美國再保險集團 (RGA) 2007 Q1 法說會逐字稿

Good day and welcome to the Reinsurance Group of America first quarter conference call.

Today's call is being recorded.

At this time I would like to introduce the President and Chief Executive Officer, Mr.

Greig Woodring, and Executive Vice President and Chief Financial Officer, Mr.

Jack Lay.

Please go ahead Mr.

Lay.

Thank you very much.

Good morning to everyone.

Welcome to RGA's first quarter 2007 conference call.

I will turn the call over to Greig, our Chief Executive Officer, 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.

As a reminder, during the call we plan to make certain statements and discusses 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 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 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 on 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 will turn it over to Greig for his comments on the first quarter.

Good morning and thank you for joining us.

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

Enterprisewide we reported strong results last night.

On a consolidated basis operating earnings per share increased 17% to $1.28 from $1.09.

Operating earnings totaled $82.1 million, up 20%.

That figure includes the effect of approximately $4.3 million pretax, or about $0.04 per-share basis.

Recorded additional income expenses as a result of new reporting guidelines and income taxes commonly referred to as FIN 48.

This interest expense will be a recurring item, but the amount will likely bounce around each quarter as tax years are closed and various tax positions are resolved or adjusted.

The current quarter amount is a non-cash item, and the payment of any amount depends on the resolution of the various tax positions.

To the extent positions are resolved in our favor, the cumulative interest expense associated with that position will be reversed.

All that being said, it will be difficult to forecast the interest expense in future periods.

However, we do anticipate that we will see some interest expense adjustment during the remainder of the year, such that we expect our annual interest expense for 2007 to approximate somewhere between $3 million to $5 million.

Reported net income for the quarter totaled $76.3 million, or $1.19 per diluted share.

That figure includes the effect of $10.5 million currency loss in anticipation of selling our direct subsidiary operation in Argentina.

We expect to finalize the sale this year, and do not expect the sale to generate a material gain or loss on the completion of the sale.

Consolidated premiums increased 13% over the prior year, at the high end our guidance range.

Foreign currency exchange rates helped the rate of increase by about 1 point.

Turning to our operating segments, first the U.S.

Pretax operating income totaled $93.5 million, up 13% from last year's first quarter.

Mortality experience was favorable as large claims were below normal levels.

Remember we define large claims for this purpose as $1 million or greater.

Premiums for the quarter were up 9%, about what we would expect on a full year basis as well.

Our asset intensive business contributed $4.5 million in pretax operating earnings.

Down a bit, down from $8.2 million last year.

During the quarter we experienced a large amount of death claims on a large bully case.

This is expected to happen from time to time.

Spreads on reinsurance of annuities were maintained at expected levels.

Turning to Canada.

Canadian operation reported a good quarter on the bottom line.

Pretax operating income increased 45% to $12.5 million from $8.6 million last year.

Mortality experience was in the expected range compared with the poor mortality last year.

Premiums increased 5% when measured in U.S.

dollars and 7% in Canadian dollars.

Those rates are slightly below our full year growth expectation, primarily due to timing issues.

We expect the rate to pick up as the year progresses, pushing to somewhere around 10 to 12%.

Regarding our international operations, Asia-Pacific reported a good quarter with pretax operating income of $10.4 million compared to $6.6 million last year.

Segmentwide mortality was in line with expectations, but varied by location.

Some weaknesses in results in Australia and New Zealand was offset by favorable results in South Korea and Japan.

Prior year reflected some unfavorable mortality in South Korea.

We are building scale in many of these operations, which has resulted in less volatility; however, some volatility can still be expected.

Premium flow was up.

It was good, up 34% to $186.8 million.

Australia, Japan and South Korea continue to be our key markets in this region.

Our other international operations, Europe and South Africa, had a very strong quarter.

Pretax operating income increased 44% to $21.3 million, due to lower than expected claim levels in the UK, also favorable results in South Africa.

Claim levels in the UK also benefited from some rescinded claims.

That is claims that were initially reported to us and were ultimately not paid by the seeding company for various reasons.

Net premiums increased 16% on a U.S.

dollar basis and 9% on an original currency basis.

The strong British pounds and euros helped the reported number.

The UK market remains one of our most competitive markets.

However, the earnings we reported this quarter are largely driven by business put on the books in previous years.

Currently more aggressive pricing in the market has caused us to sit on the sidelines more often than it has in the past.

The guidance we issued in January reflects relatively low new business levels in the UK.

We intend as usual to maintain our pricing discipline and take advantage of good opportunities when they do arise, however.

In the meantime we continue to evaluate opportunities in other parts of Europe by establishing rep offices, adding to our base management and technical talent in that part of the world.

Collectively Asia-Pacific and Europe and South Africa contributed 25% of our consolidated pretax operating income.

That is up from 20% last year.

International markets continue to represent good growth potential and meaningful diversification from our North American businesses.

In conclusion we are off to a solid start in '07.

The pricing environment in the North American market remains relatively stable.

We continue to be recognized as a leader in the life reinsurance business based on independent customerwide -- or industrywide customer surveys.

The recent Society of Actuary survey confirmed our expectation that overall reinsured amounts are down.

However, RGA was once again the leader in the North American market for new business reinsured.

Our international operations have grown substantially, now providing meaningful profits.

Yet in many ways our expansion is still in its early stages.

We appreciate your support and interest in RGA, and we will now any questions you may have.

(OPERATOR INSTRUCTIONS).

Ken Zerbe.

I just want to clarify the additional interest expense this quarter.

You said it amounted to about $0.04 per share.

I want to make sure I understand this correctly, that it was located in the corporate line, and you expect to have additional interest expense of roughly the same magnitude, but volatile for the next -- at least for the next several quarters.

Is that correct?

This is Jack.

What we were trying to explain is it was roughly $0.04 impact this year, and we expect that to approximate the annual impact.

So we think when the dust settles on the year that is about the level of impact we will have.

But it would tend to move back and forth from quarter to quarter, depending upon what tax position we resolve and so on.

I am sorry, $0.04 this quarter, and then for the full year also the $0.04 in total, maybe plus or minus $0.01 or something in each additional quarter.

Yes, it is hard to size each quarter, but we're trying to give you a feel for what we expect annually.

Understood.

The other question I had was we have seen a lot of strengthening in the British pound and the Canadian dollar recently.

If the currencies were to stay where they are now would that change your premium growth expectations going forward?

And if so, how much?

This is Jack again.

That would change only modestly, because we certainly anticipate some level of FX impact when we issue our guidance.

So I guess one could argue it would ratchet it up a little bit, but only modestly.

The final question I had was just maybe you can explain what drove the strong premium growth in I guess it was the UK?

In the UK the premium growth --.

Well, Europe and South Africa.

Europe and South Africa, it is contributions from across the regions.

I think these are growing operations.

I think the growth that we experienced there was not really out of line from what we would expect.

There was some currency effect, but in the quarter I don't think it was terribly substantial, maybe adding 1% or 2.

But basically I think that is pretty much where we expect things to be.

Saul Martinez.

a couple of questions.

First, I am a little confused by the in force growth pattern in the Asia-Pacific region.

Specifically in force grew about $70 billion year-over-year, I think $242 billion to the $312 billion.

New business in both quarters were about $3 billion to $4 billion.

I think for all of last year new business production in Asia-Pacific was $50 billion.

So in essence in force grew by a substantially higher rate than what new business was adding.

So I am wondering what drove that?

Is that a function of currency impact?

I'm a little confused by the growth trajectory.

And also can you talk a little bit about seasonality of new business production in Asia, because obviously it seems as if the first quarter is very light and it is very back end loaded, so if you can just talk a little bit about that.

This is Jack.

There is really a couple of impacts.

FX does impact quarter to quarter and year to year the total in force.

But what typically has an even stronger impact is just the reporting by our clients.

That in force number at any point in time, both new business volume as well as the total in force, is the best estimate that we can give based upon the reporting that we get from our clients.

It tends to bounce around a little bit if we get refined reporting in Asia-Pacific, as a good example.

We did get some refined reporting in some of our operations there during the quarter, and in fact several quarters last year as well.

I know unfortunately that is not a perfect answer for you in terms of trying to do any analysis, but I just caution you that the in force numbers at any point in time if you look year to year directionally you can draw some implications.

But quarter to quarter just because of the reporting anomalies it is fairly difficult to piece it together.

You're also correct in that Asia-Pacific has a couple of our major markets, notably South Korea and Japan, where the fiscal year for all the companies ends March 30, 31.

That is typically a big push of production towards the last quarter of their fiscal year, which means that gets reported to us in the second quarter very often.

In many of those markets, or some of those markets, we have a big second quarter and a light first quarter in the production category.

That's helpful.

Then just if I could follow up with a question on your capital plans.

Obviously new business production has slowed.

You have a very big in force block now, $2 trillion.

Where do you stand in terms of timing and size of a possible equity deal right now?

This is Jack.

We really don't have any equity deals planned currently.

We do have a rather large base of business, as you pointed out, that throws off a lot of retained earnings.

Absent a change in the views of the rating agencies, or M&A and that sort of thing, I know typically you get the same answer every quarter, but it tends to be a fairly stable situation.

We really don't currently expect any sort of equity.

I'm leaving debt out of it, and of course we did raise $300 million of debt during the first quarter.

But we don't have any equity -- any plans for any of equity offerings.

And based upon our current growth projections it is hard to see one this year.

There's really no -- there would really be no need to raise equity capital to fund growth for the foreseeable future.

Is that a fair comment?

All things being equal, yes, I think that is fair.

Jimmy Bhullar.

I just had a quick question on your premium growth in Canada.

I think ex currency it was 7%.

That seems a little light.

Could you discuss what your outlook is for the rest of year?

I know last year you had that creditor transaction in the fourth quarter.

That was light due to a couple of things.

First of all, there were some administrative cleanup from some of our clients that had some negative impact on the third quarter.

We were also -- we didn't have any large creditor deals or anything like that, so it distorted things a little bit.

We would expect though that number is going to be in excess, a little bit in excess of 10% for the year.

That is on and as reported basis, even with like the 25% whatever growth you had last year?

Yes.

Lastly, on just pricing in the U.S., have you seen any change in this environment over the last few months?

Not really.

There's some anecdotal evidence that pricing is changing a bit here and their around the edges, but I wouldn't consider this anything to concern ourselves.

The environment is more or less the same as it has been for the last two or three years now.

(OPERATOR INSTRUCTIONS).

Jeff Schuman.

First of all, in the UK you mentioned that there was some impact from rescinded claims in the quarter.

Do you have a ballpark on the amount of that?

This is Jack.

The best way to quantify would be at about a $5 million level, give or take a little bit.

Pretax?

Pretax, that's right.

This was -- was this particularly large claims or just a few more than usual, or what was the kind of the nature?

Well, it was somewhat unusual.

It was large and small claims, but somewhat unusual in that we got reporting from several clients that they had rescinded some claims that we had already incurred or expensed, so to speak.

So then we would have reversed any expensing we had done previously.

I was wondering if you could talk a little bit more about the industry growth rate.

Greig mentioned the SOA survey, which I think showed a 14% decline in recurring ordinary business assumed.

I guess my first question is, as you look at the data, is that a reasonable measure of industry volumes or were there some distortions in '06?

And then as we look into '07 I think Jack had said last quarter that he was optimistic that we might see a bottoming out of -- in terms of session rates.

I was wondering if that still looks like a good read on where the market is headed?

There's always a little bit of noise in those numbers, but I don't know that anything stands out that makes the numbers not comparable in a large way.

We were a little bit surprised.

We thought the market would be down 10%, 11%, something like that.

Our own number was down about 10%.

But the market ended up being down 14%, as you mentioned.

It wouldn't surprise us if it goes down a little bit more this year.

But we expect it to be close to a bottoming out, if is not this year then next year we will see the end of the decreases we think.

If you look at the market, a lot of the primary companies at this point are fairly capital rich, a little growth starved, and maybe thinking in terms of the retention in that light.

Are there any other factors on the other side that would cause companies to maybe think about increased levels of sessions or not?

That doesn't seem to be the trend.

The trend is all one way right now.

It is companies retaining a little bit more.

Not every company is retaining more; not every company is retaining as much as they can obviously, but there is still a lot of sessions in the industry.

But it doesn't seem to be anybody going backwards in that trend right now.

These things can be expected to come in waves, and some time in the future I would expect things reverse a bit.

Lastly, I'm just curious on your read from where you sit.

We get a lot of different indications from primary companies about investor-owned life volumes and that sort of thing.

And obviously from where you sit it is a little hard to know whether a particular piece of business is investor-owned or not, I suppose.

But just as you look at volumes of older aged business, any change in the trend there recently?

I don't follow that real closely myself, but I heard more about it last year, and even the year before where we were we are seeing spikes in issue agents over 70 from a client here and a client there.

And it seemed to rotate from one client to another as actions were taken at the seeding company level.

That is probably our main tool for finding out who is seeing a lot of this business.

We feel very comfortable in the mortality rates.

We've got an older aged business at this point out there in the marketplace.

And really are continuing to monitor the situation, continuing to try to work with companies who don't want to exclude everything and might find some good business to sort through in some of that.

We are anxious to help companies do that.

But in terms of investor-owned spikes of business, I really haven't heard too much about it in terms of seeing new companies or new surges in the last six months are so.

[Adam Delesky].

You were answering an earlier question about equity offerings, and you explicitly excluded debt offerings from your, let's call it a prohibition through the end of the year.

Can you talk a little bit more about debt capital raising that you did in the first quarter and plans for the remainder of the year, and maybe into next year, if you could go that far?

Sure.

This is Jack.

Yes, I thought the question related more to equity and common stock offerings than it did to debt.

We really look at debt differently.

We look at it as a feeder for funds at the holding company, and we also look at it as a mechanism obviously to lever the Company in some respects.

After the $300 million offerings that was the issuance in March of this year, we feel the leverage ratio is about where we want it.

I wasn't trying to leave the impression that we would expect additional debt offerings over the next period of time.

It is possible we can have something minor, some refinement.

But I don't want to leave the impression that we have an anticipation of any sort of kind of significant follow-on debt offering at this point.

(OPERATOR INSTRUCTIONS).

Joan Zief.

I just this question basically tied to also the trends for increased retention by the primary writers.

Are you thinking about entering into new areas?

Do you think that the major reinsurers are going to need to think of maybe new services, new innovative products that they can begin to offer to offset this trend of growing the insurance usage by the primary writers?

We are always looking at new parts of the market that we can enter new business, we can develop.

We have over the course of time focused a lot on the underwriting side of the business.

And you may think that that is strictly facultative business, which is a big part of our operations.

But there is other adjacent fields to that too.

And I think that has been a good growth area for us.

But we are also looking at a lot of other things right now.

It is a little too early to call them major businesses or to see how successful they're going to be.

But we are expecting that over the course of this year our growth in the U.S business -- U.S.

premiums is going to be somewhere around 9%, just as it was in the first quarter.

It may bounce around a little bit from time to time depending on comparisons, but that is pretty good results.

And we expect that to be bolstered by some of the new efforts that we are undertaking to try to find sources of revenue.

But do you think that you'll be looking more at how to maybe take on a little more longevity risk?

Do you think you are going to be thinking about taking on maybe a more equity market risk to help remove volatility?

Or will they just be -- the new product development will it really just be offshoots of what you do on the mortality side?

I hope it is all a little bit by way of offshooting what we do.

I mean we deal with direct feeding companies and we deal with the people we know and so forth.

We are looking at longevity.

In fact, we have made several quotes on them.

We have looked at -- we don't really have any longevity business on the books currently, but I expect by the end of this year we will have some.

And we are looking at a lot of different new markets.

David Merkle.

Sometimes I ask on a standard deviation basis how your quarter was on mortality actual to two expected.

I would guess it was pretty close to dead on, but what would you say?

Well, we almost have to break that down by markets.

The U.S., we were a little bit better than expected.

Canada, we were pretty much down, maybe even a little bit better than expected.

In the UK we were quite a bit better than expected.

Probably -- I haven't quantified it in terms of a standard deviation, but we would probably be pushing a little bit more than just a marginal increase over expected.

Australia was a little bit worse, and New Zealand was a little bit worse, but Korea and Japan were a little bit better, so it breaks down by country.

If you put the whole thing together we are pretty much on -- maybe a little bit better than expected in aggregate.

Is there anything else, at least in terms of the U.S.

competitive environment, in terms of color, like terms, conditions, and what sort of reception you are getting in new business that you could give us?

There has not been a lot a change in terms and conditions.

We went through a period of time where there was a lot of deep discussions about what claims handling would be like and what reinsurers would hope the direct companies do in terms of underwriting guidelines.

That discussion seems to have become more routine now and not a topic of conversation much.

Really terms and conditions are pretty much the same in terms of the dynamics of the marketplace.

Again, there is anecdotes about a reinsurer here or there becoming surprisingly notable in terms of their aggressive posture, but not very much.

And overall the market seems to be quite coasting quite along like it has been.

Last question.

I would assume that new entrants, without naming names, are not doing all that much, at least on [tree] business yet in the U.S.

I would also -- the other thing that I'm wondering is, does the -- at least the temporary exit of Scottish REIT have any effect on the overall competitive dynamic?

As we look at the situation, Scottish REIT had actually been fairly inactive in the last period of time after they had acquired ING anyway.

And the amount of impact they have had on the market by essentially not being a factor in new business has been pretty minimal.

I would say that the new entrants that are in the marketplace, and we do see them or hear of them from time to time, but they are acting fairly responsibly, and are providing alternative capacity for companies.

But not trying to under price the market or trying to substantially skyrocket their sales through cheap pricing.

And that leaves the market, like I said, rocking along pretty much the way it has been.

And companies are trying to -- reinsurers, that is -- are trying to differentiate themselves or build relationships that give them advantages, but not really trying to go through price wars.

Very good.

I understand better.

And we're still happy shareholders of RGA.

Jeff Schuman.

I was hoping to follow-up on Joan's question about longevity, Greig.

What kind of is the nature of the opportunity at this point?

Are companies looking for help with risk management, or is this more of a capital management exercise?

What are the folks looking for?

It is a little bit of both.

Some companies are clearly wanting to diversify their risk away from piling on an a lot of longevity risk.

Others just want somebody to share the risk and take another look at it with them.

I think we have surfaced sort of a handful of opportunities in the U.S.

market.

There is a fairly developed market in the UK.

Some of the opportunities are quite large, and the competition is very fierce on those.

We are tending to stay away from some of that.

But where we can use our underwriting skill and put the right price on a smallish block of business in the UK, we would take a look at that.

There are opportunities probably coming around the world.

Right now they seem to be here and there.

And we would expect they would come out of the need for capital leveraging expertise, and also just somebody to share the risk with.

John Nadel.

Just take a quick question on the balance sheet actually.

If I'm not mistaken, it appears that equity, if I exclude the AOCI, it appears it was down sequentially.

Can you explain that happened?

This is Jack.

You're talking about sequentially from the fourth quarter of last year?

Yes, sorry.

From year end to the first quarter it looks like it was down despite the earnings.

I guess I would argue that it really wasn't, because we did have the retention of -- the retained earnings impact.

So if you -- you said ex AOCI, right?

Yes.

Maybe I got my numbers wrong, but I've got about $2.48 billion at year end, down to $2.43 billion at the end of the first quarter.

Maybe I have a formula problem, but it appears that your book value per share was down sequentially from fourth quarter to first quarter.

I was just wondering if there was anything -- any special sort of onetime adjustment, pension related or DAC related or something?

No, there is none of that.

I think you may have a formula problem because I think we are up modestly.

I will give you call off-line to check it.

Sure.

(OPERATOR INSTRUCTIONS).

Gentlemen, there are no further questions at this time.

Thanks to everyone for joining us for the conference call.

To the extent any other questions arise, feel free to give us a call here in St.

Louis.

And with that, we will end the first quarter earnings release conference call.

Thank you.

That does conclude today's presentation.

We thank you for joining us.

Have a wonderful day.