美國再保險集團 (RGA) 2005 Q4 法說會逐字稿

Good day everyone and welcome to this Reinsurance Group of America’s fourth quarter earnings release conference call.

Today’s call is being recorded.

At this time for opening remarks and introductions I’ll turn things over to Mr. Jack Lay.

Please go ahead.

Okay, thank you, and good morning to everyone joining us this morning for RGA’s fourth quarter 2005 conference call.

I’ll turn the call over to Greig in just a second, Greig Woodring, our Chief Executive Officer.

David Atkinson, our Chief Operating Officer is also with us this morning.

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

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 things, statements relating to projections of revenue and 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 from expected results is included in the earnings release that we issued yesterday.

In addition, during the course of the call we’ll make comments about our results based upon operating income, both on a pre-tax and an after-tax basis.

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

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

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

With that I’ll turn it over to Greig for his comments on the fourth quarter results.

Good morning everyone and thank you for joining us.

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

Overall results were strong with good contributions from all operating segments.

On a consolidated basis operating income for the quarter increased 32%, in total $73.1 million.

On a per-share basis the increase was also 32% to add $1.15 per share.

Reported net income for the quarter totaled $68.2 million, or $1.07, compared to $55.4 million, or $0.87, per diluted share.

Consolidated net premium flow was good, increasing 16% over prior year quarter.

Turning to our operating statement.

In turn, first the U.S.

Operating income totaled approximately $90 million compared to $77 million last year, up 16%.

Claims in our mortality business were basically within our range of expectations.

Net premiums increased 11% for the quarter and 10% for the full year, in line with our expectations.

Our Asset Intensive business contributed $7.4 million in pre-tax operating income.

That’s a good quarter.

No new transactions occurred during the quarter.

The invested asset base for this business is about $4.1 billion.

Turning to Canada, the Canadian operation had another good quarter.

Pre-tax operating income increased 21% to a total of $21 million.

Excluding the impact of foreign currency, pre-tax operating income increased about 15%.

Mortality was good and premium flows also very strong.

Excluding the impact of foreign currency, the premium increase was about 37%.

Year to date premiums are up approximately 26% on a Canadian dollar basis, a very strong growth in that market.

Turning to international operations, results were also strong for the quarter here.

Our Europe and South Africa operations reported pre-tax operating income of $12 million, well ahead of the prior-year total of $4 million.

We saw good mortality in the UK this quarter versus poor mortality in the prior year.

Asia Pacific reported pre-tax operating income of $18 million compared to $2 million in the prior year.

Mortality was favorable in the current quarter and it was unfavorable last year.

Prior year also included estimated claims for the Indian Ocean tsunami, if you remember.

For the year, our international operations contributed $76 million in pre-tax operating income, almost double the prior year contribution.

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

In total, the premiums are up about 24% for the quarter when you factor out currency fluctuation, which had a negative impact this quarter.

For the year, premiums are up 22%, excluding currency.

The Corporate and other segment results include debt costs, corporate overhead, et cetera.

That segment also includes approximately $7 million in costs associated with the commutation of the vast majority of the remaining AFJP business.

The residual obligations are now insignificant.

Turning to guidance for 2006, we’ve set an operating earnings target of between $4 and $4.50.

This guidance presumes no additional common stock issuances, no conversion of the [inaudible] securities [inaudible].

Mortality results will determine where we end up in this range -- let’s start over -- the guidance reflects normal earnings growth rate of between 8% and 10% in our North American operations.

Earnings in our international operations are more volatile and growth rates will vary by location.

In total, we are targeting a growth rate of roughly 15% for those operations.

We would expect consolidated premiums to grow in the 10 to 15% range, with the North American operations growing less than 10% and the international operations growing roughly 15%.

These ratios are certainly estimates and could be affected by the level of in-force block opportunities we see.

In general, our guidance reflects a more moderate growth rate in North America than we’ve seen in the past 5 years or so.

That’s not unexpected.

Also, growth rates in a couple of our larger international operations, primarily the UK and Australia, are moderating as well due to the large size of those operations and the dynamics of the underlying primary markets.

During the fourth quarter, we issued $400 million of coordinated debentures that received favorable equity treatment from the rating agencies.

About half of the proceeds from the offering will be used to fund growth and therefore we do not expect to raise additional capital in 2006.

However, business flow and acquisition opportunities and other factors could well require us to change that expectation.

In conclusion, we finished the year on a positive note and made signification progress in putting the Argentine Pension business behind us.

We’re looking forward to 2006 and we appreciate your support and interest in our Company.

With that we’ll take any questions that you may have.

Thank you gentlemen. [OPERATOR INSTRUCTIONS] Ken Zerbe with Morgan Stanley.

The Argentine Pension business, I know you’ve taken charges on this for several quarters, but you mentioned you’ve eliminated 95% of your exposure.

Can you help us quantify that remaining 5%?

I know you said it’s insignificant, but is it possible that we could see another $5 to $10 million charge on that remaining 5% going forward?

Ken, this is Jack.

I’ll take that question.

In terms of reserves it’s around $5 million or so.

It would -- and I know I stated a couple of quarters ago we thought we had it behind us and I was wrong because we did take another $7 million this quarter.

Though we truly believe what’s left is very insignificant, we also think we’re well reserved against it.

The disputed amounts are now in the hundreds of thousands.

Okay, great!

And then, the [inaudible] competition, obviously premium growth was very strong, especially in Canada.

I guess what’s going on that’s driving that?

Is it competition or lack of competition?

In Canada you have to deal with a number of things.

First of all, there is currency strengthening in the Canadian dollar versus the U.S. dollar.

Secondly, there is a mix of business issue with a little bit of different types of business being issued this year.

If you were to look on a comparable basis I would say that the true Canadian picture is up -- premiums are up maybe 18%, something like that and I think that just reflects our position in the marketplace and the dynamics of the marketplace.

We would expect that to moderate next year somewhat, but probably see Canadian premium increases in the double digits anyway.

Jeff Hopson with AG Edwards.

If you can address the North American premium growth -- I think you say 10% -- what is in your assumptions regarding the primary market growth on client retention, pricing, et cetera?

And then, as you look at Asia Pacific maybe you could address the powerful few markets there and what’s happening in those markets.

Well, in terms of U.S. premium growth, in terms of rates, basically where rates are today is pretty good from our perspective and business is already pretty much locked in.

With reporting lags and so forth any pricing that’s done in the first part of the year probably won’t have any effect at all next year.

So, basically when we make that estimate, Jeff, we will look at each individual client by client project production levels from each client and come up with the total increase.

That’s how we get to the final number.

It does assume we think that there is going to be a fairly much of a continuation in ’06 from ’05 in terms of levels of production recorded.

We have seen some small tendencies to increase retentions by existing companies that reinsure less, but not very much.

And we expect that 8 to 10% number is what we’ll see coming out of all those factors.

In terms of the Asian markets, we really had good results in the fourth quarter across the board, probably better than expected.

With the exception of a large claim in New Zealand, we were in pretty good shape in each of the markets.

Some of that is, in terms of the premium flows, catching up and truing up year around, but we do expect good growth in Asia Pacific and we do expect strong results out of all those markets.

We’ve seen a surge of growth in South Korea and in Australia and in Japan in the last couple of years.

If I could follow up on North America, in terms of the primary market, what are your general assumptions regarding growth in 2006 and 2007?

Any change from the recent trends there?

No, we don’t really see very much in the way of changing the trends there at all.

John Nadel with Fox, Pitt and Kelton.

A question on the -- I missed 2 questions for you -- one question on the guidance.

It’s a pretty wide range.

I guess it’s not so surprising, but I was wondering if you could just characterize just how wide a range of mortality in terms of I guess actual to expected results, would that $0.50 range cover?

Let me put that in perspective, John.

The [inaudible] deviation in our book, it’s a moving target based on in-force growth and so forth, but right now it’s at about $0.44.

So that range is like a half of a standard deviation on either side of the center point.

And then, in terms of thinking about the 2005 full-year results, $3.54 on a reported basis, but clearly that included some items that, especially if you take into account Argentina and your comments about how minimal the remaining 5% is there, 2005 clearly included some one-time hits.

It appears to me that 2005 normalized for the second quarter, mortality and some of the Argentine hits.

It feels like 2005 was well over $4, and so I compare that to your guidance for 2006 and I feel like that 2006 guidance is implying very little growth in earnings on a normalized basis.

Maybe you can comment on that.

Yes, John, this is Jack.

I’d be happy to comment.

I think your normalization is a little bit rich.

It’s always difficult to normalize a full year’s results because there is a large number of dynamics that contribute to earnings.

But, our own view is that 2005 results on a normalized basis would have been in the $3.90s range.

In other words, between $3.90 and $4 in terms of EPS.

And that’s after offsetting the impact, as you mentioned, of the Argentine Pension cleanup; the net impact of mortality variances, some of which were positive, certainly in the U.S. it was negative on a full year basis; foreign exchange considerations; and other minor items that we wouldn’t expect to be recurring.

So, that’s our outlook on ’05.

Okay, that’s very helpful, thanks.

And then, I guess the last comment is -- or the last question is just on capital and your comments for, at least based on your expectations, no expectation for new capital during 2006 after the subordinated debt.

With the buybacks of the accelerated buyback program, can you give us a sense for -- is the $200 million the half of the $400 million subordinated debentures, is that about what you would expect to need, $200 of incremental capital on an annual basis to support growth?

This is Jack again.

I’d say that’s a little bit more than an annual need and certainly that projection can change based upon change in views of rating agencies and block transactions, and so on and so forth.

But I would characterize that as a little bit more than a year’s capital need.

And then the last question is just on securitization.

You guys have been, I guess, surprisingly silent on the securitization side for XXX, and I guess, over time, potentially for A-XXX as well.

Can you give us an update on where you stand on the securitization front?

If you’re interested?

If you’re working on anything there?

Well, up to this point we have managed to take care of our XXX needs on a long-term basis through sort of private reinsurance arrangements or private, not quite securitization, but private deals, if you will.

We have no A-XXX business on the books at this point.

We have the A-XXX reserves at RGA.

We are looking at securitizations for our business as it grows and new business coming on, so you could expect that will be something we’ll want to pull the trigger on at some point along the way here.

But, up to this point we’ve taken care of things without needing to.

Andrew Kligerman with UBS Securities.

Most of my questions have been answered, but you mentioned on the call the in-force blocks.

Could you give a little color on what’s out there and what your appetite is for in-force blocks of business?

Well, right now, Andrew, there’s not a lot of in-force block out there and I think the comment relates more to the fact that they tend to crop up very quickly and you never know when they’re going to happen.

There has not been a lot of activity from our perspective anyway for the last little while on the in-force block.

But, there was a time when we had done 20% of our production in in-force blocks and you never know when things are going to happen to change the current environment a little bit.

But right now there is not a lot of activity.

So, theoretically, that could happen again, but you just don’t see it right now?

Correct.

We actually see more activity, or we’re looking at more things internationally on in-force blocks.

In terms of the in-force blocks, would you include primary blocks of business, or would it be just reinsurance blocks, like the [Aliance] transaction?

We’re talking more about direct companies reinsuring a block of their own in-force, not buying --.

Okay, that type of block, okay.

I just wanted to make sure.

And then, just shifting over to the competitive landscape, what are you seeing in terms of new entrants?

I know we saw [Wilton] and I think there is another one.

What does the landscape look like in terms of new entrants?

We don’t see too much changing very quickly.

Now, we have seen Wilton pop up in a couple of places and I think we’ve seen Ace in at least one place, but we really aren’t seeing much impact by new entrants in the market.

They’re pretty much the same lineup?

Yes, that’s pretty much what we see at this point.

And then, you highlighted South Korea, Australia, and Japan as sort of your big Asian growth areas.

Were there any others that you see as being promising, or is it those three?

Well, like I said, Andrew, we had pretty good results across the board and maybe surprising growth in Hong Kong, but those three are the biggest markets for us there.

Jeff Schuman with KBW.

I’ll just circle back again to the issue of earnings guidance from a couple of perspectives.

I think coming into ’05 your guidance range was $3.85 to $4.15.

Your recent comment was that you kind of feel, if I had normalized, maybe $3.90 to $4.

That’s in that range, but towards sort of the lower half, so I guess my first question would be sort of what changed during ’05 to sort of the retrospect if you had normalized earnings, or maybe a little more modestly?

And secondly, looking to the ’06 guidance again, whether you view sort of normalized ’05 as $4 or $3.95.

You’re talking about a year-over-year growth rate of 6, 7 or 8% from sort of midpoint to midpoint and I’m wondering, given that you’re not burdened with an equity rate [inaudible] ’06, why you wouldn’t look for somewhat higher normalized EPS growth over that timeframe.

Jeff, this is Jack.

As I suspect you can appreciate, coming off a very difficult year we thought that a more measured perspective on the guidance really made sense, and I’m talking about ’06 now.

So that we would expect that if things fall our way we could very well report full-year ’06 result in the top half of that guidance.

And in terms of -- and once again sort of looking back at ’05, sort of seeing the normalized number, retrospectively maybe a little below the midpoint of where you’d expect coming into the year, what sort of changed during the year?

Well, we don’t view it to be very far below.

For instance, our own internal plan had it right around $3.95, our ’05 plan.

I think the midpoint of our guidance last year was about $4 even, as I recall.

So, I think we’re talking about very minor amounts here.

We don’t view that a normalized result would have fallen well short of where we expected it.

So, you didn’t really -- no real change from sort of your perception there, and then, maybe a little different sort of tactical approach towards guidance in ’06.

Yes, I think that’s a fair way to put it.

And then, obviously a lot of discussion recently about potential epidemics and scientists are all over the map.

Certainly, there are some that think that epidemics are possible.

Can you, I guess, just give us sort of the benefit of your latest thinking about any historical precedents or how we should think about companies like the reinsurers that would be pretty highly leveraged [inaudible] some changes in sort of secular or [inaudible]?

Well, Jeff, obviously that’s a subject we’ve paid a lot of attention to and I think we read everything that comes out on the subject of Avian flu and the consequences of such a pandemic.

There are a lot of things that have changed since say the worst of those flue epidemics of the 1918 epidemic, for example, in terms of healthcare, travel, and so forth, the effects of viruses of that sort on populations that are insured versus uninsured.

We try to incorporate all those things in the models and clearly, it would be a bad event if there is a pandemic of a deadly flu virus, but there are a lot of reasons to think that that’s, while a possibility, it’s a fairly small possibility.

It’s something we try to prepare for as best we can, but it’s not a large probability in our view.

And just to be clear, most of the time [inaudible] pandemics, but I mean something like that is not going to be considered a CAT event.

Is that correct?

You get no release under a CAT --?

Yes, that would not be a CAT event.

Exactly.

Thank you.

Al [Kobra] with Oppenheimer and Company.

I was wondering if you could just comment on some of the underlying mortality trends in your North American block?

I know in the second quarter we had a bit of a mortality blip.

Could you perhaps talk about experience large case versus smaller case?

Yes, in the second quarter that mortality was predominantly due to large cases.

We had an unusual number of -- or unusual amount of claims n the $1 million and over category and we tend to watch that carefully.

We haven’t seen quite so much in that category since that time.

Mortality has been correspondingly well behaved and I’m talking about the U.S. market now.

In contrast, Canada has had very good mortality for about 8 quarters in a row.

This fourth quarter was probably their -- it was still better than expected, but probably their worst quarter in a little while.

But, a lot of that has to do with absence of large claims.

They have seen in their book a real absence of the large claims in that whole stretch.

You can never explain why those things happen at certain times, but the number of cases that fall into that category is not as big as you might imagine.

So, it’s fair to say that over the past 2 quarters you’ve seen your sort of underlying mortality trends by case normalize?

Yes, pretty much, pretty much.

I think the third quarter was a better-than-expected quarter of mortality.

The fourth quarter was probably a little bit under the center point, but it’s not much.

It’s pretty close to expected.

Sure.

And just a follow-up really on Jeff’s past question about whether if there were a pandemic sort of situation would it be characterized as a catastrophe.

Does that -- am I right to believe that if there was a large event such as that that you don’t have sort of an excess of loss cover that would mitigate some of your losses?

That’s correct, yes.

Bill Procter with Mackenzie Financial Corporation.

I had a couple of questions with respect to the income statement.

The first one has to do with the policy acquisition cost.

For the year your premiums were up 15% but policy acquisition costs were up 6%.

And then, in the quarter, the fourth quarter, the premiums were still up 15% but the policy acquisition costs were only up 2%.

Nice trend.

Can you give us some guidance as to, given that your premiums could be up 10 to 15% in ’06, what might happen to the policy acquisition costs and why their increase is so low?

Bill, this is Jack.

I think it’s always difficult to kind of carve out the policy acquisition costs as a percent of premium in particular and take a look at that trend without also taking a look at the reserve and claim trend.

So, I think my best suggestion would be, as you look at the policy acquisition cost trend do it in concert with the loss reserve trend.

In other words, add the two together I think is one way that you could take a look at it.

And then, as a comparison to premium, you’ll see it’s reasonably well behaved and consistent over time.

Okay.

And the second question just has to do with the tax rate, where again I’m assuming that as your profits from foreign markets your tax rate should go down, which is what happened for the year, but in the fourth quarter again it was bouncing back up.

You’re a very generous company.

Could you comment on the trend for tax rates going forward, particularly, I guess, as your international income rises faster than your U.S. income?

Yes.

In terms of the international operations we’re in various stages of development, so it’s hard to make a blanket statement there in terms of how that will affect the effective tax rate because it really depends on where the [inaudible] are emanating.

But I would suggest that if you look at the effective tax rate on an enterprise-like basis you should presume 34.5 to 35% in terms of an effective tax rate.

So, it would actually be in the year ’05 it was 33.9, so you’re suggesting that that could be a little lower on a go-forward basis?

Could be a little low, that’s right, not dramatically.

Eric Berg with Lehman Brothers.

I was hoping to revisit the whole issue you’ve already touched on -- I’m hoping you can expand on this -- the whole issue of sort of the current growth outlook for this industry and then for your Company.

I guess I’m still trying to pull all the pieces together.

In the sense that I think most people don’t think of the primary business as growing all that rapidly.

I think you’ve indicated that prices are stable to increasing modestly in the business.

Again, if you wouldn’t mind revisiting the issue, what is allowing you, since you are presumably your reflection of the health of your customers to grow at a double-digit pace if they’re not growing at a double-digit pace?

This is in North America, that’s really what I’m talking about.

This is Dave Atkinson.

One insight there is if you look at how much of their business is currently reinsured it’s a smaller percentage than the percent of new business they’re reinsuring.

So, our business, in other words, 10 years from now if we keep growing at the current rate, we probably will reach more of an equilibrium in terms of what’s reinsured.

But I think the overall reinsurance penetration of the direct market is something in the order of what Greig? 30 to 35%?

Whereas, it’s close to 55 to 60% of new business is being reinsured.

If you look at RGA specifically, Eric, the production for ’05 was very strong in the U.S. market for us.

Now, that doesn’t mean a lot of premiums early on.

It does mean premiums will flow and there will be a good surge of continuing premiums from that business.

Part of that reflects the fact that consolidation of the [inaudible], the [Scottish] buying ING.

And I think our business went up as a result of changing sort of market dynamics with fewer players and so forth.

And so, if you look at us in isolation we feel that that 8 to 10% number is very doable next year.

Just a quick follow-up to your math.

If the cession rate of the primary level is very high and be higher than the extent to which in-force business has been reinsured, which is I think -- but let’s say that cession rate is high but stable.

Let’s say it’s 80%, but it’s been 80% for a few years.

I’m thinking that what matters is not whether the cession rate is high as much as whether it’s stable or increasing and I’m thinking that if the cession rate is stable, then once again you will be back to a rate of growth in line with the growth of your cedents.

Or, am I not thinking of your --?

Ultimately, if you do that for many years you’re right, but right now we’re in a position where our in-force is smaller than say 80% of our share of the in-force business of our customers, so it’s going to give you a better rate.

There’s one other factor that I didn’t mention and that is we have a lot of treaty structures that give us increasing premiums.

Premiums increase as people age and so fundamentally, if we were to just close our doors today to new business we would still have an increasing revenue stream of about 3% a year, I think that’s about the average.

So right there, that would give us an extra boost over what our customers would see.

Jimmy Bhullar with JP Morgan.

Could you quantify what you’re seeing in the market in terms of pricing?

I’m assuming the rates are not as much as they were a few years ago, but are you seeing them stabilize or are you even seeing rate decreases in certain lines?

And then I have a follow-up.

I think we’re -- it’s always hard to tell that on a universal basis.

Each time we do a quote it’s a new situation.

I’d say that rates are -- it moved up and then it pretty much stayed up, not changed.

Is [inaudible] improved from the last -- from like ’04 or ’03?

Or is it better, or worse?

It’s improved from ’03 and ’04.

It hasn’t really changed much from the beginning of ’05.

And then, just a follow-up on your -- on the capital needs.

If you maintain your current growth, is it fair to assume that you would not need any new equity capital until at least the late part of 2007, right?

Yes, I think that’s a fair characterization as to any unexpected sort of changes.

David Merkel with Hovde Capital.

What do you think your best opportunities are for reinvestment of free cash flow?

The best opportunities for reinvesting cash flows are probably a budding new business and writing new business.

Growth rates are probably going to be higher in Asia than anywhere else for us in the next few years.

There are no further questions at this time.

I’ll turn it back over to you, Mr. Lay, for any additional and closing comments.

Well, thanks again to everyone who joined us this morning.

To the extent any other questions come up feel free to give us a call here in St. Louis.

With that we’ll end the fourth quarter conference call.

Thank you and that does conclude today’s conference call.

We thank you for your participation.

You may now disconnect at this time.