美國再保險集團 (RGA) 2007 Q2 法說會逐字稿

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

Mr.

Lay, please go ahead.

Thank you.

Good morning.

Thanks to all those for joining us this morning for the second-quarter conference call.

Both Greig Woodring, our CEO, and Dave Atkinson, our Chief Operating Officer, are here this morning.

We'll turn it over to Greig in just a second for his prepared comments.

As a reminder during this call, we plan to make certain statements and discuss certain subjects that will contain forward-looking information including among others statements relating to projections of revenue or earnings and future financial performance and growth potential of RGA and 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 the expected results is included in the earnings release issued yesterday.

In addition during the course of the call, we will make certain 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 the press release for more information on this measure and a reconciliation 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 results.

Good morning, everyone.

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

I will make some brief comments and then we will open the line for questions.

We're pleased with the strong results in the second quarter.

On a consolidated basis, operating income for the quarter increased 22% to $84.6 million from $69.1 million in the prior year.

On a per-share basis, our reported operating income for the quarter was $1.31 per diluted share, up 19%.

Reported net income for the quarter totaled $77.5 million or $1.20 per diluted share.

Net premium flowed during the quarter increased 12% to $1.2 billion.

The year-to-date rate of increase is now 13%, which is within our range of expectations.

Net investment income totaled $274.9 million, up from the first quarter total of $215.7 million.

A large part of that increase is associated with our funds withheld portfolios in the U.S.

asset intensive segment.

Investment income in that segment can bounce around due to movements in the fair value of equity options associated with large equity index annuity funds withheld treaties.

You'll see a corresponding increase in the interest credit expense within that segment as well.

Our general account portfolio yield was essentially flat compared to the first quarter.

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

The pretax operating income was $93.3 million compared to $78.5 million last year.

Mortality experience for the quarter was in the expected range.

Premiums increased 9% for the quarter, in line with expected.

It was pretty much the same as the first quarter story.

The U.S mortality market continues to be stable in terms of pricing and level of competition.

No changes there.

Our U.S.

asset intensive business contributed $6.7 million in pretax operating income to the quarter, up from $4.8 million last year.

Onto Canada, our Canadian operation produced a very strong quarter.

Pretax operating income totaled $22.6 million, up from prior year total of $8.9 million.

The current quarter result reflects favorable mortality, whereas in the past year we experienced some adverse mortality.

Premium flow was strong, up 26% in U.S.

dollars, up 23% in Canadian dollars.

It is now up about 16% on a year-to-date basis on a U.S.

dollar basis after a sluggish first quarter.

Regarding international operations, Asia Pacific reported pretax operating income of $16.1 million compared with $7.8 million last year, a strong result.

Segment-wide mortality was slightly better than expected but varied by location of course.

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

Premium flow was up 18% to $199 million, in line with expectations.

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

Our other international operation, Europe and South Africa, experienced higher-than-expected claim levels in the UK, but segment-wide, close to expected total results.

Pretax operating income decreased to $12.5 million from $17.4 million the prior year.

Claims levels were high with some effect from large claims.

The prior year quarter reflected a favorable mortality quarter, making the year-over-year swing look large.

You'll recall that in the first quarter of the year, claim levels were lower than expected on a year-to-date basis.

Both the UK and the overall segment are performing well.

Net premiums increased 13% on a U.S.

dollar basis, 6% on original currency basis.

The strong British pound and euro helped the reported numbers.

The UK market continues to be one of our most competitive markets.

We are beginning to see some production coming from other parts of Europe with new representative offices in Germany, Poland, and France.

So in conclusion, we have increased earnings per share by 19% on a quarter-to-date and a year-to-date basis by stacking two strong quarters back-to-back in 2007.

We continue to execute our strategy to grow business in a disciplined fashion and create shareholder value.

We appreciate your support and interest in RGA and with that, we will be happy to take any questions you may have.

(OPERATOR INSTRUCTIONS) Jimmy Bhullar, JPMorgan.

I just have a couple of questions.

The first on the GAAP (inaudible) based on your growth plans right now, when do you think you'll be in the market with that being for additional debt or just additional capital?

And then secondly on Canada, the premium growth was very strong.

I am assuming there is some credit insurance or onetime type transactions, if you could just comment on that?

And how much those contributed and then what your outlook is?

Thank you.

Jimmy, this is Jack.

I'll take the question regarding capital.

We really do not expect to be in the market for any equity capital in the near future.

We continue to throw off quite a bit of retained earnings from the overall base of mortality.

And always with the caveat unless there is some big M&A opportunity that comes our way that would certainly influence or change our need for capital.

But outside of that, we really don't have a current need.

It doesn't mean if we don't continue to grow won't be at some point in the future some need.

But right now we don't see that in the not too distant future.

Jimmy, on the Canadian premium, if you recall last quarter the premium increase was about 7%, something like that if I remember.

The question came up about whether that level should be expected for the year.

We said there was some reporting noise -- some timing I should say is probably a better way to put it -- in the first quarter and that we were expecting Canada to be more than 10%.

Well, the timing sort of caught up in the second quarter all at once.

So that was favorable plus they had strong mortality.

That made bottom line so good.

In terms of premiums, I think if you sort of look at the year-to-date and average it out, that's a pretty good run rate for us.

Andrew Kligerman, UBS.

Two questions.

First just want to get a little sense on the accounting around DAC amortization in the Canadian segment.

Typically when you have very favorable mortality, you accelerate the DAC amortization and vice versa as we saw in the other segments.

But in the Canadian segment, despite the strong loss experience you only had a ratio of about 17.4% premium resulting in a claims and policyholder acquisition cost ratio of about a little less than 104, whereas historically you have kind of averaged north of 110.

So I just wanted to get a sense of how the DAC amortization worked here?

Then I have a follow-up question.

Andrew, I will take that.

This is Jack.

I wouldn't say it is completely accurate as you portrayed how we would amortize the DAC.

We lock in -- unless we have an NRB problem or some sort of realizable value problem, we pretty much lock in the DAC assumptions and simply amortize it from there.

You do see a little bit of sway from quarter to quarter on the -- not so much the DAC amortization, but just the buildup of DAC.

Now I think part of what you're seeing there is we're putting on more creditor treaties, which will have somewhat of an influence on both the DAC and the loss rate as we go forward.

But that is just going to work its way into those ratios moderately.

It is all FAS 60 business in Canada.

All right.

Maybe I will even follow up a little more at another point.

But then another thing, on the asset intensive business, you got a nice pick up in earnings and investment income.

Were there any new big account wins?

And if so, maybe you could give a little color around that?

No, there weren't any new account wins.

It was actually sort of a modest quarter for new business; results were strong.

A lot of that investment income will also show up in investment [credited] side.

So I think you just have a pretty good result for the quarter.

But it was not unexpected.

It is not too far off of the expected line either.

Excellent, thanks a lot.

Steven Schwartz, Raymond James.

Good morning, everybody.

A couple of questions.

First on the market as a whole, Greig, you stated that you thought that the market had been stable.

Your new insurance rate was actually up quarter-over-quarter for the first time in a little bit.

Do you think penetration maybe has stabilized this year?

Well, I would not read too much into a particular quarter's production.

That depends on the reporting from client companies, which tends to be a little bit lumpy.

But we are tracking along pretty strongly in production.

We believe that we are probably going to produce somewhere around the same amount of business as we did last year.

In terms of the overall market, yes, we think it is probably stabilizing.

We don't know whether that means it is up a little bit or down a little bit, but most likely, it is coming to a stable point or it is pretty close to it anyway.

Okay and then looking at some numbers, looking at the Europe and South Africa, I think you said in your comments I was writing down that the UK was pretty bad, but the rest of the geographic territories in there were pretty good.

So the loss ratio probably was not that far off from normal.

At least that's what I took from your statements.

Yet I am looking at a loss ratio that is something 78%; 1Q '07 was 78% excluding the rescinded premium.

And I think for 2006, you averaged around 70.6%.

So how should we really think about that 78.2?

I guess, Steven, my comments relate to our actuarial expectations rather than on a loss ratio basis.

And you characterized it correctly.

The UK was not terrible.

It was a little bit down, higher claims than unexpected.

Good results in places like Spain and South Africa filled up most of the hole.

They were a little bit less than what we would have expected and for an overall result, not too far off.

And if you put together the first quarter and the second quarter, they're both a little bit ahead, both the UK and the region as a whole.

So that is how I would look at it.

In terms of the loss ratio numbers, there's a lot of things going on there.

It depends where the business comes from.

Reporting catch-ups or other noise like that and I am not really sure if I have any insights into that.

We can take a look at it and see if we can get something to you as a follow-up.

That would be great.

One last question maybe just it's associated with it.

The policy acquisition costs in Europe and South Africa had a steep decrease from the first quarter and were lower than the average in '06.

Somehow maybe those are related?

This is Jack.

Actually that policy acquisition cost ratio is a little bit unusually low.

There are certain adjustments.

It was a little bit unusually high actually in the first quarter too.

But I think if you looked at a run rate of around 13% to 14% on an annual basis, you'll see it fluctuate from quarter to quarter but I think if you gear toward that sort of a ratio, that would be appropriate.

Okay, great.

Thanks.

Eric Berg, Lehman Brothers.

Greig, if we take your Q with respect to Canada and look at the year-to-date premium growth, whatever the number is, 15%, 16%, 17% -- and I think year-to-date if you average the two quarters -- isn't that handily in excess of how quickly the Canadian economy is growing and how quickly the Canadian primary market is growing?

And if so, if I have that basic idea right, if not the exact number, then the idea is right, how are you growing so quickly there?

Eric, you're right.

First of all, there are some currency effects there in Canada.

We have actually maybe not as much as I would've expected even, but it does have some positive uplift.

Premiums are growing faster than the economy.

That shows the continuing high penetration of reinsurance in the marketplace in Canada.

The penetration numbers we talk about in the U.S.

as having fallen in recent years have not fallen in Canada and the in force blocks are, the in force amount of reinsurance is not stable yet.

In other words, it is still ratcheting upwards with the increased new business cession rates.

While they are stable, the total in force is not stable, so you are growing faster than the insurance industry and you are growing faster than the economy as well.

We expected Canada to be somewhere between 10% and 15% with neutral currency and it looks like we're probably running a little bit hotter than that and the currency kicks us probably to about 16% I think for the first half of the year.

One quick follow-up question.

I thought I had learned every possible piece of jargon, buzzword, and lingo in reinsurance, but you stumped me this morning when you talked about creditor treaties.

Are we talking about credit in reinsurance of credit insurance or is a creditor treaty something else?

No, it is reinsurance of credit business written in Canada by particularly the banks and that business tends to be high premium with experienced refunds, so stable, less volatile, predictable, running a nice profit margin for us, at least so far.

And we expect it to.

We expect it to be consistently stable and we have taken a few of those treaties in the last couple of years.

Thank you.

(OPERATOR INSTRUCTIONS) [John Zell], [Viva Capital].

Two quick questions for you.

One would be if I look at the mix of business now at least in terms of earnings, it looks like about 35% of your earnings are coming outside of the U.S., Canada, Europe, South Africa, Asia-Pacific.

Can you help us understand sort of where that can go over the next couple of years?

How high can the percentage contribution from outside the U.S.

get?

And then the second question, I guess this is sort of something that I would expect a lot of companies will get this question this quarter is you had about $7 million in realized losses, down a little bit sequentially, but nonetheless a little bit higher than it has been in the recent quarters.

Can you talk a little bit about the quality in the investment portfolio, any credit concerns, subprime, that sort of thing?

I will take the first question, John.

I think we have seen the proportion of our premium income gradually attributed to international operations or outside of the U.S.

gradually increase, with the more rapid growth rates in particular Asia and than the U.S.

and in even Canada than the U.S.

We expect margins to be generally consistent, although you might see some variation from market to market.

If you look at how the premium slowly moves as a leading indicator, that is where you expect ultimately the profit contributions to move as well.

Over time, we would expect them to gradually shift as there is more business produced outside of the U.S.

than there have been the past and gradually come down.

It is not something that moves very quickly, but it is from our point of view, good to see that the international operations are contributing strongly, punching their weight in terms of producing bottom-line impact.

Just as a quick follow-up, Greig, is anything on international front sort of changed even on the margin over the past couple of months for you?

And I'd just point to or sort of pick out the quote from you at the end of the press release -- a little bit more bullish than I think I've heard at least your tenor recently and just wondered if there's anything there?

No.

I think we're very happy with the way the international development is coming.

All of our offices work hard and have produced good results.

We continue to be very pleasantly surprised by the continued acceptance of RGA and the continued growth of RGA in those markets.

We think there's a lot of opportunities for example in Asia that will continue to fuel our growth for a long time in the future.

Terrific, and on the portfolio?

John, I will take that.

In terms of the realized losses in the portfolio, we would characterize them as not particularly unusual.

There was a little bit of rebalancing there, but nothing dramatic.

I think we impaired or wrote down somewhere between $1.2 million and $1.5 million in securities which you could argue is fairly insignificant on our portfolio.

So really nothing particularly unusual there.

I characterize the credit quality as no real change.

We're very comfortable with the credit quality in there.

In terms of subprime exposure, I think we have between funds withheld portfolios and our own internally managed portfolios probably about $300 million of subprime exposure.

And it is really towards the high end of the credit curve, so to speak, relative to that exposure.

I think less than 1% depreciation in terms of unrealized depreciation in value.

So we really are not particularly worried there.

We watch it obviously just because of all that is going on in that sector, but do not really in our view have an issue with respect to the entire portfolio or the subprime exposure within that portfolio.

Thanks very much.

Terrific.

Jeff Schuman, KBW.

Just wondering if you could give us a little bit of color around new business production in the U.S.?

The primary companies over the last couple of years have given us a lot of messages about adjusting their approach to the older age market, and stranger-owned life insurance, that sort of thing.

But it is very hard for us to get a sense of how I guess underwriting standards and approaches are really changing.

What are you seeing in terms of the age distribution of new business?

Is it shifting and changing at all at this point or is it pretty stable?

Or what are you seeing?

Jeff, this is Greig.

I have not heard any real comments by our U.S.

people most recently, so I presume it is tracking pretty much the way it has been.

I have not really asked the question in the last couple months.

We have seen a surge of old age production probably before many of the direct writers were really paying much attention even because we get it from a lot of sources and just sort of look at the roll up.

We send out messages early to our clients that we would watch out for the stranger-owned life insurance production coming this way and so forth, and stated our position.

We've taken -- most of that action took place last year.

We really have not seen too much change in this year's production in terms of the age distribution from what was expected although like I said, I really have not asked the question this quarter.

Jeff, this is Dave Atkinson.

I have been in conversation with some of our people on that issue and what we're finding is because we have become more conservative at the older ages, those are situations where we are not apt to win the business.

So our age distribution is pretty normal at this point on new business, but maybe some of our competitors might be different.

I know you watch your experience closely, so to the extent that you saw a spike in older age business a couple years ago as you kind of looked at that over the last couple years, has it emerged consistent with your expectations or has there been anything to note in how that experience has emerged so far?

It is too early to tell, too early to tell yet.

Great, thank you very much.

No further questions at this time.

I'll turn it back over to our speakers for any additional or closing comments.

Okay, thanks to everyone for joining us this morning.

I don't think we really have any additional comments.

To the extent you have any additional questions, feel free to give us a call here in St.

Louis and we will go from there.

Thanks again.

Thank you.

Ladies and gentlemen, that does conclude today's conference call.

We thank you for your participation.

Have a great day.