be a bad thing to keep the dynamics of the market working well as far as the seeding companies are concerned and keep the level of reinsurance activity at a high level.

Okay.

Just a follow-up.

Did you guys look at the ING business and if so -- I imagine you did look at it.

I just if you could give a little color on why, you know, you decided not to pull the trigger there.

Well, we did look at it and while we felt we were able to get our arms around it and could deal with it, it's one of these situations where somebody else was a little bit -- little bit sharper on the pencil.

Okay.

Thanks very much.

Well now move on to Steven Gaddeus with Dreyfuss.

Thank you.

Good morning.

I'm wondering if you can give us a little more color on how you see the outlook for the marketplace.

As you mentioned, you thought that pricing is probably up around 10% and, you know, with continued favorable mortality.

If I recall correctly that's a little bit better than what you'd been thinking about several months ago.

Do you think that that's a temporary phenomenon?

Do you see it lasting awhile?

What does your crystal ball look like?

Well, it's going to last for a little while.

You know these things move fairly slowly, but in sort of wave like motions.

I'd have to say, though that we really haven't felt that our pricing over the last several years was bad, that we weren't getting returns we priced for.

So what we -- what we are really seeing is more opportunities in the market at our price, if you will, today than we saw in maybe the couple years preceding this year and maybe a little bit last year.

So in that sense, the market characteristics are very nice.

The fact that there are fewer competitors also means that it's a lot more predictable market.

There's not the sense that you're competing against a dozen companies who -- who may be stretching for production levels and so forth.

So that makes the whole marketplace work more smoothly from our perspective.

And, generally speaking, we think that our relationships with our customers are extremely good, that the market position of RGA is very good and that we expect a lot of new business over the next little while.

Okay.

Are you getting any kind of push back from your primary insurance clients at all for these kind of price increases.

Well, certainly, the direct companies are reinsuring less beginning to move in the direction of retaining more.

There are enough lags in our business that this happens only slowly, but since there are fewer reinsurers the amount of business that we're going to get at RGA we expect to actually increase.

It has increased so far this year over last year and we'll expect it to increase next year.

Steven, this is Dave Atkinson.

Just to reiterate what Greig said, though, our pricing stance has not changed that much in the marketplace.

What's really happened is our-- some of our more competitive -- some of the competitors have eased on their pricing allowing us to capture more business.

All right.

Great.

Thank you, gentlemen.

[Caller Instructions] Want to move onto Jenny Jones with Schroder.

Yes.

I was very happy to hear about the accident & health.

Just to go back on it.

In terms of the balance that is left there, have you always felt that this would be broken down into pieces and that this, perhaps, is the toughest piece left?

Or could be potentially the most costly?

Yeah.

--in resolution.

Yeah, Jenny, that's fair to say.

This was a dispute over a big number.

Right.

That we felt we had a very strong case on but, nevertheless, it does cause a lot of concern and a lot of activity and a lot of legal fees over the last little bit.

That is all behind us now.

The number of disputes-- well you can see the number of disputed claims there, it's not that many cases.

If things work well we could resolve them soon or it may drag on awhile.

A lot of it getting your arms around what it really is.

Right.

Are the claims legitimate?

Are they fair claims?

Do they belong to us?

And those answers aren't easy to get all the time.

They take a little while, a lot of auditing and the data flow in this business is very poor.

So we can't really predict when these things will be settled out.

But there aren't that many of them left now.

All right.

Well I was very happy to see this.

Thank you.

And gentlemen, at this time there are no further questions.

I'll turn things back over to you for any additional or closing remarks you may have.

Okay.

Well, thanks to everyone who joined us this morning.

Feel free to give us a call here in St. Louis should you have any additional questions or comments.

And with that we will end the third quarter conference call.

Thank you.

Thank you.

This does conclude today's conference call.

Thank you everyone for joining us and have a pleasant day.