美國再保險集團 (RGA) 2006 Q4 法說會逐字稿

Good day and welcome to the Reinsurance Group of America fourth-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.

Thank you very much and good morning to everybody.

Welcome to RGA's fourth-quarter 2006 conference call.

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

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

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

In terms of a reminder, during this 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 or earnings and future financial performance and potential growth 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 issued yesterday.

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

Under 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 fourth quarter.

Good morning.

Thank you for joining us.

I will make some very brief comments on our results then open the line for questions.

Overall, results were strong particularly good contributions from our international operations.

On a consolidated basis, operating income for the quarter increased 11% and totaled $81 million.

We consider that rate of increase strong especially given the strength of the prior year results.

On a per-share basis, the increase was 10% or $1.27 per share.

Reported net income for the quarter totaled $81.5 million or $1.28 per diluted share, compared to $68.2 million or $1.07 per diluted share.

Consolidated net premium flow was good, increasing 13% over the prior year quarter.

Turning now to our operating segments first in the U.S., pretax operating income totaled approximately $85 million compared with $89 million last year when we had a particularly strong result.

Claims in our mortality business were within our range of expectations, but in the higher end of that range.

For the full year, pretax operating income totaled $331 million, up 21% from 2005.

Net premiums increased 7% for the quarter and 9% for the full year, very much in line with our expectations.

Our asset intensive business contributed $6 million in pretax operating income.

That was another good quarter.

For the full year, that operation reported pretax operating income of $25 million, up from $17 million in 2005.

The U.S. market overall continues to be fairly stable with generally good pricing.

While ceding companies continue to evaluate cession rates in light of the pricing environment, we expect our 2007 U.S. premium growth rate to be similar to the roughly 9% growth rate experienced in 2006.

Turning now to Canada, pretax operating income in Canada totaled $11 million, which is down slightly from last year when that segment reported a particularly strong result.

The full-year pretax operating income totaled $41 million compared to $47 million in 2005 when we experienced outstandingly favorable mortality development.

Mortality was somewhat high for the quarter, but had improved from earlier in the year.

Premiums were unusually strong, showing a 30% increase due in part to the impact of group creditor business, which added about $46 million in premiums to the quarter or about $30 million above the expected rate.

Roughly $20 million of that increase is of a non-recurring nature.

That creditor business has a lower risk profile and correspondingly lower margin than our traditional business, therefore a smaller impact to the bottom line.

Regarding our international operations, results for the quarter were strong.

Our Europe and South Africa segment reported pretax operating income of $17 million, well ahead of the prior year total of $12 million.

Our UK operation represents roughly 80% of the premium volume in this segment and we experienced favorable mortality in that market.

Asia-Pacific reported pretax operating income of $24 million compared to $16 million in the prior year.

Mortality was generally favorable across most locations including our three largest markets of Australia, South Korea and Japan.

For the year, our international operations contributed $118 million in pretax operating income, a 74% increase over the prior year.

Very strong results.

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

In total the premiums are up about 22% for the quarter and 16% when you factor out currency effects.

Many of our key international markets will continue to provide good opportunities for growth in 2007 and beyond.

So to summarize 2006 results, we are quite pleased overall.

Several things fell our way including positive impacts of currency translation and several reserve refinements and favorable mortality developments in our international operations along with slightly better-than-expected investment portfolio yields.

But even without those effects, the year was a strong one.

We increased our book value per share excluding comprehensive income, which is primarily FAS 115, by 14%.

In a long-term business like ours, perhaps more importantly, our annual compound growth rate over the intermediate past specifically our five-year compound growth rate for increasing book value per share is also 14%.

And in fact our compound growth rate since we've been a public company of increasing book value per share is 14%.

Turning to 2007, we have set an operating earnings target of between $4.80 and $5.40 per share.

This guidance presumes no common stock issuances or buybacks, no conversion of the pure securities, etc.

And mortality results of course will determine where we end up in this range.

This guidance reflects normalized earnings and premium growth rates of between 8% to 10% in North America and 12% to 15% in our international operations.

In conclusion, we have completed a very successful 2006.

We remain one of the preeminent life reinsurers in the world.

We're looking forward to continued success in 2007 and appreciate your support and interest in RGA.

With that, we will take any questions you may have.

(OPERATOR INSTRUCTIONS) Jimmy Bhullar, JPMorgan.

I just have a couple of questions.

I think you mentioned that there was a benefit from a onetime type transaction in the Canada business.

Could you quantify the impact on earnings of that transaction?

I think you said that it is lower margin business.

Yes, think of that business as typically somewhere around 5% margin, which would be a lower expectation than, say, our traditional margin on a pretax basis.

The impact -- the benefit on revenues, was that $30 million?

I think it was $20 million.

$20 million was non-recurring.

$20 million was non-recurring.

And the pretax margin is about 5%.

Okay.

Typically think of it that way on an expected basis and it won't deviate too much from that.

And then if you can just talk about conditions in the U.S. market and whether you have seen any benefit from what has happened at Scottish Re.

Are your premiums in '07 benefiting at all from that?

I would say that we see a little bit more aggressiveness in pricing in the market, but not much.

We are still able to win the situations we want to win at RGA.

We wrote in terms of new business an amount equal or just about equal to what we did in 2005 and considering that the overall market is probably down, we expect that our market share will have increased when all the numbers are in.

But we won't know that for sure for a little while.

I really don't prefer to comment on one particular company or not, but I would just say that the market overall seems to be very good right now.

It is a good environment still.

Finally on capital, do you see a need for the rest of '07 or are you okay through the end of this year?

That's all I have.

This is Jack.

I will take that.

We really -- we do not expect in terms of equity capital to go through any issuance and I will issue the typical caveat that that presumes that we don't encounter any M&A opportunities or changes on the part of the rating agencies and that sort of thing.

We feel a little bit under levered with respect to debt, so there could very well be some sort of addition to our debt leverage, but not likely in terms of any equity issuance.

Okay, thank you.

Ken Zerbe, Morgan Stanley.

Can you just talk about the premium growth assumptions?

I think you were quoting high single digits in North America and on the call you mentioned 8% to 10% in the U.S.

But for Canada I guess it would also imply a dramatic slowing.

Is there anything fundamental that's happening in the Canadian market that is causing the premium growth expectation to slow or is it just off of a difficult comp because you had such high premium growth in fourth quarter?

That is a little bit it.

First off, Canada has had some actually pretty good growth in premiums for the last couple years.

Part of that is helped by currency.

Part of that has been helped by the exit of Employers Re from the marketplace; the final effects of that are still working their way through the system.

We wrote a substantial amount -- a substantial increased amount of business in Canada each of the last couple years.

There is a limit to that of course and we expect that we are getting to a point where we're not going to see much more growth in terms of our overall volume being written in Canada.

So we do expect that to come down.

The U.S. on the other hand if you remember after the second quarter when our premium in the U.S. was up somewhere around 10% or maybe even a little bit higher we were cautioning that we will probably slow down in the second half of the year just because of the way the premium flows fell in 2005 in that comparison.

We do expect you shouldn't take the 7% quarter and project that we are on a downward trend.

We really expect more like 9% again in 2007.

On a full year basis, okay.

And just in terms of Asia, obviously I think results have been very strong there.

Is there any -- I guess what factors should we be considering to know whether or not this type of growth is sustainable in terms of top line or is this just a fabulous top-line growth quarter and it's going to revert to slow growth going forward?

No, we think that -- it is always hard to predict a percentage in markets like Asia, but we expect good growth in Asia.

We expect the Japan market, the Korean market, and even Australia that we will have substantial increases next year again.

Asia, both of the international segments, both Asia and Europe, had wonderful mortality experience on the whole year basis.

That is probably not repeatable in quite that same way or you wouldn't expect it to be, but generally speaking the businesses will get bigger next year as well.

So we are expecting pretty good growth out of Asia in particular.

Then with Europe probably more low single digit growth in terms of premiums?

I wouldn't say low single digit, but I would say lower than the Asian market.

I would think that if we have a good result in Europe and South Africa, we might be talking pushing up towards 10% growth or something like that.

Great, all right.

Thank you very much.

(OPERATOR INSTRUCTIONS) Saul Martinez, Bear Stearns.

A couple of questions.

First, I think you partly addressed this with Jimmy's question, but could you talk more specifically about the new business production outlook in the U.S. and what you are kind of assuming both in terms of industry cession rates going forward in your own market share, which I believe you indicated you think could continue to increase.

Second, in Canada obviously your earnings were a little bit light in the fourth quarter and that followed sluggish results in each of the first couple quarters of the year.

Is anything to be concerned about there?

I know you had a very strong 2005 but now you've had three or four quarters that maybe could be categorized as a little bit light.

First of all on the U.S. production side, I think what I indicated is I expect when the numbers are in we may well see a marketshare increase for 2006.

I am not projecting that we will continually increase our marketshare going forward.

I think that it is always a tough competitive environment out there, but we will have a very solid marketshare.

We do see the cession rates continue to fall that the amount of business overall placed into the reinsurance marketplace is dropping and so that you can expect that new business productions will tail a bit.

I think we were down a little bit from in '06 from '05, but not significantly, almost the same number.

In that sort of an environment, you do expect it to be tough to grow premium substantially, but remember a lot of our premium growth comes from things that are already booked and we really have 2007 pretty well locked in (multiple speakers).

We pretty much we'll have a -- we will know what the premiums in 2007 are going to be within a very small deviation outside of a big in-force block deal or something that may happen during the course of the year.

Right.

I know this is difficult to predict but what do you -- do you have any sense looking out over one or two years, do you have any view of where cession rates may eventually kind of bottom out?

We think they're going to bottom out soon.

They are going to fall, maybe a little bit more in '07, but that will be near the bottom.

In Canada, I think that is an interesting question.

We are coming to -- we've been looking at our numbers in Canada all year and so forth.

In fact the Canada business has shown worse results than last year and it -- but it has been consistent month to month to month.

We are beginning to think that most of the difference is the fact that 2005 is just an extraordinarily good year and that that is more the anomaly than 2006 was.

The Canadian business is producing solid returns and is a little bit higher than we would expect but probably not as much as you think.

It's probably pretty close.

Got it.

And just one follow-up question.

I believe you had a fairly sizable transaction in Japan.

I think it was -- correct me if I'm wrong -- with Tokyo Marine.

Does that have any impact at all on your Asia Pacific results in terms of new business or premiums or earnings?

First of all, we don't want to speak about any specific company, but we did do a large transaction, a first dollar quota share transaction, in Japan.

It had very little impact in this year.

You'll see more premium next year than this year but the profit pattern on that one is also skewed a little bit to a low first year and higher later on.

Any -- I know it is a specific transaction -- any kind of ballpark range on the top line impact there?

Well, I think we're still gauging that.

This is a new product introduced to the market, so we are expecting -- it will be noticeable but we won't really know until we see it.

All right, great.

Thanks a lot and congratulations on a very strong '06.

(OPERATOR INSTRUCTIONS) David Merkel, Hovde Capital.

I just wanted to ask about the underwriting results and where it would fit on your standard deviation scale for U.S. and international?

Let's see, the U.S., we were well under one standard deviation.

We were probably if you picked an exact center point, we were within 1% or so of that in the quarter.

So we were maybe a little bit high, but in terms of dollars of claims we paid, it is very little and certainly not a standard deviation, not even close to it.

Maybe somewhere around my guess is we might have been somewhere around one-third or one-quarter of a standard deviation at the most.

International is a little bit harder to peg because we don't have all those numbers rolled up together.

We could do standard deviations by country and so forth.

Some of them would be -- we'd be well over standard deviation to the good in some of the smaller markets like for example in countries like Mexico and Spain had a good result for the year.

But it is always hard to roll up international in one big group for us because we don't have quite the data sources that we can put them all together easily.

Okay, my final question is regarding your new chairman, Steve Kandarian.

I have met him.

He is a bright investor and I'm just wondering is the reason why to the best of your knowledge why MetLife ended up choosing him is that he does not have much to do with underwriting at MetLife and thus minimizes any sort of, I don't know, informal knowledge that would go with him?

Well, no, that is probably more of a question for you to pose to them.

I think they selected him as their choice.

He's the person they would like to put forward.

We discussed it at our nominating committee of the Board and accepted him.

He seems to have been interested in the company and we will see.

We are happy to have him on board.

That's fine.

He's a great choice.

I like him.

Anyway, thank you.

(OPERATOR INSTRUCTIONS) We are showing no further questions at this time.

Okay, well thanks to everyone who joined us this morning for our conference call.

With that, we'll end the call.

Should you have any other questions, feel free to call us here in St. Louis and we will respond accordingly.

Thank you.

That concludes today's teleconference.

Thank you for your participation.

You may now disconnect.