美國再保險集團 (RGA) 2006 Q3 法說會逐字稿

Good day everyone and welcome to the Reinsurance Group of America's third quarter conference call.

Today's call is being recorded.

At this time, I would like to introduce the Chief Financial Officer, Mr. Jack Lay.

Please go ahead, sir.

Okay, thank you.

Good morning.

Thanks everyone for joining us for our call this morning.

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

Greig will comment on the results that we released late yesterday, and then we will respond to any questions from our participants.

As a reminder, during our 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 for RGA and its subsidiaries.

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

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

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

Under SEC 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.

Please refer to the tables in our press release for more information on this measure and 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 second quarter.

Good morning.

Thank you for taking the time to join us for the call.

Like the first two quarters of the year, overall results were strong in the third quarter.

On a consolidated basis, operating income for the quarter totaled $74.7 million, slightly ahead of the prior year total of 71.8 million.

Prior year's third quarter was a very strong quarter itself.

On a per share basis our reported operating income for the quarter was $1.18 per diluted share compared to $1.13 per share a year ago.

Reported net income for the quarter totaled $74 million or $1.17 per diluted share versus $67.6 million and $1.06 per share last year.

Net premiums totaled $1.1 billion, about 11% over last year, which as expected, is a difficult comparison due to the strong premium flow in the US during last year's third quarter.

The year-to-date rate of increase is 12%, which is within our range of expectations.

Net investment income totaled $183.4 million versus 166.5 million last year.

The current quarter total includes the investment earnings on the $850 million Triple X securitization we completed in June of this year and yield on our general account portfolio is basically flat.

Turning now to our operating segments, first in the US.

The pre-tax operating income totaled 84.9 million compared to $86.7 million last year when we had favorable mortality.

Mortality experience fell in the expected range for the quarter.

Premiums increased 6%, an expected result given the very strong premium flow last year, which made the comparison difficult.

On a year-to-date basis, our premiums are up 10% in the US.

That is at the top range of our expected full-year range of 8% to 10%.

Our US asset intensive business contributed $5.6 million in pre-tax operating income to the quarter, which was a good result.

The invested asset base totaled $4.4 billion as of September 30.

Turning to Canada, claims flow returned to normal levels this quarter, but not to the very low levels of last year.

Pre-tax operating income totaled $12.2 million, up slightly from the prior year total of 11.1.

The stronger Canadian dollar contributed approximately $1.2 million to the result.

Premium flow was good in Canada, up 16% in US dollar terms and 8% in Canadian dollars.

Prior year quarter premiums were enhanced by $12 million from an [in-force] transaction with retroactive premiums.

New business opportunities in Canada continue to be good with stable pricing dynamics.

Regarding our international operations, in total it was a strong quarter driven primarily by results in Asia-Pacific -- pre-tax operating income of $29.3 million versus $17.1 million last year.

We saw good results all across our Asia-Pacific locations.

Acquisition costs during the quarter were slightly higher than expected in the UK and South Africa, but quarterly fluctuations are not unusual given client reporting and the mix of business.

Year-to-date ratios are reasonable and year-to-date results continue to be very strong in that segment.

Foreign currency translation has a small positive impact on the results, only it was less than $0.5 million on pre-tax operating earnings.

Premium flow was good.

For the quarter the rate of increase was 19% measured in US dollars, about 17% on an original currency basis.

These operations continue to develop nicely.

Results are more prone to volatility due to the varying size and maturity of the individual locations throughout the world.

In conclusion, we are pleased with the quarter and the year-to-date performance.

We're operating from a position of strength at the current time and continue to take advantage of opportunities in the marketplace.

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

Operator, I think we're ready to take any questions.

(OPERATOR INSTRUCTIONS).

Ken Zerbe.

Great, thanks.

Given the problems of some of your competitors, I was hoping you can talk about what is the upper end for potential new business market share that you could realistically achieve, given the fact that the primary companies try to spread their risk across several different re-insurers.

In days past I used to get that question and used to respond that about 15% was a maximum market share, that is to say if you won everything you quoted on, you might get 20%.

And you really don't want to win everything that you quote on.

Today, because of the reduced number of competitors, I would say that market share is somewhere a little bit north of 20%, which is where we were last year and where we, I think, expect to end up this year.

We are, at this point, probably near the upper limit of our doable market share in terms of new business.

And that was even before Scottish pulled back?

What happens when Scottish pulls back, the maximum bar goes up a bit.

I think that you might see the maximum market share that you can really attain creep up a bit in the next going forward period.

It sounds like your comments that the maximum market share is a lot less than your proportional -- or your percentage of their business, I guess you could say -- if that makes sense.

It sounds like it goes up a little, but not as much as you would normally expect if you had lower market share.

Yes.

I think the fact of the matter is there are four large re-insurers instead of five large re-insurers quoting on new quotes today.

Okay, that's fine.

The other question I have -- can you walk through the collateral finance facilities expense in the corporate segment.

I assume that relates to your Triple X securitization.

Is that a perfect offset with investment income?

Or is there some net gain or loss on that?

You are right.

That does relate to the Triple X securitization.

It is largely offset.

There is a minor amount of differential in the investment rates in terms of what we pay and what we earn.

But it is fairly minor.

So it contributes very little to the earnings stream.

Okay, great.

Thank you very much.

John Nadel of Fox-Pitt Kelton.

Good morning everybody.

A question for you about DAC and other insurance expenses.

I think if I look on a consolidated basis, other insurance expenses look like they are up about 19% or 20% sequentially.

DAC amortization up, give or take, 9% or 10% sequentially.

Can you give us a sense?

I know, Greig, you said that the DAC expense in Europe/South Africa was up a little bit, but year-to-date it looks fine.

Can you give us a sense for why those numbers crept up so much, especially the other insurance expenses?

A couple of different questions there.

First on the policy acquisition costs, it is up, if you look at it enterprise-wide, maybe a point -- a little over a point.

I am really referring to percentage of premiums when I said that.

It is a little bit higher than what you would expect.

But you get some of that depending upon the mix of business and the interplay with the reserve-setting process.

While it was a little bit high this quarter, I think if you look at any particular quarter, it is likely to be a little bit higher or a little bit lower.

I would direct you to look more at what the nature of that percentage has been historically and look at the three quarters year-to-date in terms of maybe a little bit better run rate [indiscernible] about 16% or so.

There doesn't seem to be anything fundamental that would drive it one direction strongly or another right now.

Okay.

On the DAC side specifically, was there anything?

Because asset intensive was up a bit.

Is there any acceleration of DAC amortization as a result of spreads?

No.

The answer is no.

There was really nothing unusual in what is coming through the DAC line.

You had also asked about other operating expenses, which are really -- you characterize those as overhead.

It is not really policy related expenses.

Those were up for the quarter.

They were a little bit lower than our typical run rate in the first two quarters, a little bit higher in the third quarter.

So you may want to look at a three quarter run rate.

The reason they are up in 3Q relates primarily to -- we refined some of the compensation accruals based upon how the year is going.

We also incurred some advisory and consulting fees that aren't typical quarter-to-quarter.

But they've tended to have the impact of bumping that rate up a little bit for the third quarter.

Okay.

My next question is going to the changing landscape or what is obviously going to be a little bit dynamic for the next couple of months as things finish up at Scottish.

Maybe get a sense from you if you think about the two ways that the Scottish resolution could go.

One, that it is successfully bid for by a strategic buyer.

Or two, that the process falls apart and Scottish becomes a run-off business.

Can you give us a sense for what benefits or -- what benefits come to RGA in either of those scenarios.

Which one would you be pulling for?

We don't really know the answer to that question.

Right now new business is not being -- new quotations are not being sent to Scottish.

That condition could change if somebody successfully acquires them and steps into their prior shoes to some extent.

Either way the market goes, we're, I think, net beneficiaries at the current moment of the situation.

When something unfortunate like this happens to somebody in the industry, those of us left, I think, benefit from it.

That's clear.

So then the real issue is whether that benefit continues for a longer period of time?

Correct.

Even if somebody acquires them, it will most likely take a little while to get the wheels spinning again.

But, yes, there is the differential in how that happens.

There is also the possibility that somebody else steps up to take the place of them in the market size.

That is to say, instead of going from five to four large re-insurers permanently with some smaller players taking share, one of the smaller players steps up to fill the vacancy.

We don't know how that is going to play out.

The third question would be, aside from changes in the competitive landscape, what are the primary companies doing?

Is there that continuation of retaining more of the mortality risk and thus the market opportunity overall continues to shrink?

Or is that stabilized?

Are you seeing any changes?

I think it continues on.

It's a small erosion continuing on in the amount of business sent to the reinsurance market and an increase in the amount retained.

We expect that penetration rates in the industry will fall a bit again this year.

Do you see a level at which you think it drops?

Yes.

I think that this year will probably be pretty stable after this.

This will be the local bottom, if you will.

Okay.

Thanks very much.

Jimmy Bhullar of JP Morgan.

Thank you.

I have a couple of questions.

First, Greig, can you talk generally about competition.

As Scottish is not accepting new business, how has that impacted pricing?

Second, I am assuming solvency two will have a positive impact on your premium growth in Europe.

Can you discuss that?

On the pricing front, I don't think that what has happened to Scottish has really affected pricing.

Pricing was good before Scottish's series of events.

The fact that they are out of the mix now probably means that any tendency to get more competitive might be cooled off a bit.

It really hasn't noticeably changed anything.

It's a good environment right now, still.

In terms of solvency two, you're right.

That is an opportunity.

You notice our premium growth in Europe was very lack-luster in the third quarter.

Part of it is comparing to a strong quarter last year.

But part of it is simply the fact that the UK market is one that is very price competitive right now.

We're just unable to make the sort of inroads that we would like given the level of rates being below where we think they should be.

That means as time goes on, we will start turning our attention to other aspects of the European market.

Solvency two is one of those events that may trigger a whole host of opportunities for a company like RGA in that market.

Okay.

Thank you.

Andrew Kligerman of UBS.

Good morning.

A couple questions.

First, I am sorry I missed a little bit of the start of the call.

On corporate and other, I would think a sequential pickup in earnings probably about a good 3-plus million pick up.

If it didn't have anything to do with collateral financing, which as you were alluding to earlier, you've got the revenue and expense offsetting one another.

Where the pickup?

Is this a run rate that is sustainable?

That is always a tricky part of the operation to predict in part because we house all of our invest-able funds, the interest thereon in that segment.

Then we allocate the investment income based upon the required or economic counsel associated with the business operations.

It's not always easy to predict.

There is -- you may recall we had a $400 million offering in December.

So when you look at this comparison of 3Q to 3Q, you should expect some additional investment income associated with the throw-off from that $400 million, the majority of which is still housed in the corporate segment.

But there was also a nice sequential pickup too, no?

And if so, where there certain instruments that performed real well?

Or -- something along that line.

I understand your question.

It is hard to isolate amongst the investment portfolio.

There is nothing particularly unusual in that corporate segment quarter-to-quarter.

We do -- and you see a little bit of this.

We do tend to refine the allocation process quarter-to-quarter.

So you will see a little bit of noise.

It doesn't affect the enterprise-wide result.

But it would affect -- if it affects the allocation, then it does affect the corporate segment as well as [multiple speakers].

So nothing accounting for the drop- off.

So maybe -- I guess the operating income was negative sevenish and in Q2 '06 negative 10.

In 3Q it's somewhere in the ballpark of that is the way to think about it?

That's right.

I would also direct you to take a look at the run rate for the first three quarters.

That may be a little closer to what to expect than just any one particular quarter.

Okay.

I know earlier you were touching on deferred acquisition costs and that that too is a very difficult line item to predict.

As you said, it did pickup 100 basis points or more company-wide as a percent of premium.

Could you talk us through how or why it spiked up.

Is it because you had such favorable mortality, you may have amortized more quickly.

Was there something that prompted that.

What might have driven it up?

I know it depends on business mix.

But did it have anything to do with the more favorable mortality in the quarter?

No.

It has very little to do with the particular quarter's mortality results.

It has more to do with the type of business you are putting whether it is low-allowance business or high-allowance business and that sort of thing.

It's a very actuarial exercise.

So it is hard to describe the reasons for variations quarter-to-quarter.

That is in part why I typically like to talk about a longer-term run rate in terms of what we should expect.

So again an averaging approach would be the way to go?

I think that's better.

And I direct you to the year-to-date results and what we've seen historically.

Because in any one quarter, we could have the same discussion of all the variations that are included in that DAC line.

Lastly.

New entrants in the market.

There has been some talk during this call about four or five -- four players now as opposed to five big ones.

Are you seeing a lot of smaller new players in the market that potentially could step up and be that fifth large player or maybe even a sixth large player depending on the situation?

There are several new market entrants as well as some who have been around for awhile such as Generali and [Generique Loan].

None of the new entrants seem to be doing anything irresponsible or growing overly rapidly.

It's very possible that one or a couple of those other players could step up.

We don't really see anything happening right now.

Thanks a lot.

Jeff Schuman of KBW.

Good morning.

Could you give us an update on the runoff businesses.

I guess there was a small loss in Accident & Health.

Could you talk about the outlook and if there are any further views on the runoff in Argentina.

Argentina is a non-event in the quarter.

We expect it to be a non-event essentially on the [MJP] side forever now.

On the A&H side, still a little trickle of business from the '90's flowing through that continues to run off.

It's decreasing actually in the number of pieces of mail we get -- the number of incidents.

There is one big dispute left.

There are two parties so it may end up looking like two disputes.

But nothing will happen this year on that front.

Maybe towards the end of next year when we get that resolved.

But to Europe for a second.

You talked about price competition in the UK.

I am not sure you have said this in the past.

But I think some of us have guessed in the past that maybe Scottish was one of the competitors that contributed to the pricing environment there.

But now you are still talking about a fairly competitive environment.

Are there a number of sources of price competition there?

Yes, there are.

Scottish is one of them.

That change is fairly new there.

There are a couple new entrants into the UK market that have come in with a very aggressive price stance, probably three or four of them -- at least three of them, I should say.

That has made the market very difficult for us to get the sort of pricing returns we like.

So for the Europe South Africa segment, premium growth -- where does it go from here?

Does it actually go negative?

Where does it go from here?

No, we don't expect it to go negative.

As a matter of fact, what we would expect is as time goes on, if we continue to hit our heads against the wall on the straight-forward pricing on mortality risk, we will look at other markets, either geographically or other parts of the UK market that might offer better growth opportunities, better growth and return opportunities and shift our attentions a bit.

Lastly, could you talk a little more about your outlook for primary company retentions.

If you look big picture, the primary companies at this point are fairly capital-rich, but fairly growth limited in life insurance.

Reinsurance pricing is still firm.

That would seem to create an environment where companies might continue to retain more business.

Are there some offsetting factors out there that help you think that maybe you can stabilize penetration?

I think companies are continuing that move to retaining more business.

It is very difficult for them to retain a lot of Triple X business all the time without having to deal with the same issues that the re-insurers are dealing with on the Triple X front.

There is also illustration ranks and other reasons structurally that companies don't want to reinsure everything all the time.

Mostly you see the movement to retain more.

When I say that, a lot of companies that could take a very large retention are taking say, a $1 million retention, eliminating quota shares, but reinsuring everything over $1 million, say.

That generates a lot less business into the marketplace.

But it actually, in many cases, RGA might be getting more business than we had before because we are bigger player in excess side than we were on the quota-share side of a given situation.

It is always hard to predict these things.

But the trend certainly is for companies to retain more right now.

That is not -- we are not talking about a real strong movement or retaining everything they possibly can.

We are talking about increasing the amount that they retain and reinsuring less.

Thanks a lot.

Eric Berg of Lehman Brothers.

Thanks.

A few questions and a good morning to everyone.

First, could you remind us.

If prices are not increasing, if they can be described as firm to maybe, in some markets as you've said, under pressure, why does retention continue to increase?

Because I think that those prices are at a level where companies are viewing that they are fairly expensive given the retail prices that they have built into their products coming from an environment where the reinsurance pricing in the early part of this decade was quite a bit lower.

In some situations it might have moved up 10 to 30%.

So when -- there clearly are a lot of moving parts -- firm parts; declining retention; competitive situation in the UK;

Triple X in the decision perhaps to securitize more and reinsure less.

When you add it all up and you shake up all the pieces, what comes out in terms of the growth rate over the next couple of years for this Company's top and bottom line?

For RGA, we are expecting this year to do about the same amount of new business we did last year, which was at a very high level.

Expecting to have a market share somewhere in the 20% range.

It could be a fairly strong year.

In terms of the overall market and the growth rates going forward, we've seen -- as we said at the beginning of the year, we expect our US growth rates to be sliding into the 8% to 10% range on the premium side.

As we get to the next quarter, we'll probably attempt to forecast the '07 numbers.

We're clearly seeing the premium levels -- the rate of increase in premiums for RGA, falling into that high single-digit range.

Finally, last question relates to securitization versus primary company's use of reinsurance with letters of credit.

How do those two choices compare at this point from the primary company's perspective?

Which is cheaper?

Which is better?

Securitization is a lot of hard work and a lot of expense upfront.

But if you have a big enough block, it can be the cheapest solution in the long run perhaps.

There are a lot of difficulties in getting that accomplished and there are a lot of front-end expenses.

Not many companies have that size of a block.

On the other hand, letters of credit, even long-term letters of credit are available and can be gotten at a reasonable price now.

The easiest solution, of course, is just to let the re-insurers aggregate it and then deal with securitization from that end.

That is still the easiest and most common way the Triple X problem is handled these days.

Thank you.

At this time I have one person remaining in the queue for questions. (OPERATOR INSTRUCTIONS) Saul Martinez, Bear Sterns.

Good morning, everybody.

Can you give us some color or an update on your capital plan to albeit lower your new business production in North America does remain healthy, when do you believe you will need to raise equity?

Can you give a sense for what amount that might be?

Certainly during '06, we don't have any capital raises planned.

Based upon the extent to which we are retaining earnings within the capital base, that is the earnings that blow off from the mortality block, there is a good chance we would not consider an equity raise in '07 as well.

I'll give the typical caveats.

If there is any M&A activity or if rating agencies substantially change their views on the industry, then we would have to deal with that.

But we don't have any capital raises planned of the variety that I mentioned in '06 and likely through '07 as well.

How close -- just on a related question.

How close are you to be self-funding?

You mentioned you are generating greater amounts of -- or your retained earnings are helping you fund a portion of your business.

I guess you are still capital users, net.

Can you -- just looking out a couple years, is there a point at which you do become self-funding?

I think there is.

A lot depends upon the extent to which we drive up or drive down the top line.

Obviously the top-line growth has come down over that last several years, which helps in this regard.

Part of the capital requirement puzzle relates to how we're organized internationally and how many domiciles in which we're doing business.

That is part of the equation.

We are fairly close to being self-funding.

Maybe if we can drill down a little bit on the Asia-Pacific earnings.

Obviously they were very healthy this quarter.

Can you give us a little bit of a sense as to what drove the upside?

I think that Greig mentioned that it was across countries.

Were there any specific countries that really excelled?

Was there anything unusual at all in the results?

Or anything that you would categorize as unusual?

First of all, I would say it's broad-based.

First of all, start with the premium account.

There was a lot of premium.

Some of that, of course, catch up in terms of reporting.

Some of these things, especially with the newer operations, you have to smooth out a bit.

It was across the board.

Very strong in Australia, Korea, Japan, Taiwan, Hong Kong.

They all essentially had good quarters.

Finally, correct me if I'm wrong.

I think on the last call you mentioned $150 billion to $155 billion is your goal for new business production, more or less, in the US in '06.

Is that still the goal that you have?

If possible, can we decompose North America -- the new business year-to-date -- between the US and Canada?

That is actually the US number.

We are at least on target for that right now.

I guess I mixed apples and oranges a little bit.

The 150 to 155 billion, that is still your goal.

Up to now you are on target to hit that.

I wouldn't say it's a goal.

It's more of a prediction, I would say.

We are pretty much on target for it.

Canada is also on target for achieving.

They are up quite a bit as business continues to be strong there.

Great.

Thanks a lot.

David Merkel of Hovde Capital.

Mortality.

How would you characterize the quarter in terms of deviations from what you would expect -- standard deviations?

I'll attempt that.

We would characterize the mortality enterprise-wide as positive for the quarter, not dramatically positive, but a little bit positive driven in large part by what happened in the Asia-Pacific segment.

But the numbers we're talking about, since they are not that big, I don't know that I could equate it to a standard deviation.

For the company as a whole, well under one standard deviation to the good.

If you looked at say small markets, if you looked at say Taiwan alone or something, you might find deviations that exceed a standard deviation or so.

But if you looked at enterprise-wide, you are probably to the good, but well under one standard deviation, probably well under a quarter of a standard deviation.

That would sound about right.

Okay, thanks.

(OPERATOR INSTRUCTIONS) If there are no further questions at this time, I would like to turn the conference back over to your Mr. Lay for any additional and closing remarks.

Thanks to everyone who joined us this morning.

We appreciate the interest and would be happy to respond to any additional questions as they come up.

Just simply give us a call here in St. Louis.

With that, we'll end the conference.

That concludes today's conference.

Thank you for your participation.